Zoetic International plc (LON:ZOE), the London-listed vertically integrated CBD company, has announced its unaudited preliminary results for the year ended 31 March 2020. The Company’s audited report and accounts for the year ended 31 March 2020, including all notes to the financial statements, are expected to be announced and published later today.
Period and Post Period Highlights
· Transitional year from oil and gas to branded consumer CBD products
· Establishment of CHILL brand CBD smokes and chew pouches as a leading brand in USA
· Signing of substantial distribution agreements with retail outlets numbering over 6,000 stores in USA
· Signing of two international distribution agreements for CHILL delivering coverage of in excess of 15 countries across Europe
· Overheads materially reduced and in line with the new consumer CBD products business
The key elements of the Company’s results for the year ended 31 March 2020 can be found below.
Trading Update
The directors of the Company are pleased to report that the consumer reaction to the Company’s CHILL branded products has exceeded their expectations; in stores where CHILL has been on sale for several months they have experienced consistent increased sales, month on month. As the Colorado marketplace has begun to open up this month from COVID restrictions, the Company’s beta locations have seen a significant increase in sales. Chill are now the number one selling non-food CBD products in the beta stores. This has been achieved with negligible promotional spend. In the coming weeks the Company will be officially starting its roll out with its US distribution partners beyond the beta stores.
The Company is also progressing the logistical processes in order to commence the international distribution of CHILL products.
The Zoetic brand has also picked up sales momentum. Online sales have increased over 300% in the month to date. Zoetic products are continuing to be shortlisted for awards, with the most recent being the Top Sante Skincare Awards 2020. The level of interest around the Zoetic brand is starting to follow the same trajectory of CHILL.
The directors will provide further updates to shareholders as the above matters progress.
Antonio Russo, Co-CEO, commented: “We couldn’t be more excited for the path that the Zoetic branded products are on. It is pleasing to know that consumers are loving our products and the awards are flattering as well.”
Chief Executives’ Review
The financial year to 31 March 2020 marks the completion of the Group’s most significant period of change to date. Our debut financial year in the cannabidiol (CBD) sector has seen the Group evolve from its roots in the natural resources sector and it has quickly established itself as a global leader concerned in the development, production and distribution of premium CBD products.
Following a managed transition away from the turbulent natural resources market, the continued growth in popularity of Zoetic’s CBD product range has been complemented by the founding of key partnerships which continue to facilitate technical excellence within the fields of research and development. From its inception as a new start up company under the auspices of Highlands Natural Resources Plc, the US based operating company Zoetic Corporation, and by extension the renamed parent company Zoetic International plc, has become a fully-fledged name in its own right, providing a sustainable and growing profit platform on which to expand.
Despite the challenges 2020 has presented to the global economy, this financial year has seen the Group lay the groundwork for an exciting future as a CBD pioneer. We have now entered the 2020/2021 financial year as an altogether leaner operation with the technical expertise and international acclaim to bring our products to new markets across the globe.
The Turnaround
In a year which has seen performance figures collapse for many of the Group’s traditional competitors, Zoetic has successfully executed a managed exit from the volatile natural resources sector. Transitioning away from the company’s historical base of activities was by no means a simple exercise, but it is one that has already borne fruit with the company benefiting from substantial savings across its asset portfolio. Our operational costs are now lower than they have been at any point during the Group’s history, leaving capital available to reinvest in the continued refinement of our products.
This movement has been fundamentally driven by the Group’s disposal of its assets in East Denver and, subsequently, in Kansas. The process commenced with an agreement to sell the remaining interests in the Group’s oil and gas assets located in Colorado. Reaching a deal with True Oil LLC which completed in September 2020, the Group has now neatly tied up its involvement in what was becoming a significant overhead cost which was not reciprocated by an equivalent rate of return.
