Zoetic International plc (LON: ZOE), the London listed vertically integrated CBD and natural resources company, has today provided the following trading update in respect of the six month period ended 30 September 2019.
DirectorsTalk caught up with CEO Nick Tulloch to discuss the H1 Interim results. Nick talks us through the highlights for the period, the significant changes made both culturally and operationally, how Zoetic intends to grow a significant market position and the main targets for H2 2019.
Highlights
· Revenue of £1.15 million in H1 2019 (H1 2018: £0.52 million)
· 67 stores in the US now stocking Zoetic and Chill products
· Distribution agreement signed with Mr. Checkout with an initial supply to 15 distributors across the US (Mr. Checkout manages 13 industry associations with over 150,000 independent retail members)
· Expansion of Zoetic UK product lines into cosmetics before the end of the year
· First feminised hemp seed production likely to before the end of 2019 with initial sales in the first quarter of 2020
· Outdoor harvest underway
· Cash balance of £1.0 million as at 30 September 2019
· Process to obtain refund of US$360,000 performance bonds underway – US$60,000 received to date and not less than US$140,000 expected by the end of 2019
· Discussions with several parties on sale of oil & gas assets
· Buy-back of 950,000 of the Company’s ordinary shares from Diversion along with payment of $65,000 in cash by Diversion in part satisfaction of debt owed to the Company
Nick Tulloch, Chief Executive of Zoetic International, said:
“The first half of this financial year saw a number of significant developments for the Company. From a standing start, we have established a vertically integrated CBD business with sales on both sides of the Atlantic and growing relationships with significant distribution partners. Our focus in these past few months has been to establish these relationships. For the remainder of the year we can look forward to advancing sales with our partners.
“Moving into 2020, we also anticipate first sales of our feminised seeds. This has been a complex process, but early signs are that the team’s efforts are bearing success. As we expand the techniques we have been developing, we have every reason to believe that we have the capability to become a trusted supplier of significant volumes of feminised seeds on a monthly basis.
“Following our decision to exit natural resources, we have worked diligently to identify how best to realise the value in this side of our business. We will not rush into any quick or ill-advised sale, but we will develop in the coming months a series of opportunities to realise cash from these assets and reinvest in enhancing our CBD business.
“In the meantime, we have reduced our overheads such that our current cash balance, refunded performance bonds and projected revenues from East Denver and our CBD operations are capable of supporting the Company.
“Zoetic International is a very different company to the one that started the year, culturally and operationally. The team have embraced the changes we have implemented, morale is high and we are all focused on delivering results for our shareholders. I look forward to providing further updates as matters progress.”
Financial review of the period
Zoetic International generated revenues of £1.15 million in H1 2019, with the natural resources division accounting for £1.12 million and the CBD division, which commenced sales at the end of June 2019 in the US and the beginning of August 2019 in the UK, reporting £36,000. However, it is the trends behind these figures that reveal a more accurate impression of the Company’s future trading.
East Denver, in common with most oil and gas projects, is a slowly declining asset and, in the absence of unexpected movements in oil and gas prices, the Company expects second half revenues to be lower. To date, the decline in production has been closely correlated to the Company’s own model and is consistent with other wells in the nearby area. It is not linear, however, as planned workovers, unexpected interruptions (as we continue to experience with Occidental Petroleum’s gas processing plant) and consequent uplifts in production all have an overriding influence. Throughout the period, we have worked with the operator, True Oil, to manage operating costs and, whilst costs have been reducing in recent months, Zoetic International’s share of costs in the period amounted to approximately £350,000. The Board expects these costs to be lower in the second half of the year although, in addition to ongoing operating costs, there are planned workovers on four wells as well as maintenance on the pipeline.
