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Zoetic International makes rapid progress with new CBD business

Snapshot

  • Zoetic in 2019 moved fully to focus on hemp growing and production of consumer CBD products 
  • Historic US shale oil and gas interests are up for sale
  • There is also a nitrogen and helium producing operation
  • New management team took over in September led by CEO Nick Tulloch
cannabis plants

Quick facts: Zoetic International PLC

Price: 7.2 GBX

LSE:ZOE
Market: LSE
Market Cap: £10.74 m
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What the company owns

Zoetic International plc (LON:ZOE) performed a major shift in direction in 2019.

Formerly known as Highlands Natural Resources, an oil and gas group with wells in Colorado, in March the company got into the CBD business and changed its name in August.

It has established CBD sales on both sides of the Atlantic with 67 US stores now stocking its products.

Its first retail distribution and sales agreement was with Schrader Oil’s chain of eighteen convenience and gas stores, which also invested £100,000 in the business as part of the deal.

These stores are stocking CBD products under the Chill brand, namely chew pouches and pre-rolled ‘smokes’.

 

How it is doing

The six months ended 30 September recorded revenues of £1.15mln, up from £0.52mln the previous year, and ended the period with £1mln in cash.

CBD

In the US, Zoetic said in November that a trial with distributor Mr Checkout was poised to go live via some of its 150,000 independent retail members, while talks are ongoing with another distributor.

The popularity of Chill chew pouches has been stronger than expected, so management has started exploring solutions to expand manufacturing capacity, which may include outsourcing some manufacturing or expanding in-house capacity.

Ahead of the festive season, the Chill brand was ready to launch six products in the UK, starting with CBD ‘gummies’ available in two strengths and sold in four flavours from early December, as well as ‘softgel’ capsules.

Chill beauty products will also be launched in time to go in Christmas stockings, including a hand cream, night cream, facial serum and lip balm, with further product launches planned for next year alongside a broadening of a massage oil range that has proven popular since going on sale in October under the Zoetic brand.

October saw the harvest of the 16-acre US hemp crop, with the dry weight less than expected but the quality said to be “at the top end of expectations”.

In light of low biomass prices, Zoetic decided to forgo some short-term revenue from selling dried but untreated plant in order to use the product for its own CBD production, with the longer-term impact on margins expected to be “very positive” and in line with the group's "seed to sale" strategy.

The company said it was well positioned to begin sales of feminised hemp seeds next year, with management working on developing arrangements with seed distributors in the US ahead of the growing season.

Gas production

Zoetic told investors in October that it was in discussions with several parties on the sale of its historic oil & gas assets as it looks to focus solely on CBD.

It said its East Denver assets, in common with most oil and gas projects, are slowly declining in line with others in the area and second half revenues are expected to be lower.

Management have been worked with the sites' operator to manage operating costs and, whilst they have been reducing in recent months, the half-year share was expected amounted to approximately £350,000 but with a fall predicted in the second half of the year.

DT Ultravert

The CBD business was spawned, in a serendipitous way, through Zoetic's ownership of a 75% interest in the economic value of a technology called DT Ultravert, which prevents ‘well bashing’ and enhances well productivity.

The process involves the injection of nitrogen gas into an existing well at the same time as a new nearby well is fracked.

Zoetic enjoyed some early-stage success in deploying the technology but needed its own nitrogen supply represents one of the largest cost inputs.

As a result, it bought a nitrogen producing asset in Kansas in May 2018, which is also a naturally occurring source of hydrogen.

Given the volume of nitrogen produced at Kansas, the company realised it might create another revenue stream by becoming a supplier in its own right, as well as using nitrogen to improve its own crops.

A pilot project with a Colorado-based organic legal cannabis company surpassed expectations, with the gas mixture increasing plant size, height, root diameter and flower count by up to 30% and inspired the group to enter the CBD business.

 

What the boss says

"We really are writing the beginning of the story, but I think what matters is about proving the product, proving the brand, and we are getting great feedback on both,” chief executive Nick Tulloch in October.

“Here in the UK… Every single review on our website is five stars, and these are unprompted reviews from customers who have tried it, they liked the product and it’s working for them.”

In November he hailed the considerable effort to launch the Chill brand in the UK: “The primary target was to ensure that the cosmetic and beauty range was available for sale ahead of the Christmas period and I am delighted that we are on track for that.

“Furthermore, the impending launch of our first Chill-branded product in the UK is an important milestone. In conjunction with these product launches, we are upgrading and improving our sales and marketing capabilities in the UK and Europe and investors should expect to see several changes here in the coming months.”

 

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Inflexion points

Zoetic is developing at a rapid rate and plans to launch its second brand, Chill, and additional CBD products in the UK and US

Management are looking at expanding manufacturing capacity as new distributors come on stream in the US

First feminised seeds are now expected to be ready at the beginning of 2020, with initial sales expected in the first quarter

Oil and gas assets are being held for sale

Hydrogen/nitrogen produced naturally in Kansas, with significant beneficial results in growing cannabis and hemp plants

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Watch

Highlands Natural Resources showcases CBD products ahead of UK launch

Highlands Natural Resources PLC's (LON:HNR) Nick Tulloch chats to Proactive London's Andrew Scott ahead of the start of sales of their cannabidiol (CBD) products in the UK this month. The oil and gas company made the move into CBD back in March this month. Tulloch says the first...

on 17/7/19

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