Exasol Annual Report 2021

Plain-text annual report

ASX: EXL ANNUAL REPORT 2021 Marty McConnon, one of Hemp Foods Australia’s trusted Tasmanian hemp harvesters. Elixinol Wellness Limited | Annual Report 2021 Elixinol Wellness (ASX: EXL) is a global leader in the hemp industry, innovating, marketing and selling hemp derived nutraceutical and food products. www.elixinolwellness.com Contents Business Overview .......................................................................................................................................................2 Our Brands.......................................................................................................................................................................3 Letter from Chair and Global CEO.......................................................................................................................4 Financial Highlights .....................................................................................................................................................9 Key Achievements and Milestones...................................................................................................................10 Financial Report ..................................................................................................................................... 12 Directors’ Report ...................................................................................................................................................12 Auditor’s Independence Declaration..........................................................................................................32 Consolidated Statement of Proﬁt or Loss and Other Comprehensive Income .....................33 Consolidated Statement of Financial Position .......................................................................................34 Consolidated Statement of Changes in Equity ......................................................................................35 Consolidated Statement of Cash Flows.....................................................................................................36 Notes to the Consolidated Financial Statements .................................................................................37 Directors’ Declaration .........................................................................................................................................76 Independent Auditor’s Report .......................................................................................................................77 Shareholder Information........................................................................................................................................81 Corporate Directory.................................................................................................................................................83 C o m p a n y O v e r v e w i F Y 2 0 2 1 i H g h l i g h t s i K e y A c h e v e m e n t s a n d M i l e s t o n e s i F n a n c a i l R e p o r t S h a r e h o d e r l I n f o r m a t i o n 1 C O M PA N Y OV E R V I E W Business Overview Heritage Champions in hemp for 25 years Global knowledge Our global footprint delivers highest quality products Quality & transparency Our products are science & evidence backed Compliance focus We maintain a strict compliance focus in a dynamic landscape VISION To create a healthier everyday life through the power of hemp and plant-based products AMBITION Building a global, hemp-centric wellness consumer products company PURPOSE Changing lives naturally! 2 Elixinol Wellness Limited | Annual Report 2021 Our Brands C O M PA N Y OV E R V I E W A global consumer wellness business built on the goodness of hemp. Elixinol CBD Brand (Digestible & Topical Products) One of the most established & trusted US CBD brands. Human and pet wellness products. Capital light outsourced branded consumer goods model based in Colorado, USA. Hemp Foods Australia (Foods, Supplements & Skincare) Australia’s #1 hemp foods company. Extensive range of foods, skincare and supplements. Bulk and ﬁnished goods provider with integrated manufacturing. Based near Byron Bay, NSW, Australia. C o m p a n y O v e r v e w i F Y 2 0 2 1 i H g h l i g h t s i K e y A c h e v e m e n t s a n d M i l e s t o n e s i F n a n c a i l R e p o r t S h a r e h o d e r l I n f o r m a t i o n 3 C O M PA N Y OV E R V I E W Letter from Chair and Global CEO Helen Wiseman Chair Oliver Horn Global CEO Our strategy has been to transform Elixinol Wellness to a lower cost, higher margin, consumer led wellness company with improved proﬁtability. All whilst caring for and investing in the wellbeing of our teams across the world throughout the pandemic. Dear Fellow Shareholders, On behalf of the Elixinol Wellness Board, we present our Annual Report for Financial Year 2021 (FY21). FY21 was another signiﬁcantly challenging period with COVID-19 having a sustained impact on the global retail environment. The CBD industry experienced far less growth in 2021 than was initially forecasted. This was due in part to the pandemic, but also a lack in regulatory clarity in many of the major CBD markets, and a saturated industry which resulted in an over- supply of product and reduced pricing. Given the continuation of these unstable market conditions, our FY21 focus remained on further building the foundations laid in FY20 to transform Elixinol Wellness to a lower cost, higher margin, consumer- led wellness company. As a Board and management team we worked hard to reduce the cost of doing business and to enhance product margins, while at the same time making well considered and selective investment decisions to support brand building, product innovation and e-commerce initiatives. Our strategy has been to control what was controllable and optimise the business for current conditions, while ensuring the wellbeing of our team and our partners throughout the pandemic. Overall, we are pleased with our transformation progress in FY21. We have created a well-funded and leaner consumer products wellness company with leading brands that are strongly positioned in long-term growth categories especially once the US CBD market conditions improve and the current oversupply has cycled through. Importantly, we have more cost efficiencies identiﬁed for FY22 that will signiﬁcantly support our path to proﬁtability. EVOLVING OUR REGIONAL STRATEGIC FOCUS In the US we continued to transform our business model throughout FY21 by fully outsourcing our supply chain and a continued shift towards e-commerce. These activities delivered strong margin improvement and wide-ranging cost reductions, translating to $8.7m Adjusted EBITDA improvement ending the year at a $5.5m Adjusted EBITDA loss for the Americas segment (FY20 $14.2m loss). 4 Elixinol Wellness Limited | Annual Report 2021 C O M PA N Y OV E R V I E W HEALTHY CASH BALANCE of $12.6m and an additional $2.1m expected to be received under US COVID relief measures CASH USED IN OPERATIONS reduced by 38% in FY21 compared to FY20 ADJUSTED EBITDA IMPROVEMENTS of $11.7m from -$23.2m in FY20 to -$11.5m in FY21 Our global expansion strategy evolved in FY21. The objective was to cement our already strong brand reach by partnering with the most credentialed in-market partners to establish licensing agreements. This gave us a lower cost access to the market while ensuring we beneﬁted from established local expertise. As a result of an uncertain regulatory environment and an economy that was heavily impacted by COVID-19 and Brexit, we made the difficult decision to close our own European operations and transition to a licensing model in the region. Subsequently, we were delighted to secure a three-year exclusive Trademark and Know-how Licensing Agreement with the UK’s largest CBD manufacturer and distributor, BRITISH CANNABIS¤, at the end of last year. The deal enables BRITISH CANNABIS¤ to manufacture, market and sell Elixinol CBD products across the UK, ensuring our brand continues to be distributed in this market while realising signiﬁcant cost savings for the Group. In addition to this new agreement with BRITISH CANNABIS¤ in the UK, we also signed licensing and distribution agreements in Mexico, Malaysia and South Africa to create a foothold in emerging CBD markets that have a positive regulatory outlook. Elixinol has long been an established brand in South Africa where CBD has been legal for some time. Mexico only recently passed legislation to legalise CBD whereas Malaysia is expected to legalise CBD in the near term. Our decision to withdraw from the proposed acquisition of CannaCare Health GmbH in Germany in June last year was another carefully considered decision, based on a well-founded view that moving ahead with the acquisition was not in the best interest of our shareholders. Closing due diligence revealed a changed German market outlook with rapidly intensifying competition in the region. These factors led us to conclude that the acquisition, and the investments that would have been required to generate proﬁtable returns, exceeded our risk appetite. This has proven to be a very wise decision given how quickly the German market dynamics shifted in the second half of last year. C o m p a n y O v e r v e w i F Y 2 0 2 1 i H g h l i g h t s i K e y A c h e v e m e n t s a n d M i l e s t o n e s i F n a n c a i l R e p o r t S h a r e h o d e r l I n f o r m a t i o n 5 C O M PA N Y OV E R V I E W Letter from Chair and Global CEO continued The business successfully launched the new organic Hemp Gold protein and oil range, which has gained quick traction in the market, exceeding $1m in revenue and accounting for one quarter of all HFA sales for the year. During Q4 FY21, HFA also started supplying its new hemp-paste product to food manufacturers for use in products such as ice cream and plant-based milks. This is an exciting avenue for the Company as demand of hemp food products continues to grow at a rapid rate. REGULATORY PROGRESS SLOW The large-scale positive regulatory progress expected last year following the United Nations Commission on Narcotic Drugs (CND) accepting a World Health Organisation (WHO) recommendation to remove cannabis and cannabis resin from Schedule IV of the 1961 Single Convention on Narcotic Drugs, unfortunately did not materialise. One of the largest obstacles to expanded CBD growth in the US has been the continued lack of regulatory clarity from the FDA and its failure to provide full regulatory approval to permit CBD to be used as a dietary supplement and food additive. When hemp derived CBD became legal following the 2018 Farm Bill in the US, excitement was high as the FDA was anticipated to regulate the market in a timely fashion in order to ensure consumer safety. Continued inaction on the part of the FDA has taken some of the wind out of the sails of the industry and hindered its growth by limiting retail access for a wide array of products, as many mainstream retailers continue to wait for federal regulatory clarity in order to ensure full compliance. However, the US regulatory environment is evolving favourably, and we have seen some positive progress at state level more recently. In October 2021 California passed Assembly Bill 45, formally permitting the sale of hemp derived CBD products. This Bill is expected to create new trade opportunities between Elixinol Americas and major retailers, as it has established a comprehensive regulatory framework for the manufacture and retail sale of products in California containing hemp derived CBD, including dietary supplements, topicals, over-the- counter, and pet products, among others. In addition to the California bill, two Congressional Bills have strong bi- partisan support (H.R. 841 and S. 1698), with one expected to pass in 2022. In the UK, wide-reaching positive change was expected following the Food Safety Authority’s adoption of the Novel Food regime, however its inability to process applications during the course of 2021 left the market uncertain as to which products were compliant. This effectively put a pause on any new product launches and made retailers reluctant to invest in the CBD category, prompting our decision to restructure our European operations and enter a licensing agreement with BRITISH CANNABISTM. Following our exclusive License Agreement with Elixinol Japan in FY20 to manufacture and sell Elixinol branded CBD nutraceuticals products across the country, very strong progress has been made this past year in relaunching the brand. We are now seeing the benefits and have just received our first licence payment. Given Japan is one of Asia’s largest CBD markets and Elixinol Japan is firmly focused on market leadership, we are confident the payments will continue through FY22. HEMP FOODS AUSTRALIA CONTINUES TO IMPROVE PROFITABILITY Hemp Foods Australia (HFA) has further strengthened its market position through wider national distribution as hemp-based food products continued to move further into the mainstream of consumer diets. HFA’s revenue in FY21 was in line with FY20, helped by new national distribution deals with Woolworths and Costco, and strong gains in our direct-to-consumer e-commerce strategy, but off-set through deliberate efforts to exit low profitability products. 