Announcement PDF ASX Announcement 31 July 2023 Q2 FY23 QUARTERLY ACTIVITIES REPORT AND APPENDIX 4C Elixinol Wellness reports H1 FY23 revenue up 8% on PCP led by continued strong growth from Hemp Foods Australia (up 24% on PCP); TSN acquisition scheduled to complete 17 August 2023 Key Highlights • Elixinol Wellness Group Q2 FY23 revenue of $1.7m1, in line with prior quarter, contributing to H1 FY23 revenue of $3.5m, up 8% vs PCP. • Hemp Foods Australia Q2 FY23 revenue of $1.1m, in line with prior quarter, contributing to H1 FY23 revenue of $2.1m, up 24% vs PCP, led by continued strong sales of Seed Mix through Coles and national ranging of Hemp Seed Oil through Woolworths. • During the quarter, Elixinol Wellness successfully completed a $1.25m Placement to institutional and sophisticated investors; together with a $1.0m fully underwritten Share Purchase Plan to shareholders on equal terms with a free attaching 1:1 option. • Net operating cash utilised, excluding non-recurring items, during Q2 FY23 was $0.9m, a 40% reduction compared with the prior quarter (Q1 FY23: $1.5m). Continued focus on cost reduction expected to drive lower operating cash expenditures in the coming quarters. • The acquisition of The Sustainable Nutrition Group Limited (ASX: TSN) (TSN) scheduled to complete subject to receipt of all necessary approvals from TSN Shareholders, the Court and other Regulatory Authorities, on 17 August 2023 significantly increasing the size and scale of the business. • Cash held as at 30 June 2023 was $3.0m. Elixinol Wellness Limited (Elixinol Wellness, EXL or the Company) (ASX: EXL) a pioneer in the global hemp industry, innovating, marketing and selling hemp-derived nutraceutical, food and topical products, releases its Quarterly Activities Report and Appendix 4C quarterly cash flow report for the quarter ended 30 June 2023 (Q2 FY23). Group Chief Executive Officer and Managing Director (Group CEO), Ron Dufficy, commented: “Through the June quarter, the Elixinol Wellness team focused its efforts on both preparing for the Scheme of Arrangement activity to support the proposed acquisition of the TSN Group, and also on business as usual activities for Elixinol and Hemp Foods Australia. We are coming into an important timeframe for the proposed TSN acquisition and. we look forward to keeping the market apprised as the core scheme activities take place. In tandem with this, we look forward to launching two strategically important product ranges 1 All dollar amounts are in AUD unless otherwise stated; Average AUD/USD for Q2 FY23 = 0.6682; FY23 financials are unaudited. this quarter. Our Hemp Seed Oil capsule range will launch, leveraging the exclusivity period we have been afforded by the TGA, where our oil is the only TGA-approved hemp seed oil that can be used as an ingredient for listed complementary medicines in the Australian market. Our Elixinol Life range will also go live – this is a new non-CBD vitamin, mineral and supplements (VMS) product line. This product launch will enable Elixinol-branded products to be more readily sold in traditional retail channels in the US while the regulatory pathway for CBD products is outlined by the Food and Drug Association. Our corporate and operational activities have been supported by the recent Placement and Share Purchase Plan. We remain grateful for the support of our new and existing shareholders. These funds make an important contribution toward completing the proposed acquisition of TSN and positioning us to leverage scale from a bigger business with a strong footprint in hemp foods and hemp-derived CBD.” Financial Summary The Company reported revenue of $1.7m for Q2 FY23, in line with the prior quarter, contributing to H1 FY23 revenue of $3.5m, up 8% vs PCP. Operating cash used, excluding non-recurring items, during Q2 FY23 was $0.9m, a 40% reduction compared with the prior quarter (Q1 FY23: $1.5m). As a result of the Company’s continued focus on cost reduction, operating cash expenditure is expected to be reduced further in the coming quarters. In conjunction with the proposed TSN acquisition, Elixinol Wellness agreed to provide a loan to TSN of up to $2.0m. On 20 June 2023, this loan facility was increased to $2.4m to ensure outstanding liabilities to hemp growers are fully paid with $0.4m drawn down during the quarter. As at 30 June 2023, $0.3m of this facility remained undrawn by TSN and is expected to be utilised in Q3 FY23, prior to the completion of the proposed acquisition. This surplus inventory of hemp grain is expected to further reduce the ongoing cash requirements of the combined Australian business over the next 12 months. The Company will continue to work with Australian farmers to help develop a sustainable hemp growing industry, which is fundamental to its strategy. Cash