#gtec.v

After having a chance to sit down and interview with Founder and CEO Norton Singhavon, GTEC Holdings has been on our radar. They are a vertically integrated cannabis producer, based in Kelowna BC, that is focused on growing “ultra-premium” indoor flower. Currently, they are in the stages of building out their growing capacity (14,000 kg) and are looking to reach full stride by the end of 2019. The main unknown that remained after the interview was what their execution plan looks like and how that would translate into profitability. Their most recent press release has helped clarify what the coming year looks like for GTEC Holdings.

Understanding GTEC's Ultra-Premium Cannabis Product

For their sales to date, GTEC has achieved an average selling price of $5.86 per gram to wholesale buyers with an estimated production cash cost of only $1.11 per gram. This is good for 81% gross margin. These margins put them significantly above some of the top Canadian producers. While they are operating at a much smaller scale, this is still a positive step for a developing company, especially if GTEC can maintain these margins as it scales. Additionally, their claims of producing an “ultra-premium” product seem to hold some weight. Their flagship medical brand, GreenTec, has been the number one selling product on CannMart for the year to date. This early popularity suggests they may be successful at differentiating their product as “ultra-premium”, a goal all producers, big and small, are hoping to achieve.

2019 – The Year of Execution

Based on existing relationships and the rollout of their own recreational brands, GTEC anticipates it will fully utilize 2019 production output, estimated at 2,500 kg. According to their estimates, this would be good for $12.5 million in revenue, or an average sale price of $5 per gram. If they maintain similar gross margins of 80%, this would be good for $10 million in gross profit. However, as a company that has not yet reached full capacity, we don’t expect to see this growth reflected in their bottom line. While they have only recently started producing flower at scale, by the end of 2019 they expect to increase annual capacity to 14,000 kg from 4,000 kg. This is good for a 250% increase and is driven by two new facilities coming online, in addition to the three they currently operate. These new facilities have been funded by the proceeds of a $12.5 million financing. The financing, a private placement offering led by Sprott Capital, was offered at a price of $0.55 per unit. With this cash on hand, GTEC is fully funded to execute on their new production capacity and expects a full year of production for 2020. Based on current plans, there doesn’t appear to be a concern for further dilution. If they can protect their margins, even maintaining gross margins of 60% (a 25% reduction from their current levels), that would yield a gross profit of $42 million in 2020 for a $5 per gram sale price. This would be good for 400% year over year increase in gross profit assuming they achieve their 2019 goals.

Looking Forward - The Investment Potential