In the CBD division, sales comprise those made in the 67 stores in the US and those made online in the UK through www.zoetic.uk.com. We expect a very different profile in the second half of our financial year. These are early days for the business, but, now that we have a considerable range of stores across different locations, we are gathering key data points in respect to price and product placement. What is key is to identify the pattern of repeat purchases by consumers; we expect it will take around 6 to 9 months to establish a clear profile and we are working closely with our retail partners in this regard.
Our smokables generally retail at US$9.59 and our chew pouches retail at US$9.99. Our wholesale prices vary by volume but are generally in the range of 50 per cent. of retail prices. One area of feedback which we are addressing now is to increase the number of smokables per pack, thereby taking it out of the “novelty” category and into that of regular consumers. As our manufacturing scales up, we have identified economies that will enable us to expand the pack size whilst maintaining healthy margins and, importantly, keeping the retail price below US$10. Our view, which is supported by our retail partners, is that this initiative should continue to advance sales.
In light of the recent health problems that have been linked to the use of vapes, we have decided to discontinue this range for the time being. Whilst there is no link between the vapes that we have produced and the illnesses suffered by users of other products, it is clear that the vaping industry is under considerable pressure. This is a small business line for Zoetic International and there is no commercial rationale for persevering with it at this time.
Our relationship with Schrader Oil and Ox Distributing continues to flourish with new stores and, more significantly, new introductions to our distributors. Our focus on quality and using sustainable growing practices with USDA organic herbs has appealed to several counterparties and we are pleased to announce our new partnership with Mr. Checkout. Established in 1989, Mr. Checkout is a US national group of distributors, operating direct store distribution from the manufacturer. It represents products in over 60 major retailers in the US and manages 13 industry associations with over 150,000 independent retail members, visiting over 50,000 locations bi-weekly. By way of example of its customer reach, Mr. Checkout has sold over 2.4 billion five hour energy drinks. Although a very different product to Chill, the common price point and customer demographic provides a strong indication of the potential of this new relationship. Mr. Checkout will initially supply Chill products to 15 distributors and, assuming a successful trial, this could extend further into their network.
In the UK, Zoetic International is expanding its product lines. We will shortly add softgels to our range of CBD tinctures and, thereafter, will launch a range of massage oils and cosmetics as Zoetic UK continues to position itself as an aspirational brand. We expect our initial range of such products to be available before Christmas this year. Zoetic UK signed up its first retail store following a very successful attendance at the Hemp & CBD Expo in September. On the back of its move into topical products, the Company has also this week appointed a distributor for the north of England. In the meantime, we continue to develop our discussions with other retailers and distributors so that the Company is well positioned to capitalise on its enlarged product range in the coming months.
Cash balances at 30 September 2019 were a little over £1.0 million and this is being supplemented by revenues from our two divisions and also refunds of our performance bonds. During the Company’s expansion in natural resources, we lodged US$360,000 in bonds in three states. Following our decision to exit natural resources, we have started the process to obtain refunds of these bonds. US$60,000 has already been received and we expect to receive further payments of not less than US$140,000 before the end of 2019. The remainder is likely to come back in the first six months of 2020, contingent on a successful exit from some of our projects.
At the time of the Company’s AGM on 19 August 2019, we announced several cost cutting plans, all of which are well on the way to being realised. Taking that into account, pro forma operating costs for Zoetic International are in the region of £2.5 million per annum. As our CBD operations expand, we expect some increase relating to the purchase of raw materials, manufacturing and higher headcount. However, the Board will only sanction further increases in operating costs if it is satisfied that the revenue opportunities they will bring are clearly identifiable and can be delivered profitably. In the meantime, we continue to assess further cost reduction opportunities within our existing business to offset this expected expansion.
Hemp growing strategy
Harvesting is underway in Zoetic International’s 16 acres of outdoor planting. As the plants are dried and prepared, management will assess opportunities for the most efficient means of processing the hemp into CBD for use in our products as well as the wholesale of any excess biomass.
