Final Results

RNS Number : 6434G

Highlands Natural Resources PLC

25 July 2019

 

25 July 2019

Highlands Natural Resources plc ('Highlands' or the 'Company')

Final Results

Highlands is pleased to provide its Final Results for the year ended 31 March 2019.

FY 2019 Highlights

·    Revenue of £1.0m from East Denver Oil & Gas Project (FY 2018: £2.9m)

o  Two wells producing at the start of the year and six additional wells brought online in January 2019

o  Farm out of project delivered US$5.4m of cash and saw Highlands retain a 7.5% carried working interest in existing and new wells drilled

o  Highlands positioned to benefit from revenue from all eight wells during FY 2020

·    Rare gas discovery made in Kansas, culminating in the development of a US-based vertically integrated cannabidiol ("CBD") business, Zoetic, post period end

o  Testing highlighted nitrogen with 98-99.5% purity as well as hydrogen at concentrations around 8,000 parts per million

o  Nitrogen-hydrogen mix applied as an organic fertiliser during a pilot project at a US cannabis growing facility increased yields by up to 30%

o  Decision made to secure the benefit of the yield uplift for shareholders through formation of CBD business, capitalising on a rapidly growing market

Post-Period End Highlights

·    Zoetic is already generating revenues in the US after £1.56m fundraise in March 2019

·    33,000 sq ft indoor growing facility leased along with 16 acres for outdoor planting

·    Seed strategy underway - action to capitalise on demand for high quality seed through production of high margin feminised hemp seeds

·    Two retail sale agreements secured in the USA and direct-to-retail websites about to be launched in the US and UK

·    Product ranges for both "Zoetic" and "Chill" brands expanding

·    Exploring possibility of listing existing issued shares of the Company, to the OTCQB listing segment of the OTC Market and to trading on the OTCQB of the OTC Markets

o  Provides access to investors in the US and potential for greater liquidity

Robert Price, Executive Chairman and CEO of Highlands, said, "The activities undertaken during the year secured our interest in a far larger oil and gas production business than we began the year with.  In addition, we also established a vertically integrated CBD business in the US following the year end and we are delighted to report sales from that business already.

"Highlands now has two distinct operating divisions. We are ideally positioned to benefit from a full year of production at our East Denver Oil and Gas Project, where we have a 7.5% carried working interest in eight producing wells, and we have proved our ability to rapidly execute on our CBD strategy having established a business capable of generating multiple revenue streams in just four months since raising the funds. The year ahead presents Highlands with some significant opportunities and I look forward to updating shareholders regularly as we focus on building our presence in the rapidly expanding CBD market." 

Enquiries

Highlands Natural Resources plc Robert Price Nick Tulloch	[phone]
Cantor Fitzgerald Europe David Porter	[phone]
Newgate Communications Elisabeth Cowell                                                                             Ian Silvera           Fiona Norman	[phone] [e-mail]

Executive Chairman's Statement

Our financial year to 31 March 2019 was bookended by two pivotal events.  In April 2018, we farmed out much of our interest and our capital commitment at our East Denver Colorado shale project leaving us with a 7.5 per cent. carried working interest in current and future wells.  In March 2019, we raised £1.56 million to establish Zoetic, our wholly owned vertically integrated cannabidiol ("CBD") operation in Colorado.

The combination of these two transactions has streamlined Highlands' operations into two core divisions and has developed two significant sources of revenue for the Highlands Group (the "Group").

Since our IPO in 2015, we have consistently stated that our strategy is to establish a portfolio where 80 per cent. of the Group's operations should be comprised of production assets capable of providing a stable income, with the balancing 20 per cent.  of the portfolio providing significant potential upside, albeit at a higher risk.  For the first time I am delighted to report that we are very close to realising that ratio.  During 2019 East Denver has proved to be a dependable source of revenue, with its monthly contribution providing cover for much the Group's overheads.  Zoetic, which generated its first revenues last month, is fast developing into a very exciting business and a powerful contributor to shareholder returns.  This opportunity is particularly exciting given that market researcher Brightfield Group projects that the legal US CBD market will surpass $23 billion in sales by 2023 with a European CBD market of $1.7 billion by 2023.  Our remaining projects now take up relatively little management time or resources but remain as potential significant upside for the future.

Therefore, we have entered our 2019/2020 financial year with visibility on our future revenue potential, combining the cost-coverage that East Denver brings us with the rapid business development at Zoetic.

Colorado Shale Projects

East Denver

As stated above, on 20 April 2018, we announced that we had entered into a new third-party financing agreement that effectively replaced the previous arrangements on the project.  The Group received $5.4 million in cash and a 7.5 per cent. carried working interest in current and future wells.  Our new partner, True Oil LLC ("True Oil"), assumed all capital costs from June as well as operational responsibilities.

This transaction immediately strengthened the Group's near-term cash position and provided immediate financial stability.  Just as importantly, we secured an interest in a project that has become far larger than we could realistically have achieved on our own.  Today the project comprises eight producing wells with further upside potential as the carried working interest applies to the next two drilling and spacing units within an Area of Mutual Interest that spans approximately 32,000 acres. These two units could potentially have an additional 16 - 24 wells. The terms of the carried working interest are that there is no additional capital cost for Highlands on the drilling of these new wells, subject to the cost of each well not exceeding $7 million (in which case Highlands would make a contribution equal to 5.5 per cent. of the excess).  In addition, we are obliged to meet our 7.5 per cent. share of operating expenses and lease costs of both present and future wells and also account for our share of lease royalties.

