Announcement PDF Elixinol Wellness Limited ABN 34 621 479 794 Annual Report - 31 December 2023 Elixinol Wellness Limited Contents 31 December 2023 Directors' report Auditor's independence declaration Consolidated statement of profit or loss and other comprehensive income Consolidated statement of financial position Consolidated statement of changes in equity Consolidated statement of cash flows Notes to the consolidated financial statements Note 1. General information Note 2. Material accounting policy information Note 3. Critical accounting judgements, estimates and assumptions Note 4. Operating segments Note 5. Revenue Note 6. Other income Note 7. Expenses Note 8. Income tax Note 9. Cash and cash equivalents Note 10. Trade and other receivables Note 11. Inventories Note 12. Prepayments, deposits and other Note 13. Non-current assets classified as held for sale Note 14. Investments accounted for using the equity method Note 15. Property, plant and equipment Note 16. Right-of-use assets Note 17. Intangibles Note 18. Trade and other payables Note 19. Contract liabilities Note 20. Borrowings Note 21. Lease liabilities Note 22. Issued capital Note 23. Reserves Note 24. Dividends Note 25. Financial instruments Note 26. Fair value measurement Note 27. Remuneration of auditors Note 28. Contingent liabilities Note 29. Commitments Note 30. Key management personnel disclosures Note 31. Related party transactions Note 32. Parent entity information Note 33. Business combinations Note 34. Interests in subsidiaries Note 35. Deed of cross guarantee Note 36. Cash flow information Note 37. Earnings per share Note 38. Share-based payments Note 39. Events after the reporting period Directors' declaration Independent auditor's report to the members of Elixinol Wellness Limited Shareholder information Corporate directory 1 2 26 27 28 29 30 31 31 31 40 41 43 44 45 46 47 47 48 49 49 49 51 52 53 53 54 54 55 55 56 56 57 59 60 60 60 60 61 61 62 63 64 64 65 65 67 69 70 74 76 Elixinol Wellness Limited Directors' report 31 December 2023 Your directors present their report, together with the financial statements for Elixinol Wellness Limited ('Elixinol Wellness', the 'Company') and its controlled entities ('Consolidated Entity' or 'Group') for the financial year ended 31 December 2023 ('FY23'). Directors The names of the Directors of the Company in office during the financial year and up to the date of this report are as follows. Directors were in office for the entire period unless otherwise stated. David Fenlon Pauline Gately Independent Non-Executive Chair (appointed 30 September 2023) Independent Non-Executive Director (1 January 2023 to 29 September 2023) Group Chief Executive Officer Managing Director (appointed 6 April 2023) Non-Executive Director (appointed 17 August 2023) Helen Wiseman Paul Benhaim Oliver Horn Independent Non-Executive Chair (resigned 30 September 2023) Non-Executive Director (resigned 6 April 2023) Non-Executive Director (resigned 6 April 2023) Ronald Dufficy Principal activities The principal activities of the Company during the year relate to its operation as a holding company for each of Elixinol LLC ('Elixinol Americas'), Elixinol Wellness (Byron Bay) Pty Ltd trading as Hemp Foods Australia, Mt Elephant, Field Day and The Australian Superfood Co, The Sustainable Nutrition Group Pty Ltd, The Sustainable Nutrition Group (Australia) Pty Ltd (together 'Australia') and Elixinol BV and Elixinol Limited (together 'Elixinol Europe'). The principal activities of the Group are: Australia (hemp-derived nutrition and skincare products) Australia operates a vertically integrated business which produces, manufactures, and distributes a range of highly complementary products delivered across four verticals – human nutrition, human wellness, pet wellness and superfood ingredients. Brands include Hemp Foods Australia, Mt Elephant and Field Day, and are sold through grocery, wholesale, and eCommerce channels. Additionally, the Australian Superfood Co. supplies Australian native and superfood ingredients to white label customers as well as food, beverage, and beauty manufacturers. Manufacturing and distribution operations are based in Geelong, Victoria, servicing customers throughout Australia. Elixinol Americas (hemp-derived cannabidiol (‘CBD’) dietary supplements and topicals) Established in 2014, Elixinol Americas is based in the United States and specialises in marketing and distributing products made from premium quality, predominantly 'whole plant' full spectrum CBD, which is extracted from US grown industrial hemp. Rest of World (hemp-derived cannabidiol ('CBD') food and cosmetics) Rest of World includes Elixinol Europe, based in Utrecht (The Netherlands), and in London (United Kingdom). Elixinol Europe was established in 2018 specialising in the development, sourcing, marketing and distribution of hemp-derived CBD products, including skincare. Rest of the World moved to a licensing business model in 2021 covering Elixinol Europe, Japan and South Africa. Dividends There were no dividends paid, recommended or declared during the current or previous financial year. Review of operations Operating and financial review The FY23 loss for the Group after providing for income tax and non-controlling interest amounted to $7,507,000 (31 December 2022: $10,571,000). The Group revenue from continuing operations for the year ended 31 December 2023 was $8,269,000 (31 December 2022: $7,055,000). 