Our last look at GTEC Holdings ($GTEC) saw their share price ride a wave of interest, closing over a $1 no less on a couple of days. It’s since backed up, but still far ahead of the low-teens it had lived in during most of 2020. They’ve made me money, and honestly, I couldn’t see what price accretion (fundamentally) was being driven by.

CEO Norton Singhavon was apparently caught unaware as well, trying to walk back a previously announced $4MM raise while the stock was going ballistic. He made up for that quickly, successfully hitting the market up for $23MM (at $0.80!) barely more than a month after being unable to reach a $4MM at $0.20. Crazy right? Look at this chart:

Let’s see how his operations are faring.

To the financials!

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• Cash a meagre $1.6MM, payables $2.4MM. $GTEC was heading for a raise of any kind, and they’re now in far better position with that new money which came in, we’ll see it next financials.
• Net revenue under $2MM. Yep. Same as last time. And the time before. And the time before that. $100MM market cap for a company that sells $8MM in weed a year. A 41% margin this time around – which looks to be around expectations for the longer term. Volatility in this QoQ isn’t a good look.
• It’s probably also a function of the smaller scale of production, where ‘hiccups’ or ‘wins’ hit the bottom line with more heft than a larger shop.
• Adjusted EBITDA at inflection point, around ~=$0. It’s been loitering there for awhile. $500k in interest costs this quarter, that’ll be lightened as Norton’s used some of his new found cash to extinguish debt.
• Inventory up slightly to $5.7MM (from $4.8MM Q prior).
• Salaries and wages 50% of total gross margin. Blech.
• This quarter would have been $500k to the worse but for $500k in emergency wage subsidies. Still, they reported a minus <$200k> ADJ EBITDA.
• $GTEC touts the extinguishment of debt – they should. It came last fall with a 18% interest rate (and cost an additional 2MM shares to land), which reflects how thin Norton was just a few quarters ago. He’s full of swagger right now, but he’s still a long ways from anything to be doing cartwheels about.
• 7MM shares coming out of lockup between now and mid-June. A table of escrowed shares is included in Note 19(b). It’s nice to see it, and an anomaly in most cannabis companies. We’ll see if price holds until then. Significant increases in production won’t be coming online for several quarters yet.
• Another 6.3MM options outstanding. SBC at $25k/month, and executive comp is around $60k/month. Compared to many, this is modest, and shows the front office runs lean, at least in paying themselves. Given revenues, it should be.

Ok. There’s a bit more, but marginal to the overall story. Which, is a company that showed wide ambition early on, only to pivot hard and retrench…..having lost money on several deals, and walking away from several business lines. I’m not terribly sure Norton should have as much swagger as he’s showing – despite that share price being up. The story of his company is far from what can be described as a business case of financial prudence and crisp execution. What he has done is establish himself as having quality product and keeping a solid per gram revenue number – even as many in the sector have demonstrated it isn’t all that easy to do.

3PL Ventures figures large in $GTEC’s future, as it is the production asset that’ll presumeably allow enough scale to break out of current supply constraints. It’s a relatively ‘old’ deal, having been struck in late 2018 – but appeared fallow for the last year. A lack of cash and supply surplus’ probably didn’t help, but it looks to be back on track as Norton’s advanced a $1MM as a loan to get the facility completed.

A couple of hairs on this – as $GTEC doesn’t have full ownership (49%) – and a very real question exists as to whether he can replicate the quality in a new facility. $GTEC’s grows pretty good weed (so I’ve heard), and presumably they’ve got the talent in-house to do it. The other partner (51% ownership) had committed “up to” $9MM to get it done, but it sat stale for a year since Norton was broke. $GTEC’s share price blowout/$23MM raise is a godsend in this context – allowing them to finally execute. Norton has an option to buy that remaining 51% upon it receiving a sales licence. Which, means it’s probably a year out from now in getting production online.

And….. if $GTEC’s able to sustain price, Norton should be thinking about how dear that 51% will be to him. There’s no details on the purchase option, but it isn’t apparent he recognizes that he has few options other than to deal with this partner to increase production (other than going out and buying an existing facility). I’d really like to see that purchase option: if he secured favourable terms, it could be a great thing. If not, he (actually, shareholders) could get squeezed hard.

Not much more to see. It’s a company hitting its’ head on a production ceiling, with OPEX consuming most of the margin. Disgorging that expensive loan will help, but a breakeven shop it’ll remain until something changes. OPEX could become a major focal point if it’s ossified. Hey – quality comes with cost. Profits come with efficiency. It’s a difficult nexus to manage, and he’s shown little proficiency in managing it so far.

Look for continued boredom next time in operations. Sales have been coming off over the last few quarters, and while it’s not much, it’s a trend. If it comes in again under $2MM, it’ll be a bad sign. Things ‘should’ be looking up next time though, as this quarter caught both January and February’s seasonality full on the chin.

He does have an expansion of some sort underway, but unlike 3PL, it looks marginal in terms of impact. I wouldn’t put it past Norton to surprise in an acquisition or product plan. He’s young, ambitious, and now he’s got some cash after a long year. He’s done some good things establishing his brand as quality and having a level of throughput that would make most LP’s envious. As to his business acumen, I’d say the jury is still out and far from reaching a verdict. He’s only a bad decision or two (he’s already made several) away from being put back into a 2020 penalty box.

Time will tell if he’s learned to keep that ambition under control. The way he’s been talking lately, I’m not sure if that’s the case.

The preceding is the opinion of the author, and is in no way intended to be a recommendation to buy or sell any security or derivative. The author holds no position in $GTEC