held on 30 June 2023 was $3.0m, including a remaining $0.4m which was received in Q2 FY23 from the US Internal Revenue Service (IRS) from its COVID-19 relief measures and a further $0.5m received from the successful German arbitration. Also received during the quarter were the proceeds from a $1.25m capital raise via an institutional placement and a further fully underwritten SPP of $1.0m. Hemp Foods Australia Update Hemp Foods Australia reported revenue in line with the prior quarter and up 21% vs PCP (Q2 FY23: $1,059k vs Q1 FY23: $1,041k and Q2 FY22: $877k), the solid start to the year was led by continued strong sales of the Seed Mix range through Coles nationally, the rollout of Hemp Seed Oil across Woolworths stores nationally and promotional activity with Costco. On 29 November 2022, Hemp Foods Australia was afforded a two-year period of ‘market exclusivity’ by the Australian Therapeutic Goods Administration (TGA) to use and supply Hemp Seed Oil for listed complementary medicines in the Australian market. This exclusivity provides a first mover advantage and serves as a point of differentiation with competitors. This will enable Hemp Foods Australia to exclusively produce, sell and/or licence products that include the Hemp Seed Oil ingredient for two years with exclusivity to make claims on those products over that period. The Company is now preparing to launch its new TGA-approved range of Hemp Seed Oil capsules. Inventory is currently being received and prepared for an August launch in health food and specialty stores supported both by distributors and in the online channel, via the www.hempfoods.com.au website. Elixinol Americas Update Elixinol Americas reported a slight decrease in revenue vs the prior quarter and 19% decrease vs PCP (Q2 FY23: $646k vs Q1 FY23: $686k and Q2 FY22: $799k) due mainly to continued subdued sales through the retail channel. The traditional retail channel for Elixinol’s branded CBD continues to underperform due to the ongoing unclear regulatory status of CBD products. The eCommerce channel reported a slight decrease of 6% in H1 FY23 vs PCP from a cost base 48% lower than the previous year. Subscription-based revenues continued to contribute approximately one-third of eCommerce revenue for the half. Post-quarter end, the Company received the first inventory of its new Elixinol Life range, and it has immediately activated its launch plans including making the products available on its primary consumer website www.elixinol.com. Elixinol Life is a new non-CBD vitamin, mineral and supplements (VMS) product line. This product launch is strategically important as it will enable Elixinol-branded products to be more readily sold in traditional retail channels in the US while the regulatory pathway for CBD products is outlined by the Food and Drug Administration. With Elixinol Life product samples now on hand, the Company is scheduled to attend the National Association of Chain Drug Stores (NACDS) trade show in San Diego on 11-14 August 2023. NACDS represents traditional drug stores, supermarkets and mass merchants with pharmacies with chains operating over 40,000 pharmacies. The new Elixinol Life range will be presented to numerous buyers from major chains in the US. Corporate Update As part of the Company’s long-term strategy, which includes reducing corporate costs, Directors Mr Paul Benhaim and Mr Oliver Horn notified the Company of their intention to retire as Non-Executive Directors, effective from 6 April 2023. Both Mr Benhaim and Mr Horn brought significant experience and expertise to Elixinol Wellness in management roles and as long-standing members of the Board. The Board thanks both Mr Benhaim and Mr Horn for their significant service to the Board and thanks them both for their valuable contribution and strong support with assisting with the navigation of the Company’s revised strategy over this past year. Chair, Ms Helen Wiseman, and Mr David Fenlon will continue on the Company’s Board of Directors, which will ensure a majority of independent directors on the Board. Additionally, the Board expanded Group CEO Ron Dufficy’s role to also include the role of Managing Director. Mr Dufficy’s terms of employment, as announced to the market on 29 July 2022, remain unchanged as a result of this role expansion. On 19 April 2023, Ms Kim Bradley-Ware of Company Matters resigned as joint Company Secretary of the Company. Ms Sarah Prince from Company Matters was appointed as joint Company Secretary. On 23 May 2023, Ms Teresa Cleary resigned as Company Secretary of the Company and Ms Josephine Lorenz, the Company’s Group Chief Financial Officer, was appointed as joint Company Secretary. Placement and Underwritten Share Purchase Plan Successfully Completed On 5 April 2023, Elixinol Wellness announced