Deep dive on Grown Rogue

Execution excellence

Comprehensive Analysis of Grown Rogue International Inc. ($GRUSF)

1. Company Overview

Grown Rogue International Inc. ($GRIN) is a vertically integrated, multi-state operator in the U.S. cannabis industry. The company focuses on premium cannabis flower cultivation and operates primarily in Oregon and Michigan, with significant upcoming expansion into New Jersey. Grown Rogue is recognized for its operational excellence, cost-efficient cultivation, and strong margins, even in some of the most competitive markets in the U.S.

2. Business Quality

• Core Focus: Grown Rogue specializes in the cultivation of high-quality, low-cost cannabis flower. The company’s cultivation methods, honed over several years, have allowed it to thrive in Oregon, one of the most saturated cannabis markets in the U.S.

• Market Leadership: In Oregon, Grown Rogue is the leading flower producer, a title achieved despite the state’s fierce competition and challenging market conditions. The company has similarly established itself as a top-five indoor producer in Michigan, demonstrating its ability to scale and maintain quality across different states.

• Expansion into New Markets: Grown Rogue is strategically expanding into New Jersey, a market characterized by high prices and limited competition. The company's model involves transferring its cost-efficient, high-quality cultivation practices from Oregon to markets with higher margins, thus significantly boosting potential profitability.

3. Management Quality

• Leadership: CEO Obie Strickler co-founded Grown Rogue and has led the company through its growth in highly competitive markets. Strickler’s approach is characterized by disciplined capital allocation and a deep focus on operational efficiency, which has allowed Grown Rogue to outperform many of its peers.

• Strategic Partnerships: The company has formed strategic partnerships with entities like Goodness Growth Holdings, allowing it to extend its expertise in cultivation to other markets while benefiting from performance-based compensation models.

• Shareholder Alignment: Strickler and his wife are the largest shareholders, owning about 20% of the company. This high level of insider ownership aligns management's interests with those of the shareholders, ensuring that decisions are made with long-term value creation in mind.

4. Financial Health

• Revenue and Profitability: As of Q2 2024, Grown Rogue reported revenue of $7.72 million, a 23% increase year-over-year. The company’s gross profit for the quarter was $3.38 million, with an adjusted EBITDA of $4.98 million, reflecting strong financial management and operational efficiency​( FT Markets MarketScreener).

• Cash Flow: The company generated $3.34 million in operating cash flow during the first half of 2024. However, significant investments in new markets, particularly in New Jersey, have led to a net cash outflow from investing activities. Despite this, Grown Rogue maintains a strong balance sheet, with careful monitoring of its cash reserves to finance ongoing and future expansions​ (FT Markets,MarketScreener).

• Net Income: The company reported a net loss of $7.68 million for Q2 2024 and a cumulative net loss of $11.88 million for the first half of the year. This loss was primarily due to significant investments in expansion and increased operating expenses as the company prepares to enter new markets​ (MarketScreener).

• Earnings Per Share (EPS): The basic loss per share from continuing operations was $0.04 for Q2 2024, reflecting the company's ongoing investment in growth ​(

  MarketScreener).

5. Strategic Initiatives and Expansion

• Retail Expansion: Grown Rogue’s entry into the retail market in New Jersey marks a strategic shift. The company plans to open its first retail store in West New York, NJ, leveraging the market’s limited competition and high consumer demand. This move is expected to diversify revenue streams and secure distribution channels for Grown Rogue’s products​ (MarketScreener).

• Cultivation Facilities: The new cultivation facility in New Jersey is central to Grown Rogue’s expansion strategy. The facility is on track for completion, with the first sales expected by Q3 2024. This facility will supply both the new retail outlets and the broader New Jersey market, where cannabis prices are significantly higher than in Oregon and Michigan​(MarketScreener).