It is worth reflecting that the East Denver project started out as a greenfield project which had strong, yet unproven, potential. In under three years, we have delivered a successful and significant oil & gas operation. We drilled two productive wells, raising both public and private finance, proved the potential of the project to partners who were able to take on the responsibility and financial burden of fully developing the first unit and therefore removing the dilutionary and operational risk for Highlands' shareholders. In that process we have created some very strong industry relationships which will be an important asset to the Group as we continue to operate in the region.

Highlands remained operator of the project until the first four wells were drilled and True Oil assumed operatorship of the project in June. Testament to the commitment of our partner, operations to deliver the additional six wells were commenced quickly.  The first of those six was spudded just seven days after the transaction and the last within the following two weeks.  Drilling operations for all wells completed in mid-July 2018.

We experienced some delays with the weather conditions over the summer months.  Colorado experienced one of the driest summers in recent history and consequently water supply disruptions became commonplace for the local services industry. Our operations were not immune to these problems. Accordingly, the well operator amended the original fracking schedule, with more staggering of the operations to compensate for the drought conditions, and completion of operations was deferred to December.

As part of the need to source more water supplies, we took the initiative to move two E10X modular water-recycling units to the East Denver location to treat production and flow-back water from operations to make the water reusable.  This created a new business division for Highlands, further described below.

On 2 January this year, we were able to announce that our operating partner had successfully concluded completion operations for the six new wells at the project and flowback had commenced from three of those six wells.  Two weeks later, all eight wells were in production and, by the end of January, following completion of the gas pipeline, gas sales from all eight wells commenced.

The Initial Production rate of 4,600 Boepd during the flow-back period was announced on 25 February, comprising combined oil production of 4,053 Bopd and combined gas production of 3,284 Mcfpd.  As production stabilised thereafter, we updated investors in May of this year with production rates of 2,700 Bopd and 4,000 Mcfpd respectively.  Our operating partner has from the outset adopted a conservative production strategy with all six new wells choked back.  The limited choke size is based on a considered methodology focused on maintaining well pressure and extending the well lives.  We anticipate that the chokes will be opened further over time with the objective of maintaining a steady production rate and, for Highlands, a steady and extended revenue stream.

As we announced at the beginning of this month, during June, two of the new wells were taken offline for workovers, which saw a gas lift applied to assist production. The operations were completed successfully and both wells are now back on production.  The operator may take the opportunity to install artificial lifting on the remaining four wells in due course, but it is anticipated that this can be achieved through a rod pump. 

Operating costs in the second quarter of this calendar year have been higher than initially forecast.  These largely relate to one-off costs of the workovers and establishing the gas pipeline.  As previously annofunced, we have received confirmation from the operator that future monthly costs will be considerably reduced.

These recent events have meant that Highlands' objective of covering its overheads from East Denver's cashflow has not been realised over this period.  However, the return to production of all wells and the reduced operating costs means that the project's financials should recover.

The nature of oil & gas wells is that they inevitably decline but, in light of the operator's policy of managing a conservative production strategy, the Board is comfortable that East Denver will continue to be a very valuable and significant contributor of cashflow to the Group for some time.

During the month of July 2019 to date, production at East Denver averaged approximately 1,700 Bopd and approximately 5,500 Mcfpd. 

West Denver

Following on from our successful development of our East Denver project, in June 2018 we announced that we had acquired a consolidated package of 2,490 acres of oil and gas leases to the west of Denver, Colorado where the Board believes that up to 48 horizontal wells could be drilled.  At a total of $50,000 for the initial leases, this represented a low-cost opportunity to develop a new shale project for Highlands.  As the year progressed, we expanded the acreage to reach 4,800 acres by the time we filed our spacing and permit applications in October 2018 and 5,352 acres by our year end.

As we reported at the time, these development plans raised some concern from local communities.  Highlands has always committed to being a responsible and transparent operator within the state of Colorado and it is not our style or desire to cause any discord.  Therefore we withdrew the permits and we continue to consider the most appropriate way to monetise this project in light of the feedback we have received from the local community.

The project bears numerous geological similarities with East Denver. The Niobrara formation shows prominently under the West Denver acreage, but is joined by other attractive shale targets including the Codell formation. West Denver is also ideally situated for pad-based operations similar to the efficient techniques employed by Highlands and its partners at East Denver.

Other natural resources projects

Enhanced Oil Recovery

As we have reported before, infill drilling is increasingly commonplace in many active US shale regions and, as a result, well-bashing is becoming a rising legal issue in the industry. DT Ultravert is a proven and patented technology which can prevent this problem in both vertical and horizontal wells.

Well-bashing can occur when new wells, or 'child wells', are drilled in close proximity to wells already in production ('parent' wells), at a time that these existing legacy parent wells are experiencing a natural reduction in their reservoir pressure.  When the child well is fracked, it may impact the performance of both the parent well and child well because fracking fluid from the new well naturally migrates towards the low-pressurised parent well as the fractures from the new wells connect with the old ones.  In the most serious cases this can damage the wells beyond repair.

