TIDMCHLL
RNS Number : 5948H
Chill Brands Group PLC
28 July 2023
THIS ANNOUNCEMENT CONTAINS INSIDE INFORMATION FOR THE PURPOSES
OF ARTICLE 7 OF EU REGULATION 596/2014 (WHICH FORMS PART OF
DOMESTIC UK LAW PURSUANT TO THE EUROPEAN UNION (WITHDRAWAL) ACT
2018), AS AMED BY REGULATION 11 OF THE MARKET ABUSE (AMMENT) (EU
EXIT) REGULATIONS 2019/310.
28 July 2023
Chill Brands Group plc
("Chill Brands" or the "Company")
Final Results for the year to 31 March 2023
Update on US Vapour Pilot Scheme
Update on Ox Agreement and US Warehousing
Final Results for the year to 31 March 2023
Chill Brands, the consumer packaged-goods distribution company,
announces its final results and the publication of its audited
annual report and accounts for the year to 31 March 2023 (the
'Annual Report').
The Annual Report will be published today on the Company's
website in compliance with its articles of association and the
electronic communications provisions of the Companies Act 2006.
Please click on the link below for a full text version of the
Chill Brands Group plc audited annual report and accounts for the
year to 31 March 2021:
http://www.rns-pdf.londonstockexchange.com/rns/5948H_1-2023-7-28.pdf
Key elements from the Annual Report can also be viewed
below.
The Annual Report will be laid before shareholders at this
year's Annual General Meeting, which is expected to take place in
early September. Further information regarding the AGM will be
announced shortly.
Update on US Pilot Scheme of Vapour Products
Since receiving its first shipment of nicotine-free vapour
products earlier this year, the Company has been working on the
strategic expansion of a pilot store program in key US markets.
Pilot stores are now operational in Florida, Arizona and Colorado,
with the upcoming launch of select pilot locations in Texas
expected during August 2023.
Initial results from the pilot stores have been encouraging,
with consistently positive feedback received from retailers and
customers. Stores participating in the pilot scheme have
demonstrated a healthy sell-through rate that validates the quality
of Chill ZER0 vapour products and consumer appetite for them.
The Company will continue to systematically expand its own
distribution of vapour products while using the valuable data
gathered from pilot stores to support discussions with large retail
groups. The Company aims to proliferate the supply of its
nicotine-free vapour products in pilot states before conducting a
wider rollout. Chill Brands will continue to sell the products
direct to consumers throughout the US via the Chill.com
website.
Further updates regarding the UK launch of Chill Brands'
nicotine free vapour products will be provided in due course as
local partners commence retail sales, event and marketing
activations.
Update on Ox Agreement
The Company is pleased to report that Ox Distributing LLC ("Ox")
has paid the remaining balance of its debt to the Company in
settlement of the agreement made during the financial year ending
31 March 2022.
Ox previously acted as the Company's master distributor. This
agreement constituted a related party transaction as Ox is owned
and operated by members of the Schrader family, including the
Company's Non-Executive Director Eric Schrader, who collectively
have a significant shareholding in Chill Brands. In the 2022
financial year, Ox placed a large order for Chill CBD products in
line with forecasts for the activation of sales to new convenience
store locations. Logistical delays led to the late delivery of
these products to Ox, while challenges relating to the Company's
retail distribution model limited store activations.
As a result of these issues, the Group entered into an extended
credit term agreement with Ox to provide them with an adequate
opportunity to sell the delayed products downstream to retailers
and customers, generating funds with which to settle the
outstanding liability to Chill. As described in the Company's
Half-Year Report for the period to 30 September 2022, the original
value of the debt was reduced by deductions relating to product
that was not delivered to Ox during 2021. The note was further
reduced in line with promotional offers and free product fills
provided to retailers as part of the Group's retail distribution
strategy. Ox repaid a total of US $589,029.54 over the course of
the agreement. The value of this sale was recorded as revenue in
the prior financial year ending 31 March 2022. Subsequent sales of
this inventory to retailers and end consumers could not therefore
be recognised again during the financial year ending 31 March 2023.
Chill Brands ended Ox's master distributor status in May 2022.
Update on US Warehousing
The Company has been informed that Fabric, a provider of
warehousing and fulfilment services, has undergone a strategic
pivot and will no longer operate its own micro-fulfilment
facilities. The Company originally contracted to use Fabric's US
micro-fulfilment services in February 2022.
This change will have no impact on Chill Brands' ongoing
operations as alternative US warehousing and fulfilment solutions
have already been arranged and implemented. Following a thorough
search process, the Company has contracted with its significant
shareholders, the Schrader family (operating under their business
entity Racquette Hanger LLC, "Racquette") for the use of their
warehousing and fulfilment facilities in Fort Collins, Colorado.
For the avoidance of doubt, the agreement with Racquette relates
solely to provision of warehousing services and does not grant any
distributor status.
In making this decision, Chill Brands' Board of Directors
(excluding Eric Schrader) consulted external advisors and
considered the requirements of the business and the need to avoid
conflicts of interest. The warehousing and fulfilment services
provided by Racquette are offered at rates below the market average
and are more affordable than those quoted by comparable service
providers. This new arrangement will also provide greater
flexibility to Chill Brands, facilitating the onboarding and
fulfilment of certain products listed for sale on the Chill.com
marketplace while limiting costs.
-S-
About Chill Brands Group
Chill Brands Group plc (LSE: CHLL, OTCQB: CHBRF) is focused on
the development, marketing and distribution of wellness and
recreational products containing natural, functional ingredients.
The Company's proprietary product range is distributed by some of
the most recognisable convenience retail outlets in the US and
includes nicotine-free disposable vapour products that cater to the
rapidly growing market for tobacco alternatives. Chill Brands also
operates the chill.com e-commerce website, on which it is building
a marketplace of products from third-party brands.
