Despite hosting GTEC’s ($GTEC) CEO Norton Singhavon for an AMA, TheCannalysts haven’t presented much analysis around his company.

$GTEC caused a minor stir with some branding they introduced at Lift Vancouver back in January. It was noisy, but the company remained largely silent through it. Their product has largely been favourably reviewed, and this is probably one of the first of the ‘small’ producers that gained an early foothold and revenue incitation.

Last I looked, their capital structure wasn’t very comely, and late last year….Norton had to get creative to get some debt repaid. Since then, they’ve been largely quiet. If you’d like to see the guts of the Cannabis Cowboy transaction, you can find it here.

Ultimately, $GTEC can be described as a smaller shop that focuses on premium product. If that sounds familiar, it’s because there will be many more of these sorts coming online over the next year. These guys got there earlier, and by all measures….a little larger footprint than most will probably land at.

GoBlue and I have often wondered whether this scale of production can support a ‘whole’. Let’s take a look at a company that’s had ample time to establish and tweak and stabilize – and see what may lay ahead for the fly and featherweights that’ll be coming into this weight class soon.

To the financials!

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• Cash up to $500k (from $400k previous quarter). Lean that.
• Inventory at $3MM (up from $2MM previous). PP&E stable at $17MM. Additions/disposals look like normal course operations, no build in progress.
• Revenue to $2.1MM (up from $1.2MM prior). That’s good.
• Gross margin reported at 70% (!) this and quarter previous. Gee, that’s really good. And high relative to almost anyone in sector.
• One has to wonder where cost allocations are around this – 70% gross margin is an outlier.
• OPEX took a nosedive, from $1.7MM last Q to $1.1MM this one. Good improvement given larger throughput, mainly driven by a reduction in professional fees ($300k) and G&A ($150k).
• As is typical in the space, $GTEC’s using shares wherever they can. Float is at 138MM shares.
• Note 12 (Investments) shows they closed out some convertible debt held by $FAF. $GTEC paid $800k on a $1MM convertible liability, booked a $200k gain, and extinguished it.
• Optionality isn’t bad – most is out of the money – but 12MM shares in escrow will be coming out over the next 24 months. Shares have been used to buy things like genetics and providing inducements to lenders (that 16% lease interest rate is running around an effective 26% by my calculation), and these represent cheap optionality for lenders, but an expensive capital spend for shareholders.
• SBC isn’t inordinate, nor is compensation.

Ok. Overall, the financials are pretty straightforward.

The smaller numbers here are relative. Whether an extra zero or comma is in there, the business and facility is identical to looking at anything of any size. One wants to see cost containment, sales, and manageable debt/optionality.

The business end of this looks tidy. Some may characterize $GTEC as ‘aggressive’ in cashing out $FAF’s claim to assets and debt conversion. I would characterize that as something more like ‘management discretion’. Some flavours of management prefer using leverage, some will want none of it (sole proprietorships moreso in the latter).

$GTEC has been busy since the date of these statements, the totality of their actions looking like bunker building:

$GTEC – like many in build – stepped into retail, adjusted expansion plans, and is now working towards a business model that looks a lot like a ‘cash only’ sign on the front door. Not a bad inclination, and might signal that ‘what you see is what you’ll get’ here. $GTEC also sold a grey market dispensary they’d purchased a couple of years ago…the dream was to convert it to a flagship…but licensing demands and capital required looked to be more than $GTEC wanted to pursue. They’ve also divested a warehouse that was intended to become their extraction facility. Norton was kind enough to provide the answer below when I asked about why plans had changed for it, and he also speaks to the expansion of their core grow-op, the status of which hasn’t been seen in their pressers. I’ll present his reply here in its’ entirety :

There’s a bit to unpack in there, but I’ve found this to be current thinking by some in-sector. Retail and wholesale price decay has brought forward uncertainty, and specialization is being recognized as required within the value chain. To myself, it’s just another sign of industry maturation.

<An aside: this isn’t the same assumption I’ve been under with respect to the ‘big’ shops. I’ve assumed those with capital will take extraction in-house. This assumption needs to be tested, and I’ll be asking around industry to see if this is indeed the case.>

The lease financing is pricy – a reflection of the risk seen as inherent in $GTEC and the sector.

This is one of the few companies I’ve found whose share price isn’t terribly discordant with my own models. I come in around a dime on this (give or take). The debt they had coming due was rolled, and was hideously expensive to get. To wit:

So. I look at the total of this, and my thoughts are: Is Norton going to be working for lenders for the rest of time?

With a small grow show (relatively speaking), it puts a cap on revenue. They’ve got a piece of a ‘craft’ aggregator, but expanding their own production is what’s required from here.

The growth in inventory is material, and if it shows declines through next quarter’s financials, it’ll bode well. If not, it’ll be a sign that not all product coming out is saleable, or worse, it’s just not selling. For a ‘premium’ producer, they’d best have an extremely high ratio of sellable product to mids.

These guys aren’t on the edge, but neither are they very far from it. The company is currently looking run ‘hand to mouth’, with some corporate housekeeping and a pivot nestled in this quarter. Their ‘craft’ aggregation thing has been talked about and promoted for more than a year, yet only in the past month has seen the opportunity for it to finally generate income:

Look next quarter for these coming onstream, although I suspect it’ll be 2 quarters until we see something that hits the top line meaningfully. The only way these guys are going to do anything is by tripling throughput and maintaining margin. Multiple producers/brands will help, but the profitability of their aggregator/incubator has yet to be seen. Stabilization of initial grows at Grey Bruce et al. will likely mean thin margins initially, unless they hit the ground running. Given the time they’ve had to sort it out, this *should* be the case. So often though, it isn’t.

We’ll revisit this company go-forward, and whether or not $GTEC begins rocking the world….my hunch is they’ll provide some great insights to the challenges that other micro/craft/premium shops will face.

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 a position in $GTEC