Sealing the Group’s substantive exit from the natural resources industry, further movements came in the form of the proposed divestment of the Group’s Kansas nitrogen assets to Path Investments PLC (“Path”), a transaction that we expect to close in the months falling immediately after the publication of this report. As part of the transaction, Path has also agreed to purchase the Group’s interest in DT Ultravert (DTU), its innovative hydrocarbon well stimulation and protection technology. Through these dealings, the Group launched its efforts to make considerable savings by limiting its exposure to the continuing high costs of managing and maintaining natural resources facilities. Our agreement with Path has not only helped us in this endeavour, but will also secure future liquidity for the Group in the form of 15 million warrants to subscribe for new ordinary shares in Path at a rate of 0.1 pence each, along with warrants for a further 15 million shares at 1.5 pence each to last between the first and third anniversaries of the transaction. Perhaps more substantially, Path has agreed to pay the Group ongoing royalties equating to 6% of all gross revenues generated from the use of DTU technology, attributable to the 75% interest sold. In sum, this agreement will grant Zoetic the financial benefit of DTU without the immoderate overheads that result from the running and management of the project.
Although the completion of this transition falls outside of the period end, it marks the continued pursuit of a radical new direction for the Group. With the majority of our natural resources operations having been sold off during August and September 2020, we eliminated the Group’s single largest source of overhead costs and limited exposure to the risk of further costs over the long term. As negotiations for the sale of these assets had commenced but not concluded by the year end, at 31 March 2020 these assets are categorised as “assets held for sale” in the accounts. Our exit from the natural resources industry has resulted in the transformation of the company into a nimble-footed yet formidable contender within the global CBD market. Free from the need to continually invest in the maintenance of aging oil and gas facilities, Zoetic has the structural flexibility to act quickly to secure both profits and future opportunities alike.
Nowhere has this operational flexibility been more apparent than in the rapidly expanding distribution of our various product lines. Eidetic investors may recall that this financial period was launched with the announcement that an agreement had been struck with Schrader Oil and Ox Distributing. The agreement saw our Chill brand smokes and CBD chew pouches taken to market in convenience stores and gas stations across the USA. This landmark agreement was quickly followed by the July commencement of retail sales in the UK’s expanding CBD market and subsequently the establishment of a European distribution agreement just a year later. The combined effect of these developments will see Zoetic’s product range reach markets in the USA, UK, Czech Republic and Slovakia. Although outside the period, a second international distribution agreement has now been reached with a highly experienced European retailer with a strong physical footprint across more than 15 key EU markets and an established eCommerce presence. As the popularity of our products enjoys continued growth, Zoetic international’s operations are on course to expand further in the near future.
Industry leadership
As the global CBD market continues to grow, it is Zoetic’s firm intention to establish itself as an industry leader. The groundwork for this vision has been laid throughout this financial period and the subsequent months, leaving the Group in a prime position to continue on its journey as a visionary presence within its field.
Knowing that the value proposition of our products begins with the standard of our seeds, we have made concerted efforts to test the virility and quality of these primary assets. This resulted in the brokering of a landmark partnership with cannabinoid research experts GVB Biopharma which commenced in July 2020. Complementing our ongoing research work with a number of renowned US Universities, our programme with GVB Biopharma has seen 40,000 feminized hemp seeds placed in the care of their specialists, who will cultivate the plants in USDA certified ground and gather extensive data to demonstrate the eminence of our genetic base assets.
The ultimate results of this research will be twofold. Firstly, with the benefit of scientifically-backed reports into the cultivation viability of our seeds, the Group will be well placed to avoid the difficulties faced by competitors who have invested significant time and capital into the cultivation and extraction of genetically deficient hemp seed stocks. Secondly, the efforts of GVB Biopharma will not only produce technical resources with which to further the Group’s scientific work but will also turn out high-calibre CBD isolate. This in turn will furnish the Group with further resources which can be sent to market as we continue our growth as the premium choice in CBD products.
With over 110 varieties of hemp, businesses must meet the specifications set out by regulatory bodies whilst growing their plants in supervised, quality-controlled conditions. Having received test results from Colorado State University confirming a cultivation viability result of between 86% and 95%, we are confident that our seed genetics will continue to attract agronomical recognition as they undergo further testing. By building these operations into the fabric of the Group, we are confident that Zoetic can continue to grow its involvement across multiple income streams both in the recreational and pharmaceutical CBD markets.