Publication on website
A copy of this announcement is also available on the Group's
website at http://www.chillbrandsgroup.com
Media enquiries:
Chill Brands Group plc contact@chillbrandsgroup.com
Allenby Capital Limited (Financial
Adviser and Broker) +44 (0) 20 3328 5656
Nick Harriss/Nick Naylor/Lauren
Wright (Corporate Finance)
Kelly Gardiner (Equity Sales)
CHIEF EXECUTIVE'S REVIEW AND STRATEGIC REPORT
Introduction
I am pleased to present the Group's results for the financial
year ended 31 March 2023 ("FY23" or the "Period").
During the Period there has been a material shift in our
business strategy, driven by the need to adapt to survive in an
ever-evolving market. As a result of factors that I will go on to
explain, the market for CBD consumer products has become extremely
challenging. With the best interests of the Group and its
shareholders in mind, we have therefore redirected our efforts and
resources towards several diversified business activities including
the sale of nicotine-free vapour products and the development of an
e-commerce marketplace on the Chill.com website. We believe that
these activities hold great promise and have the potential to
significantly enhance the Group's commercial prospects.
Over the past year our revenue has fallen short of expectations,
and this is naturally disappointing. It is important to note,
however, that our financial statements are reflective of a year of
transition during which historical sales arrangements limited
recordable revenue. They do not demonstrate Chill's growth
potential in the rapidly expanding market for e-cigarette style
vapour products, (where sales only commenced at the very end of the
period covered) nor do they reflect the decisive action we have
taken to control costs and improve operational efficiency.
While it is important to review the Group's financial
performance during the Period, I strongly encourage you to fully
consider Chill Brands' status today along with our plans for the
future. Through continued progress across a diversified base of
business, myself and the Board wholeheartedly believe that the
Group is on course to move beyond its difficult past and grow to a
position of stability and, in due course, profitability.
This report aims to provide you with greater insight into our
decisions, the challenges faced by the business, and the steps we
are taking to position Chill Brands for success.
Adapting to Changing Market Conditions
The history of Chill Brands is characterised by near-continuous
evolution, from the Group's oil and gas origins as Highlands
Natural Resources to its expansion into cannabidiol as Zoetic
International. This evolution continued during the Period as
changes to the Group's management structure prompted a thorough
evaluation of its business model.
Following a thorough assessment of the Group's business
activities, it became evident that the performance of its CBD
products did not support the continuation of its strategy. It was
also apparent that the Group's operations had become too costly
when considered against sales results, as is often the case with
early-stage consumer goods businesses. In response to these
challenges, we took proactive measures to reduce overheads and
streamline operations. We initiated a comprehensive cost
optimisation program that focused on enhancing operational
efficiency, reducing reliance on external providers and advisers,
and reallocating resources to areas with higher growth potential.
This exercise resulted in significant costs savings, the benefits
of which will largely bear fruit during the financial year ending
31 March 2024.
The CBD Landscape
In addition to issues specific to the Group itself, it was also
evident that wider macro problems existed, and continue to exist,
within the market for cannabidiol (CBD) products. It became clear
to the management team that a strategic shift was essential to
secure the viability of the business.
While CBD products gained initial popularity following the
liberalisation of cannabinoid policy in the US and UK during 2018,
the regulatory landscape and market dynamics have changed
dramatically, impacting the ability of CBD businesses to scale and
achieve profitability. Regulatory uncertainty has limited market
access, hindered distribution channels, and created barriers to
growth for businesses operating in this industry. Enforcement by
bodies such as the U.S. Food and Drug Administration (FDA) have
restricted the ability of CBD businesses to communicate the utility
of their products to customers, limiting their marketing potential
and dampening consumer uptake.
The market for CBD products is volatile and, in many cases,
retailers have been unable to justify their continued inclusion on
shelves due to inconsistent sales performances. The proliferation
of CBD products has also led to fluctuating prices and squeezed
profit margins for businesses that are already confronted with
higher costs than those concerned with the sale of more typical
consumer products that face a lower regulatory burden. These
difficulties are not unique to the Group and have become evident
across the industry with even the most established brands reporting
declining sales. This further emphasised the need for a decisive
reaction from the Group.
Crucially, the market for cannabinoid products has itself
undergone an exceptional degree of change since the Group first
launched its wares during 2019. Due to the factors outlined in this
report, many CBD businesses have failed to generate sufficient
sales to justify their costs. This has led to level of financial
instability as evidenced by the poor performance, and in some cases
closure, of peers including certain UK listed companies. In the
United States, initial consumer appetite for non-intoxicating CBD
products has declined in favour of products that provide a more
potent effect. Products containing psychoactive cannabinoids like
Delta-9-tetrahydrocannabinol ("Delta 9") have rapidly gained
popularity and provide a natural range swap for retailers whose
appetite for CBD products has been diminished by reduced consumer
demand.
Although Chill Brands' management team believes that CBD
products have a positive future ahead of them, we must concede that
the landscape is extremely challenging. The operation of UK law
currently precludes the Group from directly participating in the
recreational psychoactive cannabinoid market even in territories
where it is legal, and while we are exploring options that may
enable us to progress in this area, there can be no guarantee that
any such option will reach fruition.
In light of these circumstances, we have taken steps to identify
alternative business avenues that offer the significant growth
potential that our shareholders deserve. The Group will continue to
service existing demand for its CBD products suite, while exploring
value accretive partnerships with successful CBD brands that may be
seeking new distribution channels. We believe that demand for CBD
products will increase organically over time as market
consolidation takes effect, but we must maintain focus on
activities and categories that are most likely to create value in
the near term. We have therefore made the decision to shift our
core business focus toward the sale of nicotine-free vapour
products and the development of a marketplace on the Chill.com
website.