The consequences for producers can be serious. First, public companies must report a revision of recoverable reserves and the lower reserve figures can affect their credit limits as banks very often tie their lending to proved reserves. Second, when two parties are involved, it may result in a lengthy and expensive litigation case and there is already precedent for substantial damages to be awarded for well-bashing.

We reported last year that DT Ultravert was successfully deployed in the Permian Basin, one of the most active shale plays in the US.  The results confirmed that it is capable of restoring and maintaining protective reservoir pressures in a horizontal wellbore.  Furthermore new child wells fracked during the DT Ultravert deployment are significantly outperforming neighbouring child wells fracked without DT Ultravert.

We presented these findings at last year's North American Prospect Expo (NAPE) conference in Houston, which is one of the industry's most widely attended trade shows.  We continue to follow up with those who have expressed interest in DT Ultravert. 

With well-bashing being such a problem, it is of no surprise that other technologies and techniques are being actively developed to counteract the effects of fracking near existing wells.  DT Ultravert is patent protected and we monitor third party activity regularly to ensure there are no infringements.

Our interest in 'Well Enhancement' extends to CO2, which can also be used to increase the productivity of wells, and in June 2018, we announced the acquisition of 46,000 acres believed to be prospective for commercial volumes of this gas. The area sits adjacent to land which was identified as a target for future CO2 production by Kinder Morgan, one of the leading suppliers of CO2 to the Permian Basin. The acquisition and maintenance of the leases were at minimal cost but, notwithstanding our continued belief in the potential, we have allowed our interest in this acreage to lapse, and have made an appropriate impairment provision in the accounts.  As I explained at the start of this report, our core focus is now the steady revenue stream from our East Denver project and the rapid upside potential from our CBD interests.  Highlands is a small company and we need to be disciplined to focus our time and financial resources on the areas that can have the biggest impact on shareholder returns.  With this in mind, we elected not to continue with our project in Arizona.

Kansas Nitrogen

Despite its proven effectiveness, the Directors are aware that the profitable and large-scale commercialisation of DT Ultravert will depend on improving its cost efficiency.  Nitrogen represents one of the single largest cost components in a DT Ultravert deployment, as the process pumps significant quantities of liquified and/or gaseous nitrogen into wellbores. Consequently, any cost reductions that can be secured represent an obvious opportunity to improve the economics of DT Ultravert.

With that in mind, we acquired 800 acres in Kansas at the end of May 2018 which host a naturally occurring nitrogen asset.  Following the acquisition, we rapidly commenced discussion with the State of Kansas Corporation Commission Conservation Division, which delivered the opportunity for Highlands to first re-enter and re-complete an existing wellbore within its landholding. Flow tests from the Barret 1-14B well, reported on 21 June 2018, indicated initial nitrogen purity levels over 99.59 per cent..

The flow rate of the well increased to 2,581 Mcfpd over time, compared to the initial flow test of 1,769 Mcfpd rate. At these indicative levels of production, we essentially achieved our objective of securing economic nitrogen supplies for DT Ultravert. For comparison, we purchased a total of over 20,000 Mcf of nitrogen during our successful tests in the Permian and Piceance Basins.

At the time of the acquisition, our primary intention was to secure nitrogen supplies for DT Ultravert. However, by way of illustration of the importance of this result, nitrogen with 98-99.5 per cent. purity is used as a preserving agent by food and beverage producers, meaning that Highlands' output could be immediately used in this industry.  Given the potential volumes of gas we were able to produce in Kansas, we began to investigate the possibility of becoming a supplier of nitrogen to third parties, in addition to utilizing it for our own needs.  We estimated that approximately 16 million bushels of corn are grown in the counties surrounding our nitrogen project and therefore agricultural use (utilising nitrogen in the manufacture of ammonia-based fertiliser) was considered to be a strong possibility.

Initial analyses of the gas composition showed traces of both helium and argon and we initially researched the isotopic composition and potential for these. We installed a gas concentration unit to further investigate the characteristics of the produced gas and, amongst other things, the results evidenced hydrogen at concentrations around 8,000 parts per million.

This was a very significant find.  Scientific studies show that treatment of soil with hydrogen improves the growth performance of many crops by 15 - 48 per cent..  Hydrogen is a key promoter of growth of certain nitrogen fixing micro-organisms.  These micro-organisms convert hydrogen and nitrogen into ammonia, which plants take up and utilize for growth.  Thus, the addition of molecular hydrogen can impact soil fertility, which is particularly useful for controlled indoor growing operations where the application of traditional anhydrous ammonia-based fertilisers is not practical.

It is very unusual to find naturally occurring hydrogen in this way.  It is frequently found in oil and gas wells, but hydrogen collected from these wells is inevitably contaminated by hydrocarbons so making the gas toxic for agricultural operations.  Highlands' gas mixture in Kansas exhibits the very rare characteristic of being entirely free of complex hydrocarbons.  Consequently, this makes it potentially suitable as a fertiliser and, even more significantly, as a fertiliser for organic crops without the need for any treatment. 

Towards the end of 2018, we entered into a pilot project with a Colorado-based organic legal cannabis company for the treatment of around 50 cannabis plants during the normal 90 days growing cycle.  Legalised cannabis is a high value crop compared with other agricultural products and, consequently, the value uplift of being organic is far more significant. 

