Our last look at GTEC surfaced some of the challenges cannabis companies faced a whole lifetime ago (like last fall).

Pricy financing via leases and a couple of quick changes in strategy saw them move into the ‘high quality’ lane, and stay there. That seems to have paid off for them, at least in social media and general perception. Criticism of their branding came to absolutely nothing – other than aggrieving some professional scolders. As I’ve written, the ‘mainstream’ isn’t the Twitter echo-chamber, where views can self affirmed with every ‘like’ and every ‘block’. The mainstream likes strong weed that isn’t $50 an eighth, and it likes consistency.

What CEO Norton Singhavon hasn’t been able to push through in retail or medical has found its’ way into wholesale (I understand Supreme ($FIRE) has some offtake) and alternate channel production in Grey Bruce Farms. So, grow decent product, market the shit out of it, and get it available for sale everywhere possible. Sounds pretty straightforward really.

And I think it is. I also believe that Norton’s sole strength is in growing decent gear. And that’s eluded many, despite so many promises (and so much ego) made. GTEC’s share price has caught an absolute wave of late. What it’s been fuelled by – well. Perhaps there’s an undercurrent of smaller investors coming in, perhaps a WSB effect, perhaps speculative cash. What ever it is, it’s driving the heck out of it:

Myself, I am interested in the fundaments and the underlying assets. Let’s take a look at GTEC’s latest quarter – and see how those pricy financings and pivots (away from extraction and retail) are faring.

To the financials!

________________________________________________________________________

• Sales of $2.2MM in the quarter, down $400k from prior. Inventory up $1.9MM
• 30% margin reported this time. Last quarter was an outlier. Annual gross margin 50%, which is still pretty good. For premium product at this stage, understandable.
• Wages and salaries $270k versus $431k Q prior. $GTEC’s taken $1.6MM in CEWS (COVID wage subsidy) in 2020, with another $560k of it booked in receivables.
• I mention this, because with that $1.6MM booked as ‘other income’. It’ll be interesting to see when that 100% wage subsidy isn’t coming in.
• An asset ‘held for sale’ remains on the books at $596k. It’s the lease for the retail store that was planned for, but abandoned. $GTEC’s made $138k in lease payments, as they haven’t been able to unload it. I suspect that because it was slated for weed, it was expensive.
• 134MM shares full diluted, making this a $100+MM company as of writing. That’s for $8MM/yr in sales, that brought in an $8MM loss. More below.
• 29MM warrants o/s, 7MM of them at $0.15. Those folks are about to hit a major payday. Another 9.5MM options at $0.56. Thumb-nailing overhang on just these is $11MM. Woot.
• All intangibles and goodwill on Alberta Craft Cannabis was written off ($8.8MM). $GTEC uses it as a grow extension, but paid $10MM for a 14k sqft facility at the height of asset pricing. Production levels there are negligible.
• And that’s another challenge of looking at this outfit – no segmentation anywhere. That CEWS subsidy was large because there’s several standalone businesses that comprise $GTEC’s production platform, and each being able to apply for it. That brings in scalability. More below.

Ok. There’s more, but that’s the guts of it. Our last look provides a good base for orientation.

Regarding that lease held for sale, a recent news release notes they were able to unload it for $500k (they’ll book a loss for $96k).

That same press release heralds the extinguishment of a convertible. Funny enough, it had originated from a company that had gone bankrupt (Invictus ($GENE)), and was repriced to $0.20 last fall. This was paid off in March. There was also ($4MM) proceeds from a capital raise done in early February – that absolutely blew out as the share price run coincided with an initial stated raise of $0.20 (and a half warrant at $0.30). Cue a very loud ‘gong’ sound as share price took off, and Norton now had more hands outstretched than he could deal with.

It comes down to timing. What I think happened around the debenture repayment was that share price blew out, and the repriced debentures (now at $.35 and $0.55 for conversion) were crystallized by $GENE’s receivers (or who ever was holding them).

Regarding the raise, Norton tried to pull the stop cord on the bus a few days later, and sought to increase the price and amount of the raise. Capital markets (nor contracts) work that way, and ultimately it came back to $GTEC having to issue the original $2.75MM (out of $4MM that was asked for…which means….he couldn’t even fill the hat) at $0.20/share.

So, the result of the share price blowout is that Norton lost out on millions more in potential raise by putting his hand up before these financials were released (which aren’t very good), a creditor took an obvious escape hatch (and made a nice payday if – as I suspect – conversions were struck), and, $GTEC can walk out a relatively good sounding press release.

Norton made some noise about his share price recently closing at $0.88, and boasting of $8MM in annual revenues. ‘8’ is a very lucky number to many from Asia – as are other ‘closed’ numbers (like ‘6’). He didn’t mention that that $8MM in revenue generated $8MM in pre-tax losses in 2020. Which translates to $16MM (2 times 8) in costs. Nor that he had to impair $8.8MM in assets during the year either (a non-segmented glimpse into profitability there).

Norton is basking in a rather bright share price glow right now. He’s taken pride in building an outfit, relatively on his own terms. Thing is – it isn’t profitable. Nor will the economics of the initial design ever be. The expansion he’s got underway is the only path forward. The capital structure in place – 134MM shares – with another $11MM of it going out for nothing, won’t support share price.

However this thing is seen by the market is one thing. As a business, unless Norton doubles sales and actually knuckles down on opex….it’ll never make a dime. He’s proven he can grow weed, he hasn’t proven he can scale. Nobody has in the premium market has…..and every other premium producer has struggled with it ($JWCA/$FIRE/$WMD).

It’s true that he’s pretty much running break even operationally. He’s providing in-demand product that commands premium pricing. To me, that’s a problem. Because if his production platform is stable, the only way forward is to scale.

I’d held $GTEC for the reasons I listed in my previous structure. And I missed most of the share price run, taking an exit and making some money when this thing was just taking off. It would have been nice to have made more, but hey, nobody can tell the future. If Norton could have, he would have waited a month to do that raise, and been able to actually capitalize the company for much longer than a few quarters. The past and present financials tell me this thing is exactly where it was 6 months ago in terms of valuation.

The future will tell us whether he’s capable of more than being a small, high quality, break even pot grower. Unfortunately for recent buyers, it’ll be a while until we actually find out.

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