• Further Market Penetration: Grown Rogue is also in advanced discussions to enter a sixth market, likely in the Midwest or East Coast, continuing its strategy of expanding into less competitive, higher-margin states. The company aims to be present in 10-12 states over the next few years, positioning itself as a leading national brand in the craft cannabis segment​(MarketScreener).

6. Competitive Positioning

• Market Dynamics: Grown Rogue’s success in Oregon and Michigan is a testament to its ability to operate efficiently in challenging environments. As the company expands into markets like New Jersey, where prices are higher and competition is less intense, its focus on quality and cost control should allow it to capture a significant market share.

• Differentiation: The company’s emphasis on high-quality, craft cannabis distinguishes it from mass-market producers. Grown Rogue targets the “craft” segment, offering products that bridge the gap between boutique quality and scalable production, which is a significant competitive advantage in the emerging U.S. cannabis market​ (MarketScreener).

7. Risks

• Regulatory Risks: The cannabis industry is subject to complex and evolving regulations at both the federal and state levels. Changes in legislation could impact Grown Rogue’s operations, particularly as it enters new states with different regulatory environments.

• Market Competition: While Grown Rogue has succeeded in competitive markets like Oregon and Michigan, its expansion into new markets brings the risk of increased competition, particularly from larger multi-state operators (MSOs). The company’s ability to maintain its cost advantage and quality standards will be critical to its success.

• Execution Risks: The company’s aggressive expansion plan requires flawless execution. Delays in the construction of new facilities, regulatory hurdles, or operational issues could impact the expected revenue and profitability from new markets.

8. I don’t have a clear Valuation yet, but…

Since it is a fast-growing company, it is hard to evaluate without multiple assumptions.

Their capex is not big

If they can grow in all those states, and the payback is even 3 years for each store, the stock is clearly undervalued. However, I won’t throw numbers around because what I clearly need to understand is why their competitive advantage would be durable. Sorry I don’t have a clear answer here.

9. Conclusion and Investment Thesis

Grown Rogue represents a compelling investment opportunity in the U.S. cannabis sector. The company’s proven ability to operate efficiently in competitive markets, coupled with its strategic expansion into high-margin states like New Jersey, positions it for significant growth. With strong management, disciplined financial practices, and a clear focus on quality and cost control, Grown Rogue is well-equipped to capitalize on the growing demand for premium cannabis products.

However, investors should be aware of the risks, particularly those related to regulatory changes and market competition. Given the company’s current valuation and growth prospects, there is substantial upside potential, particularly as the New Jersey operations come online and contribute to the bottom line.

Next Steps for Investors

1. Monitor New Jersey Developments: Watch for updates on the completion and operationalization of the New Jersey cultivation facility and retail stores. This market is expected to be a significant driver of revenue and profitability.

2. Assess Financial Performance: Continue to track Grown Rogue’s quarterly financial reports, focusing on revenue growth, EBITDA margins, and cash flow management as the company scales its operations.

3. Evaluate Expansion Plans: Pay attention to announcements regarding the company’s entry into additional markets. The success of these expansions will be critical to sustaining long-term growth.

Grown Rogue’s story is one of disciplined growth, operational excellence, and strategic expansion into markets that offer higher margins and less competition. For investors looking to capitalize on the burgeoning cannabis industry, Grown Rogue but not at any price

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Notes:

Bullet Points Summary

1. Company Overview and Strategy: Grown Rogue focuses on high-quality, low-cost cannabis flower in highly competitive markets like Oregon and Michigan. They aim to expand to 10-12 states over the next 2-5 years while maintaining profitability and operational efficiency.

2. 2023 Expansion: The company has made significant strides by partnering with Goodness Growth in Minnesota and Maryland and launching a new facility in New Jersey, with sales expected to start in late 2024.

3. Key Metrics: For 2024, the company's priorities are executing New Jersey operations, controlling costs, improving yields, and ensuring high product sell-through rates.