2 Elixinol Wellness Limited Directors' report 31 December 2023 The Group’s earnings before interest, tax, depreciation and amortisation (‘EBITDA’) from continuing operations, including share of associates’ net loss and excluding impairments and share-based payments, for the year ended 31 December 2023 was an Adjusted EBITDA loss of $4,626,000 (31 December 2022: Adjusted EBITDA loss of $8,538,000). EBITDA and Adjusted EBITDA are financial measures which are not prescribed by Australian Accounting Standards (‘AAS’) and represent the statutory result under AAS, adjusted for certain items. The directors consider EBITDA and Adjusted EBITDA to reflect core earnings of the Group. A reconciliation of Adjusted EBITDA from continuing operations to statutory loss is detailed below: 2023 $'000 Group 2022 $'000 Loss after income tax (7,507) (10,571) Add back/(deduct): Income tax expense/(benefit) Finance costs Interest income Depreciation and amortisation EBITDA 3 101 (213) 597 (7,019) 2 71 (22) 721 (9,799) Add back/(deduct): Impairment of intangibles Impairment of other assets Share-based payments 1,718 675 234 786 241 Adjusted EBITDA (4,626) (8,538) Group cash used in operations for the year ended 31 December 2023 was $2,758,000 (31 December 2022: $8,152,000), which included $190,000 of non-recurring transaction costs. The Group also recognised non-cash impairments of intangibles (including goodwill) of $nil (31 December 2022: $234,000) for the year ended 31 December 2023 related to the Elixinol Americas cash-generating unit ('CGU'). Group non-cash impairment of other assets of $1,718,000 (31 December 2022: $786,000) for the year ended 31 December 2023 relate to the write-down of the Company’s non-core asset investment in Altmed Pets LLC. Subsequent to year end, on 21 February 2024, the Company entered into a binding agreement, subject to finance, to sell this investment for approximately $2,300,000, an amount equal to the revised value in the Company’s financial statements. Australia Australia comprises trading results from Elixinol Wellness (Byron Bay) Pty Ltd trading as Hemp Foods Australia, Mt Elephant, Field Day, and The Australian Superfood Co, The Sustainable Nutrition Group Pty Ltd, and The Sustainable Nutrition Group (Australia) Pty Ltd. Australia reported revenue for the year ended 31 December 2023 of $5,587,000 (31 December 2022: $3,691,000) and Adjusted EBITDA loss of $1,115,000 (31 December 2022: $704,000 Adjusted EBITDA loss). In H1 FY23, Hemp Foods Australia recorded strong sales of its Seed Mix range through Coles nationally, the rollout of Hemp Seed Oil across Woolworths stores nationally and promotional activity with Costco. The national Woolworths roll-out of Hemp Foods Australia’s product range also coincided with the launch of its rebrand and fresh look for its Hemp Foods Australia brand. Other highlights include the launch of the Group’s TGA-approved range of Hemp Gold® Seed Oil capsules in August through health food and specialty stores as well as online channels. With an expanded brand portfolio, following the acquisition of The Sustainable Nutrition Group Ltd ('TSN') effective 17 August 2023, Australian-based revenue increased to $3,487,000 in H2 FY23, an increase of 66% compared with H1 FY23 revenue of $2,100,000. On a full year basis, Hemp Foods Australia branded Business to Consumer ('B2C') revenue climbed 25% compared with FY22. 3 Elixinol Wellness Limited Directors' report 31 December 2023 During H2 FY23, the Group was notified of successful ranging of its Mt Elephant products with Coles. Coles will range 4 Mt Elephant SKUs from April 2024 augmenting the 10 Mt Elephant SKUs already sold in Woolworths stores nationally. During H2 FY23, the Company also confirmed online distribution with Chemist Warehouse. From February 2024, Hemp Foods Australia’s Plant-Based Omega and its Pain Relief capsules will be available via www.chemistwarehouse.com.au. Additionally, from April 2024, a unique 1kg pack of Hemp Foods Australia’s flavoured proteins and a new Plant-Based Collagen product will also be available online. Americas The Americas segment comprises the trading results of Elixinol LLC and its investments in Pet Releaf ('Elixinol Americas'). A binding agreement to dispose of the investment in Pet Releaf was entered into on 21 February 2024 and as a result, the investment has been classified as non-current asset, held of sale. There was no impact on the trading results of Elixinol Americas. Elixinol Americas reported revenue of $2,638,000 in FY23, a 20% decline compared with the prior year (FY22: $3,318,000). Traditional retail channels for Elixinol branded CBD products continue to underperform due to the unclear regulatory status of CBD products in the USA. Revenues from eCommerce were maintained from a cost base which was 42% lower than the previous year. This was achieved by servicing the Company’s customer base and through subscription-based ordering, which contributed approximately one-third of eCommerce revenue for the year. The Americas’ business has transitioned to a lean eCommerce business and moves into FY24 contributing positively to Group EBITDA. Share of associates' loss Share of associates loss during the year ended 31 December 2023 was $nil (31 December 2022: $73,000). Review of financial position As at 31 December 2023, Group net assets were $6,462,000, including $708,000 in cash and cash equivalents. The key impact during the period was a loss of $7,437,000. Business strategies and future prospects During FY23, the Company repositioned its business to become a house of branded consumer goods in addition to its Business to Business ('B2B') ingredients business and CBD portfolio. Revenue growth and substantial cost reductions culminated in improved cash flow during the financial year. The Company’s strategy is to build a global, wellness consumer products