The results surpassed expectations with the gas mixture increasing plant size, height, root diameter and flower count by up to 30 per cent..  This led us into our new business of CBD which is described further below.

In the meantime, we continue to explore avenues for third party sales of our nitrogen gas in Kansas in conjunction with a local partner.  It would be unrealistic to anticipate any revenues from this activity to be significant in the short term but, noting the costs of our Kansas operation, we are in a position to offer very attractive prices to potential purchasers whilst still achieving a high margin.

Helios Two (Montana) and Water Resources

Montana

As at 31 March 2019, Highlands held leases over 109,694 acres in south-eastern Montana which is down from our peak holding of 220,009 acres as we let some peripheral leases costing £258,000 to lapse. As we have previously reported our January 2017 Competent Person's Report for the initial lease holding of 69,120 acres indicated a "best estimate" NPV10 of US$341 million for a natural gas development project alone.  No account was taken in that report for any potential helium resource although, as previously announced, the presence of helium was subsequently established by Highlands to be present in concentrations of 0.31 per cent. to 0.33 per cent..

With these encouraging results, we have carried out a number of tests on the project and, whilst the outcome of the tests has at times been promising, the information has been inconsistent.  Natural gas production rates peaked at 216 Mcfpd but the production rate was not sustainable.  However, when the first stage of a subsequent fracturing operation, which was left unopened, was stimulated with water, shut in and left to soak for 10 months, a sustainable production rate of 58 Mcfpd was achieved.  This innovative water-based soaking method, in comparison to using expensive foam-based stimulation techniques, could potentially allow us to economically develop the Eagle formation provided that we can increase the level of sustainable production.  Given the thickness of the formation, we believe that it may be possible to stimulate the formation with potentially up to a dozen stages and achieve potential economic production.

As we have said before, the extensive resource base of the area is not in doubt but the technical challenges for a full development and commercialisation of the project should not be underestimated.  We continue to monitor long-term gas rates at the wellbore and this will confirm over time the commerciality of the project.  As we said at the time of our interim results last year, pending this clarification it would be imprudent to commit extensive financial resources to the project and therefore we have scheduled no material activity on the Montana natural gas and helium prospects for the time being as we concentrate on our other core projects.

One potential initiative that we have described before is that we discovered, during the dewatering operations at Montana, that our acreage there contains potentially billions of barrels of water suitable for oil and gas operations and specifically in the Powder River basin given its proximity.  This is clearly not the original strategy for our Montana project and its viability will depend on water requirements in the nearby area which itself is likely to be more weather-dependent than driven by industry activity.  However, any commercial development of Montana is going to require a significant dewatering exercise and if that dewatering can itself become a business line for Highlands, then it will considerably change the economics of the project.  A number of variables will determine the viability of this initiative so I would caution investors about ascribing too much value to this option although it remains an opportunity that we continue to monitor.

Highlands Water Resources

Hydraulic fracturing operations usually require vast amounts of clean water.  Much of the water used in these operations is then recovered alongside the hydrocarbon products extracted.  The consequence is that operators can be left with considerable quantities of water to dispose of at the conclusion of each stage of their operation.

Water produced in fracking contains various chemical impurities.  It therefore cannot be released onto the surface and must be safely disposed of, usually by being pumped into separately drilled disposal well either on site or having been transported to a suitable location.  The logistics of this adds considerable costs to fracking operations.

Based on our industry experience as an operator in the region, we estimate the average cost of acquiring and transportation of the fresh water for hydraulic fracturing operations to be around $2-3 per barrel in the Denver Julesburg Basin ("DJ Basin") and that the average disposal cost for a barrel of water in the basin is a further $2-3.  Inevitably the acquisition and disposal costs for the water will vary between regions but we believe that this element of the fracking operations is an important component of profit margins of the operators across the United States.  According to IHS Markit, the annual water management costs for the Permian Basin alone are expected to reach US$25 billion in the next five years.

Following the water shortages referred to above in Colorado, we partnered with Epiphany Water Solutions to move two of its E10X modular water treatment solutions to East Denver Project to treat produced water from the operations.  We initiated this pilot project to verify the technical and economic merits of the technology for DJ Basin operations. During this pilot project we processed up to 500 barrels of water per day.

We were pleased to announce on 16 October 2018 that we had established a new subsidiary, Highlands Water Resources, and had become a distribution partner for Epiphany's technology across several US states.  We commenced discussions with other operators for the deployment of E10X machines for which we could either receive a sales commission on the machine or, more likely, a "per barrel" fee based on the water that is treated. 

The viability of the project is not in doubt and the fee potential for future operations includes both recycling the produced water and, separately, re-selling the treated water for re-use in the same hydraulic fracturing operations at the location. However, it is becoming apparent that we would need to considerably increase the scale of Highlands Water Resources to position it as a meaningful partner at some of the larger fracking locations where water use and recycling is most significant.  As we focus on our CBD business, that is an opportunity that we may need to defer for a period of time but we remain in discussions with potential partners who may be able to assist us in accelerating this business line.