In the same vein, and as a critical step towards formalising the Group’s status as a market leader, this financial year has seen Zoetic make a range of US Patent applications which cover the method for the manufacture of Chill brand THC-free smokable CBD products and, in an unrelated application, for the composition of pharmaceutical products which include cannabinoids. Working closely with authoritative figures within the scientific community, it is our hope that the coming year will see progression towards the granting of these patents which offer significant protection to the Group’s intellectual property and therefore its position as an innovator at the forefront of the CBD industry.
Product development and diversity
The growing breadth of Zoetic’s global operations has been mirrored by the continual expansion of our product range. By extension, our numerous products now provide multiple streams of income – the diversity of which provides an essential safeguard against the regulatory uncertainty faced by companies in the CBD space.
Sales of products sold under the banner of Chill, Zoetic’s tobacco alternative brand, have gathered considerable speed in the US market and the Company continues to explore new ways of meeting consumer demand. Chill’s CBD chew pouches (currently available in fresh peach, rich vanilla and cool mint flavour variants) have proven to be particularly popular, and their market share is expected to develop further as we progress through the next financial period and beyond. Similarly, against a backdrop of strict regulation within the tobacco market, Chill brand tobacco alternative CBD smokes have enjoyed enormous popularity with further US distribution agreements already in the pipeline. Now available in hemp, calm and mint varieties, our smokes continue to benefit from the regulation of tobacco-based menthol cigarettes which have now been banned in Brazil, Canada, Ethiopia, Turkey, Moldova, the European Union and the United Kingdom. With this trend set to continue, Chill brand products stand to become a frontrunner in the race for a share of the $85 billion strong global menthol cigarette market. As the Chill range of tobacco alternative products are ready to make their way into the European arena across the Czech Republic and Slovakia, further emerging markets are set to follow in the near future as Chill becomes an international name.
Outside of the tobacco alternative market, Zoetic branded goods continue to make waves across the board. Our range now includes CBD oil, massage oil, vegan gummies, vegan lip balm, softgels, pills, hand cream, night cream and facial drops. Sold across the Group’s core UK market, our Zoetic CBD products each have specific applications that not only target an area of the market but each aim to become the single most acclaimed product of their kind. Validating the hard work that has gone into the creation and marketing of these products, the Group is now the grateful recipient of numerous awards and nominations that recognise the quality and broad appeal of our CBD produce. These include:
● Winner at the Global Green Beauty Awards – Zoetic Jasmine & Lavender CBD Night Cream
● Winner at the Hip & Healthy CBD Awards – Zoetic CBD Flavoured Drops range
● Shortlisted at the Real Beauty Skincare Awards – Zoetic Jasmine & Lavender CBD Night Cream
● Shortlisted for the Marie Claire Skincare Awards – Zoetic CBD Facial Drops and Eucalyptus & Lavender CBD Massage Oil
● Shortlisted for the Pure Beauty London Awards – Zoetic Lemongrass & Ylang Ylang CBD Hand Cream and 3000mg Natural CBD Oil
● Shortlisted for the Top Sante Skin Awards – Zoetic Jasmine & Lavender CBD Night Cream
These awards and accolades illustrate almost immediate acclaim for Zoetic and Chill products upon entry into the market. The calibre of these products speaks for itself as they have become industry favourites within just months of becoming available.
All of our products, both under the Zoetic and Chill names, are leading the way as CBD moves from a recreational novelty into the mainstream. As the popularity of traditional tobacco products is hampered by international regulation, it is our belief that CBD products offer the most viable alternative, whilst our Zoetic gummies, tinctures, oils and other products allow the health conscious public to access premium CBD goods. Given estimates that only 6% of the global market currently permits the development and sale of CBD products, there is huge potential for the growth of our sales figures and indeed the Zoetic and Chill brands as political trends point towards the ongoing deregulation of the cannabidiol industry.
Handling the COVID-19 pandemic
The COVID-19 pandemic has presented issues to companies operating across the world, and Zoetic has been no exception. The limitations placed on cross-border trade and movement as a direct response to the pandemic have made it increasingly difficult to manage the supply chain with the same efficiency as in pre-pandemic times.