company, with a stated vision of creating healthier lives through the power of plant-based products. Building on the Company’s FY22 Strategic Review, its cost base was refined further with a streamlined organisational structure that combines corporate and business unit functions. Importantly, this structure supports the Company’s strategy of diversifying towards natural and plant-based wellness products, and reducing reliance on its CBD portfolio. The Company remains focused on driving cost efficiencies and strengthening its balance sheet to create value for all shareholders. To this end, the Company’s recently announced acquisition of Ananda Food Pty Ltd ('Ananda Food') adds further scale to enhance Group profitability. The acquisition strengthens the Company’s leadership position in the Australian hemp market and leverage across the supply chain. Highly complementary product ranges have the ability to accelerate sales through cross-selling, significantly improve unit economics through improved yields, increase asset utilisation and sale of by-products, and create immediate cost synergies. Vision and mission The Company’s vision and purpose are the cornerstone of its strategy, which is underpinned by the following: Company Vision: To create healthier everyday lives through the power of plant-based products. Purpose: Changing lives naturally. 4 Elixinol Wellness Limited Directors' report 31 December 2023 Key strategic objectives identified The Group remains positive about market opportunities for plant-based products, and its ability to leverage its strong brands and reputation for high quality products. The Group’s strategic focus is predicated on the following strategic initiatives to support revenue growth, margin improvement and deliver sustainable profit: ● Bring to market new products developed through innovation in functional plant-based foods, while further increasing leadership in hemp led consumer products; ● Merge the Ananda Food business (proposed acquisition announced 12 February 2024) with the Australian product offering to realise synergies and economics of scale, and broaden national retail distribution through Woolworths, Coles, Costco and pharmacy chains; ● Relentless focus on improving capital efficiency - long term focus on improving cash flow, driving margin accretion, and tightly controlling expenditures, optimise and systemise the supply chain, empowering the sales and marketing teams; ● Continue to operate the Elixinol Americas business with a leaner and capital light business model; and, ● Develop an Environmental Social Governance ('ESG') agenda. Principal risks and uncertainties Acquisition risk Completion of the Ananda Food acquisition is conditional on raising sufficient funds under the Rights Issue Offer and the satisfaction of a number of customary conditions. Integration risk Assuming the Ananda Food acquisition completes, substantial effort and cost will be required to integrate the two businesses. The anticipated benefits arising from the acquisition could either not be achieved or achievement could be delayed. Agricultural risk and climate change risk The Group is exposed to agricultural risk as the business is reliant on agricultural products. As such, the business is subject to the risks inherent in the agriculture industry. These risks include insects, plant diseases, storm, fire, frost, flood, water availability, water salinity, pests, bird damage and force majeure events. These risks may impact the financial performance through increased costs (from low yields or increased prices from low supply) or lack of supply to address customer demands. Supplier arrangements The Group has arrangements with a number of key suppliers. To the extent that Group entities cannot secure and retain key suppliers, their respective ability to maintain consistent production levels may be compromised, which in turn may have an adverse impact on the financial performance and position of Elixinol Wellness. Risk of adverse events, product liability or other safety issues As with all food or nutraceutical products, there is a risk that the products sold by Elixinol Wellness could cause serious or unexpected side effects, including risk or injury to consumers. Should any of Elixinol Wellness’ products be associated with safety risks such as misuse or abuse, inadvertent mislabelling, tampering by unauthorised third parties, or product contamination or spoilage, several materially adverse outcomes could occur, including: ● Regulatory authorities may revoke any approvals that have been granted, impose more onerous facility standards or product labelling requirements, or force the Group to conduct a product recall; ● The Group could be subject to regulatory action or be sued and held liable for any harm caused to customers; or ● The Group’s brands and reputation could be damaged. These may all impact the financial performance of the Group. Systems, security and data privacy While the Group has policies and procedures in place to address system security and data risks, there is a risk that these may not be adequate, which could adversely affect the Group’s reputation and financial position. There is also a risk that systems are not scalable or have the ability to leverage the synergies of the different businesses across the Group. This may lead to a financial impact and loss in revenue and profitability. Key management personnel and employees The Group relies upon its ability to attract and retain experienced and high performing executives and other employees. The failure to achieve this may impact upon the Group’s ability to develop and meet its strategies, and may lead to a loss in revenue and profitability. 