The Opportunity in Vapour
Our decision to enter the vapour industry was driven by several
factors but it is important not to lose sight of the bigger
picture. It has been forecasted that the market for vapour products
could be worth more than USD $168 billion by 2030, with a compound
annual growth rate of almost 30 percent during the intervening
period. Behind the numbers there has been a considerable surge in
demand for disposable products driven by changing consumer
preferences and increasing acceptance of vaping as an alternative
to traditional tobacco products. There can be no doubt that the
future of this industry is bright and the potential return on an
investment by Chill Brands will be amplified if we can gain even a
small percentage share of the vapour products market.
For Chill Brands there is a natural fit between the vapour
category and the Group's existing experience in the tobacco
alternatives space. While still challenging, the regulatory
landscape for vapour products provides greater certainty and
therefore a more favourable environment for growth than has been
the case for CBD products. By redirecting our efforts towards this
category, we are capitalizing on a rapidly expanding market that
has gained immense popularity among a diverse range of consumers,
offering a broader customer base and greater revenue
opportunities.
We have further considered how the Group could gain a strong
competitive advantage in the vapour category. Following the
discontinuation of the Group's synthetic nicotine oral pouch range
in August 2022, the Board is acutely aware of the difficulties
surrounding the regulatory approval of nicotine products in the US.
Compliance will always remain a high priority for the business, and
we have elected to sell products that are not currently subject to
nicotine licensing or approval requirements in order to avoid
increasing the regulatory burden incumbent on the Group. At the
time of writing, Chill Brands' vapour products are not subject to
FDA deeming rules (which determine whether a product is regulated
as 'tobacco') in the United States, and given their lack of
nicotine content are not subject to many of the rules and
restrictions contained within The Tobacco and Related Products
Regulations in the UK.
Our nicotine-free vapour products (marketed as 'Chill Zero'
devices) are intended to appeal to a wider customer base of adult
consumers. Not all users of vapour products wish to consume
nicotine and there is growing demand for alternatives. Some
customers will be nearing the end of their smoking cessation
journey and seeking a product that will satisfy their habitual
fixation while finally eliminating their intake of nicotine. Others
may simply want the sensory experience of vaping in recreational
settings without introducing the highly addictive compound into
their daily lives.
We have already taken strides towards making a success of our
newly launched nicotine-free vapour products and anticipate that
sales of this range will rapidly become the Group's primary source
of revenue. When combined with the magnetism of our brand, we
expect these products to gain traction in the market through
multiple points of distribution in the UK, US and beyond.
In the US our dedicated sales agents have been actively
introducing our vapour products to a wide range of potential
stockists and we look forward to sharing further updates on sales
to retail stores and distributors in the near future. The feedback
we have received both from early adopters and market research has
been overwhelmingly positive, reinforcing our belief in the
potential success of our products. Few competitors have adjusted
their focus to nicotine-free devices and there remains a niche
available for us to occupy as a leading brand within this
category.
As announced in May 2023, the Company has also entered into an
agreement with The Vaping Group to act as its sales and
distribution agent in the UK. We continue to draw on the expansive
network and extensive industry expertise of our new partners with
whom we are executing a comprehensive go-to-market strategy that is
intended to result in sales of Chill Zero vapour products to large
retailers, category-specific chains, and independent outlets across
the country. From these foundations we expect further growth into
the burgeoning European and Middle Eastern markets.
There is, of course, still much work to be done in order to
capture the future potential of our vapour products range. We will
need to monitor regulatory developments carefully, working closely
with our manufacturing partners to ensure that our products are
safe and of the highest possible quality. It will also be necessary
for us to adopt an even stronger position with regard to social and
environmental responsibility. It is imperative that the Group takes
measures to restrict the sale of its products to adult consumers
while limiting its impact on the environment through sustainable
manufacturing and schemes relating to the recycling of vapour
products. These issues will continue to demand attention from the
Group, and it will be important for us to allocate resources to
solving them.
With that being said, we are confident that this strategic shift
will make an extremely positive contribution to our revenue
trajectory, delivering long-term value to our shareholders. Even a
fraction of the sales volumes achieved by category leaders would be
transformational for Chill Brands and there is substantial upside
for the Group if new distribution channels can be effectively
unlocked.
A Marketplace on Chill.com
Beyond ambitions for our new range of nicotine-free vapour
products, we have also developed a revised business plan relating
to the use of the Chill.com domain. Following its acquisition in
2021 (completed during the Period as announced on 23 June 2022),
the website was used only for online sales of the Group's branded
products including CBD-infused oral chew pouches and herbal smokes.
During the extensive review of the Group's operations described
elsewhere in this report, it was determined that online sales of
its own products did not do justice to the marketing potential of
the Chill.com domain. This led us to explore alternative routes to
fully commercialise this digital asset and ultimately to the
onboarding of third-party brands and their products to the
site.
Through consistent efforts we are steadily building a
marketplace that is dedicated to natural products containing hemp
derivatives, nootropics, and other functional ingredients. There
are numerous advantages for brands joining the marketplace,
including exposure to a growing number of monthly visitors, a
diverse consumer base that will continue to expand as additional
brands list on the site, and cross-brand marketing opportunities
through social media, extensive email lists and other means. Given
the Group's dual US/UK footprint there is also an opportunity for
brands from either territory to make an initial entrance to a new
geographic market simply by listing on the Chill.com site. The
experience is designed to be as pain-free as possible for
businesses, with the Group taking a commission from sales and not
overly limiting the upside potential for brands as is the case with
certain other marketplace platforms.
It is hard to fully quantify the opportunity ahead if we can
build the Chill.com platform effectively. Successful marketplace
websites create a network effect, where the value of the platform
increases with the number of participants. As more sellers and
buyers join the marketplace, additional customers are attracted,
leading to a continuous cycle of growth. The resultant brand
community will be populated with customer reviews, blogs and other
materials that will build credibility and enhance the overall user
experience.
If nothing else the performance of the Group's legacy CBD
products has shown that consumer markets are cyclical in nature.