Zoetic

On 19 and 20 March we announced a fundraising to raise £1.56 million via the issue of new ordinary shares of 1 pence each at a price of 8.5 pence each to establish an organic, vertically integrated cannabidiol ("CBD") operation in Colorado, USA, through a newly established and wholly-owned subsidiary, Zoetic.  As explained above, this new business opportunity followed the completion of our very successful recent trial, which saw a nitrogen-hydrogen mix from our operation in Kansas applied as a natural, organic fertiliser at a cannabis operation in Colorado. As reported, the gas mixture increased plant size, height, root diameter and flower count by up to 30 per cent., surpassing our expectations.

Zoetic's business was established on 1 April 2019 so falls after the period end but, given its potential significance to Highlands, it is important to provide some commentary on the business as part of this report.

The business commenced when Highlands entered into an agreement to lease an extensive organic purpose-built indoor growing facility from a company which had ceased its cannabis operations. The management team, which joined Zoetic at the same time, had previously operated that facility, bringing with them all the skills and abilities for Zoetic to commence operations immediately. To incentivise the team, Highlands issued them with 5 million warrants (all of which have now been exercised) and agreed to issue them with 12.9 million ordinary shares in March next year.  Part of the rationale for extending Highlands' business into CBD and forming Zoetic was that, in the view of the board, it would secure the benefit of the up to 30 per cent. yield uplift for Highlands' shareholders.  The alternative would be to simply sell the gas as a commodity fertiliser for a few dollars per Mcf.

The Company quickly advanced its strategy of vertically integrating its yield-enhancing gas with indoor and outdoor hemp growing as well as developing new products. The passing of 2018 US Farm Bill, which legalised industrial hemp cultivation and hemp-derived products under State-approved programmes, has created a substantial market opportunity for Highlands.  We have quickly been able to capitalise on the expertise of the Zoetic management, as well as Colorado's heritage as one of the first states to legalise hemp's close relative cannabis (meaning the local workforce is already experienced in this new industry).

In a rapidly growing market (the US alone is forecast to surpass $23 billion in four years according to Brightfield Group), Zoetic will seek to distinguish itself by producing premium, high quality products and always providing full transparency in its labelling and websites. CBD is becoming an increasingly mainstream supplement, which is available in Boots, Holland & Barrett and other high street stores in the UK.  As the CBD market develops further in both the US and the UK, our belief is that discerning consumers will seek out higher quality products.

Zoetic's core asset is the 33,000 square foot state of the art indoor growing facility which can grow up to 10,000 hemp plants per harvest and with at least three harvests per year.  In addition, we are growing hemp outside in two fields of 16 acres in total, planted at around 2,500 hemp plants per acre.

We are targeting a yield of 30 grams of CBD per outdoor plant.  Estimated wholesale prices are currently at around $3 per gram although, for CBD used in our own retail products, the value to Zoetic will be many times this.

Since establishing Zoetic, the Board has evolved its strategy for plants at the indoor growing facility. In addition to growing plants for CBD production, Zoetic also intends to produce feminised hemp seeds for sale to other hemp producers.

A well-managed plant has the potential to produce in excess of 500 seeds.  Whilst the growing cycle for seed production is marginally longer, we believe that the controlled conditions in our indoor growing facility, and the supply of Highlands' proprietary nitrogen-hydrogen gaseous fertiliser, has the potential to establish a robust seed-production operation. This provides Zoetic with a significant revenue opportunity.  Zoetic's management team is currently working on the most suitable strains of hemp for seed production and we have seven possibilities identified at the current time.

Demand for high quality seeds is very strong as the hemp and CBD industries continue to expand, and it is not unusual for the most sought after seeds to retail at up to $1 each. Seed producers do typically incur costs associated with laboratory testing, storage, seed-broker fees and quality control initiatives and we have conservatively factored these into Zoetic's business plan.  We expect to use all of our indoor planting to fulfil our seed strategy although some wholesale CBD may still be produced from the biomass once the seeds have been extracted from the plant.

A seed production strategy has a timing implication on revenue.  Growers typically do not purchase seeds until planting time and so, whilst Zoetic's seed production can be carried out all year-round, revenue will be weighted towards the last quarter of our financial year.  Nevertheless the upside that this strategy could provide us outweighs other timing considerations.

Alongside our strategy to produce feminised hemp seeds for sale, we also entered into a collaboration with analytical chemist Stephen Goldman on 28 May 2019, to examine, develop and file patents and other intellectual property on behalf of Company in the areas of (i) agricultural genetics and (ii) pharmaceutical and wellness products based on, or incorporating, cannabinoids.  In return for funding the costs of this collaboration, which are not material, all intellectual property that is developed will be owned by Highlands.

We filed our first patent in relation to Mr Goldman's work almost immediately.  The patent relates to the methodology for combining cannabinoids with pharmaceutical and wellness products.

Since its inception, Zoetic has established two brands each with their own direct-to-retail websites:

Zoetic	A premium CBD brand available in both the US and UK.  It will distinguish itself with full transparency of the contents of its products, both on the labels and on its website. Products: premium tinctures, soft-gel capsules and topicals Further details can be found at www.zoetic.com
Chill	Chill is positioned as a high quality CBD alternative traditional tobacco products. With an extensive and growing social media presence, Chill involves its customers in its brand.  Products: smokables, vapes and chew pouches Further details can be found at www.thechillway.com

Progress has been considerable since we established the business.  Chill smokables now are sold in a total of 36 stores - 18 Schrader convenience stores and a further 18 stores belonging to smaller chains. Both Chill and Zoetic products are sold by LeafyQuick, a specialist CBD retail that offers same day delivery to the Chicago area, with the first delivery to LeafyQuick being made this week. Ox Distributing, the Company's distribution partner, has also recently indicated its plans to bring Chill products to stores in Texas.  In addition, Zoetic products will very shortly be on sale in the UK, initially on our own website and thereafter in stores.