6 Elixinol Wellness Limited | Annual Report 2021C O M PA N Y OV E R V I E W A STRATEGIC REVIEW OF THE BUSINESS Our priorities for FY22 reflect our focus on delivering value to our shareholders. We are taking the natural next step to improve shareholder returns by commencing a strategic review, which will include consideration of merger, sale or other options for the Company as a whole or as business units. We believe the Company is well positioned with strong brands in long-term consumer growth categories. The outlook for the CBD industry globally remains positive and our Elixinol range, with strong brand equity, and established relationships with distribution and/or licensing agreements in many parts of the world, is well placed to capitalise on the opportunities in the global market. Equally, Hemp Foods Australia enjoys a strong position built upon over 20 years of operations in the high growth plant based food category and operates already at near proﬁtable levels. While the strategic review is being undertaken, we remain focused on driving performance in the Australian and US markets where we have a strong competitive position. We will continue to accelerate our e-commerce growth and bring exciting new products to consumers and customers, while continuing to improve proﬁtability and reducing cost. LOOKING AHEAD… 2022 will be a deﬁning year for all of us at Elixinol Wellness. We have laid the growth foundations across the Group, with new and innovative products hitting the market in the coming months, our business costs further reducing and the expectation that the regulatory and market environment will shift positively. In addition to this improving outlook, we will be able to seize new opportunities that enhance shareholder value following our strategic review. Special recognition must go to all our teams around the globe, who have been champions of change and have demonstrated incredible resilience in the face of some of the most challenging times in history. We are incredibly proud of, impressed by and grateful for their discretionary efforts and positive attitudes. In closing, we would also like to thank our shareholders for your continued support as we navigate these challenging times and the transformation of our business. Yours sincerely Helen Wiseman Chair Oliver Horn Global CEO While there was limited progress in 2021, we do believe the long-term outlook for positive CBD regulatory progress remains strong and consumer demand continues to grow as more and more people adopt CBD products in their wellness routines. E-COMMERCE INVESTMENT FUELS SALES GROWTH Our shift to being ‘digital-ﬁrst’ and investment in e-commerce continues to be rewarded. In the last quarter of FY21, Elixinol Americas successfully transitioned to the Shopify e-commerce platform as it offers a better user experience while yielding signiﬁcant cost savings. Since launch in October, the e-commerce site has demonstrated strong performance improvements, with 72% growth in user sessions and 25% transaction growth versus the prior quarter, and is set to provide a welcome growth platform for 2022. As previously mentioned, HFA also realised signiﬁcant improvements in online sales in FY21, with both e-commerce revenue and transactions up 47%, and conversion rates up by 27% on the previous ﬁnancial year. INNOVATION IS AT THE CORE OF OUR BUSINESS One of our most signiﬁcant investments during the FY21 was the creation of a Global R&D and Innovation team. The team is focused on developing next generation nutraceuticals and health food products, and we are very pleased with the fast progress already made. In FY21 we launched a number of new products that are already driving revenue growth, including an Elixinol CBD pet range and Hemp Foods Australia’s hemp paste. A comprehensive new product pipeline will continue to roll out in H1 FY22, ensuring Elixinol Wellness leads the industry for innovation and product development in both the CBD and hemp foods space. One example is our newly launched Elixinol Sleep product range which includes gummies, liposomes and tinctures which have become best sellers within a short period of time. FY21 FINANCIAL RESULTS The result of our business transformation initiatives led to 50% EBITDA improvement for FY21 compared to FY20. In addition, Elixinol Wellness’ average margins improved by 7% and quarterly cash outflows reduced to $3m in Q4 FY21 vs $3.8m in the same period prior year. We achieved an overall reduction in OPEX of $10.3m, driven by $7.0m savings in the US following transition to the capital light model through which we outsourced production and supply chain function, and a $2.7m OPEX reduction following closure of the European business. While we did not achieve our revenue growth budgets for 2021, largely due to conditions described earlier, our relentless focus on improving margins and reducing cost meant we ﬁnished the year well-funded and with $14.7m of ﬁnancing available. C o m p a n y O v e r v e w i F Y 2 0 2 1 i H g h l i g h t s i K e y A c h e v e m e n t s a n d M i l e s t o n e s i F n a n c a i l R e p o r t S h a r e h o d e r l I n f o r m a t i o n 7 F Y 2 0 2 1 H I G H L I G H T S 8 Elixinol Wellness Limited | Annual Report 2021 Financial Highlights F Y 2 0 2 1 H I G H L I G H T S With a strong cash position Elixinol Wellness is in the best EBITDA it has been over recent periods. Revenue by Channel A$ million, 31 December year end 15.015.0 9.39.3 11.4 75% 8.6 92% FY20 FY21 Hemp Foods Australia Elixinol e-Commerce Elixinol Retail Europe & UK rivate label CBD Bulk/Private label Adjusted EBITDA by Half A$ million, 31 December year end H1 FY20 H2 FY20 H1 FY21 H1 FY21 H2 FY21 (4.4) (4.4) (8.0) (7.1) (15.2) (15.2) Hemp Foods Australia Elixinol Americas Corporate Corporate Europe & UK 16 14 12 10 8 6 4 2 0 0 -2 -4 -6 -8 -10 -12 -14 -16 Revenue by channel Divested low margin business to focus on higher margin branded products. Driving margin improvement as business mix shifts towards e-commerce and branded consumer goods channels. Key markets impacted by COVID-19 through the period. Adjusted EBITDA* Improved signiﬁcantly between FY21 and FY20, despite lower revenues with a reduced cost base supporting a simpliﬁed strategy. Cost reduction program and higher margin business driving performance improvements. H2 FY21 includes $1.6m non-recurring income from US Employee Retention Credit program. Cost base reduction 35% Operational and corporate cost reduction initiatives have signiﬁcantly reduced operating expenses FY21 compared with FY20. Well funded** With improving cash flow, approximately ﬁve quarters of funding based on latest quarter. $14.7m vs $27.7m in FY20 5 Quarters * ** Excluding non-cash impairments and share-based payments. $12.6m Cash and cash equivalents at the end of the reporting period plus $2.1m expected to be received from one-off US COVID-19 relief measures ($1.6m from ERC program plus $0.5m refund of taxes paid in prior ﬁnancial years). C o m p a n y O v e r v e w i F Y 2 0 2 1 i H g h l i g h t s i K e y A c h e v e m e n t s a n d M i l e s t o n e s i F n a n c a i l R e p o r t S h a r e h o d e r l I n f o r m a t i o n 9 K E Y A C H I E V E M E N T S A N D M I L E S TO N E S Key Achievements and Milestones March 2021 March 2021 Elixinol Global announces it has signed a binding agreement to acquire CannaCare Health GmbH, owner of Canobo, one of Germany’s leading CBD brands May 2021 May 2021 May 2021 Elixinol Wellness appoints Rob Hasselman as President Americas and Beata Silber as Global Head of R&D and Innovation July 2021 July 2021 Hemp Foods Australia’s Hemp Gold Protein is being sold in all Costco stores across Australia and online March 2021 Elixinol, under its European Industrial Hemp Association (EIHA) Novel Food consortium membership, successfully submits its Novel Food Application allowing products to remain in distribution whilst the UK Food Safety Authority (FSA) processes applications. May 2021 Elixinol Global Limited changes its name to Elixinol Wellness Limited, representing the evolution of the Company to a natural health and wellness consumer products business June 2021 Elixinol Wellness announces the termination of the proposed acquisition of CannaCare Health GmbH due to a changing German market outlook and increased competition September 2021 Elixinol Americas enters pet CBD wellness category with dedicated product range September 2021 Hemp Foods Australia launches hemp paste as a versatile food ingredient, and is initially available as part of a dairy free ice cream range October 2021 Elixinol US launches a new Shopify e-commerce site for better user experience at a lower cost September 2021 Hemp Food Australia’s Hemp Seed Oil available in 104 Woolworths supermarket stores nation wide October 2021 The state of California in the US passes Assembly Bill 45, formally permitting the sale of hemp derived CBD products December 2021 Elixinol Wellness transitions European operations to licensing model and enters into a three-year exclusive Trademark and Know-How Licensing Agreement with BRITISH CANNABISTM¤ to manufacture, market and sell CBD products across the UK 10 Elixinol Wellness Limited | Annual Report 2021 K E Y A C H I E V E M E N T S A N D M I L E S TO N E S C o m p a n y O v e r v e w i F Y 2 0 2 1 i H g h l i g h t s i K e y A c h e v e m e n t s a n d M i l e s t o n e s i F n a n c a i l R e p o r t S h a r e h o d e r l I n f o r m a t i o n 11 F I N A N C I A L R E P O R T Directors’ Report The directors present their report, together with the ﬁnancial statements, on the consolidated entity (referred to hereafter as the ‘Group’ or ‘Elixinol Wellness’) consisting of Elixinol Wellness Limited (referred to hereafter as the ‘Company’ or ‘parent entity’) and the entities it controlled at the end of, or during, the year ended 31 December 2021. DIRECTORS The following persons were directors of Elixinol Wellness Limited during the whole of the ﬁnancial year and up to the date of this report, unless otherwise stated: Helen Wiseman Non-Executive Director and Chair Paul Benhaim Non-Executive Director Oliver Horn Executive Director and Global Chief Executive Officer 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 (‘Hemp Foods Australia’) and Elixinol BV and Elixinol Limited (together ‘Elixinol Europe’). The principal activities of the Group are: Elixinol Americas (hemp derived cannabidiol (‘CBD’) dietary supplements and topicals) Elixinol Americas is based in Colorado USA, and was established in 2014 to specialise in the manufacturing and distribution of products made from premium quality, predominantly ‘whole plant’ full spectrum CBD, which is extracted from organically grown industrial hemp. Hemp Foods Australia (hemp derived foods and skincare products) Hemp Foods Australia is based in Byron Bay Shire, New South Wales, Australia, and was founded in 1999 to manufacture, market and distribute hemp derived food, supplements and skincare products. Hemp Foods Australia distributes mainly within Australia but also supplies to export markets. Elixinol Europe (hemp derived cannabidiol (‘CBD’) food and cosmetics) Elixinol Europe is based in Utrecht, The Netherlands, and London, United Kingdom, and was established in 2018 to specialise in the development, sourcing, marketing and distribution of hemp derived CBD products including skincare. DIVIDENDS There were no dividends paid, recommended or declared during the current or previous ﬁnancial year. REVIEW OF OPERATIONS Operating and Financial Review The loss for the Group after providing for income tax and non-controlling interest amounted to $17,025,000 (31 December 2020: $104,478,000 loss). The Group’s revenues from continuing operations for the year ended 31 December 2021 were $9,338,000 (31 December 2020: $15,010,000). 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 2021 was an Adjusted EBITDA loss of $11,496,000 (31 December 2020: Adjusted EBITDA loss of $23,223,000). EBITDA and Adjusted EBITDA are ﬁnancial measures which are not prescribed by Australian Accounting Standards (‘AAS’) and represents the statutory result under AAS adjusted for certain items. The directors consider EBITDA and Adjusted EBITDA reflect the core earnings of the Group. 