Additionally, the necessary restrictions on personnel movements caused by the pandemic made it impossible for the auditors to attend the stocktake at our UK premises at the year end. This has led to the auditors qualifying their audit opinion in this specific respect.
Throughout these challenging times, the Group has benefitted from its vertically integrated structure from last harvest year in addition to the extremely strong connections it has formed with suppliers, distributors and vendors across the entirety of its business network. With the ability to make executive decisions with the speed that modern investors have come to expect, the Group has been able to position itself as a trendsetter whilst riding out the difficult trading and logistics environment brought about by the pandemic.
A side effect of the global health emergency has been a renewed level of interest in holistic health solutions from citizens across the globe. It is our belief that this environment lends itself to the continued growth in the use of CBD-based products as medicinal aids, spelling opportunity for the Group across all profit streams including Chill as the health-conscious look to turn away from traditional tobacco products.
Board changes and operational composition
The Group’s transition away from it’s legacy assets and into the CBD space has been supported by the work of it’s joint Chief Executive Officers, Antonio Russo and Trevor Taylor. The board’s streamlined nature has allowed the Group to navigate the difficulties brought about by the COVID-19 pandemic, given that strategic decisions can be made with speed and with the benefit of full supply chain oversight. We are proud of how this structure allows us to grasp opportunities and with the unique benefit of 15 combined years of experience in the CBD industry, the Board is well placed to drive growth and further establish the Group as an innovative global presence.
Listing on the OTC
In an exciting move for the Group, the year also saw its shares listed on the OTC market with an opening date of 12 November 2019. This development follows from sustained interest in the Group from US investors and will better facilitate their ability to trade in our shares. Owing to the Group’s existing listing on the London Stock Exchange, obtaining a listing on the OTCQB Venture Market did not require the filing of a prospectus and moreover there are no Sarbanes-Oxley or SEC reporting requirements or disclosure obligations beyond those already met for the purposes of the London listing.
CBD facilities
In line with the Zoetic’s substantive efforts to cut costs and restructure its activities, this year has also seen the termination of the Group’s leasehold agreement for its Colorado greenhouse facility. This follows a significant period of growth for our CBD products and it is now the case that our resources requirements can be focused on our product lines.
Moving forward, cultivation and production of our high-quality base seed assets will be entrusted to a European partner based in the UK. Having brokered a Joint Venture agreement (the “JV”) with one of Europe’s best regarded cultivation specialists, we now look forward to the next stage of growth as we benefit from their knowledge and expertise in the fields of growth and regulation. Closing the doors to our original facility has also enabled the Company to make a significant saving by eliminating one of its most substantial overhead costs totalling some $80,000 per month in operational spending.
Outlook
As mentioned at the outset of this review, this financial year has been one of extensive yet positive change for the Group as Zoetic has come to the fore of its operations. What last year was described as a ‘foothold’ in an exciting growth industry has now given way to the establishment of a growing global brand that has achieved early acclaim for its quality and innovation.
Despite a tumultuous year for the global economy, the Group is now fighting fit and in a state of continual growth that we strongly believe will persist as we move through the 2020/2021 period. With numerous international level distribution agreements and penetration of the lucrative eCommerce market, our business continues to gain ground in the international CBD arena which itself is ever expanding despite robust regulation. The breadth of Zoetic’s CBD operations means shareholders can take heart that our revenues are somewhat guarded against changes within the market and we expect our seed and retail operations to escalate further throughout the current financial year, both in terms of activity and revenues.
We have now arrived at a seminal point in the Group’s development. Since the launch of Zoetic in 2019, it has been the intention of the Board to follow a four pronged strategy to secure the very best future for its CBD business interests. Throughout the course of the financial period and in the months since, huge ground has been made towards the realisation of these goals, and the contents of this report along with Group’s wider operations serve to show that we have developed products that fit the market and have mass appeal. Furthermore, with the announcement of numerous International Distribution Agreements, along with a new cultivation Joint Venture in the UK, the Board is confident that the Group now benefits from veritable scalability and distribution channels on a multinational scale. Throughout the next financial period we will continue to build on these elements, but also crucially will execute a full product launch with our products making it to market across multiple territories, many for the first time. In turn, we expect this to have a positive resultant impact on our sales revenues and the Group will of course continue to benefit from the cost-cutting exercise conducted during the 2019/2020 financial period.
