Just Chill as Zoetic rebrands
“…But with its new management, aggressive distribution strategy, and willingness to undergo comprehensive rebranding to appeal to its target market, we think the emerging Chill brand is one to keep an eye on…”
Zoetic International (LON:ZOE), soon to be rebranded as the Chill Brands Group, has been undertaking a radical transformation over the past year to refocus its natural resources business on the fast growing cannabis extract CBD derivatives market.
The company has two product lines. Chill is a range of CBD-based smokes and chew pouches free from nicotine, heavy metals, and THC – the cannabis plant’s psychoactive element. Zoetic is a luxury health and wellness brand encompassing oral tinctures, soft-gel capsules, massage oils, and topical cosmetic products. The company’s transition is being overseen by Co-CEOs Trevor Taylor and Antonio Russo, cannabis start-up veterans who worked together to develop the Colorado-based District 8 CBD brand.
Zoetic ‘prepares to lift off’
Zoetic’s makeover began with the – ongoing – offload of its legacy natural resource assets, including the replacement of its in-house Colorado-based hemp cultivation and CBD production centre with a set of partnerships with US and UK agronomy research institutes. The company’s seed testing programme is carried out at several US universities, and it has commissioned cannabinoid researchers GVB Biopharma to cultivate some 40,000 hemp seeds and test high-calibre CBD isolates. Zoetic continues to file US patents to protect THC-free smokable innovations yielded by the research, and is open to possible medical as well as retail applications.
The company is also pursuing an ambitious ‘Prepare for Lift Off’ retail distribution and marketing campaign through the ongoing renovation of its brands, the upgrade of its online channels, and a growing complex of bricks-and-mortar distribution agreements with distribution partners across Europe and the US.
Zoetic announced its most significant distribution deal to date in February, the incremental rollout of the Chill brand across the American Trade Associations Council’s network of 88,000 national convenience stores. It has also secured an agreement to distribute Chill in filling stations and convenience stores across the Czech Republic and Slovakia, and has signed distribution deals to facilitate the distribution of Chill products across 17 distinct European markets, which are subject to regulatory compliance checks in each jurisdiction. An agreement has also been secured with ‘a prominent retail partner in the UK’ which is also conditional on satisfying regulators: UK regulations require businesses to submit a food authorisation application to sell CBD products. An April update reported that Chill is passing through the administrative channels, and is expected to be on UK shelves ‘during Q2 2021’ – the product line was launched online on 30 June.
An update reporting on sales for the first weeks of the current financial year – from 1 April through to 14 May – said Zoetic had achieved trading profitability, having received orders for Chill products of over $1m across more than 2,000 stores. By July Chill products were stocked in approximately 2,500 US retail outlets, and total orders had surpassed $2m.
The update also announced a significant rebrand based on the acquisition of the Chill.com domain name. The Chill product line will be renamed to CHILL.COM, and the company intends to change its name from Zoetic International plc to Chill Brands Group plc to further underline its focus on the brand. Its stock ticker will switch from ZOE to CHLL.
Zoetic raised £6m in May to continue to support speedy rollout of the Chill brand. The raise supersedes a financing agreement the company had reached in March with Californian institutional investor LDA Capital that had given Zoetic access to £35m over a 36-month period. Termination of the agreement will cost Zoetic £1.2m.
Zoetic’s last set of interim results, for the six months ended 30 September 2020, reported that its decision to farm out its CBD research had reduced its operating expenses by some 65pc, saving the company around $80,000 a month. Its loss for the period was £1.13m, down from a £4.04m deficit for the previous year. Working capital was £1.6m. Zoetic’s financial results for the year ended 31 March 2021, due ‘before the end of August 2021’, will give a fuller indication of the company’s sales performance to date.
The CBD sector’s growing pains
As anyone who has been paying any attention to the markets this year will know Zoetic is targeting one of the retail industry’s most exciting new sectors. Back in March TMS provided a feature length discussion of the worldwide trend towards liberalisation of CBD-based products, which has gathered momentum as the compound’s medicinal benefits and potential as a tobacco-substitute become ever clearer, and public understanding of the plant’s non-psychoactive properties improves.
