Highlands Natural Resources plc (LON: HNR) CEO Robert Price joins DirectorsTalk to discuss fundraising to establish a CBD operation. Robert talks to us about the business being established, the advantage it has, the market opportunity, how this fits into the broader business, how investors can take advantage of an offer through PrimaryBid, how the funds will be utilised and its growth strategy going forward.
Highlands, the London-listed natural resources company, is pleased to announce a fundraising to raise a minimum of £1.27 million via a subscription for ordinary shares of 1 pence each and an offer for Ordinary Shares via PrimaryBid.com at a price of 8.5 pence. The funds raised will be used to establish an organic, vertically integrated cannabidiol (“CBD”) operation in Colorado, USA, through a newly established and wholly-owned Highlands subsidiary, Zoetic Organics.
This initiative follows the completion of a recent trial, which saw hydrogen from Highlands’ rare naturally occurring gas operation in Kansas, discovered during the summer of 2018, applied as a natural, organic fertiliser at a cannabis operation in Colorado. Encouragingly, the gas mixture increased plant size, height, root diameter and flower count by up to 30%, surpassing expectations.
The Company intends shortly to announce a proposed offer for subscription via PrimaryBid providing an opportunity to new and existing retail investors. A further announcement launching the PrimaryBid Offer will be made shortly. The PrimaryBid Offer is expected to begin at around 4:31 p.m. today and remain open until 9.00 p.m. on 19 March 2019.
Highlights
· Zoetic Organics will target sales of organic hemp oil, retail bottled tinctures, CBD-infused chewing pouches and pre-rolled smokables into wholesale and retail channels
o Highlands expects first revenues by mid-2019 and profitability by year end
· A lease will be agreed over an extensive organic growing operation, including a 33,000 sq ft indoor facility with a potential 40,000 annual hemp plant capacity
o By 2020 Zoetic Organics proposes to plant a further 100 acres outside, with a potential 250,000 annual hemp plant capacity which, together with the development of new product lines, offers exciting expansion potential
· Highlands will appoint an experienced management team for Zoetic Organics and intends:
o To provide $2 million of start-up funding for the business during the year; and
o To incentivise the team with 5 million warrants, exercisable at the Issue Price at any time before 30 June 2019, and 12.9 million Ordinary Shares to be issued in 12 months’ time
· Low-cost entry into a rapidly growing market – growing hemp in Colorado for CBD sales in that state is legal, and certain CBD products are legal both in the USA and the UK (subject to legal and regulatory compliance)
· Near term focus on expanding hemp oil operations and developing the outdoor growing facility
· Zoetic Organics will be developed alongside Highlands’ existing portfolio of assets – production from the 8 wells at East Denver will cover the Company’s overheads for 2019
Robert Price, Executive Chairman and CEO of Highlands, said:
“Zoetic Organics provides us with a compelling opportunity to enter the rapidly growing CBD market at low cost and to secure for shareholders the value that our large, rare and valuable gas discovery creates for organic agricultural operations.
“This deal sees us bring our organic fertiliser together with extensive growing operations, and we are delighted to have raised these funds to expand and complete our new vertically integrated operation in Colorado. Our immediate priority is to advance the discussions currently underway with potential retail and wholesale partners, purchase manufacturing equipment and expand our outdoor growing, ahead of our intended harvest of our first 10,000 hemp plants by mid-2019. Beyond this we will expand our harvest and expand our product range.
“The CBD market is estimated by Brightfield Group to reach $22 billion by 2022. Zoetic Organic’s operation will be totally organic and sustainable, creating a key differentiator for our products. We are very pleased to welcome our new Zoetic Organics team to Highlands and look forward to generating revenues and profits during the course of 2019.”
Funding for Zoetic
Highlands estimates that the gross funding to establish Zoetic will comprise:
· Machinery: $500,000 for hemp oil distillation and pouch manufacturing machines
· Initial cultivation start-up costs: $120,000 for purchases of hemp plants and indoor soil
· Expansion of infrastructure: $150,000 for expanded gas and water infrastructure
· Opex for year 1: $1.3 million of which the main items will be salaries, grow supplies and utilities
In respect of the machinery, Highlands expects that the more significant machines will be leased with a consequent net saving on capital expenditure of approximately $300,000. Furthermore, noting that Highlands expects Zoetic to be profitable by the end of the year, the final quarter of operating expenditure is expected to be largely self-funding.
Taking these factors into account, Highlands expects the net cost to shareholders of starting up Zoetic to be in the region of $1.5 million.