12 Elixinol Wellness Limited | Annual Report 2021 F I N A N C I A L R E P O R T A reconciliation of Adjusted EBITDA from continuing operations to statutory loss is detailed below: Loss for the year Add back/(deduct): Income tax (benefit)/expense Finance costs Interest revenue Depreciation and amortisation EBITDA Add back/(deduct): Impairment of intangibles Impairment of other assets Share-based payments Adjusted EBITDA Group 2021 $’000 2020 $’000 (17,025) (104,478) (65) 92 (47) 1,490 4,200 49 (100) 3,213 (15,555) (97,116) 186 3,679 194 39,178 35,008 (293) (11,496) (23,223) The Group’s cash flow used in operations for the year ended 31 December 2021 was $14,071,000 (31 December 2020: $22,621,000 used in operations), which included $1,596,000 non-recurring transaction and severance costs. The Group recognised non-cash impairments of intangibles (including goodwill) of $186,000 (31 December 2020: $39,178,000) for the year ended 31 December 2021. The Group recognised non-cash impairments of other assets of $3,679,000 (31 December 2020: $35,008,000) for the year ended 31 December 2021 relating to inventory and ﬁxed assets. Segment assets Americas The Americas segment comprises the trading results of Elixinol LLC (‘Elixinol Americas’) and its investment in Altmed Pets LLC (trading as Pet Releaf). Americas reported revenue of $4,783,000 for the year ended 31 December 2021 (2020: $8,510,000) and EBITDA loss of $5,492,000 for the year (2020: $14,170,000 EBITDA loss). Throughout 2021, Elixinol Americas implemented an aggressive transformation agenda focused on improving proﬁtability driven by an accelerated move towards an outsourced capital light model, reduction in operating expenditures and further shift towards higher margin consumer channels such as e-commerce. In the US, the regulatory environment remains dynamic and varies from state to state but with a heightened expectation that the Food and Drug Administration (‘FDA’) will progress its rulemaking process regarding marketing of CBD products as dietary supplements. The current CBD market continues to be oversupplied, posing a challenging environment for the industry. Additionally, COVID-19 factors continued to negatively impact sales, in particular in traditional retail / bricks and mortar channels. A new leadership team was put in place in May 2021 led by a new Americas President. Throughout the year, the full-time equivalent (‘FTE’) head count was reduced from 39 to 29, thus contributing materially to the Company’s overall reduction in quarterly cash outflows of $0.8 million comparing Q4 FY2021 to Q4 FY2020. As a result of the Group’s strategy to focus on higher margin e-commerce channels and the increased demand for online shopping in the COVID-19 environment, online sales now represent approximately 63% (2020: 50%) of US revenues. In October 2021, Elixinol Americas successfully transitioned to Shopify, a more consumer friendly, lower cost and better performing e-commerce platform. The new e-commerce site showed strong performance improvements, with 72% growth in user sessions and transaction growth of 25% versus the prior quarter. Q4 FY2021 also 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. C o m p a n y O v e r v e w i F Y 2 0 2 1 i H g h l i g h t s i K e y A c h e v e m e n t s a n d M i l e s t o n e s i F n a n c a i l R e p o r t S h a r e h o d e r l I n f o r m a t i o n 13 F I N A N C I A L R E P O R T Directors’ Report continued The transition to a fully outsourced supply chain neared completion in Q4 FY2021 with inhouse warehousing and fulﬁlment on track to move to a third-party model in Q1 FY2022. This will result in further enduring operating cost efficiencies. During the year, Elixinol Americas lodged an 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 $1.6m (US$1.2m). Under additional COVID-19 relief measures, Elixinol Americas is also expecting a refund of taxes paid in prior years of $0.5m (US$0.3m). Due to an extensive processing backlog at the Internal Revenue Service (IRS) no cash has yet been received and the total $2.1m is now expected to be received in FY2022. Australia The Australian segment comprises the continuing trading results from Elixinol Wellness (Corporate Services) Pty Ltd (formerly Elixinol Australia Pty Ltd) (‘Elixinol Australia’) and Elixinol Wellness (Byron Bay) Pty Ltd trading as Hemp Foods Australia (‘Hemp Foods Australia’). Australia reported revenue of $4,086,000 for the year ended 31 December 2021 (31 December 2020: $4,156,000) and EBITDA loss of $203,000 (31 December 2020: $283,000 EBITDA loss). Q4 FY2021 was Hemp Foods Australia’s strongest quarter for the year, with gains led by recent distribution growth in Woolworths and Costco. Hemp Foods Australia also ﬁnished FY2021 with signiﬁcant gross margin improvement following continued portfolio optimisation and the discontinuation of several unproﬁtable product lines at the end of FY2020. 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 in the stronger gross margins, which ended FY2021 at 34% (up from 27% in FY2020). The business successfully launched the new organic Hemp Gold protein and oil range early in the year, which has quickly gained traction in the market, exceeding $1m in revenue and accounting for approximately one quarter of all Hemp Foods Australia sales for the year. Throughout FY2021 Hemp Foods Australia also consolidated its distributor network to fewer partners and developed and commercialised a unique hemp paste to be used as a versatile and healthy ingredient in the food service industry. Europe The European segment comprising Elixinol BV and Elixinol Limited (‘Elixinol Europe’) reported revenue of $469,000 for the year ended 31 December 2021 (31 December 2020: $2,344,000) and Adjusted EBITDA loss of $2,321,000 (31 December 2020: $4,470,000 EBITDA loss). As a result of an uncertain regulatory environment and an economy that was heavily impacted by COVID-19 and Brexit, revenues were challenged during the year. The difficult decision to close our own European operations and transition to a licensing model in the region was successfully made. Subsequently Elixinol Wellness secured a three-year exclusive Trademark and Know-how Licensing Agreement with the UK’s largest CBD manufacturer and distributor, BRITISH CANNABIS™, at the end of 2021. The deal enables BRITISH CANNABIS™ to manufacture, market and sell Elixinol CBD products across the UK, ensuring our brand continues to be distributed in the market while realising signiﬁcant cost savings for the Group. Share of associates’ loss Share of associates loss during the year ended 31 December 2021 was $nil (31 December 2020: $1,076,000 loss). Review of ﬁnancial position At 31 December 2021 the net assets of the Group were $19,077,000, which included $12,649,000 of cash and cash equivalents. The key impact during the period was total comprehensive loss of $16,658,000. Underlying drivers of performance The Group operates across three geographical segments and different industries, each of which has their own underlying drivers of performance. These are summarised below: – Creating strong consumer brands and improving marketing capability to drive brand equity; – Innovating and developing new products to increase consumer adoption and drive category growth; – A varied global regulatory framework of CBD and hemp products; – Securing high quality supply of ﬁnished goods and manufacturing relationships at competitive prices for hemp and CBD products; – Consumer and customer education on the power of hemp and CBD to increase penetration & understanding; – Delivering high quality, ethical and sustainable products to consumers; 14 Elixinol Wellness Limited | Annual Report 2021 F I N A N C I A L R E P O R T – Continued investment in digital and e-commerce capability to own the consumer relationship; and – Optimising and reducing cost base to create a ﬁt for purpose and more agile business. Business strategies and future prospects Reﬁned strategic focus The Company has been aggressively repositioned towards a branded consumer goods business over the last two years, leading to improved fundamentals with substantial cost reductions and improved cash-flows. Key initiatives included: – Extensive leadership changes, bringing new strategic, commercial, digital marketing, supply and strong governance disciplines; – An ongoing substantial operational and corporate cost reduction program, leading to an annualised cost base which is approximately 50% lower than 2020; – Simpliﬁcation of our e-commerce backbone via Shopify to drive higher margin sales and cost savings; – Pursuing an omni-channel sales strategy to reduce dependency on bricks & mortar channels, and improve in-home shopping product availability via e-commerce; – Embedding and optimisation of the ERP system to improve business reporting, controls and commercial decision making; and – Cessation of low value business activities such as bulk and private label services to improve proﬁtability. Vision and mission The Company’s vision, ambition, and purpose are the cornerstone of its strategy, which is underpinned by the following: Company Vision: To create a healthier everyday life through the power of hemp, plant-based and natural products. Ambition: Building a global, hemp centric wellness consumer products company. Purpose: Changing lives naturally. Key strategic objectives identiﬁed The Group remains positive about the market opportunity for hemp derived food and CBD products, and its ability to leverage its strong brands and reputation for high quality products. The Group has repositioned its strategy towards a branded consumer goods nutraceutical and food business aimed at delivering proﬁtable growth. The Group’s strategic focus is predicated on the following key pillars to support revenue growth and margin improvement: – Delivery of the strategic review project to identify new in-organic opportunities for shareholder value creation; – Further optimisation of corporate cost base; – Continue Elixinol America’s transition to a lean and capital light business model; – Bringing to market an extensive new product development pipeline; – Expand hemp foods product offering to participate in more healthy plant based food consumer occasions; – Relentless focus on improving capital efficiency - long term focus on improving cash flow, driving margin accretion and tightly controlling expenditures; and – Continued investment in building global brands - the new and rebranded Elixinol range is ideally positioned to participate in the global growth of nutraceutical wellness products. Principal risks and uncertainties The management of the business and the execution of the Group’s growth strategies are subject to a number of risks which could adversely affect the Group’s future development. The following is not an exhaustive list or explanation of all risks and uncertainties associated with the Group, but those considered by management to be the principal risks, which may impact the operations or results of the Group: Coronavirus (COVID-19) The ongoing COVID-19 pandemic has had a signiﬁcant impact on the global economy and the ability of individuals, businesses, and governments to operate. Across the globe, travel, trade, business, working arrangements and consumption have been materially impacted by the pandemic. There continues to be considerable uncertainty as to the duration of and further impact of COVID-19 including in relation to government, regulatory or health authority actions, work stoppages, lockdowns, quarantines and supply chain challenges. In particular, supply chain risks may including shipping container shortages and extended transits times due to labour shortages. The impact of some or all of these factors could cause an adverse impact to the Group’s ﬁnancial performance, even though we operate an essential business. Furthermore, as an international business supplying products to various markets globally, the pandemic and associated impacts could necessitate further capital requirements / support (either on a standalone basis or concurrently), which creates additional challenges and risks for the ﬁnancial position of the Group. C o m p a n y O v e r v e w i F Y 2 0 2 1 i H g h l i g h t s i K e y A c h e v e m e n t s a n d M i l e s t o n e s i F n a n c a i l R e p o r t S h a r e h o d e r l I n f o r m a t i o n 15 F I N A N C I A L R E P O R T Directors’ Report continued In addition, the Group’s ﬁnancial position may be adversely impacted if suppliers (including its counterparties, suppliers of IT services, and other suppliers of products and services) are unable to successfully implement business continuity plans in the current environment or if any such suppliers are unable to continue as going concerns as a result of the economic impact of COVID-19. However, the extent of the impact on our business, results of operations, ﬁnancial condition, liquidity and cash flows is largely dependent on future developments, which are highly uncertain and not predictable, including the scale of COVID-19 and actions taken to address its impact. Moreover, changes in interest rates, reduced liquidity or a continued slowdown in Australia, the United States and Europe, or global economic conditions may also adversely affect our business, ﬁnancial condition, results of operations, liquidity or prospects. Further, extreme market volatility may result in us being unable to react to market events in a prudent manner. Agricultural risk and climate change risk The Group is exposed to agricultural risk as the businesses are reliant on agricultural products. As such, the businesses are 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 relies on several key supplier arrangements to supply raw materials and manufacturers of out-sourced ﬁnished goods products. The failure to maintain long term contracts with these suppliers may impact the Group’s ability to maintain consistent supply levels and meet the customer demand, thereby having a ﬁnancial impact. 