4. Strong Shareholder Support: The CEO and his wife hold a significant stake (~20%) in the company, with major investors like Bengal Capital and Mindset Capital also showing long-term commitment by holding significant shares without selling.

5. Financial and Market Position: Grown Rogue's cost of production is around $600-$700 per pound, with sales prices of $1,000 in Oregon and Michigan, and potentially $3,000 in New Jersey, reflecting their competitive edge in both cost control and market pricing.

What do they do differently?

Grown Rogue differentiates itself from other cannabis companies through a combination of operational efficiency, scalability, and a deep commitment to quality. Here’s what they do differently:

1. Scalable Business Model: Grown Rogue employs a highly scalable business model where they replicate their 50,000 sq. ft. manufacturing facilities across different states. This standardized approach allows them to quickly set up operations and expand efficiently, making them agile compared to larger competitors with more complex structures​ (GROWN ROGUE).

2. Cost Leadership with Quality: One of their core competitive advantages is producing some of the lowest-cost, high-quality cannabis in the U.S. They focus on high-grade cannabis that ranks in the top 5 to 10 in states where they operate, which enables them to undercut competitors like Curaleaf on both price and quality​ (Treasure Valley Cannabis).

3. Strategic State Expansion: Rather than expanding haphazardly, Grown Rogue carefully selects states with low competition and high market prices, allowing them to enter markets where they can dominate quickly. This strategy reduces risks and maximizes profitability as they expand​( GROWN ROGUE,Treasure Valley Cannabis).

4. Efficient Decentralized Operations: Unlike many larger cannabis companies, Grown Rogue operates with a decentralized chain of command, which streamlines decision-making and speeds up execution. This lean operational structure allows them to be more responsive to market changes and opportunities​ (GROWN ROGUE).

5. Partnerships and Industry Expertise: Grown Rogue’s reputation in the industry as experts in efficient and high-quality cannabis production has led them to form strategic partnerships. For instance, they collaborate with other companies like Goodness Growth, where they operate in a consultancy capacity, further establishing their influence in the cannabis sector​ (Treasure Valley Cannabis).

These strategic choices position Grown Rogue as a formidable player in the cannabis market, capable of rapid growth while maintaining high standards.

Grown Rogue, a cannabis company trading under the ticker symbol GRIN on the Canadian Securities Exchange (CSE) and GRUSF on the OTC market, is led by CEO Obie Strickler. The company, which currently has a market capitalization of approximately $87 million, focuses on producing high-quality, low-cost cannabis flower, primarily in the competitive markets of Oregon and Michigan. Grown Rogue has been operational in Oregon for six to seven years and recently expanded its operations to Michigan. The company is also engaged in strategic partnerships and expansion efforts, aiming to establish a significant presence in the cannabis industry across the United States.

Company Overview and Market Position

Grown Rogue's core business revolves around the cultivation and sale of high-quality, low-cost cannabis flower. The company prides itself on its ability to operate profitably in highly competitive markets, a feat achieved by maintaining strict cost controls and operational efficiencies. The company's headquarters are located in Oregon, one of the most competitive cannabis markets in the United States. In addition to Oregon, Grown Rogue operates a facility in Michigan, another highly competitive market, and has recently expanded into New Jersey, one of the most lucrative and less competitive markets in the U.S. cannabis industry.

Strategic Partnerships and Expansions

In 2023, Grown Rogue entered into a significant partnership with Goodness Growth, formerly known as Vireo, a publicly traded cannabis company with operations primarily in Minnesota and Maryland. Under this partnership, Grown Rogue provides cultivation leadership and expertise to Goodness Growth, helping to improve their processes, increase yields, and enhance overall operational efficiency. The partnership is structured around a performance-based compensation model, wherein Grown Rogue earns revenue only if Goodness Growth benefits from their improvements. This partnership exemplifies Grown Rogue's commitment to aligning their success with the success of their partners.