that it had successfully completed a $1.25m placement (Placement) with support from new and existing institutional and sophisticated investors, and that it would undertake an underwritten Share Purchase Plan (SPP) to make the offer available on the same terms to existing shareholders. Placement shares were offered to sophisticated and institutional investors at the offer price of $0.018 per share, representing a 25% discount to the last price close on 31 March 2023 ($0.024 per share) and a 19.2% discount to the volume weighted average price of shares over the five-day and fifteen-day periods up to the last close on 31 March 2023 ($0.022 per share). A total of 69,444,445 New Shares were issued within the Company’s available placement capacity under ASX Listing Rules 7.1 and 7.1A. Participants in the Placement and SPP were entitled to subscribe for one Attaching Option for every New Share issued. Each Attaching Option is exercisable for one share at an exercise price of $0.02 and will expire two years after the date of issue. On 24 May 2023, Elixinol Wellness announced the successful completion of the SPP which was fully underwritten by Canaccord Genuity (Australia) Limited (Canaccord). The approval of the underwriting was approved by the Company’s shareholders at the Annual General Meeting (AGM) held on 31 May 2023. Proposed Acquisition of The Sustainable Nutrition Group On 29 November 2022, Elixinol Wellness announced plans to implement schemes of arrangement (Schemes) with The Sustainable Nutrition Group Ltd (ASX: TSN) (TSN) to acquire 100% of TSN’s ordinary shares. The acquisition increases size and scale for both Elixinol Wellness and TSN and will see the Group expand to own and operate brands across four key verticals: plant-based food and nutrition, hemp-based nutraceuticals (including cannabinoids such as CBD), pet nutritional supplements and skin health. TSN brands include Australian Primary Hemp, Mt Elephant, Field Day and The Australian Superfood Company. The proposed acquisition of TSN aligns with Elixinol Wellness’ strategic objectives of being a premium hemp and plant-based health and wellness company, and will provide the following benefits to the group: Creates a global plant-based food, health and wellness company: Optimises access to supply chains in Australia and enables the group to leverage access to one of the largest contract growers networks in Australia. Highly complementary product set with improved product innovation: Number of brands increase from four to eight across the human nutrition, food, CBD, pet, and wellness verticals. Additionally, the combined group’s new product development and IP sharing will assist in driving cost effective growth, whilst also accelerating ecommerce growth with the increased product range aimed to increase growth in website traffic and online sales through seven e-commerce sites, including in the US. Expands distribution network: Immediately broadens distribution capabilities across Australia from 2,300 locations to over 4,000 locations, providing substantial cross-sell opportunities for EXL and TSN brands, and the ability for EXL and TSN to expand existing relationships with partners and distributors. Increases size and scale: Leveraging the strategic reviews conducted by both TSN and EXL, the combined group aims to realise economies of scale through the rationalisation of operations and distribution channels. The combined group targets cost and revenue synergies to be realised over time, as well as margin expansion through the consolidation of operations. Leveraged to strong sector tailwinds: The combined group is positioned to leverage the mainstream shift towards plant-based, sustainable nutrition products. The global plant-based protein market is expected to significantly grow from US$10.3bn in 2020 to US$17.5bn in 20272 . Indicative timetable and next steps On 28 June 2023, The Federal Court of Australia made orders approving the dispatch by TSN of the explanatory statement (“Scheme Booklet”) in relation to the proposed acquisition by Elixinol Wellness of 100% of the TSN ordinary shares (“Scheme”) under a TSN Boardrecommended scheme of arrangement. The Court ordered that a meeting of TSN shareholders be convened to consider the Scheme (“Scheme Meeting”). The Scheme Meeting is to be held at 10am on Wednesday, 2 August 2023. A Scheme booklet containing information relating to the Scheme, the reasons for the TSN directors’ recommendation, the Independent Expert’s report and details of the Scheme Meetings was dispatched to TSN shareholders and Option holders on 3 July 2023. The Scheme Booklet details in full the important dates for the Scheme, however, a summary of the indicative key dates is provided below: Event Date and time Date and time for determining eligibility to