Zoetic is a vertically integrated CBD operation with operations "from seed to shelf".  As we predicted, the business has already started generating revenues from retail sales and, in the coming months we expect these to increase in line with brand awareness.  We expect revenue to be supplemented by further revenues from wholesale hemp and CBD sales later in the year when our outdoor harvest is ready as well as, in the first quarter of 2020, sales of hemp seeds.

As we have said before, the Board has no plans to grow any cannabis at Zoetic's facility. Zoetic plans to grow only hemp, taking advantage in particular of the regime being put in place under the 2018 US Farm Bill.

Non-Core Portfolio

Outside of its core portfolio, Highlands has other assets which, although not currently viewed by the Board as forming part of the Group's core portfolio, may in time be value accretive and could provide significant upside potential. 

Highlands holds approximately 3,952 acres of land targeting the Niobrara and Muddy formations in Emmons County, North Dakota, which includes the shallow natural gas prospect, "Gravity".

Highlands also holds approximately 1,340 acres in Grand County, Utah which presents it with an in-situ uranium mining opportunity. 

Further details of these assets were provided in previous years' strategic reports.  Whilst we have not progressed them further this year, we remain of the view that they continue to represent potential upside for the Group in the future.

Other matters

Board changes

Towards the end of the financial year, our former Finance Director, Melvyn Davies, indicated his plans to retire and I was delighted that Nick Tulloch, who has been our financial adviser for four years, agreed to step into the role and join the Board.  Like Melvyn, Nick is based in the UK and, in addition to his duties as Finance Director and Company Secretary, will also support the development of the Group's investor relations strategy.  Already we are making progress here with a revised website and a social media strategy, underpinned by our new LinkedIn page, to give greater levels of information to our investor base, as well as other audiences important to our business.

Nick replaced Melvyn on 1 May 2019 when Melvyn retired from the Board.  Melvyn agreed to stay on with Highlands as a consultant until the publication of these results and to ensure an orderly handover to Nick.  He has been a core part of the Highlands team since our IPO and I would like to thank him for his hard work and invaluable advice and wish him all the very best for the future.

Listing on OTC market

We are currently exploring a listing of Highlands' ordinary shares on the OTC market in the United States.  With several US shareholders in the Group already and an increasing following in the US developing, we have been exploring ways to make it easier for those investors to trade in our shares.  As a London Stock Exchange listed company, obtaining (and maintaining) a listing on the OTC is a relatively straightforward and cost-effective process, with there being no need to file a prospectus or similar document.  Independent studies have also shown that increasing the investor audience in this way can have a very positive effect on the liquidity of a company's shares.

We will announce further details as we work through the process but our current target is to complete the listing towards the end of the summer.  Listing on the OTC will have no impact on the existing listing of our ordinary shares in London.

Reduction of capital

At our AGM on 21 August 2018, we passed a Special Resolution regarding the reduction of capital. As we explained at the time, due to an accumulated deficit on our profit and loss account, we did not have any distributable reserves and so would be unable to make any distributions to our shareholders.  The effect of the reduction of capital was to cancel the Company's share premium and to reduce the nominal value of the existing ordinary shares of 5 pence per share to 1 penny per share by cancelling the paid up capital of 4 pence on each such ordinary share.  We then applied the reserve arising to eliminate the Company's accumulated profit and loss account deficit and to create distributable profits at that date of approximately £14.45 million.

This was an important item of housekeeping and, subject to the future performance of the Group, this should give us the ability to make distributions to shareholders in the future as and when the Directors may consider that it is appropriate to do so. Naturally at this stage we cannot give any guarantee either that the Group will make any distributions or as to the size of the distributions which may be made but the Board considered that creating that ability was an important task for Highlands to undertake.

Outlook

As I stated at the beginning of my review, this last financial year was defined by two pivotal events at the start and the end.  We began the year as a predominantly oil & gas group with an established and producing project and we finished the year, still with the benefit of considerable revenue upside from this project, but with a foothold in one of the most exciting growth industries at the present time.

It is my belief that as 2019 progresses, our CBD business will become increasingly significant to the Group.  We are only a little over four weeks into product sales but early signs are encouraging and, as the Zoetic and Chill brands continue to add more product lines, it is my hope and expectation that growth in this division of Highlands will continue to accelerate.  When I report to shareholders next year, our vertically integrated CBD business will be fully established with revenues from seed sales, wholesale CBD and retail sales.

We remain a small and focused management team and naturally every week we must make decisions on where to focus our financial resources and time.  Whilst Zoetic has dominated our commitments since the end of the last financial year, I want to assure our shareholders that our other projects remain as viable as they always have been and, even though work may have slowed, the team at Highlands has not lost sight of their potential.  DT Ultravert in particular, having proved its ability to prevent well-bashing, and improve production, in both horizontal and vertical wells, remains an opportunity of considerable upside. We continue to develop and police our patents and, as well-bashing, grows in significance throughout the onshore oil & gas community in the US, we remain open to opportunities to monetise our investment in this exciting technology.   At present, we have been awarded five patents along with two additional notices of allowances.