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 the Group could cause serious or unexpected side effects, including risk or injury to consumers. Should any of the Group’s 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 and position 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. Change to laws or regulations Elixinol Wellness’ operations are highly regulated and the Group 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 Elixinol Wellness 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 UK. It is likely that governments worldwide will continue to explore the beneﬁts, risks and operations of companies involved in the hemp sector. Elixinol Wellness’ 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 16 Elixinol Wellness Limited | Annual Report 2021 F I N A N C I A L R E P O R T may change. This could potentially result in additional processing costs for the Group and impact the Company’s overall ﬁnancial performance. 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 (‘CGMPs’) regulation, nutrition and allergen labelling, and label claim regulations and safety requirements including, as applicable, new dietary ingredient (‘NDI’) and generally recognised as safe (‘GRAS’) 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 Elixinol Wellness, could impact adversely on the assets, operations, and the ﬁnancial performance of the Group and the industry in general. The Group is well positioned to capitalise on favourable long-term trends in the hemp-based wellness products segment and as the regulatory environment in which the Group operates continues to evolve, the Group may explore strategic opportunities including product expansion beyond the Group’s traditional hemp-based, CBD wellness products. Regulatory compliance and the management of regulatory change are an important part of Elixinol Wellness’ planning processes. Elixinol Wellness will 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. The failure of Elixinol Wellness 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. To the extent possible, these risks are managed on an ongoing basis. Mitigation measures and strategies to address the risks are maintained and regularly reviewed, including via regular reporting to the Board. SIGNIFICANT CHANGES IN THE STATE OF AFFAIRS On 17 May 2021, with approval of the shareholders at the Annual General Meeting, the company changed its name from Elixinol Global Limited to Elixinol Wellness Limited. There were no other signiﬁcant changes in the state of affairs of the Group during the ﬁnancial year. MATTERS SUBSEQUENT TO THE END OF THE FINANCIAL YEAR The Board of Elixinol Wellness has commenced a 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. There is no certainty that the strategic review will lead to any particular outcome or transaction. No further matter or circumstance has arisen since 31 December 2021 that has signiﬁcantly affected, or may signiﬁcantly affect the Group’s operations, the results of those operations, or the Group’s state of affairs in future ﬁnancial years. LIKELY DEVELOPMENTS AND EXPECTED RESULTS OF OPERATIONS Elixinol Wellness remains positive on the long term market opportunity for hemp derived CBD and food products and its ability to leverage its strong reputation for high quality products. Throughout a prolonged period of regulatory change and uncertainty, Elixinol Wellness has reﬁned its strategy to ensure it operates efficiently and effectively in the current market and regulatory environment as well as anticipating and pursuing longer term opportunities. Elixinol Wellness’ strategic focus is now predicated on the following key pillars to support revenue growth and margin improvement: – Signiﬁcant reduction of corporate and head office expenses; – Further optimisation of Elixinol Americas operations to reduce cost; – Seeking new opportunities to increase scale of the US business whilst continuing to lower its cost base; – Expansion of hemp foods product offering to participate in healthy plant based food occasions; – Relentless focus on improving capital efficiency with a long term focus on improving cash flow, driving margin accretion and tightly controlling expenditures; – Continued investment in building global consumer wellness brands; – Continued shift towards a digitally led global business with revenues from e-commerce representing a growing proportion of overall sales; – Bringing to market an extensive new product pipeline to generate growth at premium margins; – Supply chain optimisation - seeking new opportunities to shorten supply chain and reduce cost of goods; and – As part of a strategic review process, identifying new opportunities, including merger and divestments of the Company as a whole or its parts, to improve shareholder value. Also refer to ‘Business strategies and future prospects’ included under ‘Review of operations’ section above. C o m p a n y O v e r v e w i F Y 2 0 2 1 i H g h l i g h t s i K e y A c h e v e m e n t s a n d M i l e s t o n e s i F n a n c a i l R e p o r t S h a r e h o d e r l I n f o r m a t i o n 17 F I N A N C I A L R E P O R T Directors’ Report continued ENVIRONMENTAL REGULATION The Group is not subject to any signiﬁcant environmental regulation under Australian Commonwealth or State/ Territory laws. INFORMATION ON DIRECTORS Helen Wiseman Non-Executive Chair and Non-Executive Director Qualiﬁcations: Experience and expertise: Chartered Accountants Australia and New Zealand – Fellow, Graduate of the Australian Institute of Company Directors, Certiﬁed Director, INSEAD International Directors Programme Helen Wiseman is a Non-Executive Director and audit committee specialist with extensive international experience in food, pharmaceutical, natural healthcare, professional services, energy and natural resources and manufacturing industries. Helen is a former KPMG partner and brings extensive ﬁnancial and commercial acumen, strategic risk oversight and seasoned global governance skills to the board. Helen was previously named as one of the 2014 Australian Financial Review and Westpac 100 Women of Influence. Other current directorships: Bid Corporation (JSE: BID) Former directorships (last 3 years): Special responsibilities: None Interests in shares: Interests in rights: Chair of Audit and Risk Committee and Member of Remuneration and Nomination Committee 280,132 ordinary shares 62,271 performance rights Paul Benhaim Non-Executive Director Experience and expertise: Paul has over 26 years’ experience in the hemp industry and is the co-founder of Elixinol, Elixinol Australia and Hemp Foods Australia. Paul is considered an expert in the industrial hemp industry and frequently presents at industry conferences globally. He has also played a role in shaping regulation around cannabis laws. Other current directorships: None None Former directorships (last 3 years): Special responsibilities: Interests in shares: Interests in rights: Chair of Remuneration and Nomination Committee and Member of the Audit and Risk Committee 29,209,217 ordinary shares None 18 Elixinol Wellness Limited | Annual Report 2021 F I N A N C I A L R E P O R T Qualiﬁcations: Experience and expertise: Oliver Horn Global Chief Executive Officer and Executive Director BSc degree, GAICD Oliver Horn was most recently MD/CEO of Swisse Wellness for Australia and New Zealand (ANZ) and North America. Oliver has previously held senior operational leadership positions at Treasury Wine Estates across ANZ, Europe, Middle East and Africa. With an established track record for exponential growth in established and emerging markets, Oliver has extensive experience in building premium global consumer brands, a deep knowledge of the vitamins, minerals and supplements (VMS) category, a track record of premium brand building and a passion for creating businesses with a positive and thriving workplace culture. Other current directorships: None Former directorships (last 3 years): Special responsibilities: Interests in shares: Interests in rights: Non-Executive Director of Aumake Ltd (ASX: AUK) (Nov 2019 - Oct 2020) Member of Audit and Risk Committee and Member of Remuneration and Nomination Committee 1,203,971 ordinary shares 361,722 performance rights ‘Other current directorships’ quoted above are current directorships for listed entities only and excludes directorships of all other types of entities, unless otherwise stated. ‘Former directorships (last 3 years)’ quoted above are directorships held in the last 3 years for listed entities only and excludes directorships of all other types of entities, unless otherwise stated. GLOBAL CHIEF FINANCIAL OFFICER Qualiﬁcations: Experience and expertise: Ron Dufficy Global Chief Financial Officer BEc, MCom, FCPA Ron is a senior ﬁnance executive having held various ﬁnancial leadership roles with ASX-listed companies such as CSR Ltd (ASX: CSR) and Aristocrat Leisure Ltd (ASX: ALL). Ron has signiﬁcant experience in regulated markets including being based in the USA for 9 years, most recently as Chief Financial Officer for Aristocrat’s largest and most proﬁtable division, responsible for developing and implementing strategies to improve proﬁt margins, grow market share and creating a global share services organisation. Ron joined the Company in 2017 with a focus on the administrative, ﬁnancial, and risk management operations of the Group. C o m p a n y O v e r v e w i F Y 2 0 2 1 i H g h l i g h t s i K e y A c h e v e m e n t s a n d M i l e s t o n e s i F n a n c a i l R e p o r t S h a r e h o d e r l I n f o r m a t i o n 19 F I N A N C I A L R E P O R T Directors’ Report continued COMPANY SECRETARIES Qualiﬁcations: Experience and expertise: Teresa Cleary General Counsel and Joint Company Secretary LLB BA GAICD FGIA Teresa joined the Company on 4 November 2019 and is an experienced corporate lawyer and governance professional with signiﬁcant private practice and in-house experience which has included the role of Supervising Counsel at Telstra Corporation Limited and General Counsel & Company Secretary at the Australian Institute of Company Directors (‘AICD’). Teresa’s expertise includes managing legal and regulatory risk, corporate advisory, commercial negotiations, dispute resolution and commercial strategy. Teresa is a Fellow of the Governance Institute of Australia, a graduate of the AICD and she is an active member of the International Bar Association. Teresa is also a non-executive director of the Association of Corporate Counsel, Australia. Kim Bradley-Ware Joint Company Secretary Qualiﬁcations: Experience and expertise: BCom, CPA, LLB Kim has over 20 years’ ﬁnance and governance experience in various listed and private companies, as well as in private practice. Prior to joining Company Matters, Kim worked with Pan Paciﬁc Petroleum (an ASX and NZX listed entity) since 2001, most recently as CFO and Company Secretary. Prior to that Kim held various roles in accounting across a variety of different industries including credit reporting, telecommunications and media. MEETINGS OF DIRECTORS The number of meetings of the Company’s Board of Directors (‘the Board’) and of each Board committee held during the year ended 31 December 2021, and the number of meetings attended by each director were: Full Board Remuneration and Nomination Committee Audit and Risk Committee Attended Held Attended Held Attended Held H Wiseman P Benhaim O Horn 13 13 13 13 13 13 2 2 2 2 2 2 3 3 3 3 3 3 Held: represents the number of meetings held during the time the director held office or was a member of the relevant committee. 