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GTEC Holdings Ltd
Symbol GTEC
Shares Issued 126,684,777
Close 2019-10-09 C$ 0.23
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GTEC Holdings loses $2.3-million in Q3 fiscal 2019

2019-10-09 17:15 ET - News Release

Mr. Norton Singhavon reports


GTEC Holdings Ltd. has released its third quarter of fiscal 2019 results. As the company continues its objective of developing purpose-built indoor operations to produce and distribute ultrapremium cannabis in Canada, it has remained committed to operating in a disciplined and fiscally responsible manner while delivering substantial revenue growth, combined with significant reductions in operating expenses.

The company is pleased to present the following results for the third quarter of fiscal 2019.

Key financial highlights of the third quarter of fiscal 2019:

  • Significant revenue growth of 845 per cent from the sale of 212 kilograms of cannabis, for total revenue in excess of $1-million (third quarter revenues were solely from the company's Alberta craft cannabis facility);
  • Gross margin increased by 752 per cent to $639,000, while continuing to achieve favourable margins of 62 per cent before fair value adjustments, representing increased production and efficiency that continue to improve as the company realizes economies of scale;
  • Operating expenses were reduced by 37 per cent, representing a $1.1-million reduction, as a result of management's determination in implementing strict internal finance protocols;
  • Net operating loss of $1.1-million and a net loss of $2.3-million.

"With three operational licensed facilities cultivating our unique and premium genetics, the company is well positioned to continue achieving strong quarterly sales growth," said Norton Singhavon, founder, chairman and chief executive officer of GTEC. "Furthermore, we are committed to operating in a fiscally disciplined manner in order to achieve success under dynamic and challenging market conditions."

Key operating highlights of the third quarter of fiscal 2019:

  • Increased annual production capacity by over 200 per cent to 4,000 kilograms of indoor flower, with the expectation of reaching full capacity utilization by the end of fourth quarter 2019;
  • Executed all of the company's licensing initiatives for 2019, which included:
    • ACC receiving a standard processing licence on July 26, 2019 (for sales into the provincial and territorial supply chains);
    • ACC receiving a medical sales licence on July 26, 2019 (for direct on-line sales to medical patients);
    • Grey Bruce receiving a standard cultivation licence on July 5, 2019;
    • Tumbleweed receiving a standard cultivation licence, standard processing licence and medical sales licence on Aug. 16, 2019;
  • Commenced cultivation at Grey Bruce Farms, which commenced its first harvest fewer than 90 days after receiving its licence;
  • Commenced cultivation at Tumbleweed Farms with its first production harvest expected in December, 2019;
  • Introduced over 30 new premium cultivars (strains) into GTEC cultivation facilities; the majority of these cultivars is not currently available from other licensed producers and is predominantly a high-THC (tetrahydrocannabinol) profile;
  • Flagship medical brand GreenTec was added to CannaFarms' (a wholly owned subsidiary of Vivo) on-line medical e-commerce platform;
  • Established relationships with new B2B (business to business) buyers: Cronos, TerrAscend, Vivo and Indiva;
  • Produced 188 kilograms of cannabis at ACC, with an average production cash cost of $1.85 per gram;
  • Implemented infrastructure upgrades at ACC, resulting in an improvement of efficiency, yield and product quality;
  • Restructured corporate and operating functions to streamline and minimize the company's cash burn going forward;
  • Revised the overall corporate strategy to focus on the cultivation and extraction of premium indoor flower.

Key subsequent events of the third quarter of fiscal 2019:

  • A strong cash balance of $4.4-million (as of Oct. 8, 2019), as a result of the following:
    • Received $4.06-million in debt repayment from Cannabis Cowboy Inc.;
    • Received $250,000 deposit repayment from Canopy Growth Corp. as a result of not proceeding with a purchase and sale agreement related to an acquisition target;
    • Generated $456,504 in revenue from the sale of 85 kilograms of cannabis at an increased average selling price of $5.60 per gram for flower;
  • Entered into an agreement to divest its 25-per-cent ownership in Cannabis Cowboy for gross proceeds of $1-million in stock and secured notes;
  • Entered into an agreement to make an early payment of $800,000 toward its $5-million convertible debenture maturing June, 2020, which payment is expected to be made Oct. 15, 2019;
  • Grey Bruce Farms commenced its first harvest, consisting of GTEC's new cultivars, which are expected to launch into provincial and territorial adult-use supply chains in November, 2019.

Liquidity and capital resources

As at the date of this news release, the company had a cash balance of $4.4-million. Based on the current financial resources and fiscal 2020 projected revenues, the company anticipates that it has sufficient financial resources to continue the construction of its GreenTec BP and 3PL assets, and to fulfill all debt obligations due in the second half of fiscal 2020, without further equity dilution to its shareholders or assuming additional debt obligations.

The company now has three licensed facilities, with production and sales increasing month over month as Grey Bruce and Tumbleweed enter into full production. The company is expecting a current annualized output of 4,000 kg (A) from the existing facilities.