I would like to thank our shareholders for their continued support.  This financial year is one of great opportunity for Highlands as we diversify away from traditional natural resources but into a new industry that is developing fast and one in which we participate with significant strategic advantages.

CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME

YEAR ENDED 31 MARCH 2019

	Year ended 31 March 2019 £		Year ended 31 March 2018 £
Revenue	1,016,399		2,900,785
Administrative expenses	(5,511,418)		(6,878,055)
Operating loss	(4,495,019)		(3,977,270)
Loss on disposal of intangible asset	(1,276,178)		-
Finance income	473		1,033
Loss on ordinary activities before taxation	(5,770,724)		(3,976,237)
Taxation on loss on ordinary activities	-		-
Loss for the period	(5,770,724)		(3,976,237)
Items that may be re-classified subsequently to profit or loss:
Exchange difference on handling foreign operations	1,060,393		(1,341,710)
Total comprehensive loss for the period attributable to the equity holders	(4,710,331)		(5,317,947)
Loss per share (basic and diluted) attributable to the equity holders (pence)	(4.88) p		(4.15) p

CONSOLIDATED STATEMENT OF FINANCIAL POSITION

At 31 MARCH 2019

	At 31 March 2019 £		At 31 March 2018 £
NON-CURRENT ASSETS
Tangible assets	1,503,499		73,693
Intangible assets	3,432,536		8,871,396
	4,936,035		8,945,089
CURRENT ASSETS
Trade and other receivables	1,186,814		2,533,307
Cash and cash equivalents	1,508,649		602,814
	2,695,463		3,136,121
TOTAL ASSETS	7,631,498		12,081,210
CURRENT LIABILITIES
Trade and other payables	1,314,370		2,713,549
TOTAL LIABILITIES	1,314,370		2,713,549
NET ASSETS	6,317,128		9,367,661
EQUITY
Share capital	1,364,831		5,824,885
Share premium account	1,276,611		12,819,639
Share based payments reserve	793,128		887,541
Foreign currency translation reserve	(422,566)		(1,482,959)
Retained profit/(loss)	3,305,124		(8,681,445)
TOTAL EQUITY	6,317,128		9,367,661

COMPANY STATEMENT OF FINANCIAL POSITION

At 31 MARCH 2019

	At 31 March 2019 £		At 31 March 2018 £
NON-CURRENT ASSETS
Intangible assets	435,675		506,325
Investment in subsidiary	15,746,518		15,746,518
Loan to group undertaking	-		37,493
	16,182,193		16,290,336
CURRENT ASSETS
Trade and other receivables	208,501		27,996
Cash and cash equivalents	1,293,132		361,690
	1,501,633		389,686
TOTAL ASSETS	17,683,826		16,680,022
CURRENT LIABILITIES
Trade and other payables	152,470		174,361
TOTAL LIABILITIES	152,470		174,361
NET ASSETS	17,531,356		16,505,661
EQUITY
Share capital	1,364,831		5,824,885
Share premium account	1,276,611		12,819,639
Share based payments reserve	793,128		887,541
Retained profit/(loss)	14,096,786		(3,026,404)
TOTAL EQUITY	17,531,356		16,506,661

CONSOLIDATED STATEMENT OF CHANGES IN EQUITY

YEAR ENDED 31 MARCH 2019

	Share capital		Share Premium account		Share based payment reserve		Foreign Currency Translation Reserve		Retained loss		Total
	£		£		£		£		£		£
At 31 March 2017	3,389,367		7,639,622		833,332		(141,249)		(4,712,400)		7,008,672
Comprehensive income for the period
Loss for the period	-		-		-		-		(3,976,237)		(3,976,237)
Other comprehensive income	-		-		-		-		-		-
Translation adjustment	-		-		-		(1,341,710)		-		(1,341,710)
Total comprehensive loss for the period attributable to the equity holders	-		-		-		(1,341,710) -		(3,976,237)		(5,317,947)
Issue of warrants and options	-		-		61,401		-		-		61,401
Exercise of warrants	-		-		(7,192)		-		7,192		-
Shares issued in the period	2,435,518		6,060,696		-		-		-		8,496,214
Cost relating to share issues	-		(880,679)		-		-		-		(880,679)
At 31 March 2018	5,824,885		12,819,639		887,541		(1,482,959)		(8,681,445)		9,367,661
	Share capital		Share Premium account		Share based payment reserve		Foreign Currency Translation Reserve		Retained loss		Total
	£		£		£		£		£		£
At 31 March 2018	5,824,885		12,819,639		887,541		(1,482,959)		(8,681,445)		9,367,661
Comprehensive income for the period
Loss for the period	-		-		-		-		(5,770,724)		(5,770,724)
Other comprehensive income	-		-		-		-		-		-
Translation adjustment	-		-		-		1,060,393		-		1,060,393
Total comprehensive loss for the period attributable to the equity holders	-		-		-		1,060,393		(5,770,724)		(4,710,331)
Exercise of warrants	83,333		116,667		(61,401)		-		61,401		200,000
Lapse of warrants	-		-		(33,012)		-		33,012		-
Re-organisation of share capital	(4,726,574)		(12,936,306)		-		-		17,662,880		-
Shares issued in the period	183,187		1,373,903		-		-		-		1,557,090
Cost relating to share issues	-		(97,292)		-		-		-		(97,292)
At 31 March 2019	1,364,831		1,276,611		793,128		(422,566)		3,305,124		6,317,128

