Elixinol Wellness : Quarterly Update and Appendix 4C

For personal use only

ASX Announcement

31 January 2022

Q4 FY21 QUARTERLY ACTIVITIES REPORT AND APPENDIX 4C

Elixinol Wellness delivers stable revenues and commences

strategic review to maximise shareholder value

Key Highlights

• Q4 FY21 revenue of $2.3m1, in line with prior quarter (Q3 FY21: $2.3m), due to declines in US retail, COVID-19 impacts and industry headwinds, offset by growth in Hemp Foods Australia
• Operating cash used during Q4 FY21, excluding non-recurring items, was $3.0m, a slight increase on the prior quarter (Q3 FY21: $2.9m) (due to raw material purchases for Hemp Foods Australia necessary to ensure supply chain continuity and to support growth) and representing a 21% improvement compared with $3.8m in the prior corresponding period (PCP)
• Well-fundedwith $12.6m in cash and an additional $1.9m expected from US Employee Retention Credits, leaving the Company with approximately five quarters of funding on a historical run rate basis
• Hemp Foods Australia revenue up 6% over Q3 FY21, led by continued growth in Costco; third consecutive quarter of growth despite COVID-19 impacts
• Elixinol Americas' revenue 7% lower over Q3 FY21, due to depressed retail spending amid rising Omicron infections
• The Company signed exclusive licensing agreement with market leading UK manufacturer BRITISH CANNABIS™; first licensing revenue received from Japan
• The Board of Elixinol Wellness commences strategic review to maximise shareholder value which will include consideration of merger, sale or other options for the Company as a whole or its business units

Elixinol Wellness Limited (Elixinol Wellness or the Company) (ASX:EXL; OTCQB:ELLXF) a global leader in the hemp derived food and CBD industry, innovating, and selling hemp derived food and CBD products, releases its Quarterly Activities Report and Appendix 4C cash flow report for the quarter ended 31 December 2021 (Q4 FY21).

1 All dollar amounts are in AUD unless otherwise stated; Average AUD/USD for Q4 FY21 = 0.7285; FY21 financials are unaudited.

For personal use only

Global CEO, Oliver Horn, commented: "The December quarter contained many highlights, including growth continuation for Hemp Foods

Australia and strong early performance from our new US e-commerce site. We entered into a three-year exclusive Trademark and Know-How Licensing Agreement with BRITISH CANNABIS™ and are excited about the potential in that agreement.

Our US business has continued to operate in a challenging environment with the overall CBD market remaining depressed. In contrast, Hemp Foods Australia and the plant-based food sector continues to perform well.

As shareholders would be aware, for several quarters now the Board has been carefully assessing our path to profitability. Today we are announcing the start of a strategic review process with the aim to accelerate our path to profitability and maximise shareholder value. This review will include exploring and considering merger or sale options of all or parts of the Group.

We've been through a large-scale transformation process and created a well-funded and leaner consumer products wellness company with strong brands that are positioned in long- term growth categories.

Building on the transformational work done throughout 2021, we are now taking the next well considered and courageous steps to improve shareholder value by evaluating all strategic options that provide larger-scale cost synergies.

Throughout the strategic review process, we will remain focused on executing our operating plans and improving overall Group operational performance, while further reducing cost by completing the US supply chain outsourcing project.

We look forward to updating our shareholders as we make progress."

The Company reported revenue of $2.3m for Q4 FY21, in keeping with the prior quarter (Q3 FY21 $2.3m), due to declines in US retail, offset by growth in Hemp Foods Australia.

Operating cash used during Q4 FY21 excluding non-recurring items was $3.0m, a slight increase on the previous quarter (Q3 FY21: $2.9m) and a 21% improvement compared with PCP (Q4 FY20: $3.8m). The minor increase in cash outflows was due to investment required to minimise COVID-19 related supply chain impacts and ensure uninterrupted access to Australian hemp seeds to support Hemp Foods Australia's growth.

For personal use only

The Company finished the quarter well-funded with $12.6m in cash and an additional $1.9m expected from US Employee Retention Credits. With a steadily reducing cost base and with more optimisation initiatives on foot, including the Employee Retention Credits, the Company has approximately five quarters of funding on a historical run rate basis.

Hemp Foods Australia update

Hemp Foods Australia's growth trajectory continued to improve, with revenue up 6% (Q4 FY21: $1,121k vs Q3 FY21: $1,057k), led by national distribution gains including continued growth in Costco.

Q4 was Hemp Foods Australia's strongest quarter for FY21, with gains led by recent distribution growth in Woolworths and Costco. Hemp Foods Australia also finished FY21 with significant gross margin improvement following continued portfolio optimisation and discontinuation of several unprofitable product lines. The focus on margin accretion through shifting to higher margin branded consumer goods and continued growth in Hemp Foods Australia's direct to consumer e-commerce business resulted the stronger gross margins which ended FY21 at 34%, up from 27% in FY20.

During the quarter Hemp Foods Australia also shipped its new hemp-paste product which is a versatile health food ingredient to create hemp-based food products such as ice creams or plant-based milks and has a variety of other applications. Hemp Foods Australia's hemp paste is now being used in a range of ice creams which are vegan, low in sugar, high in protein and hemp milk based.

Americas business transformation continues

The Elixinol Americas business showed a revenue decline through the quarter, down 7% (Q4 FY21: $1,074k vs Q3 FY21: $1,159k), due to depressed traditional retail spending amid rising Omicron infections whilst the CBD category continued to face over-supply challenges.