Trends come and go, yet by building a marketplace site the Group
can quickly adapt to changing market conditions by expanding into
new product categories without adopting the financial risk of
product development costs or inventory obsolescence. We intend for
this diversified revenue stream to help mitigate the risk of
relying solely on Chill branded product sales and in future it may
provide a degree of stability during periods of volatility in the
retail sales market.
To succeed in this venture, it will be necessary for us to make
progress in relation to search engine optimisation, user experience
and other areas that will enhance the effectiveness of the site. A
complete visual refresh of the Chill.com website has already
rectified the apparent disconnect between our previous brand
identity, product offering and the preferences of relevant consumer
demographics. Now we must take steps to increase traffic to the
site, as our ability to attract higher levels of customer traffic
will become one of the primary factors determining our success.
Growth of the Chill.com marketplace remains a long-term
endeavour for us, but it is one that has vast potential if scale
can be achieved. I look forward to providing further updates on our
work as the site expands both in terms of its user base and the
breadth of brands and products available listed for sale.
Looking Ahead
The 2023 financial year marked a critical juncture for Chill
Brands. Having started 2022 as a distressed contender within the
extremely challenging CBD market, the business now has a renewed
opportunity in the fast-growing market for vapour products. Our
change of focus is one that we strongly believe will improve our
financial performance and create significant value for our
shareholders.
The Group is once again at an early stage of its development in
a new area. It is crucial to recognise that there are many factors
that can influence the performance of a newly launched product and
so it is important to manage expectations. Generating substantial
revenue from these new products may take time, but there is cause
for optimism from the steps we have already taken to secure their
success. We continue to build our distribution channels and enhance
our marketing strategies to maximise potential sales, and there is
no apparent reason why our Chill.com marketplace and Chill Zero
vapour products cannot in turn capture a sizeable portion of their
respective markets.
We will continue to keep you informed about our progress and
performance as we invest in the promotion, distribution and
refinement of our platform and products. While it may take time to
gain traction, it is worth remembering that the most successful
product launches are characterised by gradual market penetration
and a steady increase in consumer adoption. We are not merely
chasing trends and are focused on sustainable growth that requires
a patient and calculated approach.
On behalf of the entire management team, I extend my sincere
gratitude to our shareholders for your continued patience, support,
and enthusiasm. We are incredibly grateful to have the opportunity
to build this company and look forward to delivering value as we
complete this operational pivot and continue Chill Brands' journey
of growth.
CHIEF EXECUTIVE'S FINANCIAL REVIEW
During the Period the Group executed a managed pivot from its
previous activities to a more diverse base of business including
the online distribution of third-party brands and the development
and sale of nicotine-free vapour products. The focus of the Group's
management team during this time has been on exiting historical
contracts, eliminating costs, and reallocating resources from
non-performing business activities.
The Group recorded a loss for the year of GBP4,287,891 (2022:
GBP5,711,503), a reduction of 25% that can largely be attributed to
the removal of significant costs for marketing sponsorships and
consultancy agreements. The recorded loss is inclusive of non-cash
costs for the year of GBP1,304,570 (2022: GBP1,958,076) reflecting
share expenses for options granted during this and previous periods
and imputed interest on convertible loan notes. The remainder of
the loss is a result of the Group's continued costs of operation,
listing, and the servicing of business activities and products that
had not gained sufficient traction in the consumer market to yield
a profit.
On 26 April 2022 the Group announced that it had conditionally
raised GBP3,500,000 (before costs) from new and existing investors
through fundraising consisting of two parts. The first part was by
means of Subscription for 29,166,699 new ordinary shares of 1 pence
each at a price of 2 pence each. The second part comprised
convertible loan notes of 2 pence each with an aggregate value of
GBP2,916,670 which will convert automatically on the publication of
a prospectus or the passing of legislation that means a prospectus
is no longer required. Shareholder approval was sought and gained
at a General Meeting held on 12 May 2022, where all resolutions
were duly passed.
Further to the aforementioned fundraising, the Group announced
its intention to issue an Open Offer to enable long-term
shareholders to participate on equivalent terms. As announced on 17
June 2022, the Open Offer raised a total of GBP212,201 (before
expenses).
In June 2022 the Company completed its purchase of the Chill.com
website domain, making a balancing payment of $800,000. Further
commentary relating to the financial treatment of the Chill.com
domain can be found in Note 2 to the Financial Statements
accompanying to this report.
During the 2022 financial period the Group launched a new range
of synthetic nicotine products under the commercial name 'Tobacco
Free Nicotine' or 'TFN'. As discussed elsewhere in this report, the
US Congress legislated during March 2022 to regulate all forms of
nicotine in the same way as tobacco. As a result of this regulatory
change, manufacturers and markets of synthetic nicotine products
must now submit a premarket tobacco application (PMTA) in order for
their products to remain on sale in the US. While the Group
submitted initial PMTA documentation in respect of its TFN
products, the cost of pursuing the application through to
completion was considered prohibitively expensive given that the
product range was new and therefore lacked established distribution
channels. The Group subsequently discontinued the TFN range and the
remaining value of the TFN inventory has been discounted.
The Company's commercial activities during the reporting period
consisted of ongoing sales of its legacy CBD products and the
development of new business areas including nicotine free vapour
products and the sales of products from third-party brands on the
Chill.com website. A redesigned and refreshed Chill.com website was
launched in October 2022, while sales of the first third-party
products commenced in February 2023 with the addition of Mad Tasty
hemp-infused sparkling water products. Numerous other brands have
now joined the site both in the UK and the US.
On 16 March 2023 the Company announced that it had raised
GBP560,000 (before expenses) from a financial institution. The
fundraise consisted of a subscription for 16,000,000 new ordinary
shares of 1 pence each at a price of 3.5 pence per share.