Additionally, Grown Rogue launched a new operation in New Jersey in 2023, a state that is currently experiencing high demand for cannabis products with relatively low competition. The company expects to complete construction of its New Jersey facility by the end of March 2024, with sales projected to begin in the third or fourth quarter of 2024. The timing of this expansion is particularly advantageous, as the capital markets for cannabis are currently constrained, leading to sustained high pricing in the market. Grown Rogue's strategy in New Jersey includes not only cultivation but also retail operations, where they hold a 35% stake in a retail entity located in West New York, New Jersey. This retail location is strategically positioned in one of the most densely populated areas in the world, directly across the river from Manhattan, and is expected to generate significant traffic and sales.

Operational Strategy and Future Plans

Grown Rogue's operational strategy is centered on maintaining profitability and scaling their business efficiently. In 2023, the company's focus was on demonstrating its ability to scale its operations beyond Oregon and Michigan. This included not only securing capital for expansion but also ensuring that the company's talent and management team could handle increased responsibilities. The partnership with Goodness Growth was a critical step in this direction, providing Grown Rogue with the confidence to pursue further expansion, such as the New Jersey cultivation asset.

Looking ahead, Grown Rogue aims to expand into 10 to 12 states over the next two to five years, with a focus on establishing a significant footprint in the U.S. cannabis market. The company's long-term goal is to become a nationally recognized craft cannabis brand, bridging the gap between boutique quality and large-scale production. Grown Rogue's cultivation strategy is focused on producing high-quality cannabis flower in facilities that are large enough to be scalable but still small enough to maintain the quality and exclusivity associated with craft cannabis. Their facilities typically produce around 1,200 pounds of cannabis per month, which allows them to operate in a niche that combines high demand with limited supply, ensuring low inventory levels and strong sell-through rates.

Competitive Landscape and Industry Challenges

The U.S. cannabis industry is characterized by its fragmented nature, with each state operating as a distinct market due to federal restrictions on interstate commerce. Grown Rogue has strategically positioned itself in this landscape by focusing on states that offer both high demand and limited competition. However, the company is fully aware that the cannabis industry is extremely competitive and subject to significant regulatory challenges. The company operates in some of the most competitive markets in the U.S., such as Oregon and Michigan, where intense competition has driven prices down to around $1,000 per pound of cannabis flower. In contrast, markets like New Jersey offer much higher prices, with cannabis flower selling for around $3,000 per pound.

Grown Rogue's success in navigating these challenges can be attributed to several key factors. First, the company is deeply passionate about the cannabis industry and is committed to delivering high-quality products to consumers. This commitment is reflected in their rigorous approach to cultivation and quality control, which ensures that their products consistently meet consumer expectations. Second, Grown Rogue operates with a high level of intensity and discipline, recognizing that the cannabis industry is a "knife fight" that requires relentless focus and effort. This intensity is particularly necessary in competitive markets like Oregon and Michigan, where only the most efficient and disciplined operators can thrive.

Another key factor in Grown Rogue's success is their lean corporate structure. The company maintains some of the lowest selling, general, and administrative (SG&A) costs relative to revenue in the U.S. cannabis industry, which translates into strong profitability even in challenging market conditions. Grown Rogue's management team, led by CEO Obie Strickler, is highly focused on maintaining this lean operational approach as the company continues to expand into new markets.

Financial Position and Shareholder Structure

Grown Rogue is in a strong financial position, with a robust balance sheet and no immediate need for additional capital. The company raised capital in late 2022 and 2023 through convertible notes that included warrants with an acceleration clause. These warrants are now well in the money, and the company expects to exercise them soon, bringing in approximately $4.7 million in additional cash. This capital will help support Grown Rogue's ongoing expansion efforts without the need for dilutive equity raises.