Zoetic International’s plans to develop feminised hemp seeds for sale are proceeding satisfactorily, with the first seeds likely to be produced before the end of 2019. Revenues are unlikely to be earned prior to the growing season beginning in the first quarter of 2020, but our assessment of what we have achieved so far is that this project is likely to be successful.
The Company’s 33,000 square foot indoor growing facility in DeBeque, Colorado provides ideal conditions for seed production. This facility was bespoke constructed for growing cannabis plants and our ability to control the climate and, importantly, exclude male pollen, provides Zoetic International with a significant competitive advantage in this very high margin segment of the CBD industry.
The facility is divided into four bays with each bay capable of supporting up to 2,500 plants for three seasons per year. As we perfect our seed production techniques the target is to harvest one bay per month. The development of these techniques has been time-consuming, but we are pleased with the results and the Board expects the facility to reach maximum capacity in the coming six months.
As previously announced, a typical plant can produce up to 500 seeds. These are living organisms and so production is not uniform and the Company’s internal models plan for up to one million seeds per bay per season. All produced seeds will be checked under strict quality control processes to ensure Zoetic is established as a trusted a recognised supplier of feminised hemp seeds. This means that the seeds must germinate quickly, have a high germination rate and develop into plants with low THC and high CBD.
When the Company established its CBD business, we announced an intention to expand our outdoor farming to 100 acres in 2020 (increasing from the 16 acres we have planted this year). Following a review of strategy, the Board has determined not to proceed with this and to maintain our farming activities at 16 acres. The highest margins of Zoetic International’s business are in seed production and retail sales. Outdoor farming is a profitable enterprise, but at a far lower margin than our core activities. Furthermore, scaling up outdoor farming would require a considerable increase in headcount during planting and harvesting as well as further investment in machinery and facilities for higher staff numbers. The Board is not satisfied this is a good use of the Company’s financial resources or management time and so we will instead focus on our more profitable areas. It is also important to note that hemp production from 16 acres provides sufficient CBD for our own product development. Scaling up our farming would mean that the crop would be sold wholesale, the price for which may be unreliable.
Diversion share buy back
Following its IPO in 2015, the Company’s first acquisition was a 75 per cent. interest in the economic value of DT Ultravert, a refracking and anti well-bashing technology. The vendor, Diversion Technologies LLC (“Diversion”), is owned by Paul Mendell, the Company’s Chairman, and Robert Price, former Chairman and Chief Executive. Diversion continues to own a 25 per cent. interest in DT Ultravert but, under the terms of the acquisition agreement, the Company paid all of the costs of the subsequent development of DT Ultravert, including securing five patents and two notices of allowances.
The original intention was that Diversion would reimburse the Company for its share of these costs once DT Ultravert began to generate revenue. This future reimbursement is held as a debt on the Company’s balance sheet and amounted to US$125,548 at 31 March 2019.
In light of the Company’ decision to exit its natural resources business, Diversion has agreed to sell back to the Company the 950,000 ordinary shares that it owns in Zoetic International and pay US$65,000 in cash by way of part satisfaction of the debt. The buy-back will be conducted at the prevailing market price at the time of the transaction and a further announcement will be made in due course. The Company will hold the 950,000 ordinary shares in treasury.
Disposal of natural resources assets
On 4 September 2019, the Company announced an intention to carry out an orderly sale or closure of its natural resources business. Since that date, the management team have been working to identify the optimum means of generating value from these assets and discussions are already underway with several potential buyers, of which two have already given an indicative price. Any possible sale could be either on an asset by asset basis or as a package of the whole. To date, Robert Price has not made an offer for any of the assets.
As set out above, pending the exit from natural resources, the Company has already begun the process of reclaiming US$360,000 of performance bonds paid to three US states.
Based on the progress of discussions to date and its ongoing review of the business, the Board remains confident that the realisable value of the natural resources business will exceed all known liabilities of the Company, including repayment of the US$500,000 bank facility. Further announcements will be made in the coming months as the structure for the exit is established.