On 3 April 2023 the Company announced that it had raised GBP2.6
million (before expenses) from a high net worth investor. This
consisted of a subscription for 25,000,000 new ordinary shares of 1
pence each at a price of 4 pence per share for a total of
GBP1,000,000,000, and the issue of convertible unsecured loan notes
with a value of GBP1.6 million. The Convertible Loan Notes carry a
coupon of 12% per annum for a term of three years from the date of
issue on 31 March 2023, and are convertible into ordinary shares at
8 pence per share.
The Company received its first nicotine-free vapour products in
late March 2023 and no sales of these products were recorded during
the reporting period. Since the end of the reporting period the
Company has worked with pilot stores in Arizona, Colorado and
Florida to gather sales data and establish a market fit for the
nicotine-free vapour products. The Company continues to expand its
roll out and distribution of nicotine-free vapour products to
distributors and retailers in the US.
On 18 May 2023, the Company announced that it had entered into
an agreement with The Vaping Group for the marketing and
distribution of its nicotine-free vapour products in the UK. The
Company's nicotine-free vapour products, marketed as 'Chill Zero',
will become available for purchase by UK customers, distributors
and retailers during Summer 2023. The UK distribution of Chill Zero
nicotine-free vapour products is expected to make a significant
contribution to the Company's revenues during the financial year
ending 31 March 2024.
Revenue
During the Period the Company recorded revenues of GBP82,840
(2022: GBP624,187 - of which GBP447,814 was generated by a single
sale event to Ox Distributing LLC as described below). Actual sales
of its branded products to retailers and consumers exceeded this
level, however recordable revenues were limited by circumstances
relating to the ownership of these products. The Company sold a
large portion of its CBD product inventory to its former master
distributor and connected party, Ox Distributing LLC ("Ox"), during
the year ending 31 March 2022. Extended payment terms agreed in
relation to that sale provided the Company with cashflow during the
Period in review as products sold through, however additional
revenues could not be recognised for sales of products that had
already been recorded as sold to Ox..
Going forward, the Board of Directors is confident that the
Company will be able to improve revenues, primarily through the
sale of its newly launched nicotine-free vapour products which are
wholly owned by the Company.
Expenditure
During the period the Company took targeted steps to reduce
expenditure, in particular those costs related to marketing
activities and professional advisory fees. Notably, the Company
incurred substantial legal costs during the prior financial year, a
large portion of which was not settled until the start of the 2023
financial year. The Company negotiated with its former legal
advisors, reducing the amount payable by more than GBP100,000.
Numerous financial, legal and corporate consultancy agreements were
also terminated during the 2023 financial year as contractual
arrangements permitted.
During the year the Company incurred a one-off expense of
$800,000 in respect of the final payment for the acquisition of the
Chill.com web domain. Further one-off costs related to legal
advisory services in connection with the Company's range of
synthetic nicotine products that were discontinued in August 2022.
Additional legal costs were incurred in relation to an employment
and intellectual property dispute with a former senior employee.
That dispute has now been settled amicably and has not materially
affected the Company's financial position or ongoing
operations.
Overall, expenditure decreased as compared to the prior
financial year. The Company has reduced costs associated with its
staff and directors, while reducing its exposure to marketing costs
through the termination of legacy sponsorship, advertising, and
consulting contracts.
In addition to cash costs, the Group also incurred costs
relating to share-based awards including those from prior periods
that have been amortised and recorded over an extended period of
time. Going forward, the Company will incur additional costs in
relation to establishing sales and distribution channels for its
range of nicotine-free vapour products. This, along with ongoing
costs relating to the Company's listing on the London Stock
Exchange, represent a significant portion of its ongoing costs
base.
Liquidity, Cash and Cash Equivalents
At the year end, the Group held GBP3,767,426 at the bank (2022:
GBP420,045).
Funding and Going Concern
During the Period the Group was sustained by fundraising
activity that raised a total of GBP3,500,000 before costs through a
combination of subscription shares at 2 pence per share and through
convertible loan notes of 2 pence each with an aggregate value of
GBP2,916,670 which will convert automatically on the publication of
a prospectus by 31 May 2024 or the passing of legislation that
means a prospectus is no longer required. The loan note aspect of
the fundraising activity was made necessary by the Group's
compliance with the FCA listing rules which limited the Board's
ability to issue subscription shares to that value. Further funds
were raised from an Open Offer to the Group's long-term
shareholders totalling GBP212,201 before costs. This fundraising
was approved at a General Meeting of the Company's shareholders
held in May 2022.
In March 2023 the Group raised GBP560,000 (before costs) from
the issue of 16,000,000 new ordinary shares of 1 pence each at a
price of 3.5 pence per share. This was followed by further
fundraising activity as the Group raised GBP2,600,000 from a
high-net-worth investor. This fundraise consisted of a subscription
for 25,000,000 new ordinary shares of 1 pence each at a price of 4
pence per share, and the issue of convertible unsecured loan notes
on 31 March 2023 with a value of GBP1.6 million, convertible into
ordinary shares at 8 pence per share.
The Directors note that the Company's external independent
auditors have recognised an uncertainty as to going concern in
their report. This relates to the operation of convertible loan
notes with an aggregate value of GBP2,916,670 issued to investors
as part of the Company's fundraising activities in April and May
2022 (the "2022 Loan Notes"). The 2022 Loan Notes are set to
automatically and compulsorily convert into ordinary shares upon
the publication of a prospectus that has been approved by the UK
Financial Conduct Authority. The loan notes will terminate and
their principal value, along with any accrued interest, will become
payable if the prospectus has not been approved by the FCA by 31
May 2024. It is this potential requirement to repay the 2022 Loan
Notes that is the subject of the reported uncertainty as to going
concern. This is because, in such circumstances, the Company may
need to seek additional investment capital in order to settle the
outstanding balance of the loan notes while continuing to operate
its business.