This is an exciting time for the Group, and we would like to extend our thanks to our shareholders who have made this transformative phase possible. As we now look to accelerate out of the turnaround, this financial year holds great promise and we have every confidence that Zoetic will continue to make waves across the fast developing CBD industry.
Antonio Russo
Trevor Taylor
Joint Chief Executives
30 September 2020
Financial Review
During the year the Group has seen its primary source of revenue generation shift from the sale of oil and gas and it now sits firmly in the sale of its CBD products. Although a loss was made on the eventual disposal of the Group’s legacy natural resources assets, which were classified as assets held for sale at the year end, this movement has allowed for a significant reduction in ongoing costs.
Key developments
The Group’s year began with the formal launch of Zoetic Corporation as a wholly-owned subsidiary of Highlands Natural Resources plc (“Highlands”). The Group’s CBD arm quickly saw commercial growth as it entered into a retail distribution and sales agreement in April 2019, facilitating the sale of its CBD smokables and CBD chew pouches. The period since has seen the activities of the operating entity, Zoetic Corporation, expand and this laid the foundation for the relaunch of the parent company as Zoetic International plc.
Following this development, further retail distribution and sales agreements have been reached with partners in the UK, the Czech Republic, Slovakia and in other key European markets. Online sales have also commenced during the period, both of the eponymous Zoetic range of products and of Chill branded CBD tobacco alternative products. As the Group scales up its retail output, sales revenues from its various products are expected to grow whilst the costs of production have been limited through establishment of a strategic joint venture with a UK-based cultivation expert. The Group’s operations in this sphere are in a growth phase and so substantial revenues were not expected during the year.
This financial year and the subsequent months saw the Group attempt to divest itself of its legacy natural resources assets. This followed the continual decline of revenues from its oil and gas producing wells, along with difficulty in monetising its rights and assets in other fields.
Most significantly, a buyer was found for the Group’s 5% interest in eight oil and gas producing wells in East Denver. Whilst the asset was sold at a loss, its disposal will have a substantial positive impact on the Group’s future operational costs. It is also of note that the disposal of the Group’s East Denver assets has allowed it to settle an outstanding loan of bank loan of US $276,574 from ANB Bank. A potential buyer has also been identified for the Group’s interest in a nitrogen production well situated in Kansas, along with its 75% stake in the patents for the DT Ultravert well protection technology. The consequence of the Group’s disposal of its interests in the legacy Kansas and DT Ultravert assets has not yet been finalised but the deal is expected to return a combination of shares, options, and a continuing royalty of 6% for the use of the DT Ultravert patents. This transaction is expected to conclude in the month following the publication of this review.
Ultimately the year has seen the Group make a loss after taxation of £7,078,513, however this figure does not fully reflect the transition undergone throughout the period. Through its divestment of non-performing and under-performing natural resource assets, the Group has made substantial savings whilst limiting its exposure to ongoing costs and further risk from volatility within the oil and gas market.
Funding
As raised in last year’s Financial Review, the Group has funded its CBD operations to date through a fundraising effort in March 2019 which raised £1.56 million before costs.
During this financial period the Group raised £1.66 million net of costs from the exercise of warrants and the issue of shares. This included a fundraising effort in February 2020 which saw the Group raise £387,000 through a subscription for £330,000 of convertible loan notes and 950,000 ordinary shares of 1 pence each at a price of 6 pence per Ordinary Share.
In the weeks following the end of the period, the Group successfully applied for loans under the US COVID-19 aid arrangements to the approximate value of $290,000 (approximately £230,000). The majority of this funding will meet the requirements necessary for the borrowing to be forgiven, whilst any residual sum shall be repayable over a period of two years with an annual interest rate of 1%.