20 Elixinol Wellness Limited | Annual Report 2021 F I N A N C I A L R E P O R T REMUNERATION REPORT (AUDITED) The remuneration report details the key management personnel remuneration arrangements for the Group, in accordance with the requirements of the Corporations Act 2001 and its regulations. The remuneration report is set out under the following main headings: – Key management personnel; – Principles used to determine the nature and amount of remuneration; – Linking remuneration and company performance; – Details of remuneration; – Service agreements; – Share-based compensation; and – Additional disclosures relating to key management personnel. Key management personnel Key management personnel (‘KMP’) are those persons having authority and responsibility for planning, directing and controlling the major activities of the entity, directly or indirectly, including all directors. The KMP of the Group consisted of the following directors of Elixinol Wellness Limited: – »Helen Wiseman - Non-Executive Chair and Non-Executive Director; – Paul Benhaim – Non-Executive Director; and – Oliver Horn - Executive Director and Global Chief Executive Officer. And the following executive of Elixinol Wellness Limited: – Ron Dufficy - Global Chief Financial Officer. Except if noted, the named persons held their current position for the whole of the ﬁnancial year and since the end of the ﬁnancial year. Principles used to determine the nature and amount of remuneration An executive reward framework has been developed to ensure reward for performance is competitive and appropriate for the results delivered. The framework aligns executive reward with the achievement of strategic objectives and the creation of value for shareholders and conforms to the market best practice and advice from independent external advisors for the delivery of reward. The Board of Directors (‘the Board’) has ensured that executive reward satisﬁes the following key criteria for good reward governance practices: – competitiveness and reasonableness; – acceptability to shareholders; – performance linkage / alignment of executive compensation; and – transparency. The Remuneration and Nomination Committee is responsible for determining and reviewing remuneration arrangements for its directors and executives. The performance of the Group depends on the quality of its directors and executives. The remuneration philosophy is to attract, motivate and retain high performance and high-quality personnel. The Remuneration and Nomination Committee ensures the structure of the executive remuneration framework is market competitive and complementary to the reward strategy of the Group. The reward framework is designed to align executive reward to shareholders’ interests. The Board has considered that it enhances shareholders’ interests by: – having economic proﬁt and revenue growth as a core component of plan design; – focusing on sustained growth in shareholder wealth, consisting of dividends and growth in share price, and delivering constant or increasing return on assets as well as focusing the executive on key non-ﬁnancial drivers of value; and – attracting and retaining high calibre executives. Additionally, the reward framework enhances executives’ interests by: – »rewarding capability and experience; – »reflecting competitive reward for contribution to growth in shareholder wealth; and – »providing a clear structure for earning rewards. C o m p a n y O v e r v e w i F Y 2 0 2 1 i H g h l i g h t s i K e y A c h e v e m e n t s a n d M i l e s t o n e s i F n a n c a i l R e p o r t S h a r e h o d e r l I n f o r m a t i o n 21 F I N A N C I A L R E P O R T Directors’ Report continued Non-Executive Directors’ remuneration Fees and payments to Non-Executive Directors reflect the demands and responsibilities of their role. Non-Executive Directors’ fees and payments are to be reviewed annually by the Remuneration and Nomination Committee. The Remuneration and Nomination Committee may, from time to time, receive advice from independent remuneration consultants to ensure Non-Executive Directors’ fees and payments are appropriate and in line with the market. The chair’s fees will be determined independently to the fees of other Non-Executive Directors based on comparative roles in the external market. The chair will not be present at any discussions relating to the determination of their own remuneration. The Constitution provides that the Non-Executive Directors are entitled to total ﬁxed remuneration not exceeding an aggregate maximum sum determined by the Company in general meeting. The current amount has been ﬁxed at $500,000 and was approved by shareholders at the Annual General Meeting (‘AGM’) held on 17 May 2021. Remuneration of directors may be provided as a contribution to a superannuation fund. Additionally, it is anticipated that Non-Executive Directors will participate in the Company’s long-term incentive plan. Executive remuneration The Group rewards Executives based on their position and responsibility, with a level and mix of remuneration which has both ﬁxed and variable components. The Executive remuneration and reward framework has three components: – ﬁxed remuneration - to provide a fair and equitable ﬁxed salary, which accurately reflects the skills and responsibilities of the role and the experience of the individual fulﬁlling the position; – short-term performance incentives - to encourage and reward for individual outperformance against annual key performance indicators during the ﬁnancial year; and – long-term incentive share-based payments - to drive long-term sustainable growth and facilitate alignment between the senior executive team and the long-term interests of shareholders. The combination of these comprises the Executive’s total remuneration. Fixed remuneration Fixed remuneration, consisting of base salary, superannuation and non-monetary beneﬁts, is reviewed annually by the Remuneration and Nomination Committee for market competitiveness to attract and retain talent, to consider individual and business unit performance as well as the overall performance of the Group. Executives may receive their ﬁxed remuneration in the form of cash or other fringe beneﬁts (for example motor vehicle beneﬁts) where it does not create any additional costs to the Group and provides additional value to the Executive. Short-Term Incentive Plan (‘STIP’) The Company has adopted a STIP which will enable it to assist in the attraction, motivation and retention of the Directors, executive team and other selected employees of the Group and provide a direct link between remuneration and performance. Its aim is to reward the Executive and management of the Group for achieving a combination of clearly deﬁned Group, regional and individual targets. The STIP is subject to annual review by the Remuneration and Nomination Committee. The structure, performance measures and weightings may therefore vary from year to year. The STIP is weighted 65% (50% in 2021) to Group ﬁnancial measures and 35% (50% in 2021) to individual measures for Executive KMPs. STIP Opportunity (at target) is 25-40% (25%-40% for 2021) of Total Fixed remuneration for Executive KMPs. Group ﬁnancial measures are set out below: – Group net proﬁt after tax (‘NPAT’) (25% of the STIP) and Group revenue (‘Revenue’) (40% of the STIP); – Group NPAT and Revenue was chosen to align executive performance with the key drivers of shareholder value and reflect the short-term performance of the business. Group ﬁnancial performance measures for future years will be determined annually; and – minimum threshold performance will be 80% of the on-target performance level of Group NPAT metrics. 22 Elixinol Wellness Limited | Annual Report 2021 F I N A N C I A L R E P O R T Individual measures are set out below: – Executive KMPs are set individual objectives based on their speciﬁc area of responsibility. These objectives are directly aligned to the Board approved ﬁnancial, operational and strategic objectives and include quantitative measures where appropriate; and – payouts are based on a minimum of 80% achievement (50% for 2021). Actual performance against Group ﬁnancial and individual measures is assessed at the end of the ﬁnancial year. The Board determines the amount, if any, of the STIP to be paid to each Executive KMP, seeking recommendations from the Remuneration and Nomination Committee. Where performance is below threshold, payment of any STIP amount will be at the sole discretion of the Board. Where performance is above the threshold, up to 150% of the target STIP amounts are payable. The STIP amount on-target will be paid in cash or equity and will be subject to relevant local statutory and tax obligations. The Board at its discretion, may elect to grant equity in lieu of payments in cash. If a takeover or change of control event occurs or in the case of death, disability, bona ﬁde redundancy or genuine retirement or another reason (with the exception of resignation or dismissal), the Board at its discretion, may elect to pay pro rata STIP amounts. STIP payments granted as equity include the following conditions: – Any STIP outcome deferred into equity cannot be traded until after they have vested; – Any unvested share rights may be forfeited if the Executive ceases to be an employee before the vesting date; and – Share rights which have vested can only be traded in accordance with the Company’s Securities Trading Policy. Long-Term Incentive Plan (‘LTIP’) The LTIP is an equity incentive plan used to align the Directors and Executive KMP’s remuneration to the returns generated for the Group’s shareholders. The key features of the LTIP are outlined below. Performance rights over ordinary shares in the Company were issued to KMPs for nil consideration. The nature, timing and structure of the grant is detailed below. Performance rights Performance rights are awarded based on the ﬁxed amount to which the individual is entitled. Upon satisfaction of vesting and employment conditions, each performance right will, at the Company’s election, convert to a share on a one-for-one basis or entitle the participant to receive in cash to the value of a share at the Board’s discretion in lieu of an allocation of shares. Where the Board makes such an election, the amount payable will be as determined below: Cash payable = (No. of Share Rights x VWAP) - Applicable Withholding Tax (if any) - Amounts paid as superannuation Where VWAP means the volume weighted average share price of the shares traded on the ASX in the 5 trading days immediately prior to the relevant vesting date. LTIP opportunity (at target) LTIP opportunity has been determined by informed benchmarking. Performance period For the grant made during 2018, the performance period of the grant is ﬁve ﬁnancial years in four equal tranches from the ﬁnancial year of granting. The performance period is from 20 March 2018 to 31 December 2022. For the 2019 Share Rights grant made during 2019, the performance period of the grant is four ﬁnancial years in three equal tranches from the ﬁnancial year of granting. The performance period is from 1 January 2019 to 31 December 2022. For the 2020 Share Rights grant made during 2020, the performance period of the grant is three ﬁnancial years in one tranche following the performance period. The performance period is from 1 January 2020 to 31 December 2022. For the 2021 Share Rights grant made during 2021, the performance period of the grant is three ﬁnancial years in one tranche following the performance period. The performance period is from 1 January 2021 to 31 December 2023. C o m p a n y O v e r v e w i F Y 2 0 2 1 i H g h l i g h t s i K e y A c h e v e m e n t s a n d M i l e s t o n e s i F n a n c a i l R e p o r t S h a r e h o d e r l I n f o r m a t i o n 23 F I N A N C I A L R E P O R T Directors’ Report continued Vesting dates Tranche Vesting date Vesting date Vesting date Vesting date Share Rights granted in 2018 Share Rights granted in 2019 Share Rights granted in 2020 Share Rights granted in 2021 Tranche 1 Tranche 2 Tranche 3 28 February 2020 (lapsed) 28 February 2021 (lapsed) 28 February 2022 (lapsed) 28 February 2021 (lapsed) 28 February 2022 (lapsed) 28 February 2023 Tranche 4 28 February 2023 28 February 2023 28 February 2024 Vesting conditions Share rights which have not lapsed will vest and become exercisable on the date on which any vesting conditions (and any employment conditions) applicable to the share rights have been satisﬁed (or waived by the Board) or the date on which the share rights otherwise vest in accordance with the Plan rules. The share rights are subject to the following vesting conditions: – satisfaction of absolute Total Shareholder Return (‘TSR’) performance hurdles for the relevant vesting period; and – participant must be employed (or continue to be a Director) of the Company or one of its wholly owned subsidiaries at the time that audited ﬁnancial statements are released to the ASX following the performance period. The proportion of TSR share rights that will vest will be determined by reference to the absolute TSR of the Company during the relevant performance period, in accordance with the following vesting schedule: Company’s TSR over the relevant performance period Percentage of TSR share rights vesting Below 10% Greater than 10% but less than 20% Equal to or greater than 20% 0% of the TSR share rights will vest 40% of the TSR share rights will vest 100% of the TSR share rights will vest Cessation of employment (employment conditions) Subject to the Board determining otherwise (in its absolute discretion), should a participant cease to be an employee or Director of the Group because of: – resignation or dismissal: all unvested rights or options lapse; – death, disability, bona ﬁde redundancy, genuine retirement or another reason (with the exception of resignation or dismissal): a pro rata number of unvested rights or options will not lapse, and any vested right or option will not lapse. All other rights or options will lapse. Disposal restrictions When vesting occurs, restriction on disposal of shares will be subject to the Company’s Securities Trading Policy. A participant may not enter into any arrangement for the purpose of hedging, or otherwise affecting their economic exposure to their performance rights. Change of control The Board in its absolute discretion may determine that all or some of a participants unvested options or rights vest where a Takeover Event or Control Event occurs. Use of remuneration consultants During the ﬁnancial period ended 31 December 2021, the Board did not consult or did not engage remuneration advisors for benchmarking of executive remuneration. In the prior year, the Board engaged Hewitt Associates Pty Ltd (AON) to conduct a remuneration benchmarking exercise for several Executive KMPs. AON was also engaged to provide advice on the design for the future reward framework which applies to future periods including 2021. 