COMPANY STATEMENT OF CHANGES IN EQUITY

YEAR ENDED 31 MARCH 2019

	Share capital		Share Premium account		Share based payment reserve		Retained loss		Total
	£		£		£		£		£
At 31 March 2017	3,389,367		7,639,622		833,332		(2,672,332)		9,189,989
Comprehensive income for the period
Loss for the period	-		-		-		(361,264)		(361,264)
Other comprehensive income	-		-		-		-		-
Total comprehensive loss for the period attributable to the equity holders	-		-		-		(361,264)		(361,264)
Issue of warrants	-		-		61,401		-		61,401
Exercise of warrants	-		-		(7,192)		7,192		-
Shares issued in the period	2,435,518		6,060,696		-		-		8,496,214
Cost relating to share issues	-		(880,679)		-		-		(880,679)
At 31 March 2018	5,824,885		12,819,639		887,541		(3,026,404)		16,505,661
	Share capital		Share Premium account		Share based payment reserve		Retained loss		Total
	£		£		£		£		£
At 31 March 2018	5,824,885		12,819,639		887,541		(3,026,404)		16,505,661
Comprehensive income for the period
Loss for the period	-		-		-		(634,103)		(634,103)
Other comprehensive income	-		-		-		-		-
Total comprehensive loss for the period attributable to the equity holders	-		-		-		(634,103)		(634,103)
Exercise of warrants	83,333		116,667		(61,401)		61,401		200,000
Lapse of warrants	-		-		(33,012)		33,012		-
Re-organisation of share capital	(4,726,574)		(12,936,306)		-		17,662,880		-
Shares issued in the period	183,187		1,373,903		-		-		1,557,090
Cost relating to share issues	-		(97,292)		-		-		(97,292)
At 31 March 2019	1,364,831		1,276,611		793,128		14,096,786		17,531,356

CONSOLIDATED CASHFLOW STATEMENT

YEAR ENDED 31 MARCH 2019

		2019		2018
Cash flow from operating activities		£		£
Loss for the period		(5,770,724)		(3,976,237)
Adjustments for:
Depreciation and amortisation charges		323,842		992,269
Write off costs of lapsed leases		242,329		-
Loss on disposal of intangible asset		1,276,178		-
Cost settled by issue of shares		-		241,100
Net exchange adjustments		408,396		(740,084)
Operating cashflow before working capital movements		(3,519,979)		(3,482,952)
Decrease/(increase) in trade and other receivables		1,346,493		(2,148,480)
(Decrease)/increase in trade and other payables		(1,399,179)		2,391,213
Net cash outflow from operating activities		(3,572,665)		(3,240,219)
Cashflows from investing activities
Purchase of tangible fixed assets		(18,913)		(77,489)
Investment in Intangible, exploration and drilling rights		(1,426,609)		(5,853,118)
Proceeds from sale of exploration and drilling rights		4,239,126		585,951
Net cash benerated/(absorbed) by investing activities		2,793,604		(5,344,656)
Cashflows from financing activities
Net proceeds from issue of shares		1,659,798		7,435,836
Net cash generated by financing activities		1,659,798		7,435,836
Net increase/(decrease) in cash and cash equivalents
As above		880,737		(1,149,039)
Cash and cash equivalents at start of period		602,814		1,934,486
Foreign exchange adjustment on opening balances		25,098		(182,633)
Cash and cash equivalents at the end of the year		1,508,649		602,814

COMPANY CASHFLOW STATEMENT

YEAR ENDED 31 MARCH 2019

		2019		2018
Cash flow from operating activities		£		£
Loss for the period		(634,103)		(361,264)
Adjustments for:
Depreciation and amortisation charges		70,650		70,650
Cost settled by issue of shares		-		241,100
Foreign exchange translation adjustments		(4,174)		44,667
(Decrease) in provision against loan to subsidiary		-		(1,462,935)
Operating cashflow before working capital movements		(567,627)		(1,467,782)
(Increase)/decrease in trade and other receivables		(131)		11,063
(Decrease)/increase in trade and other payables		(21,941)		(31,823)
Net cash outflow from operating activities		(589,699)		(1,488,542)
Cashflows from investing activities
Investment in subsidiary		(138,657)		(6,256,839)
Net cash absorbed by investing activities		(138,657)		(6,256,839)
Cashflows from financing activities
Net proceeds from issue of shares		1,659,798		7,435,836
Net cash generated by financing activities		1,659,798		7,435,836
Increase/(decrease) in cash and cash equivalents in the year		931,442		(309,545)
Net increase in cash and cash equivalents
As above		931,442		(309,545)
Cash and cash equivalents at start of period		361,690		671,235
Cash and cash equivalents at the end of the period		1,293,132		361,690

 

END

 

 

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