5 Elixinol Wellness Limited Directors' report 31 December 2023 Change to laws or regulations The Group’s operations are highly regulated and could be adversely affected by changes in laws, regulations or regulatory policy in the jurisdictions in which it operates. The operations and proposed operations of the Group are subject to a variety of laws, regulations and guidelines related to the retail sale of hemp-derived products. The hemp-derived CBD industry is evolving globally, including in the USA and in Europe and the United Kingdom. It is likely that governments worldwide will continue to explore the benefits, risks and operations of companies involved in the hemp sector. The Group’s business, prospects, reputation, performance and financial condition could all be affected by changes to law and regulation, changes to policies, and changes in the supervisory activities and expectations of its regulators across all of the jurisdictions in which it operates. In particular, the regulation of hemp is developing and, as a result, a change in government or increase in political lobbying may result in a change in government policy and an amendment of legislation and/or regulation. For example, there is a risk that the allowable levels of THC in hemp products sold in the US may change. This could potentially result in additional processing costs and impact the overall financial performance of the Group. There is a further risk that the US Food and Drug Administration ('FDA'), the regulator which regulates ingestible and topical products including CBD products, may seek to change the laws and regulations governing the manufacturing and marketing of CBD products in the US. This could include current ‘good manufacturing practice’ regulation, nutrition and allergen labelling, and label claim regulations and safety requirements including, as applicable, ‘new dietary ingredient’ and ‘generally recognised as safe’ regulations. In the US, given that many of the applicable laws and regulations are determined at the State level, there is also a risk that the regulatory regime governing the Group’s US operations and distribution network becomes further fragmented and difficult to comply with. The introduction of new legislation or amendments to existing legislation by governments, or the respective interpretation of the legal requirements, in any of the legal jurisdictions which governs the operations or contractual obligations of the Group, could impact adversely on the assets, operations, and the financial performance of the Group and the industry in general. Regulatory compliance and the management of regulatory change are an important part of the Group’s planning processes. The Group intends to continue to invest in compliance and the management and implementation of regulatory change and, at the same time, significant management attention and resources will be required to update existing or implement new processes to comply with new regulations (such as obligations to provide certain data and information to regulators) or new interpretations of existing laws or regulations. Failure to appropriately manage and implement regulatory change, including failing to implement effective processes to comply with new regulations, could in the future result in Elixinol Wellness failing to meet a compliance obligation, and this could in turn lead to a financial impact and loss in revenue and profitability. Loss of key relationships The hemp-derived CBD industry is undergoing rapid growth and change, which has resulted in increasing consolidation and formation of strategic relationships. It is expected that this consolidation and strategic partnering will continue. Acquisitions or other consolidating transactions could harm the Group in a number of ways. The Group may lose strategic relationships if third parties with whom the Group has arrangements with are acquired by or enter into relationships with a competitor (which could cause the Group to lose access to necessary resources). The Group’s current competitors could become stronger, or new competitors could form from consolidations. This could cause the Group to lose access to markets or expend greater resources in order to stay competitive. Separately, the relationship between the Group and third parties may deteriorate organically, which may have an adverse impact on the business of the Group. Production risk The ability for Group entities to cultivate and produce products is dependent on a number of key inputs and their related costs. These key inputs include raw materials, electricity, water, other utilities and skilled labour. Any significant interruption or negative change in the availability or cost of these inputs could materially impact the production of the business and subsequently, the operating results of the Group. In particular, given the nature of the raw materials used by each of the Group entities, supply may be limited to a single or limited number of suppliers, with access to these raw materials more competitive than conventional ingredients. As a result, there is an enhanced risk of difficulties in securing the required supplies, or to do so on appropriate terms. Reputational risk There is a risk that incidents beyond the control of the Group entities could occur which would have the effect of reducing patient, medical/scientific or regulatory confidence, or preferences for cannabis or medicinal cannabis products generally. This reputational risk could result from incidents involving members of the Group or other non-related industry participants. 