The Company continues work to complete the preparation of a
prospectus, with a number of drafts having been exchanged with the
FCA. At the time of writing it is the expectation of the Directors,
having consulted the Company's professional advisors, that the
prospectus will likely be approved by the FCA in the near future
and that the 2022 Loan Notes will therefore convert in advance of
their termination date. Provided that the prospectus is approved
and published in advance of the termination date on 31 May 2024,
the principal value of the 2022 Loan Notes will not be repayable in
cash and the Company will be absolved of the uncertainty as to
going concern, subject to no other changes.
Noting the above, and given gross fundraising of GBP3.16 million
since the start of 2023, the cost cutting efforts described in this
report, and the continued focus of the Company's management on cash
management, the Directors have a reasonable expectation that the
Group has adequate resources to continue in operational existence
for the foreseeable future. Further details are given in Note 2.2
to the Financial Statements and in the Directors' Report. For this
reason, the Directors continue to adopt the going concern basis in
preparing the financial statements.
CHIEF EXECUTIVE'S REVIEW AND STRATEGIC REPORT - OTHER
MATTERS
Board Changes and Operational Composition
On 19 April 2022, the Group announced a reorganisation of its
executive management team with my appointment to the Board of
Directors in the capacity of Chief Executive Officer. In line with
this change, the former Co-Chief Executive Officers have adopted
alternative roles within the business. Antonio Russo now acts as
the Group's Chief Commercial Officer with responsibility for the
Group's sales and marketing activities. Trevor Taylor now acts as
the Group's Chief Operating Officer with primary responsibility for
reducing costs, sourcing, and distribution.
Feminised Hemp Seed Program
The Company also carries a significant inventory of feminised
hemp seeds. The seeds are of a variety that, upon cultivation,
yield plant matter with a high CBD content and low levels of THC.
This characteristic is of paramount importance and holds
significant value due to the legal and market considerations
surrounding hemp cultivation. The high CBD and low THC profile
ensures compliance with EU regulations, as hemp crops must contain
THC levels below the legal threshold to be classified as industrial
hemp.
The seeds are undergoing extensive testing with a view to
securing entry into the European seed catalogue. Once included on
this list, the seeds would become saleable to licensed cultivators
in the European Union. During the latest testing cycle the
Company's cultivation and testing partners observed anomalies
relating to the colour of the plant matter and the presence of off
types within the cultivation area. Further testing will be required
to determine the source and prevalence of these anomalies.
The anomalies observed during the latest testing cycle are not
expected to have any impact on the commercial potential of the
feminised hemp seeds outside of the EU. These observations are
specific to the testing and regulatory requirements within the EU,
and they do not affect the viability or marketability of the seeds
in other regions.
Going forward, the Company will gather additional data to
determine the most appropriate course of action in relation to its
inventory of feminised hemp seeds. This may include conducting
further test cycles, offering the seeds for sale outside of the
European Union, or seeking a buyer interested in continuing the
development of hemp seed genetics with the varieties owned by the
Company.
During the 2023 financial year, the Directors proactively
explored the potential application of the Company's feminised hemp
seeds for phytoremediation purposes. The involves the cultivation
of hemp plants to mitigate environmental pollution and restore site
contaminated by mining and other industrial activities. The
Directors will continue to evaluate the potential benefits, market
demand and regulatory landscape for this application of the hemp
seeds and will determine whether further development of this
business area will be viable.
UK Novel Foods Authorisation
In order to sell ingestible CBD products in the UK, the Company
has progressed through the novel foods application process by
submitting relevant applications to the Food Standards Agency
(FSA). Novel Foods are defined as food items were not widely
consumed in the European Union before May 1997.
The Company's Zoetic tinctures and Chill gummies have now been
added to an updated FSA list of CBD food products that are linked
to a credible application for authorisation. Products that have
reached the validation stage undergo risk assessments and further
examination by the FSA to determine their safety profile and
suitability for sale in the UK market. The FSA has provided that
the products can remain on sale during this stage of the Novel
Foods application process.
The Company and its manufacturing partners have taken all
necessary steps to comply with the requirements imposed by the FCA.
Recent reports suggest the FSA may not complete the process
required to provide full Novel Foods authorisation to CBD products
until at least 2024. The Company will provide further updates
regarding the status of its ingestible CBD products as the Novel
Foods application process progresses.
Discontinuation of Synthetic Nicotine Products
In late 2021 the Company launched a new range of 'Tobacco Free
Nicotine' ("TFN") pouches containing synthetic nicotine. In March
2022, a Federal funding bill that amended the statutory definition
of "tobacco product" was passed by the US Congress, giving the US
Food and Drug Administration ("FDA") authority over synthetic
nicotine products. The FDA ruled that companies selling synthetic
nicotine products should submit Premarket Tobacco Applications
("PMTA") in order to remain on sale. While the Company filed the
necessary application, the ongoing costs of completing a PMTA were
considered prohibitive to the continuation of the Chill TFN product
range. As announced on 3 August 2022, the Company has discontinued
the development of synthetic nicotine products and the value of the
remaining inventory has been written off.
Zoetic
The Group continues to operate the Zoetic brand of CBD-infused
topical creams, beauty products and ingestible tinctures in the UK.
While certain products (notably the CBD tinctures) have gained a
core base of repeat customers, the skincare range has not achieved
the same level of success. After much consideration, we have made
the decision to retire non-performing products and focus our
resources and energy on those products that perform well enough to
justify ongoing production and investment. This will better enable
us to allocate resources towards areas and activities that offer a
clearer path to value creation.
Going forward, Zoetic tinctures and a select number of other
products will remain on sale both via the brand's website and on
the Chill.com marketplace.
Prospectus
The Company is currently in the process of preparing a
prospectus which, upon approval and publication, would lead to the
issuance of 154,675,220 additional ordinary shares and up to
19,750,574 warrants for ordinary shares. This detailed prospectus
has been carefully prepared with the assistance of the Company's
advisors and several drafts have been exchanged between the Company
and the UK Financial Conduct Authority (FCA). Further information
regarding the progress of the prospectus will be provided when
appropriate.
