GTEC Holdings Releases Q2 Results – Are Investors Overreacting?

Operationally, GTEC [stock_market_widget type="inline" template="generic" color="default" assets="GTEC.V" markup="(TSXV: {symbol} {currency_symbol}{price} ({change_pct}))" api="yf"] had a strong quarter with sales, revenue, and gross margin all moving in the right direction.

Revenues jumped 17% to $109,000 on the back of 18.6 kg of sales. Cost of goods sold dropped 50% to $34,000 or $1.86 per gram. This led to a 200% increase in gross profit to $75,000 or $4 per gram.

While GTEC posted EBITDA losses of $1.5m, the company is in the middle of production ramp-up, so this is not surprising.

With that said, the big question floating around has been about liquidity.

With $2.2m of cash on the balance sheet and an apparent quarterly operational burn rate of $2.6m, investors are wondering if they need to worry about the possibility of a dilutive capital raise.

We spoke directly with CEO Norton Singhavon to find out.

The Top Line First

While revenue for the quarter was only $109,000 or $5.86 per gram, inventory saw an increase to over 166 kg. This would be good for over $970,000 of revenue at the sale price GTEC is getting on the wholesale market.

A prudent investor understands inventory doesn’t guarantee revenue. However, when you read the financial statements properly, you realize they state they have sold the majority of the inventory as well as additional inventory subsequent to the quarter-end.

Speaking with Norton, he explained this inventory build-up was due to the licensing delays from Health Canada, where they had to hold back two crops worth of product. Since the quarter-end, they have been granted the license and started selling.

With their ACC and Grey Bruce facilities now licensed and ramping up production, they are guiding to substantial revenue increases over the next two quarters. The midpoint of their guidance suggests investors should expect $3.2m of additional revenues by year-end.

This guidance doesn’t account for any increase in product selling prices now that GTEC can sell cannabis directly to provincial retailers instead of being forced to sell supply at a lower wholesale price. It also neglects possible production from Tumbleweed, which is due to be licensed in the next 1-2 months.

The Devil is in the Details

The operational expenses for the quarter were $2.6m. While this number is concerning from the perspective of this quarter alone, when you take a step back it becomes more understandable.

GTEC incurred several one-time expenses associated with the capital raise that occurred in the quarter as well as capital expenses for the now completed ACC and Grey Bruce facilities.

Additionally, speaking with Norton, he explained a number of expenses generated in Q1 were pushed into Q2 until after the capital raise. Investors can see evidence of this by looking at accounts payable of $1.9m in Q1 compared to accounts payable of only $0.84m for this quarter. This is a substantial drop that led to significant incurred operating expenses in Q2.

Looking forward, we believe GTEC will be able to keep operational expenses under control, allowing operations to fund ongoing expenses. At the very least, GTEC has the option to delay or slow down the buildout of their GreenTec, BioPharmaceuticals, and 3PL Ventures facilities, further conserving cash.

While there are no guarantees in the world of cannabis investing, Norton stated that he is confident any future equity raise will be done at a price at or higher than the last equity financing done through Sprott Capital.

Understanding the Pending Payments

The last two points worth touching on are the possible acquisition of the Canopy growing facility and the convertible debenture due in June of 2020.

At this time, it seems unlikely the acquisition of the Canopy facility will go through as originally planned. If this is the case, GTEC would see their refundable deposit returned and the deal would be terminated.

While there are other options on the table that include adjusted timelines and alternative bank financing, it’s unclear how exactly those would play out. Needless to say, this deal doesn’t affect GTEC’s liquidity and would serve more as a booster for capacity and the revenue growth rate.

Looking at the $5m in convertible debentures due in 2020, this obviously cannot be cancelled. Norton stated they will have enough free cash flow from their three fully ramped growing facilities (4,000 kg annualized capacity) to service the debt.

While that is certainly within reach, at the very least, negotiations with lenders are always on the table. Once again, serious liquidity concerns are not in question.

At the end of the day, small-cap cannabis stocks do come with some risks. However, GTEC seems to be setting itself apart with a “tighten the belt” approach, decreasing the risk for investors and making it no riskier than any of its small-cap peers.

GTEC’s focus on operations instead of promotion and their transparency with investors is rare in the cannabis space. This gives us a good feeling about management’s ability to execute and drive further upside in the stock from these very low levels.

 

 

GTEC Holdings is a Market Awareness Client of Capital 10X

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GTEC Holdings is a market awareness client of Capital 10X.

The opinions provided in this article are those of the author and do not constitute investment advice. Readers should assume that the author and/or employees of Capital 10X hold positions in the company or companies mentioned in the article. For more information, please see our Content Disclaimer.

Evan Veryard
Evan Veryard has a Bachelor's of Chemical Engineering from McGill University and a MaSc. of Chemical Engineering from RMC. He has over 6 years of research experience focusing on industrial materials. Address: 682 Indian Road, Toronto, Ontario, M6P 2C9. Phone: 416-721-8257.
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