6 Elixinol Wellness Limited Directors' report 31 December 2023 Protection of intellectual property The Group’s success will depend on, in part, its ability to protect its intellectual property, including its trade marks, copyright, trade secrets and know-how. To the extent the Group fails to protect its intellectual property or infringes a third party’s intellectual property, the Group may face increased competition from similar products, have to cease using certain intellectual property or be liable for damages. In the event that this occurs, there is a risk that it has a materially adverse impact on the Group’s operations, financial performance and future prospects. Competition risk The industries in which the current Group entities are involved is subject to domestic and international competition. While the entities will undertake all reasonable due diligence in their business decisions and operations, they will have no influence or control over the activities or actions of their competitors, which activities or actions may, positively or negatively, affect the operating and financial performance of the Group. Some of the Group’s competitors and potential competitors may have significantly more financial resources and marketing experience than EXL which may lead to reduced margins and loss of revenue or loss of market share for the Group. Further, Group revenues in the future may be reduced as the industry consolidates and seeks revenue accretion at the expense of profit margin. Uncontracted sales A material proportion of the Group’s revenue is derived from uncontracted customer relationships, with sales made under standard terms and conditions. There is a risk that these customer relationships may not be able to be maintained, or new relationships may not be formed, on terms acceptable to the Group. Additionally, given the uncontracted nature of these relationships, it is not possible to guarantee consistency of sales volumes, price or terms going forward. The Group’s financial performance could be materially and adversely impacted by wholesale customers: ● Materially changing their trading terms; ● Promoting the products of one or more of the Group’s competitors; or ● Refusing to promote or stock the Group’s products or significantly reducing orders for its products. Contracts and agreements There are a number of risks associated with the Group’s existing contracts and agreements, including those related to previous supply arrangements and property leases. There is a risk that the Group’s existing contracts may be terminated, lost or impaired, or renewed on less favourable terms. Some of the Group’s contracts can be terminated without cause or on short notice periods (depending on events and circumstances), and although the relevant parties may continue to operate on existing commercial terms, a number of its existing contracts have expired or will shortly expire. A loss of any of the Group’s contracts could have an adverse effect on its business, operating and financial performance. Similarly, there is a risk that the Group may not meet its existing obligations under current contracts and agreements. Should this be the case, the Group may be liable (to varying extents) under indemnity provisions in a number of contract and agreements. Any failure to meet these obligations could adversely impact the financial position of the Group. Counterparty risks The Group has entered, and may enter, into several commercial agreements and arrangements (including licences) with third parties that are, or could be, material to the financial performance and prospects of its business. There is a risk that counterparties may not execute such agreements or, in respect of agreements that have been executed or are executed in the future, the counterparty may fail to meet their obligations under those agreements and arrangements. Negative commercial consequences will, or are likely to, result from the non-execution of such an agreement or any non-observance of obligations under such agreements. These consequences may include preventing the relevant Group entity from executing a part, or parts, of its business plan. This in turn may result in an adverse effect on the Group’s proposed activities and operations, financial performance and prospects. Significant changes in the state of affairs On 14 February 2023, the Company announced that the dispute between CannaCare Health GmbH ('CannaCare') and the Company’s wholly owned subsidiary, Elixinol BV, had been successfully concluded, with an arbitration award made in the Company’s favour to the tune of approximately 543,000 EUR ($835,000). On 6 April 2023, as part of the Company’s long-term strategy to reduce corporate costs, Directors Mr Paul Benhaim and Mr Oliver Horn notified the Company of their intention to retire as Non-Executive Directors. 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. On 6 April 2023, additionally, the Board expanded Group CEO Ron Dufficy’s role to 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 his role expansion. 7 Elixinol Wellness Limited Directors' report 31 December 2023 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') 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 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 successful completion of the SPP which was fully underwritten by Canaccord Genuity (Australia) Limited ('Canaccord') to raise $1.0 million. Approval of this underwriting was approved by the Company’s shareholders at the Annual General Meeting (AGM) held on 31 May 2023. Acquisition of The Sustainable Nutrition Group On 17 August 2023, the scheme of arrangement to acquire 100% of the ordinary shares of The S