24 Elixinol Wellness Limited | Annual Report 2021 F I N A N C I A L R E P O R T Voting and comments made at the Company’s 17 May 2021 AGM At the 17 May 2021 AGM, 98.27% of the votes received supported the adoption of the remuneration report for the year ended 31 December 2020. The Company did not receive any speciﬁc feedback at the AGM regarding its remuneration practices. Linking remuneration and company performance Impact of the Group’s 2021 performance on remuneration A challenging COVID-19 environment and a lack of regulatory development across key markets contributed signiﬁcantly towards revenue growth targets not being achieved during 2021. However, due to a focus on cost reduction and margin improvement the Group delivered on its EBITDA targets. The Group also delivered numerous strategic objectives designed to position the Company for future growth across the business. The business has been successfully repositioned with a signiﬁcantly reduced cost base and moves forward with a strong balance sheet. The link between Executive KMP remuneration and Group ﬁnancial performance is detailed below: Revenue Adjusted EBITDA from continuing operations Net loss after tax Basic loss per share (cents per share) Diluted loss per share (cents per share) Opening share price Closing share price on 31 December 2021 $’000 2020 $’000 9,338 (11,496) (17,025) (5.41) (5.41) $0.175 $0.072 15,010 (23,223) (104,478) (58.25) (58.25) $0.570 $0.175 2019 Restated $’000 30,714 (24,632) (83,071) (62.71) (62.71) $2.500 $0.570 2018 $’000 37,131 (114) (860) 0.79 0.79 $1.000 $2.500 There were no dividends declared or paid during the ﬁnancial year. DETAILS OF REMUNERATION Amounts of remuneration Details of the remuneration of Directors and other KMP of the Group are set out in the following tables. Short-term benefits Post-employment benefits Long-term benefits Cash salary and fees $ Cash bonus $ Other fees $ Super- annuation $ Termination payments $ Deferred STI $ Share- based payments Equity- settled Perform- ance Rights $ Total $ 108,702 98,734 – – 372,715 74,260 260,716 56,883 840,867 131,141 – – – – – 10,578 9,599 22,285 24,284 66,746 – – – – – – – – – – 7,464 4,487 126,744 112,820 99,819 569,079 (75,678) 266,205 36,092 1,074,848 2021 Non-Executive Directors: H Wiseman P Benhaim Executive Directors: O Horn(a) Other KMP: R Dufficy(b) (a) On 7 July 2021, the Company granted Oliver Horn 868,132 performance rights over ordinary shares with an exercise price of $0.00 and a vesting date of 28 February 2024 with their issue subject to shareholder approval at the next shareholder meeting. Shareholder approval will be sought at the Company’s annual general meeting in May 2022. The amount recognised in this ﬁnancial year ($99,819) is a representation of the performance period. (b) LTIP value of equity includes negative amounts for options forfeited during the year (not included in % remuneration in the table below). C o m p a n y O v e r v e w i F Y 2 0 2 1 i H g h l i g h t s i K e y A c h e v e m e n t s a n d M i l e s t o n e s i F n a n c a i l R e p o r t S h a r e h o d e r l I n f o r m a t i o n 25 F I N A N C I A L R E P O R T Directors’ Report continued Short-term benefits Post-employment benefits Long-term benefits Cash salary and fees $ Cash bonus $ Other fees $ Super- annuation $ Termination payments $ Deferred STI(a) $ Share- based payments Equity- settled Perform- ance Rights $ Total $ 65,684 106,963 31,123 20,700 263,899 112,581 260,000 860,950 – – – – – – – – – – – – – – – – 6,240 10,162 2,957 1,967 – – 127,000 85,000 – – – – 936 72,860 – 117,125 (231,168) (70,088) – 107,667 15,386 – 15,931 123,187 418,403 10,501 251,562 – (345,360) 29,284 25,000 – 13,221 132,339 430,560 72,213 463,562 29,152 (320,066) 1,105,811 2020 Non-Executive Directors: H Wiseman(c) P Benhaim A Duff(b) G Ellery(b) Executive Directors: O Horn(c) S Karousos(b) Other KMP: R Dufficy (a) Deferred STI relates to STI awarded in relation to the ﬁnancial year but deferred subject to continuity of employment until 28 August 2021. 60.5% of the deferred bonus was recognised in the ﬁnancial year based on the vesting period. (b) Remuneration is from 1 January 2020 to date of ceasement of directorship. (c) Remuneration is from date of appointment as a Director to 31 December 2020. The proportion of remuneration linked to performance and the ﬁxed proportion are as follows: Name 2021 2020 2021 2020 2021 2020 Fixed remuneration At risk - STI At risk - LTI Non-Executive Directors: H Wiseman P Benhaim A Duff G Ellery Executive Directors: O Horn S Karousos Other KMP: R Dufficy 94% 96% – – 70% – 99% 100% 100% 100% 67% 100% – – – – 13% – 83% 67% 17% – – – – 4% – 3% 6% 4% – – 17% – – 1% – – – 29% – 30% 26 Elixinol Wellness Limited | Annual Report 2021 F I N A N C I A L R E P O R T The proportion of the cash bonus paid/payable or forfeited is as follows: Name Executive Directors: O Horn Other KMP: R Dufficy Cash bonus paid/payable Cash bonus forfeited 2021 2020 2021 2020 47% 57% – – 53% 100% 43% 100% Service agreements Remuneration and other terms of employment for KMP are formalised in service agreements. The total ﬁxed remuneration (‘TFR’) is subject to annual review. Details of these agreements effective from 1 January 2021 are as follows: Oliver Horn(b) Ron Dufficy(b) Fixed Remuneration $ (a) 395,000 285,000 Target STI $ 158,000 99,750 Notice Period by Executive months Notice Period by Company months Restraint Period months 6 6 6 6 12 12 (a) Fixed remuneration comprises base cash remuneration, superannuation (superannuation equal to the minimum amount required to be paid to comply with the superannuation guarantee legislation) and other beneﬁts which can be sacriﬁced for cash at the employee’s elections. (b) KMPs are entitled to participate in a long-term incentive plan, as discussed in this report. KMP have no entitlement to termination payments in the event of removal for misconduct. Any payments on termination will be subject to the termination beneﬁts cap under the Corporations Act. Share-based compensation Issue of shares Details of shares issued to directors and other KMP as part of compensation during the year ended 31 December 2021 are set out below: Name O Horn O Horn R Dufficy Date Shares 30 January 2021 468,750 21 October 2021 468,750 28 February 2021 854,430 C o m p a n y O v e r v e w i F Y 2 0 2 1 i H g h l i g h t s i K e y A c h e v e m e n t s a n d M i l e s t o n e s i F n a n c a i l R e p o r t S h a r e h o d e r l I n f o r m a t i o n 27 F I N A N C I A L R E P O R T Directors’ Report continued Performance rights The terms and conditions of each grant of performance rights over ordinary shares affecting remuneration of Directors and other KMP in this ﬁnancial year or future reporting years are as follows: Name R Dufficy O Horn R Dufficy H Wiseman O Horn R Dufficy R Dufficy P Benhaim H Wiseman O Horn R Dufficy O Horn H Wiseman P Benhaim Number of rights granted Grant date Vesting date and exercisable date Expiry date Fair value per right at grant date 900,000 15 May 2018 Various 15 August 2023 361,722 30 July 2020 28 February 2023 30 October 2025 208,791 30 July 2020 28 February 2023 30 October 2025 62,271 30 July 2020 28 February 2024 30 October 2025 144,689 7 July 2021* 31 August 2021 7 October 2026 156,593 7 July 2021 28 February 2022 7 October 2026 548,077 7 July 2021 28 February 2024 7 October 2026 186,813 7 July 2021* 28 February 2025 7 October 2026 280,879 7 July 2021* 28 February 2025 7 October 2026 868,132 7 July 2021* 28 February 2024 7 October 2026 1,366,438 21 January 2022 28 February 2025 21 April 2027 2,164,384 21 January 2022* 28 February 2025 21 April 2027 700,274 21 January 2022* 28 February 2026 21 April 2027 465,753 21 January 2022* 28 February 2026 21 April 2027 $0.890 $0.092 $0.092 $0.092 $0.182 $0.182 $0.076 $0.083 $0.083 $0.076 $0.115 $0.115 $0.141 $0.141 * Subject to shareholder approval Performance rights granted carry no dividend or voting rights. Other than outlined above, there were no other performance rights or options over ordinary shares granted to or vested in Directors and other KMP as part of compensation during the year ended 31 December 2021. Shares issued in the past ﬁnancial year were approved under section 10.14 of the ASX Listing Rules. Additional disclosures relating to key management personnel Shareholding The number of shares in the Company held during the ﬁnancial year by each Director and other members of KMP of the Group, including their personally related parties, is set out below: Ordinary shares H Wiseman P Benhaim(a) O Horn R Dufficy Balance at the start of the year Received as part of remuneration Additions Disposals/ other Balance at the end of the year 168,132 29,523,008 266,471 269,471 – – 937,500 854,430 112,000 – 280,132 – – – (313,791) 29,209,217 – 1,203,971 (500,000) 623,901 30,227,082 1,791,930 112,000 (813,791) 31,317,221 (a) Held indirectly due to Paul Benhaim’s interest with the holder of the shares, Raw With Life Pty Ltd. Included as disposals are 313,791 shares which were transferred to Equities First Holdings LLC (Equities First) under a margin loan facility (Loan Facility) are included as disposals. The term of the Loan Facility is three years. Under the terms of the Loan Facility, Mr Benhaim transferred the Secured Shares to Equities First and procures registration of the Secured Shares in the name of Equities First by way of transfer to an account nominated by Equities First. Equities First may, during the term of the loan, deal with the Secured Shares. Shares provided as security must be returned to Mr Benhaim on repayment of the loan, in accordance with the terms of the Loan Facility. 28 Elixinol Wellness Limited | Annual Report 2021 F I N A N C I A L R E P O R T Performance rights holding The number of performance rights over ordinary shares in the Company held during the ﬁnancial year by each Director and other members of KMP of the Group, including their personally related parties, is set out below: Performance rights over ordinary shares H Wiseman(a) P Benhaim(b) O Horn(c) R Dufficy Balance at the start of the year 62,271 – 1,299,222 Granted Vested Expired/ forfeited/ other Balance at the end of the year – – – – – (937,500) – – – 62,271 – 361,722 1,513,221 704,670 (854,430) (225,000) 1,138,461 2,874,714 704,670 (1,791,930) (225,000) 1,562,454 (a) (b) (c) On 7 July 2021 the company granted two tranches to Helen Wiseman performance rights over ordinary shares with their issue subject to shareholder approval at the next shareholder meeting. 280,879 performance rights were granted with a vesting date of 28 February 2025. Shareholder approval will be sought at the company’s annual general meeting in 2022 and as such the options have not been included in the table above. On 7 July 2021 the company granted two tranches to Paul Benhaim performance rights over ordinary shares with their issue subject to shareholder approval at the next shareholder meeting. 186,813 performance rights were granted with a vesting date of 28 February 2025. Shareholder approval will be sought at the company’s annual general meeting in 2022 and as such the options have not been included in the table above. On 7 July 2021 the company granted two tranches to Oliver Horn performance rights over ordinary shares with their issue subject to shareholder approval at the next shareholder meeting. 