REG - Chill Brands Group - Final Results for the year to 31 March 2023
28/07/2023 13:00
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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 AMENDED BY REGULATION 11 OF THE
MARKET ABUSE (AMENDMENT) (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
(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.
-ENDS-
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 (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 £4,287,891 (2022: £5,711,503), 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 £1,304,570 (2022: £1,958,076)
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
£3,500,000 (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 £2,916,670 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 £212,201 (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 £560,000 (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 £2.6 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 £1,000,000,000, and the issue of convertible unsecured loan
notes with a value of £1.6 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 £82,840 (2022: £624,187 -
of which £447,814 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 £100,000. 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 £3,767,426 at the bank (2022: £420,045).
Funding and Going Concern
During the Period the Group was sustained by fundraising activity that raised
a total of £3,500,000 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 £2,916,670 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 £212,201 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 £560,000 (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
£2,600,000 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 £1.6 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 £2,916,670
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 £3.16 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
£2,916,670 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 £3.16 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 INDEPENDENT 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 £2,916,670 and £176,835 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
Notes Year ended 31 March 2023 £ Year ended 31 March 2022 £
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: (24,241) 271,869
Foreign exchange adjustment on consolidation
Total comprehensive income for the (4,312,132) (5,983,372)
period attributable to the equity holders
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
Notes At 31 March 2023 £ At 31 March 2022 £
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 £ 2022 £
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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