Tue, 19th Mar 2019 16:30
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19 March 2019
Highlands Natural Resources plc ('Highlands' or 'the Company')
Fundraising to establish an organic cannabidiol operation
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 ("Ordinary Shares") (the "Subscription") and an offer for Ordinary Shares via PrimaryBid.com (the "PrimaryBid Offer") at a price of 8.5 pence (the "Issue Price") (together the "Fundraising"). 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.
· 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.
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
The PrimaryBid Offer
A further announcement will be made regarding the PrimaryBid Offer shortly.
For further information:
Highlands Natural Resources plc
Robert Price +1 (0) 303 322 1066
Cantor Fitzgerald Europe
Nick Tulloch +44 (0) 20 7894 7000
Keith, Bayley, Rogers & Co. Limited
Brinsley Holman +44 (0) 207 464 4098
Elisabeth Cowell +44 (0) 20 3757 6880
Notes to Editors
Highlands (LSE: HNR.L) is a London-listed natural resources company with a portfolio of high-potential assets and technologies. The Company's core projects include:
· Colorado Shale: Highlands holds a 7.5% carried interest in the East Denver Niobrara shale project. East Denver is currently producing from eight wells, with the potential for up to 24 wells in total. At its West Denver project, Highlands holds c. 5,300-acres of leases geologically similar to the East Denver project. This division also includes its patented anti well-bashing technology, DT Ultravert, successfully deployed in the Permian in 2018 and Piceance basins in 2016.
· Kansas Gas Resource: 3,457-acres with the first well producing nitrogen with an initial flow rate of 2,581 Mcfpd. Potential for an additional 24 wells.
· Highlands Water Resources: formed to facilitate a range of initiatives focused on easing the water shortage currently being experienced across the US oil and gas industry, and particularly across more arid States such as Colorado. Utilises the E10X modular solar powered water-recycling units. Highlands is also exploring the potential to supply water from its 154,072 acreage in Montana.
· Zoetic Organics: newly formed subsidiary targeting the production of premium organic CBD products into wholesale and retail channels from a 33,000 sq. ft. indoor facility (potential annual harvest of 40,000 hemp plants) and an initial 20-acre outdoor growing facility (potential annual harvest of 50,000 hemp plants).