144,689 performance rights were granted with a vesting date of 31 August 2021 and 868,132 performance rights were granted with a vesting date of 28 February 2024. Shareholder approval will be sought at the company’s annual general meeting in 2022 and as such the options have not been included in the table above. Loans to key management personnel and their related parties Prior to its acquisition by Elixinol Wellness Limited, Hemp Foods Australia entered into a Shareholder Loan Deed with Raw With Life, an entity controlled by Mr Paul Benhaim, whereby Raw With Life agreed to lend $250,000 to Hemp Foods Australia. The loan is made on an unsecured basis, with no interest payable. Hemp Foods Australia undertakes to repay the loan subject to achievement of predeﬁned performance milestones. This is a related party agreement, as Raw With Life holds (as at the date of this report) approximately 9.25% of the shares in Elixinol Wellness Limited. The Group assessed the fair value of the loan at the reporting date and the amount is not materially different from its carrying value. This concludes the remuneration report, which has been audited. Shares under option or performance rights Unissued ordinary shares of Elixinol Wellness Limited under option or performance rights which have not yet vested at the date of this report are as follows: Grant date 3 April 2018 15 May 2018 21 September 2019 30 July 2020 16 October 2020 7 July 2021 7 July 2021* 21 January 2021 21 January 2021* Expiry date 3 July 2023 15 August 2023 21 December 2024 30 October 2025 16 January 2026 7 October 2026 7 October 2026 21 April 2027 21 April 2027 Number under rights 30,112 225,000 9,598 877,564 33,090 3,479,376 1,480,513 11,523,034 3,330,411 20,988,698 * Performance rights to Directors subject to shareholder approval No person entitled to exercise the option or performance rights had or has any right by virtue of the option or performance right to participate in any share issue of the Company or of any other body corporate. C o m p a n y O v e r v e w i F Y 2 0 2 1 i H g h l i g h t s i K e y A c h e v e m e n t s a n d M i l e s t o n e s i F n a n c a i l R e p o r t S h a r e h o d e r l I n f o r m a t i o n 29 F I N A N C I A L R E P O R T Directors’ Report continued Shares issued on the exercise of options or performance rights The following ordinary shares of Elixinol Wellness Limited were issued during the year ended 31 December 2021 and up to the date of this report on the exercise of performance rights granted: Date performance rights granted 30 January 2021 28 February 2021 31 May 2021 31 August 2021 21 October 2021 Exercise price $0.000 $0.000 $0.000 $0.000 $0.000 Number of shares issued 468,750 854,430 379,747 379,272 468,750 2,550,949 Indemnity and insurance of officers The Company has indemniﬁed the directors and executives of the Company for costs incurred, in their capacity as a director or executive, for which they may be held personally liable, except where there is a lack of good faith. During the ﬁnancial year, the Company paid a premium in respect of a contract to insure the directors and executives of the Company against a liability to the extent permitted by the Corporations Act 2001. The contract of insurance prohibits disclosure of the nature of the liability and the amount of the premium. Indemnity and insurance of auditor The Company has not, during or since the end of the ﬁnancial year, indemniﬁed or agreed to indemnify the auditor of the Company or any related entity against a liability incurred by the auditor. During the ﬁnancial year, the Company has not paid a premium in respect of a contract to insure the auditor of the Company or any related entity. Proceedings on behalf of the Company No person has applied to the Court under section 237 of the Corporations Act 2001 for leave to bring proceedings on behalf of the Company, or to intervene in any proceedings to which the Company is a party for the purpose of taking responsibility on behalf of the Company for all or part of those proceedings. Non-audit services Details of the amounts paid or payable to the auditor for non-audit services provided during the ﬁnancial year by the auditor are outlined in Note 26 to the ﬁnancial statements. The directors are satisﬁed that the provision of non-audit services during the ﬁnancial year, by the auditor (or by another person or ﬁrm on the auditor’s behalf), is compatible with the general standard of independence for auditors imposed by the Corporations Act 2001. The directors are of the opinion that the services as disclosed in Note 26 to the ﬁnancial statements do not compromise the external auditor’s independence requirements of the Corporations Act 2001 for the following reasons: – »all non-audit services have been reviewed and approved to ensure that they do not impact the integrity and objectivity of the auditor; and – »none of the services undermine the general principles relating to auditor independence as set out in APES 110 Code of Ethics for Professional Accountants (including Independence Standards) issued by the Accounting Professional and Ethical Standards Board, including reviewing or auditing the auditor’s own work, acting in a management or decision-making capacity for the Company, acting as advocate for the Company or jointly sharing economic risks and rewards. 30 Elixinol Wellness Limited | Annual Report 2021 F I N A N C I A L R E P O R T Officers of the Company who are former partners of BDO Audit Pty Ltd There are no officers of the Company who are former partners of BDO Audit Pty Ltd. Rounding of amounts The Company is of a kind referred to in Corporations Instrument 2016/191, issued by the Australian Securities and Investments Commission, relating to ‘rounding-off’. Amounts in this report have been rounded off in accordance with that Corporations Instrument to the nearest thousand dollars, or in certain cases, the nearest dollar. Auditor’s independence declaration A copy of the auditor’s independence declaration as required under section 307C of the Corporations Act 2001 is set out immediately after this directors’ report. This report is made in accordance with a resolution of directors, pursuant to section 298(2)(a) of the Corporations Act 2001. On behalf of the directors Oliver Horn Global Chief Executive Officer 25 February 2022 Sydney C o m p a n y O v e r v e w i F Y 2 0 2 1 i H g h l i g h t s i K e y A c h e v e m e n t s a n d M i l e s t o n e s i F n a n c a i l R e p o r t S h a r e h o d e r l I n f o r m a t i o n 31 Auditor’s Independence Declaration Tel: +61 2 9251 4100 Fax: +61 2 9240 9821 www.bdo.com.au Level 11, 1 Margaret St Sydney NSW 2000 Australia DECLARATION OF INDEPENDENCE BY LEAH RUSSELL TO THE DIRECTORS OF ELIXINOL WELLNESS LIMITED As lead auditor of Elixinol Wellness Limited for the year ended 31 December 2021, I declare that, to the best of my knowledge and belief, there have been: 1. No contraventions of the auditor independence requirements of the Corporations Act 2001 in relation to the audit; and 2. No contraventions of any applicable code of professional conduct in relation to the audit. This declaration is in respect of Company Name and the entities it controlled during the period. Leah Russell Director BDO Audit Pty Ltd Sydney 25 February 2022 BDO Audit Pty Ltd ABN 33 134 022 870 is a member of a national association of independent entities which are all members of BDO Australia Ltd ABN 77 050 110 275, an Australian company limited by guarantee. BDO Audit Pty Ltd and BDO Australia Ltd are members of BDO International Ltd, a UK company limited by guarantee, and form part of the international BDO network of independent member firms. Liability limited by a scheme approved under Professional Standards Legislation. 32 FINANCIAL REPORTElixinol Wellness Limited | Annual Report 2021 Consolidated Statement of Proﬁt or Loss and Other Comprehensive Income for the year ended 31 December 2021 F I N A N C I A L R E P O R T Revenue Share of losses of associates and joint ventures accounted for using the equity method Other income Interest income calculated using the effective interest method Expenses Raw materials and consumables used and processing expenses Employee benefits expenses and Directors' fees Share-based payments Depreciation and amortisation expense Impairment of intangibles Impairment of other assets Professional services expenses Sales and marketing expenses Administrative expenses Distribution costs Finance costs Loss before income tax benefit/(expense) Income tax benefit/(expense) Loss after income tax benefit/(expense) for the year Other comprehensive income Items that may be reclassified subsequently to profit or loss Foreign currency translation Other comprehensive income for the year, net of tax Total comprehensive loss for the year Loss for the year is attributable to: Non-controlling interest Owners of Elixinol Wellness Limited Total comprehensive loss for the year is attributable to: Non-controlling interest Owners of Elixinol Wellness Limited Basic loss per share Diluted loss per share Group Note 2021 $’000 2020 $’000 5 6 7 7 7 7 8 35 35 9,338 15,010 – (1,076) 2,429 47 (4,442) (9,661) (194) (1,490) (186) (3,679) (2,379) (3,062) (3,099) (620) (92) 260 100 (8,344) (13,329) 293 (3,213) (39,178) (35,008) (4,068) (6,602) (4,504) (570) (49) (17,090) (100,278) 65 (4,200) (17,025) (104,478) 367 367 80 80 (16,658) (104,398) – 28 (17,025) (104,506) (17,025) (104,478) – 31 (16,658) (104,429) (16,658) (104,398) Cents (5.41) (5.41) Cents (58.25) (58.25) The above consolidated statement of proﬁt or loss and other comprehensive income should be read in conjunction with the accompanying notes C o m p a n y O v e r v e w i F Y 2 0 2 1 i H g h l i g h t s i K e y A c h e v e m e n t s a n d M i l e s t o n e s i F n a n c a i l R e p o r t S h a r e h o d e r l I n f o r m a t i o n 33 F I N A N C I A L R E P O R T Consolidated Statement of Financial Position as at 31 December 2021 Assets Current assets Cash and cash equivalents Trade and other receivables Inventories Income tax refund due Prepayments, deposits and other Total current assets Non-current assets Trade and other receivables Investments accounted for using the equity method Property, plant and equipment Right-of-use assets Intangibles Total non-current assets Total assets Liabilities Current liabilities Trade and other payables Contract liabilities Borrowings Lease liabilities Income tax Employee benefits Accrued expenses Total current liabilities Non-current liabilities Borrowings Lease liabilities Total non-current liabilities Total liabilities Net assets Equity Issued capital Reserves Accumulated losses Total equity Group Note 2021 $’000 2020 $’000 9 10 11 8 12 10 13 14 15 16 17 18 19 20 8 19 20 12,649 27,743 2,970 2,201 541 1,227 1,191 4,735 509 1,176 19,588 35,354 183 2,617 1,308 1,173 463 5,744 – 2,316 2,471 1,412 917 7,116 25,332 42,470 2,208 2,795 94 428 747 – 229 1,009 4,715 250 1,290 1,540 6,255 89 – 920 29 344 818 4,995 250 1,574 1,824 6,819 19,077 35,651 21 22 218,058 217,730 9,094 8,971 (208,075) (191,050) 19,077 35,651 The above consolidated statement of ﬁnancial position should be read in conjunction with the accompanying notes 34 Elixinol Wellness Limited | Annual Report 2021 Consolidated Statement of Changes in Equity for the year ended 31 December 2021 F I N A N C I A L R E P O R T Group Foreign currency translation reserve $’000 Issued capital $’000 Share-based payments reserve $’000 Accumulated losses $’000 Non- controlling interest $’000 Total equity $’000 Balance at 1 January 2020 188,771 8,231 955 (86,544) (31) 111,382 (Loss)/profit after income tax expense for the year Other comprehensive income for the year, net of tax Total comprehensive (loss)/ income for the year Share-based payments (Note 36) Transactions with owners in their capacity as owners: Contributions of equity, net of transaction costs (Note 21) Balance at 31 December 2020 – – – – – 77 77 – – – – (292) 28,959 217,730 – 8,308 – 663 (104,506) 28 (104,478) – (104,506) – – (191,050) 3 31 – – – 80 (104,398) (292) 28,959 35,651 Group Foreign currency translation reserve $’000 Issued capital $’000 Share-based payments reserve $’000 Accumulated losses $’000 Non- controlling interest $’000 Balance at 1 January 2021 217,730 8,308 663 (191,050) Loss after income tax benefit for the year Other comprehensive income for the year, net of tax Total comprehensive (loss)/ income for the year Transactions with owners in their capacity as owners: Share-based payments (Note 36) Share issue transaction costs (Note 21) – – – 438 (110) – 367 367 – – – – – (17,025) – (17,025) (244) – – – Balance at 31 December 2021 218,058 8,675 419 (208,075) – – – – – – – Total equity $’000 35,651 (17,025) 367 (16,658) 194 (110) 19,077 The above consolidated statement of changes in equity should be read in conjunction with the accompanying notes C o m p a n y O v e r v e w i F Y 2 0 2 1 i H g h l i g h t s i K e y A c h e v e m e n t s a n d M i l e s t o n e s i F n a n c a i l R e p o r t S h a r e h o d e r l I n f o r m a t i o n 35 F I N A N C I A L R E P O R T Consolidated Statement of Cash Flows for the year ended 31 December 2021 Cash flows from operating activities Receipts from customers (inclusive of GST) Payments to suppliers and employees (inclusive of GST) Government grants Interest received Interest and other finance costs paid Income taxes refunded Income taxes paid Group Note 2021 $’000 2020 $’000 9,650 14,095 (24,070) (37,120) 354 51 (92) 36 – 365 100 (15) – (46) Net cash used in operating activities 34 (14,071) (22,621) Cash flows from investing activities Payments for property, plant and equipment Payments for intangibles Proceeds from disposal of business Proceeds from disposal of property, plant and equipment Net cash from investing activities Cash flows from financing activities Proceeds from issue of shares Share issue transaction costs Repayment of lease liabilities Net cash (used in)/from financing activities Net (decrease)/increase in cash and cash equivalents Cash and cash equivalents at the beginning of the financial year (160) (132) – 464 172 (295) (33) 230 2,652 2,554 21 21 – 31,478 (110) (1,047) (1,157) (15,056) 27,743 (2,519) (1,414) 27,545 7,478 20,373 Effects of exchange rate changes on cash and cash equivalents (38) (108) Cash and cash equivalents at the end of the financial year 9 12,649 27,743 The above consolidated statement of cash flows should be read in conjunction with the accompanying notes 36 Elixinol Wellness Limited | Annual Report 2021 Notes to the Consolidated Financial Statements for the year ended 31 December 2021 F I N A N C I A L R E P O R T Note 1: General information ................................................................................................................................................................................ 