GOING CONCERN
The financial statements have been prepared on a going concern
basis which assumes that the Group will continue in operational
existence for the foreseeable future.
The Directors note that the Company's external independent
auditors have recognised a material uncertainty as to going concern
in their report. This relates to the operation of convertible loan
notes with an aggregate value of GBP2,916,670 issued to investors
as part of the Company's fundraising activities in April and May
2022 (the "2022 Loan Notes"). The 2022 Loan Notes are set to
automatically and compulsorily convert into ordinary shares upon
the publication of a prospectus that has been approved by the UK
Financial Conduct Authority. The loan notes will terminate and
their principal value, along with any accrued interest, will become
payable if the prospectus has not been approved by the FCA by 31
May 2024. It is this potential requirement to repay the 2022 Loan
Notes that is the subject of the reported uncertainty as to going
concern. This is because, in such circumstances, the Company may
need to seek additional investment capital in order to settle the
outstanding balance of the loan notes while continuing to operate
its business.
The Company continues work to complete the preparation of a
prospectus, with a number of drafts having been exchanged with the
FCA. At the time of writing it is the expectation of the Directors,
having consulted the Company's professional advisors, that the
prospectus will likely be approved by the FCA in the near future
and that the 2022 Loan Notes will therefore convert in advance of
their termination date. Provided that the prospectus is approved
and published in advance of the termination date on 31 May 2024,
the principal value of the 2022 Loan Notes will not be repayable
and the Company will be absolved of the uncertainty as to going
concern.
Noting the above, and given gross fundraising of GBP3.16 million
during calendar year 2023, the cost cutting efforts described in
this report, and the continued focus of the Company's management on
cash management, the Directors have a reasonable expectation that
the Group has adequate resources to continue in operational
existence for the foreseeable future. Further details are given in
Note 2.2 to the Financial Statements and in the Directors' Report.
For this reason, the Directors continue to adopt the going concern
basis in preparing the financial statements. The auditors refer to
going concern by way of a material uncertainty within their audit
report.
EXTRACT FROM INDEPENT AUDITOR'S REPORT TO THE MEMBERS OF CHILL
BRANDS PLC
Opinion
We have audited the financial statements of Chill Brands Plc
(the 'Parent Company') and its subsidiaries (the 'Group') for the
year ended 31 March 2023 which comprise the Consolidated Statement
of Comprehensive Income, the Consolidated and Parent Company
Statements of Financial Position, the Consolidated and Parent
Company Statements of Changes in Equity, the Consolidated and
Parent Company Statements of Cashflows and notes to the financial
statements, including significant accounting policies. The
financial reporting framework that has been applied in their
preparation is applicable law and UK-adopted International
Accounting Standards and as regards the Parent Company financial
statements, as applied in accordance with the provisions of the
Companies Act 2006.
In our opinion:
-- the financial statements give a true and fair view of the
state of the Group's and of the Parent Company's affairs as at 31
March 2023 and of the Group's loss for the year then ended;
-- the Group financial statements have been properly prepared in
accordance with UK-adopted International Accounting Standards;
-- the Parent Company financial statements have been properly
prepared in accordance with UK-adopted International Accounting
Standards and as applied in accordance with the provisions of the
Companies Act 2006; and
-- the financial statements have been prepared in accordance
with the requirements of the Companies Act 2006.
Basis for opinion
We conducted our audit in accordance with International
Standards on Auditing (UK) (ISAs (UK)) and applicable law. Our
responsibilities under those standards are further described in the
Auditor's responsibilities for the audit of the financial
statements section of our report. We are independent of the Group
and Parent Company in accordance with the ethical requirements that
are relevant to our audit of the financial statements in the UK,
including the FRC's Ethical Standard as applied to listed public
interest entities, and we have fulfilled our other ethical
responsibilities in accordance with these requirements. We believe
that the audit evidence we have obtained is sufficient and
appropriate to provide a basis for our opinion.
Material uncertainty related to going concern
We draw attention to note 2.2 in the financial statements, which
indicates that the going concern status of the Group is dependent
on the successful publication of the Parent Company's prospectus
and subsequent compulsory conversion of certain Convertible Loan
Notes ("CLNs").
The Group issued CLNs on 13 May 2022 and 21 June 2022 with an
aggregate value of GBP2,916,670 and GBP176,835 respectively (as
disclosed in note 24). These CLNs have a termination date of 31 May
2024, which falls into the period under review with respect to the
going concern assessment. The Directors have considered the terms
and conditions of these CLNs, and note that they both contain a
settlement option whereby they automatically convert into newly
issued ordinary shares, on the publication of a prospectus or the
passing of future legislation that means a prospectus is no longer
required. The Directors consider the successful publication of the
prospectus to be a likely event, which will occur prior to the
termination date of the CLNs. We note that if the prospectus is not
successfully published prior to the termination date, the principal
amount of the CLNs becomes payable in cash.
As stated in note 2.2, these events or conditions, indicate that
a material uncertainty exists that may cast significant doubt on
the Group's and Parent Company's ability to continue as a going
concern. Our opinion is not modified in respect of this matter.
In auditing the financial statements, we have concluded that the
Director's use of the going concern basis of accounting in the
preparation of the financial statements is appropriate. Our
evaluation of the Directors' assessment of the Group's and Parent
Company's ability to continue to adopt the going concern basis of
accounting included:
-- reviewing the terms and conditions of the CLNs;
-- assessing and challenging key underlying assumptions used by
the entity's management in the going concern model for
reasonableness; and
-- reviewing management accounts for portions of the going
concern period to ascertain the forecasting accuracy of management
and performing sensitivity analysis to stress test the going
concern model.
Our responsibilities and the responsibilities of the Directors
with respect to going concern are described in the relevant
sections of this report.