Zoetic Organics
Highlands Natural Resources has formed Zoetic Organics, a 100% owned subsidiary, to establish a vertically integrated, organic and sustainable CBD operation in Colorado.
During the summer of 2018, Highlands discovered a naturally occurring source of nitrogen; which was subsequently found to include hydrogen, making it a natural, organic fertiliser. During autumn 2018, Highlands began selling this gas to an organic cannabis grower and the results have surpassed expectations, increasing plant size and production by up to 30%.
With this in mind, Highlands will enter into an agreement to lease an extensive organic growing facility from a company which has now ceased its cannabis operations. The management team have previously operated that facility, bringing with them all the skills and abilities for Zoetic Organics to commence operations immediately. To incentivise the team, Highlands will issue them with 5 million warrants, exercisable at the Issue Price at any time before 30 June 2019, and will agree to issue a further 12.9 million Ordinary Shares in 12 months’ time. The Board believes that this will ensure that it secures the benefit of the up to 30% yield uplift for Highlands shareholders better than simply selling the gas for a few $ per litre.
In a rapidly growing market (the US alone is forecast to be worth $22 billion in three years), Zoetic Organics will seek to distinguish itself by producing only premium, organic products. CBD is becoming an increasingly mainstream supplement, which is available in Boots, Holland & Barrett and other high street stores in the UK.
Highlands plans to grow approximately 40,000 hemp plants per annum in a 33,000 sq ft greenhouse (a minimum of 3 harvests per year is anticipated). The land also includes the ability to grow hemp outside and Highlands has a target to plant 20 acres this year, equating to around 50,000 hemp plants, and rising to 100 acres in 2020 (250,000 hemp plants, one harvest per year). Operating at full capacity in 2020 could see the business harvest approximately 290,000 hemp plants in that year.
Highlands will target a yield of 12 grams of CBD per indoor plant and 30 grams of CBD per outdoor plant. Estimated wholesale prices are $3 per gram although the Board believes sales made direct to retail channels could be at a premium of over 5 times this.
The Board has no plans to grow any cannabis at Zoetic Organic’s facility. Zoetic Organics plans to grow only hemp, taking advantage in particular of the regime being put in place under the 2018 US Farm Bill.
The business is expected to generate first revenues in the middle of 2019 and to be self-funding by the end of the year. The Board has identified a range of opportunities to drive growth through Zoetics Organics beyond this, including:
· Expanding outdoor facilities
· Expanding products for direct sale to retailers
· Developing Zoetic as a premium brand
PrimaryBid.com Offer
Fundraising to establish an organic cannabidiol operation
At 4.30 p.m. on 19 March 2019, Highlands, the London-listed natural resources company, issued an announcement of a fundraising to raise a minimum of £1.27 million via a subscription for ordinary shares of 1 pence each and an offer for ordinary shares via PrimaryBid.com (the “Offer”) at a price of 8.5 pence (the “Issue Price”), being a discount of approximately 20.9% per cent to the closing mid-price on 18 March 2019.
The funds raised by way of the Offer will be used to establish an organic, vertically integrated cannabidiol (“CBD”) operation in Colorado, in the United States, through a newly established and wholly-owned Highlands subsidiary, Zoetic Organics, further details of which are set out in the Announcement which should be read in its entirety.
Offer
The Company values its retail investor base and is therefore pleased to provide private and other investors the opportunity to participate in the Offer by applying exclusively through the www.PrimaryBid.com platform and the PrimaryBid mobile app available on the Apple App Store and Google Play. PrimaryBid does not charge investors any commission for this service.
The Offer, via the PrimaryBid.com platform, will be open to individual and institutional investors from 4.31 p.m. on 19 March 2019 to 9.00 p.m. on 19 March 2019. The Offer may close early if it is oversubscribed.
Subscriptions under the Offer will be considered by the Company on a “first come, first served” basis, subject to conditions (which are available to view on PrimaryBid.com) with any investment request over £50,000 first requiring consultation with the Company.
No commission is charged to investors on applications to participate in the Offer made through PrimaryBid. It is vital to note that once an application for New Ordinary Shares has been made and accepted via PrimaryBid, an application cannot be withdrawn.
For further information on PrimaryBid.com or the procedure for applications under the Offer, visit www.PrimaryBid.com or call PrimaryBid.com on +44 20 3026 4750.
The New Ordinary Shares will be issued free of all liens, charges and encumbrances and will, when issued and fully paid, rank pari passu in all respects with the Company’s existing Ordinary Shares.