The company is also highly disciplined in its capital allocation, focusing on opportunities that offer strong returns on invested capital (ROIC). CEO Obie Strickler and his wife Sarah are the largest shareholders in Grown Rogue, holding approximately 20% of the company's shares. They have not sold any shares, demonstrating their long-term commitment to the company's success. Other significant shareholders include Bengal Capital, which holds 14-15% of the company's shares, and Aaron Edelheit from Mindset Capital, who holds just under 10%. Like the Stricklers, these major shareholders have also held onto their shares, signaling confidence in the company's future.

Industry Trends and Regulatory Environment

The U.S. cannabis industry is evolving rapidly, with new markets opening up and existing markets becoming increasingly competitive. Grown Rogue is positioning itself to capitalize on these trends by expanding into new states and leveraging its expertise in cultivation and operational efficiency. The company believes that over time, all U.S. cannabis markets will become as competitive as Oregon and Michigan, and they are preparing for this eventuality by building a scalable and profitable business model.

On the regulatory front, there has been some positive momentum recently, with the U.S. Department of Health and Human Services (HHS) recommending that the Drug Enforcement Administration (DEA) reschedule cannabis from a Schedule I to a Schedule III substance. This change, if implemented, could have significant implications for the cannabis industry, including reducing the tax burden on cannabis businesses and potentially opening up new financing opportunities. However, Grown Rogue is cautious about the impact of such regulatory changes, noting that increased competition and price pressures are likely to offset some of the potential benefits.

Growth Strategy and Future Outlook

Grown Rogue's growth strategy is centered on expanding its presence in high-value, limited-license markets like New Jersey, while continuing to optimize its operations in established markets like Oregon and Michigan. The company's long-term goal is to be operational in 10 to 12 states, creating a national footprint for its craft cannabis brand. Grown Rogue is open to a variety of approaches for achieving this expansion, including partnerships, acquisitions, and organic growth, but remains focused on maintaining its core values of quality, efficiency, and profitability.

Looking ahead, the company's key priorities for 2024 include executing its New Jersey operations, controlling costs, improving yields, and ensuring strong sell-through rates for its products. These priorities are seen as critical to maintaining Grown Rogue's competitive edge and continuing its strong financial performance.

Investor Relations and Market Perception

Grown Rogue has seen increased interest from both retail and institutional investors as its stock price has risen significantly over the past year. The company has been approached by several U.S. funds and Canadian banks, which are interested in marketing the Grown Rogue story and potentially providing financing for future expansion. However, Grown Rogue remains cautious about diluting its shareholders and is focused on raising capital only when it can create additional value for both existing and new investors.

The company also maintains a strong relationship with its major shareholders, including Bengal Capital and Mindset Capital, who have been supportive of Grown Rogue's long-term strategy and have not sold any of their shares. Grown Rogue's management team, led by Obie Strickler, is committed to transparent and consistent communication with investors, ensuring that they are well-informed about the company's progress and future plans.

Challenges and Opportunities

Despite the significant progress Grown Rogue has made, the company faces ongoing challenges in navigating the competitive and rapidly evolving cannabis industry. CEO Obie Strickler acknowledges that the industry is a "knife fight" that requires constant vigilance, intensity, and adaptability. The company must also continue to manage its growth carefully, avoiding the pitfalls of overexpansion and maintaining the discipline that has been key to its success thus far.

However, Grown Rogue also sees significant opportunities ahead, particularly in new markets like New Jersey, where the combination of limited licenses and high demand creates a favorable environment for profitable growth. The company is optimistic about its ability to continue expanding its footprint, improving its operations, and delivering value to its shareholders in the years to come.

In conclusion, Grown Rogue is a cannabis company that has demonstrated its ability to operate profitably in some of the most competitive markets in the U.S. and is now poised to expand into new, high-value markets. With a strong financial position, a committed management team, and a disciplined approach to growth, Grown Rogue is well-positioned to capitalize on the opportunities in the evolving U.S. cannabis industry. The company is focused on maintaining its competitive edge, delivering high-quality products, and creating long-term value for its shareholders.