For small-cap market participants, there’s an interesting story out this morning that deserves some attention.
GenTech Holdings Inc (OTCMKTS:GTEH) just put out a press release that could (should?) impact how the market views this company. If you’re familiar with this stock, then you know it’s been a long road to here – one filled with many starts and stops and a process of strategic identity that has hit some dead-ends over the years. Hence, a reasonable level of skepticism has defined the tape for GTEH.
However, there was some cause for excitement in April and May when the company announced that it was acquiring a functional foods brand that almost looked too good to be true as a deal. How could this CBD coffee play with a history of false starts suddenly land the Sinfit nutritional products brand and its associated products, trade secrets, IP, inventory, and relationships?
After all, Sinfit is a known player with a top-5 functional food brand position sold in over 2,500 GNC locations in North America and over 10,000 global physical and e-commerce stores across more than 10 countries around the world.
Once again, the market seemed to yawn at the deal as if to say, “something has to be wrong with this”.
Now, here we are, a few months down the road, and guess what: GTEH is suddenly setting company records for cash, assets, sales, growth, purchase orders, and just about every other metric. And it’s suddenly getting a whole lot harder to say there’s no “there” there.
By the Numbers
According to the release out this morning from GenTech Holdings Inc (OTCMKTS:GTEH), operational performance data for the three months ended July 31 is filled with goodies for long-time committed shareholders, or so it would seem.
Highlights from the quarter include over $300k in Purchase Orders for the three months ended July 31, with $151,630 booked as gross sales (both Company records), total assets as of July 31 stood at $446,959 (versus $48,351 as of April 30, 2020), representing an increase of 824% on a sequential quarterly basis and 2,200% annually, cash up 2,580% on a sequential quarterly basis, and up over 6,700% annually, inventory valued at $62,500 as of July 31, and accounts receivable valued at $86,293 as of July 31.
“As anticipated in prior releases, the turning point for GenTech, in terms of the establishment of robust and accelerating growth, came with our landmark acquisition of Sinister Labs, LLC, and the Sinfit Nutrition brand, which closed in June,” commented David Lovatt, CEO of GenTech. “This is a strong and growing brand with a massive domestic and international distribution footprint in the booming functional foods market space. Our July quarter set multiple Company records. Our October quarter is on pace to handily set new ones.”
The striking thing here is the sense that everything for this company – on a financial performance basis – appears to have come to life during the July quarter. It’s as if you are looking at a coma patient in a hospital bed every day at noon for 5 years, and then one day you walk in and he’s up and eating a cheeseburger, watching TV, and wondering where the beard came from.
It’s alive!
The growth in total assets is striking. Up 824% in a quarter. Up over 2,000% year/year. The pulse is back. The fire is lit. As far as we can tell, GTEH is now a rapidly growing commercial-stage player with a massive global distribution network in the multibillion-dollar functional foods space. Just like that.
Dilution?
Guess what, folks: the whole reason for a company to be publicly traded is to provide it with a means to source capital from its equity to drive expansion. That’s it. That’s why the stock market exists at all. It’s not so you can play “trader” in your third bedroom. It’s so companies just like this can tap the market for capital to invest in growth.
As far as we can tell, the 43% increase in outstanding shares reported by GenTech Holdings Inc (OTCMKTS:GTEH) during the July quarter represents the effective cost of the acquisition of the Sinfit brand in equity terms, and looks more and more like a strong ROI transition where this level of dilution could be nothing compared to the value gained from the deal.
The company stated as much in its release:
“Management notes that the Company also announced a 43% increase in total outstanding GenTech common shares during the three months ended July 31, 2020, which represents the overall equity cost of the Sinfit acquisition. However, the Company urges shareholders to view this information in context. This increase in total outstanding shares is already being balanced by sharp growth in cash, assets, sales, and the overall business backed by that equity.”
The last point here is the important one. The increase in shares represents a dilution cost that has already almost been completely offset by the increase in total assets reported in the 10Q. And that was the case on July 31. Since then, there has no doubt been more sales, more production, more growth. Looking back a year from now, will shareholders be happy with the decision to expand the outstanding shares and suddenly ramp “cash, assets, sales, and the overall business backed by that equity” or not? That’s the only real question that counts here when weighing this issue.
So far, it looks like a no-brainer that this was the best decision the company ever made – a point bluntly made by the company’s CEO this morning:
Lovatt continued, “We understand concerns over dilution. It’s natural to view an increase in outstanding shares as a negative event. But acquisitions aren’t free, and growth comes at an upfront cost. When it works out, we call it an investment. Our current growth is coming through an equity investment, rather than one levied in debt, which is ultimately desirable. Note that, in simple terms, our total liabilities held steady from April to July while our total assets grew by over 800%. We anticipate this growth to continue and likely accelerate over the coming twelve months. And we continue to project a potential for over $3 million in sales in 2021, which is simply an extrapolation from our current performance and recent growth trend.”
Time will tell. But, as of this point, the benefits seem destined to overwhelmingly outweigh the cost.