Chill Brands Group PLC
Consolidated Statement of Comprehensive Income
For the years ended 31 March 2023 and 2022
Year ended Year ended
31 March 31 March
Notes 2023 GBP 2022 GBP
------ ------------------------ --------------------------------
Revenue 3 82,840 624,187
Cost of sales (61,798) (738,555)
Obsolete inventory expense 15 (227,901) (664,442)
------------------------ --------------------------------
Gross loss (206,859) (778,810)
Administrative expenses (2,636,115) (2,837,400)
Share expenses for options granted 20 (1,126,846) (1,958,076)
Operating Loss 5 (4,115,654) (5,574,286)
Finance income 24,159 1,962
Finance cost (323,556) -
Other income 6,203 -
------------------------ --------------------------------
Loss on ordinary activities before
taxation (4,263,014) (5,572,324)
Taxation on loss on ordinary
activities 8 - -
------------------------ --------------------------------
Loss for the period from continuing
activities (4,263,014) (5,572,234)
Loss for the period from
discontinued
activities 9 (24,877) (139,179)
Loss for the period (4,287,891) (5,711,503)
Other comprehensive income
Items that may be re-classified
subsequently
to profit or loss:
Foreign exchange adjustment on
consolidation (24,241) 271,869
Total comprehensive income for the
period attributable to the equity
holders (4,312,132) (5,983,372)
------------------------ --------------------------------
Basic and diluted earnings per
share
attributed to the equity holders:
Attributable to continuing
activities (1.75) p (2.65) p
Attributable to discontinued
activities (0.01) p (0.06) p
------------------------ --------------------------------
Total 10 (1.76) p (2.71) p
------------------------ --------------------------------
The notes on pages 45 to 73 of the Annual Report form an integral part
of the financial statements.
Consolidated Statement of Financial Position
At 31 March 2023 and 2022
At 31 March At 31 March
Notes 2023 GBP 2022 GBP
------ ------------- -------------
Non-Current Assets
Property, plant, and equipment 11 42,612 54,173
Right of use lease asset 12 210,216 260,376
Intangible assets 13 1,209,424 1,190,225
Total Noncurrent Assets 1,462,252 1,504,774
Current Assets
Inventories, net 15 464,028 636,294
Trade and other receivables 16 447,367 700,199
Cash and cash equivalents 17 3,767,426 420,045
Total Current Assets 4,678,821 1,756,538
Total Assets 6,141,073 3,261,312
============= =============
Non-Current Liabilities
Long-term debt, excluding current
maturities 24 4,034,726 50,463
Right of use lease liability, net
of current portion 13 149,755 205,672
-------------
Total Noncurrent Liabilities 4,184,481 256,135
Current Liabilities
Current maturities of long-term debt 24 468,893 18,494
Trade, other payables and accrued
liabilities 18 540,641 1,384,255
Right of use lease liability, current
portion 12 68,386 62,390
Total Current Liabilities 1,077,920 1,465,139
Total Liabilities 5,262,401 1,721,274
-------------
Net Assets 878,672 1,540,038
------------- -------------
Equity
Share capital 19 2,611,153 2,120,700
Share premium account 19 10,923,000 10,298,440
Shared based payment reserve 21 4,516,608 3,389,762
Compound loan note equity component
reserve 22 419,168 -
Shares to be issued reserve 21 1,079,256 89,517
Foreign currency translation reserve 236,536 260,777
Retained loss (18,907,049) (14,619,158)
-------------
Total Equity 878,672 1,540,038
============= =============
Chill Brands Group PLC
Consolidated Statement of Cash Flows
For the years ended 31 March 2023 and 2022
2023 GBP 2022 GBP
------------------------------ -------------------------------------
Cash Flows From Operating Activities
Loss for the period (4,287,891) (5,711,503)
Adjustments for:
Depreciation and amortization
charges 132,779 113,090
Inventory impairment provision 227,901 664,441
Loss on disposal of property,
plant,
and equipment and intangible
assets - 226
Promotional product in lieu of
fees 41,818 -
Imputed interest on convertible
loan
notes 177,722 -
Share expenses for options
granted 1,126,846 1,958,076
Shares issued as compensation 40,739 89,517
Foreign exchange translation
adjustment 1,157 (319,545)
Operating cash flow before working
capital
movements (2,538,929) (3,205,698)
------------------------------ -------------------------------------
Increase in inventories (30,029) (61,957)
(Increase)/decrease in trade and
other
receivables 288,864 (564,106)
Increase/(decrease) in trade and
other
payables (234,692) 1,268,131
Net Cash outflow from Operating
Activities (2,514,786) (4,962,830)
------------------------------ -------------------------------------
Cash Flows From Investing Activities
Purchase of property, plant, and
equipment - (27,443)
Payment on purchase of intangible assets (639,192) (617,198)
Net Cash generated from/(used in)
Investing
Activities (639,192) (644,641)
------------------------------ -------------------------------------
Cash Flows From Financing Activities
Net proceeds from issue of shares and
shares to be issued 2,004,013 5,699,999
Proceeds from issue of convertible loan
notes 4,693,504 -
Payments on long-term debt (18,859) (11,467)
Payments of lease liability (66,173) (52,801)
Net Cash Generated from Financing
Activities 6,612,845 5,635,731
------------------------------ -------------------------------------
Net increase (decrease) in cash and
cash equivalents
As above 3,458,507 28,260
Cash and cash equivalents at beginning
of period 420,405 333,176
Foreign exchange adjustment on opening
balances (111,486) 58,609
------------------------------ -------------------------------------
Cash and cash equivalents at end of
period 3,767,426 420,045
============================== =====================================
Non-cash Items
============================== =====================================
Shares to be issued for prepaid
consulting
fees 60,000 -
============================== =====================================
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July 28, 2023 08:00 ET (12:00 GMT)
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