vote at Scheme Meeting 7pm on 31 July 2023 Latest date and time for lodgement of Proxy Forms or powers of attorney for Scheme Meeting 10am on 31 July 2023 Scheme Meeting to vote on the Scheme 10am on 2 August 2023 Second Court Date for approval of the Scheme 7 August 2023 Effective Date – Court Order lodged with ASIC and announced to ASX 8 August 2023 TSN Shares cease trading on ASX at close of trading 8 August 2023 Scheme Record Date for determining participants in the Scheme and entitlements to Scheme Consideration 10 August 2023 Implementation Date – Scheme Shares transferred to EXL and Scheme Consideration provided to Scheme Participants 17 August 2023 2 UnivDatos Market Insights: Plant-Based Protein Market. Current Analysis and Forecast 2021-2027, July 2021. More information on the proposed acquisition, benefits and next steps can be seen at the Elixinol Wellness website at www.elixinolwellness.com. Appendix 4C Commentary During the quarter the Company reported net operating cash expenditure of $0.3m, in line with the previous quarter (Q1 FY23: $0.3m). Net operating cash expenditure includes receipt of $0.4m from the IRS, and the final $0.5m received following the successful German arbitration award and offset by a further $0.3m of transaction and transition costs. Excluding non-recurring items, net operating cash expenditure was $0.9m, a 40% reduction from the previous quarter (Q1 FY23: $1.5m) and a 57% reduction versus PCP (Q2 FY22: $2.1m). These expenditures supported revenue shifted toward direct-to-consumer channels and consolidating e-commerce capabilities, as well as investment in inventory for new product development and Australian hemp seed raw material, brand building, and the expansion of traditional retail distribution (in particular, in Australia with Hemp Foods Australia). Expenditures across business segments were as follows: Americas $1.3m, Australia $1.1m and Corporate $0.4m. In addition, there was $0.3m of non-recurring operating cash expenditures in relation to the proposed acquisition of The Sustainable Nutrition Group and transition costs. The Company reported payments to related parties totalling $173,000. These payments comprise Non-Executive Director fees and remuneration paid to the Group CEO and Managing Director. In line with cost reduction efforts, the Non-Executive Directors have elected to reduce their director fees from 1 July 2023 by 50% in exchange for equity, and the Group CEO and Managing Director elected to a 20% reduction in salary, in exchange for equity. These changes to Directors remuneration were approved at the Company’s 31 May 2023 Annual General Meeting (AGM). Note to Market None of the information included in this announcement should be considered individually material, unless specifically stated. All figures in this announcement are provided on an unaudited basis. This Company presentation may include certain statements, estimates or projections with respect to the anticipated future performance of the Company, and any ongoing or future projects or both. Those statements, estimates or projections are based on assumptions about future events and management actions that may not necessarily take place and are subject to significant uncertainties, many of which are outside the control of the Company. Those assumptions may, or may not, prove correct. No representation is made as to the accuracy of those statements, estimates or projections. This document was authorised to be given to the ASX by the Board of the Company. Investor relations please contact: Ron Dufficy, Group CEO & Managing Director ron.dufficy@elixinolwellness.com About Elixinol Wellness Elixinol Wellness Limited (ASX: EXL) is a pioneer in the global hemp industry, innovating, marketing and selling hemp and other plant derived nutraceutical, cosmetic and food products. The Company’s simplified business model is focusing on: ● In the Americas, innovating, marketing and selling high quality Elixinol branded hemp and other plant derived nutraceutical and skincare products based in Colorado, USA ● In Australia, Hemp Foods Australia is a leading hemp food wholesaler, retailer, manufacturer and exporter of bulk and branded raw materials, and finished products ● In the United Kingdom, South Africa, Japan, Brazil, Mexico and Malaysia (pending approvals), branded hemp and other plant derived products are available to consumers via exclusive Distribution and/or Trademark and Know-How Licensing Agreements ● Across the Rest of World, expanding distribution of branded hemp and other plant derived products through reputable distributors as key markets open. See more at www.elixinolwellness.com About The Sustainable Nutrition Group Ltd (“TSN”) TSN is a vertically integrated business which produces, manufactures, and distributes a