The continued business transformation towards a leaner, more capital light and e-commerce driven branded consumer wellness business saw significant progress throughout the quarter.

In October Elixinol Americas successfully transitioned to a more consumer friendly, lower cost and better performing Shopify e-commerce platform. The new e-commerce site showed strong performance improvements with 72% growth in user sessions and transaction growth of 25% versus prior quarter. The quarter further saw the launch of a subscription model which accounted for 12% of quarterly revenues and the launch of a loyalty points scheme to strengthen recurring revenues.

The transition to a fully outsourced supply chain neared completion in the quarter with in- house warehousing and fulfilment on track to move to a third-party model in Q1 2022 which will result in further enduring operating cost efficiencies.

For personal use only

In line with Elixinol America's aggressive new product development strategy, Q4 also saw the release of the new Extra Strength Daily Balance capsules retailing at RRP US$119.99 which accounted for 10% of e-commerce revenues throughout the quarter and which have become a bestselling product. New product launches for the Sleep Rapid Reset liposomes with CBD and CBG and Sleep THC Free2 Gummies were planned for the quarter but had to be moved to January 2022 due to supply chain challenges.

The US regulatory environment is evolving favourably. Two Congressional Bills have strong bi-partisan support (H.R. 841and S. 1698), with one expected to pass in FY2022. Assembly Bill 45 (AB45) was signed into law by California Governor, Gavin Newsom on 6 October 2021. This has established a comprehensive regulatory framework for the manufacture and retail sale of products in California containing hemp derived cannabidiol (CBD), including dietary supplements, topicals, over-the-counter, and pet products, among others. This is a very positive development for reputable hemp derived CBD product providers like Elixinol Americas. California is one of the largest CBD markets in the US with many retailers and consumers seeking to enjoy the benefits of high quality and safe CBD products. This Bill is expected to create new trade opportunities between Elixinol Americas and major retailers, who were previously seeking clear regulatory guidance at the state level.

During the quarter, Elixinol Americas lodged another application for refundable tax credits which were made available under the Coronavirus Aid, Relief, and Economic Security Act (CARES Act). The value of the credits calculated through to 31 December 2021 totals approximately $1.9m (US$1.4m). Due to an extensive processing backlog at the Internal Revenue Service (IRS) no cash has yet been received and the total $1.9m is now expected to be received in FY22.

Elixinol Wellness signs three-year license agreement with BRITISH CANNABIS™ for UK distribution

In December 2021, Elixinol Wellness entered into a three-year exclusive Trademark and Know-How Licensing Agreement with CBD Health Foods Ltd, trading as BRITISH CANNABIS™, to manufacture, market and sell CBD products across the UK.

The agreement followed Elixinol Wellness' decision on 16 September 2021 to cease trading in the UK and EU markets, and instead move to an indirect route to market by seeking a licensing partner in the UK. This was due to the continued uncertainty with the regulatory environment in these markets and the Company's strategic focus on driving profitability.

The new agreement between Elixinol Wellness and BRITISH CANNABIS™ enables the Elixinol brand to continue to be distributed in the UK whilst realising significant cost savings through cessation of direct UK operations.

2 THC Free means testing conducted to 0.01%. Testing method and detection limits vary depending on the tests conducted.

For personal use only

BRITISH CANNABIS™ is the most established manufacturer and distributor of branded and white label CBD products in the UK.

The BRITISH CANNABIS™ Cannabidol brand is a widely distributed brand in UK pharmacies, demonstrating the company's credentials and capability to build brands in sophisticated retail channels. BRITISH CANNABIS™ manufacturing capability also enables the manufacture of Elixinol branded products in the UK, creating a more efficient supply chain solution.

Through the partnership with BRITISH CANNABIS™, UK consumers will now continue to be able to buy their favorite Elixinol branded products, following many years of brand-building in the UK market.

Elixinol Wellness commences strategic review

The Board of Elixinol Wellness has commenced a strategic review with the objective of maximising shareholder value. The Group has engaged financial advisors Greenhill & Co. Australia Pty Limited (Greenhill) to assist with the strategic review which will include consideration of merger, sale or other options for the Company as a whole or its business units.

The Board believes the Company is well positioned with strong brands in long-term consumer growth categories. The outlook for the CBD industry globally remains strong and its Elixinol range, with strong brand equity, and established relationships with distribution and/or licensing agreements in many parts of the world, including the United Kingdom, South Africa, Japan, Malaysia, Brazil and Mexico, is well placed to capitalise on the opportunities in the global market. Equally, Hemp Foods Australia enjoys a first mover advantage in a growth category, continues a sustained growth trajectory and is already nearing profitability.

However, given recent prices at which Elixinol Wellness shares have traded on the ASX, the Board believes the business is undervalued and, in this context, is commencing the strategic review with a view to maximising value for all Elixinol Wellness shareholders.

There is no certainty that the strategic review will lead to any particular outcome or transaction. Elixinol Wellness shareholders do not need to take any action in relation to the strategic review. Elixinol Wellness will continue to keep shareholders informed about the progress and outcomes of the strategic review in accordance with Elixinol Wellness' continuous disclosure obligations.

Appendix 4C commentary

During the quarter the Company reported operating cash expenditures excluding non- recurring items of $5.2m, flat compared with the previous quarter (Q3 FY21: $5.2m) and a