Note (A): This estimate is consistent with historical output based on an output of 200 to 235 grams per square foot of canopy space on an annualized basis (or approximately two pounds per light each harvest).

Over the duration of this quarter, management committed to restructure its corporate overhead and implement disciplined cost controlling measures to significantly reduce its cash burn. As a result, these initiatives have strengthened the organization's financial position, and the operational expenses were reduced by 37 per cent or $1.1-million.

The current fiscal year to date had required several one-time expenses related to Health Canada regulatory licensing, legal fees for mergers and acquisitions, consultants, corporate development, financing initiatives, and general development costs. This resulted in the company incurring greater-than-normal corporate overhead costs. Management remains committed to operating in a disciplined and fiscally responsible manner, and management believes the company will be entering into a steady state of operations, where corporate expenditures are expected to be significantly reduced going forward and into the 2020 year.

As previously announced, the company has taken a strategic review of non-core/non-operational assets to strengthen its balance sheet and reduce its cash burn in preparation to repay its debt obligations due in third quarter and fourth quarter 2020. Through these initiatives, the company received a $4.06-million outstanding loan repayment from Cannabis Cowboy, and concurrently entered into an agreement to divest its 25-per-cent equity stake in Cannabis Cowboy for a sum of $1-million. The divestment is expected to close on or before Oct. 15, 2019.

The company will continue to review its non-performing assets and investments and explore strategic opportunities with the objective to utilize its cash flow to reinvest in near-term accretive assets within the GTEC group of companies.

On Oct. 2, 2019, the company entered into an agreement to make a payment of $800,000 to its senior secured $5-million convertible debtholder. Upon the completion of the payment, which is expected to occur on or before Oct. 15, 2019, the balance of the loan will be $4.2-million.

Outlook and strategy

The company's objective to produce, market and distribute ultrapremium-quality indoor cannabis is being accomplished through the determination and execution of the GTEC team. The company commenced with the development of five cultivation facilities across Canada, of which three are now licensed and operational. As a result, the company is now revenue generating with production growth to increase significantly throughout the coming fiscal quarters.

The company has commenced divesting of non-core/non-operational assets to strengthen its balance sheet, while focusing the organization's resources on the cultivation and extraction of premium indoor flower and its derivatives, with the mandate to establish long-term brand equity and consumer loyalty by distributing premium-quality cannabis products.

Management anticipates that the company will continue to achieve quarter-to-quarter sales growth until all of its production facilities are complete, licensed and fully operational. Upon achieving its full capacity target of approximately 9,000 kilograms (B) during the fiscal 2020 year, the company will re-evaluate additional opportunities for expansion or acquisitions through internal cash flow.

Note (B): This estimate is consistent with historical output based on an output of 200 to 235 grams per square foot of canopy space on an annualized basis (or approximately two pounds per light each harvest).

The company continues to build out and execute its strategic plan, with the following outlook:

  • Currently producing premium-quality indoor flower, with ultrapremium flower to commence harvesting in fourth quarter of 2019;
  • Transition all existing facilities into the new cultivars, with the objective to increase the company's overall average selling price and gross margin;
  • Fourth quarter 2019 production is now estimated between 320 kg and 370 kg of cannabis; the decreased production estimates from second quarter are due to delays in achieving full production within the newly licensed operations;
  • Launch BLK MKT and Tenzo into the provincial supply chains for adult-use/recreational sales, which include British Columbia, Alberta and Saskatchewan;
  • Build and launch a medical sales business utilizing ACC's medical sales licence;
  • Increase customer base, building on the existing base of B2B clients (licensed cannabis companies);
  • Continue the development of its GreenTec BP and 3PL facilities, which are now expected to be completed in 2020 (previously fourth quarter 2019); the company has deferred the completion timelines to align the capital expenditures with revenue and cash flow;
  • Maximize the economic value of harvested plants, by optimizing the ratio of marketable components, such as the sale of flower, popcorn and trim; as well as, converting its trim to value-add products (that is, oil or prerolls);
  • Management's objective is to be cash flow positive from operations within the first half of fiscal 2020.

A copy of management's discussion and analysis and financial statements for the third quarter of fiscal 2019 can be downloaded from GTEC's SEDAR profile.

About GTEC Holdings Ltd.

GTEC Holdings is a specialized cannabis company dedicated to cultivating ultrapremium-quality cannabis in purpose-built indoor facilities. The company currently holds the following licences issued by Health Canada pursuant to the Cannabis Act and Regulations: three standard cultivation licences, two standard processing licences (for adult-use sales into the provincial and territorial supply chains), two medical sales licences (for direct to medical patients), standard processing (for extraction) and analytical testing.

The management team is composed of diverse experts from senior roles at leading global food and beverage, CPG (consumer packaged goods), and premium alcohol companies.

GTEC is actively pursuing sales and distribution opportunities across all major business channels: medical, recreational, B2B and export.

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