Zoetic International PLC (LON:ZOE), the London listed vertically integrated CBD company, today provided a further update regarding the impact of Covid-19.
Oil & Gas Division
The steep fall in oil & gas prices has inevitably put considerable pressure on margins at the Company’s East Denver project, where it has an interest in eight producing wells, and the project is operating at a loss given the current oil price. The operator has determined that the most prudent course of action is to curtail production until such time as there is a recovery in oil & gas prices. Five wells will be shut in, with the remaining three choked back to produce around 240 barrels of oil equivalent per day between them. This is calculated to generate sufficient revenue to cover the fixed overheads of the project and to ensure that none of the partners is obliged to cover these from their own resources.
The Board is supportive of the operator’s proposal, although its consequence is to remove the sole revenue stream of Zoetic’s oil & gas division. A considerable amount of progress had been made since September last year in reducing this division’s overheads and ceasing unnecessary expenditure, but certain liabilities do remain, including an outstanding bank facility. This was originally drawn down as US$500,000 but the Company has adopted a policy of repaying the principal in line with the projected revenue from the East Denver project and the current outstanding balance is US$325,000. Zoetic is in constructive dialogue with the bank about a rescheduled payment plan and, although final details are to be agreed, the bank is supportive in principle.
In the circumstances, Zoetic is exploring the aid packages that are being made available by the US federal and state governments in response to the Covid-19 outbreak and the Company is working with its bank to apply for loans to cover its short term operating costs, including payroll, rent, utilities and loan interest. Further details will be announced in due course.
In addition to this, the Board is examining the feasibility of selling certain assets from its oil & gas division, in part to reduce ongoing liabilities and to generate short term cash. Given macro-economic difficulties worldwide, it is unrealistic to expect a high value from these assets, but the Board believes it may be possible to obtain part-payment for any sale upfront and the balance on a deferred basis in addition to retained overrides.
As part of the reorganisation of the Group put in place in the period since September last year, the oil & gas and CBD divisions in the US operate as distinct entities and so challenges in oil & gas should not necessarily impact the core CBD business. Zoetic has provided a guarantee to the loan facility referred to above however.
As previously announced, Zoetic anticipates lower revenue in its CBD division during the Covid-19 crisis, particularly in its US operation where sales are more dependent on stores. However, the Company’s plans with its distribution partner and outsourced manufacturing remain intact and all parties are determined to launch its contract to distribute smokable products and chew pouches with a US national distributor when the time is right.
Pending that launch, the operating costs of the US CBD division, which now amount to around US$80,000 per month (the biggest component of which is the rent for the Company’s indoor growing facility) are unlikely to be covered from product sales and cash balances in the US are low, having been primarily committed to preparing for the distribution contract and the commencement of seed sales. However, cash balances held in the UK will cover any short term requirements in the US if necessary. Group cash balances are also expected to be boosted over the coming 10 months from the £1.2 million subscription by Ox Distributing, LLC announced on 26 March 2020, with the first payment due at the end of April.
The management team are implementing a number of initiatives to generate cash, including the launch of a low cost subscription service for Chill products. Cost controls also continue to be tightened. However, the immediate focus is to sell the Company’s inventory of almost 3 million feminised hemp seeds. This represents Zoetic’s most valuable asset and this is the time of year when growers typically make their purchases, albeit made considerably more challenging by the Covid-19 outbreak.
Furthermore, as with the oil & gas division, the Company is applying for loans under the US Covid-19 aid arrangements to cover the short term operating costs of the CBD division. As Zoetic’s interests in the US are held in two distinct subsidiaries with separate operations, it is necessary to make a further application for this division and not include it within the oil & gas application. Further details will be announced when the Company has more clarity on the loan terms.
In the UK, Zoetic continues to focus on boosting online sales and, at the end of last week, the Company introduced an offer of a free CBD hand sanitiser with all orders placed on www.zoetic.com. This has had a positive response so far and in the coming week Zoetic will also launch a subscription service for its UK products, similar to the arrangement being introduced in the UK.
Nick Tulloch, Chief Executive of Zoetic, said:
“The unprecedented, and in many ways, unpredictable consequences we face from the Covid-19 crisis continue to present challenges but, as a management team, we are resolved to take all actions necessary in pursuit of our business plan. As I said in our previous update, we know it will not be easy but we are fortunate to be entering this period as much more streamlined and focused business. We should all be prepared address further hurdles in the coming weeks and months but it is important also to remember that our two CBD brands and our inventory of feminised hemp seeds are significant assets for the business and that will remain the case throughout this difficult time. The ongoing support of our shareholders, and particularly the significant investment by Ox Distributing and the Schrader family last week, matches our own confidence.
“We have prepared the business to operate on a much restricted cost base but, equally, we remain fully capable of continuing to build our revenue opportunities.”