Revenue
The Group’s revenue has fallen from the 2019 figures, and this decline can in part be attributed to the partial cessation of the Group’s involvement in the natural resources industry along with the global deterioration of oil and gas prices. The Group is no longer generating revenue from its remaining legacy natural resources assets and future revenue generation will centre around its interests in the CBD industry.
Expenditure
The year has been characterised by a significant cost-cutting exercise, the effects of which are likely to become more obvious as the next financial year goes on. This includes, most notably, the cessation of costs relating to legacy natural resources assets, the management of DT Ultravert, and the closure of the Group’s hemp growth facility in Colorado. These efforts are expected to see a reduction in costs in excess of US$1 million.
The Group’s main costs are now its ongoing cultivation, development and production of CBD products, along with costs relating to distribution and external professional fees both in the US and in London where the Company bears the costs associated with its listing on the London Stock Exchange, including legal, regulatory and public relation costs.
Liquidity, cash and cash equivalents
At the year end the Group held approximately £349,000 at the bank. Moving forward, it is expected that the Group’s CBD business will begin to be cash positive in the short term, with strong revenues expected to follow in the near term as its Zoetic and Chill retail brands grow their market share
Events after the reporting period
The end of the reporting period coincided with the rapid spread of the COVID-19 novel coronavirus which has played some part in the drastic deterioration of global oil and gas prices. This saw a reduction in the operating output of the Group’s natural resource production facilities and a resultant decline in associated revenues. The following months saw the Group secure ‘COVID-19’ loans in the US in the value of $290,000, most of which will meet the requirements to be forgiven. Any residual sum will be repayable over two years and will attract interest of 1% per annum.
On 3 April 2020, the Group issued a further 12,900,000 ordinary shares of 1 pence each to the now Joint Chief Executive Officers, Antonio Russo and Trevor Taylor. This issue followed an incentive arrangement entered into with the new management team during March 2019.
Following the establishment of the Group’s cannabidiol (“CBD”) business, various distribution agreements have now been reached in respect of the Chill and Zoetic retail brands under which the Group’s CBD goods are sold. These include a multi-state distribution agreement with BettermentRS in the US, a further agreement for the distribution of Chill brand tobacco alternative CBD products across the Czech Republic and Slovakia, and an additional EU-focussed international distribution agreement involving 15 distinct European markets. In addition to these agreements, the Group has entered into a new arrangement with a UK-based partner for the cultivation of feminized hemp seeds and the local distribution of its CBD products. This agreement follows the conclusion of the Group’s Joint Venture with former CEO Mr Nick Tulloch.
The months following the end of the reporting period have also seen the progression of the Group’s managed exit from the natural resources sector. May 2020 saw an asset purchase agreement reached between the Group and Path Investments plc, the latter of which will acquire the Group’s 75% interest in the patented hydrocarbon well stimulation and protection technology, DT Ultravert. The agreement also saw Path Investments plc acquire the Group’s Kansas nitrogen assets, along with all associated leases and equipment. As a result of the aforementioned agreement, the Group will receive 15 million warrants to subscribe for new ordinary shares in Path at a rate of 0.1 pence each, along with warrants for a further 15 million shares at 1.5 pence each to last between the first and third anniversaries of the transaction. Path has agreed to pay, in perpetuity, to Zoetic a royalty equal to 6% of all gross revenues received by Path that are derived from DTU and attributable to the 75% interest being sold, accruing from receipt of first revenues although not payable until 12 months thereafter.
In September 2020, the Group reached an agreement regarding the disposal of its East Denver oil and has assets to the operator of those facilities, True Oil LLC. The proceeds of sale from the East Denver assets was agreed at US$376,000, although the Group had a loan secured on the assets of US$276,574 from ANB Bank. Following the execution of this agreement, the ANB Bank loan has been settled in full and the Company now has no borrowings. In the same month the Group finalised the closure of the legacy Highlands Natural Resources Corporation office in Denver, Colorado, along with the termination of a number of employment and consultancy contracts for personnel concerned with the management of the Group’s former natural resources assets. Zoetic International’s Colorado-based hemp cultivation and CBD production centre has also been closed, generating a saving of some $80,000 per month. Growing operations continue with research partners and will also recommence on a commercial level in the UK.
