Amid a busy week of earnings, GTEC Holdings
We have always viewed GTEC as an undervalued craft producer growing with a substantial upside if they can sell all of their production capacity. In a severely oversupplied market, this is the key for any cannabis company.
Based on the details provided in this update, it appears they are achieving this requirement. Investors should be happy with the substance of the release, especially at a time when many other LPs are showing slowing sales trying to “right-size” their operations.
While still very early days, the results speak to the value of a premium product in an oversupplied market; it can command both a higher price point and avoid sell-through challenges.
Looking forward, 2020 is setting up to be a breakout year for the craft producer with their three operating facilities at full capacity.
While they still have costs associated with additional facilities and the MMCAP debt, GTEC appears to be positioned with adequate liquidity to cover these expenses.
GTEC has always maintained cash balances will be tight over the beginning of 2020. If necessary, management has stated they will slow down facility developments, however they do not believe that will be necessary.
Additionally, management continues to demonstrate prudence by focusing on growing premium flower, as opposed to trying to be everything to everyone. They are continuing with their trend of selling assets outside of this purview (retail, etc.), which will further support liquidity.
We will be looking at the year-end and Q1 2020 financials closely to ensure they have control over costs as they enter retail sales channels with additional SKUs. If GTEC can demonstrate similar margins and sell-through across 2020, we believe the upside is substantial.
GTEC Breaks Into Retail
In the quarter, GTEC reported wholesale sales of 256 kg at $5.25 per gram of flower and 24 kg of retail sales at $9.25 per gram. Assuming negligible contributions from trim, GTEC generated approximately $1.5 million in revenue.
While the company initially guided to ~$2 million in revenue for Q4, investors should still be pleased with the results.
Amid a period with slowing sales for the larger producers, GTEC is demonstrating the power of premium, by increasing total sales and driving up the sale price per gram of their wholesale flower ($4.86 in Q3).
The most intriguing factor, however, is the retail sale price they are receiving for their Blk Mkt brand. If GTEC were to sell even a quarter of their 2020 capacity at $9.25 per gram, they would generate revenues of $9.25 million.
While retail sales do come with additional packaging and processing costs this should be more than offset by the higher sales price. While it’s unclear exactly how overall gross margins will be affected, investors should expect a slight dip during the initial retail rollout.
Looking forward, these higher prices should help increase revenues, along with their ramp in production capacity. With all three facilities now operating at full capacity, GTEC should produce approximately 4,000 kg in 2020.
GTEC’s JV, the 3PL facility, is on schedule to be completed during fiscal 2020. They have reassured investors that the JV has the necessary financial resources to complete the build-out, licenses, and operating capital. Overall this facility will provide GTEC with an additional 3,000 kg of annual capacity.
The company is also moving forward with the sale of its last remaining retail asset in Vancouver as well as its Spectre Labs warehouse. Given their initial success growing premium flower, we don’t believe these were significant assets.
Finally, GTEC announced they received the approval to supply into the province of Manitoba. While a small province, hopefully, the company can continue to make their way east to Canada’s biggest provinces in Ontario and Quebec.
GTEC Holdings is a market awareness client of Capital 10X.
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