range of sustainable and plant-based nutrition brands, including hemp products under the Mt Elephant, Australian Primary Hemp, Field Day and The Australian Superfood Company brands to retail, wholesale, e-commerce and white label customers in Australia. TSN engages across the value chain encompassing seed selection, farming, processing, packaging, distribution and sales of bulk, food service and retail products. Rule 4.7B Appendix 4C Quarterly cash flow report for entities subject to Listing Rule 4.7B Name of entity Elixinol Wellness Limited ABN Quarter ended (“current quarter”) 34 621 479 794 30 June 2023 Consolidated statement of cash flows Current quarter $A’000 1. Cash flows from operating activities 1.1 Receipts from customers 1.2 Payments for Year to date (6 months) $A’000 1,857 3,595 - - (1,057) (2,443) (199) (483) 82 128 (e) staff costs (920) (2,023) (f) (733) (1,273) - - (a) research and development (b) product manufacturing and operating costs (c) advertising and marketing (d) leased assets administration and corporate costs 1.3 Dividends received (see note 3) 1.4 Interest received 24 39 1.5 Interest and other costs of finance paid (13) (28) 1.6 Income taxes paid/(received) 49 48 1.7 Government grants and tax incentives 408 1,404 1.8 Other – non recurring 173 422 1.9 Net cash from / (used in) operating activities (329) (614) 2. Cash flows from investing activities 2.1 Payments to acquire or for: (g) entities - - (h) businesses - - (1) (1) (i) property, plant and equipment (j) investments - - (k) intellectual property - - (l) - - other non-current assets ASX Listing Rules Appendix 4C (17/07/20) + See chapter 19 of the ASX Listing Rules for defined terms. Page 1 Appendix 4C Quarterly cash flow report for entities subject to Listing Rule 4.7B Consolidated statement of cash flows 2.2 Current quarter $A’000 Year to date (6 months) $A’000 Proceeds from disposal of: (a) entities - - (b) businesses - - (c) property, plant and equipment - - (d) investments - - (e) intellectual property - - (f) - - (352) (952) other non-current assets 2.3 Cash flows from loans to other entities 2.4 Dividends received (see note 3) - - 2.5 Other - - 2.6 Net cash from / (used in) investing activities (353) (953) 3. Cash flows from financing activities 3.1 Proceeds from issues of equity securities (excluding convertible debt securities) 2,250 2,250 3.2 Proceeds from issue of convertible debt securities - - 3.3 Proceeds from exercise of options - - 3.4 Transaction costs related to issues of equity securities or convertible debt securities (199) (199) 3.5 Proceeds from borrowings - - 3.6 Repayment of borrowings (174) (343) 3.7 Transaction costs related to loans and borrowings - - 3.8 Dividends paid - - 3.9 Other - - 3.10 Net cash from / (used in) financing activities 1,877 1,708 4. Net increase / (decrease) in cash and cash equivalents for the period 4.1 Cash and cash equivalents at beginning of period 1,853 2,864 4.2 Net cash from / (used in) operating activities (item 1.9 above) (329) (614) 4.3 Net cash from / (used in) investing activities (item 2.6 above) (353) (953) ASX Listing Rules Appendix 4C (17/07/20) + See chapter 19 of the ASX Listing Rules for defined terms. Page 2 Appendix 4C Quarterly cash flow report for entities subject to Listing Rule 4.7B Consolidated statement of cash flows Current quarter $A’000 Year to date (6 months) $A’000 4.4 Net cash from / (used in) financing activities (item 3.10 above) 1,877 1,708 4.5 Effect of movement in exchange rates on cash held (5) 38 4.6 Cash and cash equivalents at end of period 3,043 3,043 5. Reconciliation of cash and cash equivalents Current quarter $A’000 Previous quarter $A’000 at the end of the quarter (as shown in the consolidated statement of cash flows) to the related items in the accounts 5.1 Bank balances 3,043 1,853 5.2 Call deposits - - 5.3 Bank overdrafts - - 5.4 Other (provide details) - - 5.5 Cash and cash equivalents at end of quarter (should equal item 4.6 above) 3,043 1,853 6. Payments to related parties of the entity and their associates 6.1 Aggregate amount of payments to related parties and their associates included in item 1 173 6.2 Aggregate amount of payments to related parties and their associates included in item 2 - Current quarter $A'000 Note: if any amounts are shown in items 6.1 or 6.2, your quarterly activity report must include a description of, and an explanation for, such payments. ASX Listing Rules Appendix 4C (17/07/20) + See chapter 19 of the ASX Listing Rules for defined terms. Page 3 Appendix 4C Quarterly cash flow report for entities subject to Listing Rule 4.7B 7. Financing facilities Note: the term “facility’ includes all forms of financing arrangements available to the entity. Add notes as necessary for an understanding of the sources of finance available to