The Canadian cannabis industry has been generating significant traction so far this year and this is a market that we are closely watching after recreational cannabis became legal in October 2018.
We expect 2019 to be a banner year for the Canadian cannabis industry and expect to see Licensed Producers build upon its success from the previous years. GTEC Holdings Ltd. (GTEC.V) (GGTTF) is a company that we have been closely following and have provided an update on the Canadian cannabis producer.
Last year, GTEC Holdings came under pressure after its merger with Invictus MD Strategies (GENE.V) (IVITF) was called off and we think this created a great opportunity for investors. When you look at the company’s valuation and compare it to its peers, you can see that there is a major discrepancy and we believe that the market underappreciates this growth opportunity.
GTEC Represents a Multi-Faceted Growth Opportunity
GTEC has been nothing short of an execution story and it has been in the middle of a major expansion. The Canadian cannabis producer is focused on producing, marketing and distributing ultra-premium cannabis. Supported with multiple purpose-built indoor facilities, in various stages; of fully operational, to completed construction, to in process of construction.
With Provinces recently reporting supply shortages, , and Health Canada monthly inventory data confirming that LPs have excess of 100,000 kg on-hand and available for sale, this leads us to believe that there is a severe shortage of what consumer want, versus an oversupply of what consumers are rejecting. This is something that we are watching closely as GTEC enters various markets with its 14,000kg of ultra-premium flower capacity by year end.
When compared to its peers, GTEC represents a differentiated opportunity and has an attractive structure. The Canadian cannabis producer is taking a wait-and-see approach with its buildouts and plans to analyze how these facilities operate before focusing on expanding capacity for the ones that are the most profitable.
This is a different approach and we are favorable on this operating structure and have provided an update on the existing facilities below:
- Alberta Craft Cannabis Inc. (ACC): The 14,000 sq. ft. craft cannabis cultivation facility is based in Edmonton, Alberta and has been generating revenues. The facility is fully operational and is able to produce 1,300 kilograms of cannabis per year. GTEC recently announced that they expect their annual production to increased, based on yields higher than originally projected.
- Tumbleweed Farms: GTEC recently completed construction on its 10,000 sq. ft. purpose-built facility in Chase, BC (expected to produce 1,000 kilograms of cannabis per year). The company announced that it has submitted its Evidence Package to Health Canada and expects license to be issued in a timely manner.
- Grey Bruce Farms: GTEC completed a major retrofit of an existing industrial building and anticipates fully completing the 15,000 sq. ft. cannabis cultivation facility later this month. The facility is projected to produce 1,640 kilograms of cannabis per year.
- GreenTec Bio-Pharmaceuticals: The facility is GTEC’s flagship, purpose-built facility located in Kelowna, BC. GreenTec is currently in Phase 1 of development, building 20,000 sq. ft. of its planned 80,000 sq. ft. cannabis cultivation facility. Last year, the company started construction and it expects the facility to be completed sometime in late 2019. GreenTec is projected to produce 2,150 kilograms of cannabis per year.
- 3PL Joint Venture: This pertains to an agreement with F-20 Developments to develop a premium indoor cultivation facility in Vernon, BC. The 3PL (three per light) facility is currently being retrofitted to facilitate the cultivation of ultra-premium cannabis. Phase 1 of this partnership is currently underway, with completion anticipated in late 2019. 3PL is projected to produce 7,500 kilograms of cannabis per year.
ACC Completes its First Harvest of 2019
Earlier this month, GTEC reported a significant milestone after ACC completed its first harvest of 2019 and is now operating at a fully utilized production capacity. ACC expects to be harvesting every 10 days and the company expects to see ACC exceed its projected annual output of 1,300 kilograms of premium cannabis due to the harvests having higher yields than originally anticipated.
This was a significant development for GTEC and we are bullish on the growth prospects associated with this asset. We believe that the better-than-expected production yield will lead to the company reporting strong revenue growth and this could prove to be a major catalyst for the shares.
At the time of this release, GTEC also announced that ACC has been recording significant demand for its premium tiered flower, which is being sold to multiple Licensed Producers across Canada. The strong demand for GTEC’s medical cannabis products is significant and we are favorable on this trend.
Namaste Relationship with the #1 Selling Product on CannMart
Last year, GTEC entered into a cannabis supply agreement with Namaste Technologies Inc. (N.V) (NXTTF) and this partnership is proving to be beneficial for both companies. According to the agreement, Namaste’s wholly owned subsidiary, CannMart, will purchase cannabis from GTEC to resell on CannMart’s online medical cannabis platform.
In December 2018, GTEC commenced shipment of cannabis to CannMart for re-sale after ACC became operational and started producing cannabis. The product is sold under GTEC’s flagship medical brand, GreenTec™ and has become CannMart’s #1 selling product and continues to maintain this. During the last year, Namaste has significantly expanded its reach and has advanced its story through organic and inorganic growth initiatives. We consider this to be a strategic relationship and will monitor how the teams continue to execute.
Namaste is one of the better-known cannabis companies and it has been able to create a massive network of cannabis businesses and consumers. Through this network, GTEC has been able to generate significant demand for its cannabis products and we are favorable on the growth prospects associated with this relationship
A Well Capitalized Growth Story
Earlier this year, GTEC announced plans to raise capital and strengthen its balance sheet through a private placement offering that was led by Sprott Capital Partners LP. Demand for this offering was stronger than anticipated and the Canadian cannabis producer had to increase the size on this offering on two separate occasions.
Due to the strong-than-expected demand, GTEC further increased the size of its previously announced private placement offering to $10 million. In late February, the company closed the first tranche the private placement and raised more than $6.1 million, with the expectation to close up to $10 million on or around March 19th, 2019
We are favorable on the decision to raise capital as it will leave the company well positioned to execute from here. GTEC plans to use the net proceeds of the private placement for to complete its plans to produce 14,000kg of cannabis on an annualized basis. We are monitoring how the company advances its story from here and will be keeping an eye on how the management team allocates this capital.
An Underappreciated Opportunity
Although GTEC has significantly advanced its fundamental story, the shares continue to trade at a significant discount to its peers and this something that we are watching. During the last month, the shares have been trending higher and we believe that this opportunity is flying under the radar.
GTEC Holdings is a company that has significant catalysts for growth, and we are favorable on the relationship with Namaste Technologies. Over the next year, we expect to see the Canadian cannabis producer report some significant developments and we believe that it has several catalysts for growth.
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