CBD products are now legal in more than 40 countries, and the giant US market is gradually opening, with CBD-based products already legal in 15 states and the prospect of further deregulation under the Biden administration. The UK legalised medicinal cannabis in 2018, allowing doctors to prescribe it for medical use. But the Financial Conduct Authority (FCA) only gave the green light for UK-based cannabis companies – with the right Home Office licences – to list on the LSE last autumn. The ruling led to a surge in companies applying to list, and, of course, investor interest: retail investors have poured hundreds of millions into cannabis stocks since companies began to go public in February.
Zoetic’s website states that reports from the Centre for Medicinal Cannabis suggests that six million UK citizens had tried CBD by 2019, with growing revenues from CBD products already in excess of £300m annually, and that the value of the European medical cannabis market could reach €55 billion by 2028 provided that favourable infrastructure and relevant legislative and social changes unfold. Legal cannabis sales in the United States passed $17.5bn in 2020, 46pc up on 2019 sales, and a new report by marijuana analytics firm Headset forecasts the US industry will expand 27.7pc to $23.6bn by the end of this year and an additional 29.3pc to $30.5bn in 2022. A study by Arcview Group & BDS Analytics indicates the global cannabis market will be worth $42.7bn by 2024.
The big tobacco companies are joining Zoetic and a host of small caps in targeting the rapidly growing tobacco substitutes market. As noted by TMS last month British multinational tobacco company Imperial Brands has invested in Oxford Cannabinoid Technologies, a biopharmaceutical company focused on researching, developing, and licensing cannabinoid-based compounds and therapies. Imperial has also invested $123m in Auxly Cannabis Group, a Canada-based company focused on developing, manufacturing, and distributing cannabis products for wellness and recreational consumers. Altria Group, another giant tobacco company, has taken a $1.8bn 45pc stake in the Canadian cannabinoid company Cronos Group. BAT has launched its first CBD vaping product, the VUSE CBD Zone, and FTSE 100 cigarette maker British American Tobacco is ramping up its investment in cannabis-related products.
It seems possible to get high on the continued hype surrounding the rapidly developing CBD sector. But many of the most excitable forecasts rest on the somewhat parlous assumption that the trend towards deregulation will continue. A much quoted report by Maple Tree Consultants and Mackrell Solicitors makes plain the hurdles that still remain here in Britain, warning that a ‘restrictive and cautious approach’ means ‘the UK is at risk of missing out on the commercial and industrial benefits of this rapidly developing sector’. In brief, because recreational cannabis remains a criminal offence in the UK, cannabis companies with non-UK operations could fall foul of Britain’s Proceeds of Crime Act. They must ensure their overseas operations would be legal if carried out in the UK, making marketing and distribution a legal minefield. And British-based cannabis companies are still prohibited from using cannabis grown in the UK, able only to sell products produced from imported plants. The Maple Tree study urges the government to make it easier to grow cannabis for medical use, relax restrictions on the extraction of the cannabinoid CBD, and allow general practitioners, not just specialists, to prescribe cannabis.
The European picture is just as cloudy, with regulations and attitudes differing sharply from country to country. Some allow the use of medicinal products containing cannabinoids, and others the medical use of unauthorised products or preparations. Some allow cannabis product manufacture and others do not allow manufacture but do permit cannabis import, while in other countries both are permitted.
And if anything the scenario is even more complex in the US where CBD is regulated on a state-by-state basis, creating a complicated and conflicting patchwork regulatory framework. But US reform may be on the horizon, a group of senators publishing a 163-page proposal earlier this summer that promises to sweep away much of the confusion by establishing nation-wide regulations for the safe formulation, production, labeling, and marketing of CBD products. The legislation’s passage would be greatly eased should it be backed by the President, who though promising to decriminalise cannabis possession during his 2020 campaign, remains ambivalent about federal reform, being inclined at present to allow states to continue to chart their own course.
Zoetic’s share price touched a peak of 104p in March when a steady stream of companies listed on the LSE following the FCA rule change and cannabis stocks boomed. As that initial flurry of excitement has subsided the company’s stock has gradually drifted down to settle at around 40p. Cannabis investors now face the sober task of choosing likely winners in an increasingly crowded market. Zoetic is up against fierce competition from other small caps targeting the retail CBD space: see for example our profiles of Love Hemp, Kanabo and Fast Forward (now known as Seed Innovations).
But with its new management, aggressive distribution strategy, and willingness to undergo comprehensive rebranding to appeal to its target market, we think the emerging Chill brand is one to keep an eye on. Prospective investors should look out for the company’s full year results due later this month, and, given Zoetic’s US focus, keep track of cannabis regulation developments on Capitol Hill.