Capital 10X President Evan Veryard sat down with GTEC Holdings
Singhavon touches on the company’s performance, projected revenues and path to profitability, not to mention the cash balance, debt repayment, and the CFO transition.
The Bottom Line
GTEC finally gave investors a glimpse of what they can achieve with solid earnings results this quarter. GTEC grew revenue 846% while maintaining gross margins of 62%, a positive signal.
Management also demonstrated their ability to tighten their belts by cutting spending 37% or $1.1 million. This is in-line with management’s assurance that last quarter’s spending was abnormally high and included some one-time expenses.
At first glance, GTEC’s cash position looks low at $514k, however, as of Oct. 8 the company is sitting with $4.4 million of cash on the balance sheet.
In the past, concerns had been raised about a potential need to raise capital, so we took the time to look closer at the numbers for a worst-case scenario.
For our assessment, we used a selling price of $5.60 per gram and assumed a reasonable increase (~25%) in operating expenses. Given GTEC is starting to sell direct to retail, we believe this price will increase over time as they sell less wholesale product.
Overall, GTEC is on track to be cash-flow positive in early 2020. The only necessary CapEx is $1 million in 2020 Q1 to obtain pay for their 49% share of 3PL production. All other CapEx can be deferred and management has already confirmed they will do so if needed.
With $4.2 million convertible debenture due during Q3, it’s looking like they will have enough to pay the debt with an additional $2.3 million left over after retiring the convertible debt and covering CapEx owed for 3PL over the next three quarters.
|($000’s)||Q3 (Aug. End)||Q4 (Nov. End)||Q1 (Feb. End)||Q2 (May End)||Q3 (Aug. End)|
|Cash (Before CFI+CFF)||514||3,183||4,543||7,493||10,443|
*Additional production capacity from 3PL or GreenTec facilities not included.
While it will be close, GTEC’s management has said they will have sufficient capital to complete their GreenTec facility in the first half of 2020. This facility requires an additional $3.7 million to complete. We believe this is an achievable goal for GTEC.
In the above assessment, we chose not to include the sale of their 25% stake in Cannabis Cowboy, valued at $1 million (80% stock), to be conservative. Additionally, we believe a small craft producer will command a higher price premium than $5.60 per gram with retail sales.
Further, this doesn’t include cash from any other levers that management can pull. In the past, we have also seen management lend capital to the company where necessary.
Later in Q4, they will have to pay the remaining $2.5 million convertible debenture. However, with the 3PL facility fully operational well before then (adding 3,000 kg of annual production), cash flow generated from operations should cover this.
Overall, we see this quarter as a positive step for GTEC. They increased revenues while maintaining impressive gross margins and dropping operating expenses. This is the definition of scale.
While everyone always wishes the company had more cash, we believe their cash-constrained operations have created a value opportunity for investors.
From the current operations alone (4,000 kg), there is still upside on a valuation basis. With planned production more than doubling to 9,000 kg in 2020, even with a delay, the upside is substantial.
We continue to see GTEC as a value opportunity at these levels.
The CEO has his head down, pushing towards profitability and refreshingly continues to act with his investors’ best interests in mind, unlike many of his peers.
Q3 Operational Review
For the quarter, GTEC grew revenues 846% to just over $1 million from the sale of 212 kg of cannabis. This is good for an average selling price of $4.86 per gram.
Notably, this was generated exclusively from their Alberta facility, with two newly licensed facilities expecting to boost production numbers for Q4.
They maintained solid gross margins of 62%, giving them a gross profit of $639,000, good for a 752% increase.
They managed to drop operating expenses 37% or $1.1 million to $1.7 million. This demonstrates GTEC is able to achieve scale in their operations.
Operational cash burn for the quarter dropped to $420,000 from $3.8 million in Q2. Overall net loss on the quarter was $2.3 million.
GTEC completed the sale of the retail locations owned through Cannabis Cowboy for $4.06 million. They are also selling their 25% stake in Cannabis Cowboy for $1 million.
Although investors would have liked to see them keep these assets, management made the conservative decision to sell to strengthen their balance sheet. We believe this demonstrates prudence.
Management also pulled out of the greenhouse acquisition from Canopy Growth because appropriate financing couldn’t be secured. This has resulted in the return of a $250,000 deposit and again shows us management sticks to their word.
GTEC is a Market Awareness client of Capital 10X.
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.