the entity. Total facility amount at quarter end $A’000 Amount drawn at quarter end $A’000 7.1 Loan facilities - -- 7.2 Credit standby arrangements - - 7.3 Other (please specify) - - 7.4 Total financing facilities - 7.5 Unused financing facilities available at quarter end - 7.6 Include in the box below a description of each facility above, including the lender, interest rate, maturity date and whether it is secured or unsecured. If any additional financing facilities have been entered into or are proposed to be entered into after quarter end, include a note providing details of those facilities as well. N/A $A’000 8. Estimated cash available for future operating activities 8.1 Net cash from / (used in) operating activities (item 1.9) (329) 8.2 Cash and cash equivalents at quarter end (item 4.6) 3,043 8.3 Unused finance facilities available at quarter end (item 7.5) 8.4 Total available funding (item 8.2 + item 8.3) 8.5 Estimated quarters of funding available (item 8.4 divided by item 8.1) 3,043 9.2 Note: if the entity has reported positive net operating cash flows in item 1.9, answer item 8.5 as “N/A”. Otherwise, a figure for the estimated quarters of funding available must be included in item 8.5. 8.6 If item 8.5 is less than 2 quarters, please provide answers to the following questions: 8.6.1 Does the entity expect that it will continue to have the current level of net operating cash flows for the time being and, if not, why not? N/A 8.6.2 Has the entity taken any steps, or does it propose to take any steps, to raise further cash to fund its operations and, if so, what are those steps and how likely does it believe that they will be successful? N/A 8.6.3 Does the entity expect to be able to continue its operations and to meet its business objectives and, if so, on what basis? N/A Note: where item 8.5 is less than 2 quarters, all of questions 8.6.1, 8.6.2 and 8.6.3 above must be answered. ASX Listing Rules Appendix 4C (17/07/20) + See chapter 19 of the ASX Listing Rules for defined terms. Page 4 Appendix 4C Quarterly cash flow report for entities subject to Listing Rule 4.7B Compliance statement 1 This statement has been prepared in accordance with accounting standards and policies which comply with Listing Rule 19.11A. 2 This statement gives a true and fair view of the matters disclosed. Date: 31 July 2023 ................................................................................... The Board Authorised by: ................................................................................... (Name of body or officer authorising release – see note 4) Notes 1. This quarterly cash flow report and the accompanying activity report provide a basis for informing the market about the entity’s activities for the past quarter, how they have been financed and the effect this has had on its cash position. An entity that wishes to disclose additional information over and above the minimum required under the Listing Rules is encouraged to do so. 2. If this quarterly cash flow report has been prepared in accordance with Australian Accounting Standards, the definitions in, and provisions of, AASB 107: Statement of Cash Flows apply to this report. If this quarterly cash flow report has been prepared in accordance with other accounting standards agreed by ASX pursuant to Listing Rule 19.11A, the corresponding equivalent standard applies to this report. 3. Dividends received may be classified either as cash flows from operating activities or cash flows from investing activities, depending on the accounting policy of the entity. 4. If this report has been authorised for release to the market by your board of directors, you can insert here: “By the board”. If it has been authorised for release to the market by a committee of your board of directors, you can insert here: “By the [name of board committee – eg Audit and Risk Committee]”. If it has been authorised for release to the market by a disclosure committee, you can insert here: “By the Disclosure Committee”. 5. If this report has been authorised for release to the market by your board of directors and you wish to hold yourself out as complying with recommendation 4.2 of the ASX Corporate Governance Council’s Corporate Governance Principles and Recommendations, the board should have received a declaration from its CEO and CFO that, in their opinion, the financial records of the entity have been properly maintained, that this report complies with the appropriate accounting standards and gives a true and fair view of the cash flows of the entity, and that their opinion has been formed on the basis of a sound system of risk management and internal control which is operating effectively. ASX Listing Rules Appendix 4C (17/07/20) + See chapter 19 of the ASX Listing Rules for defined terms. Page 5