38 Note 2: Signiﬁcant accounting policies .......................................................................................................................................................... 38 Note 3: Critical accounting judgements, estimates and assumptions ............................................................................................ 46 Note 4: Operating segments ................................................................................................................................................................................47 Note 5: Revenue ........................................................................................................................................................................................................50 Note 6: Other income..............................................................................................................................................................................................50 Note 7: Expenses........................................................................................................................................................................................................ 51 Note 8: Income tax.................................................................................................................................................................................................... 53 Note 9: Cash and cash equivalents................................................................................................................................................................... 54 Note 10: Trade and other receivables ................................................................................................................................................................ 54 Note 11. Inventories.................................................................................................................................................................................................... 55 Note 12: Prepayments, deposits and other..................................................................................................................................................... 56 Note 13: Investments accounted for using the equity method............................................................................................................. 56 Note 14: Property, plant and equipment...........................................................................................................................................................57 Note 15: Right-of-use assets .................................................................................................................................................................................. 58 Note 16: Intangibles....................................................................................................................................................................................................60 Note 17: Trade and other payables........................................................................................................................................................................61 Note 18: Contract liabilities......................................................................................................................................................................................62 Note 19: Borrowings ....................................................................................................................................................................................................62 Note 20: Lease liabilities ........................................................................................................................................................................................... 63 Note 21: Issued capital .............................................................................................................................................................................................. 63 Note 22: Reserves........................................................................................................................................................................................................ 64 Note 23: Dividends...................................................................................................................................................................................................... 64 Note 24: Financial instruments ............................................................................................................................................................................. 64 Note 25: Fair value measurement .........................................................................................................................................................................67 Note 26: Remuneration of auditors.....................................................................................................................................................................67 Note 27: Contingent liabilities ................................................................................................................................................................................67 Note 28: Commitments ............................................................................................................................................................................................ 68 Note 29: Key management personnel disclosures ...................................................................................................................................... 68 Note 30: Related party transactions ................................................................................................................................................................... 68 Note 31: Parent entity information...................................................................................................................................................................... 69 Note 32: Interests in subsidiaries............................................................................................................................................................................71 Note 33: Deed of cross guarantee .........................................................................................................................................................................71 Note 34: Cash flow information..............................................................................................................................................................................72 Note 35: Earnings per share.....................................................................................................................................................................................73 Note 36: Share-based payments...........................................................................................................................................................................74 Note 37: Events after the reporting period ......................................................................................................................................................75 C o m p a n y O v e r v e w i F Y 2 0 2 1 i H g h l i g h t s i K e y A c h e v e m e n t s a n d M i l e s t o n e s i F n a n c a i l R e p o r t S h a r e h o d e r l I n f o r m a t i o n 37 F I N A N C I A L R E P O R T Notes to the Consolidated Financial Statements for the year ended 31 December 2021 NOTE 1: GENERAL INFORMATION The ﬁnancial statements cover Elixinol Wellness Limited as a Group consisting of Elixinol Wellness Limited (‘Company’ or ‘parent entity’) and the entities it controlled at the end of, or during, the period (‘Group’). The ﬁnancial statements are presented in Australian dollars, which is Elixinol Wellness Limited’s functional and presentation currency. On 17 May 2021, with approval of the shareholders at the Annual General Meeting, the company changed its name from Elixinol Global Limited to Elixinol Wellness Limited. Elixinol Wellness Limited is a listed public company limited by shares, incorporated and domiciled in Australia. Its registered office and principal place of business is: Level 12 680 George Street Sydney NSW 2000 A description of the nature of the Group’s operations and its principal activities are included in the directors’ report, which is not part of the ﬁnancial statements. The ﬁnancial statements were authorised for issue, in accordance with a resolution of directors, on 25 February 2022. The directors have the power to amend and reissue the ﬁnancial statements. NOTE 2: SIGNIFICANT ACCOUNTING POLICIES The principal accounting policies adopted in the preparation of the ﬁnancial statements are set out below. These policies have been consistently applied to all the years presented, unless otherwise stated. New or amended Accounting Standards and Interpretations adopted The Group has adopted all of the new or amended Accounting Standards and Interpretations issued by the Australian Accounting Standards Board (‘AASB’) that are mandatory for the current reporting period. Any new or amended Accounting Standards or Interpretations that are not yet mandatory have not been early adopted. Going concern The annual ﬁnancial statements have been prepared on a going concern basis, which contemplates the continuation of normal business operations and the realisation of assets and settlement of liabilities in the normal course of business. During the year ended 31 December 2021, the Group incurred a net loss before tax of $17,025,000 (31 December 2020: $104,478,000 loss). During the year, net cash outflows from operating activities were $14,071,000 (31 December 2020: $22,621,000). The year was another signiﬁcantly challenging period for the Group with COVID-19 having a sustained impact on the global retail environment. The CBD industry experienced far less growth in FY2021 than was generally expected. This was due in part to the pandemic, but also a lack in regulatory clarity in many of the major CBD markets, and a saturated industry which resulted in an over-supply of product and reduced pricing. Not withstanding these conditions, the Directors believe that it is reasonably forseeable that the Group will continue as a going concern, and that it is appropriate to adopt the going concern basis in the preparation of the ﬁnancial report, after consideration of the factors noted within this report. As at 31 December 2021, the Group has net assets of $19,077,000 including cash of $12,649,000. The Directors regularly monitor the Company’s cash position on an ongoing basis and the Group has demonstrated a track record of raising capital and funding as and when required, including completing two capital raises totalling $31,477,000 FY2020. In addition, the net loss before tax of $17,090,000 has been signiﬁcantly reduced in FY2021 from that recorded in FY2020 of $100,278,000 and the net cash outflow from operating activities reduced to $2,898,000 (excluding $322,000 non- recurring transaction and severance costs) in Q4 FY2021 from $3,820,000 in Q4 FY2020 as expenditure was reduced and the scale of the business operations was reset. In addition, ongoing cash outflow savings of $2.5m per year will be realised through the restructure of the European operations as the business transitioned to a licensing model during Q4 FY2021. Elixinol Wellness secured a three-year exclusive Trademark and Know-how Licensing Agreement with the UK’s largest CBD manufacturer and distributor, BRITISH CANNABIS™, at the end of 2021. The deal enables BRITISH CANNABIS™ to manufacture, market and sell Elixinol CBD products across the UK, ensuring our brand continues to be distributed in the market while realising signiﬁcant cost savings for the Group. In addition, ongoing cash outflow savings will also be realised in the Americas, through the transition to a fully outsourced supply chain that also near complete in Q4 FY2021 with inhouse warehousing and fulﬁlment on track to move to a third-party model in Q1 FY2022. 38 Elixinol Wellness Limited | Annual Report 2021 Notes to the Consolidated Financial Statements for the year ended 31 December 2021 F I N A N C I A L R E P O R T NOTE 2: SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) Also, Elixinol Americas lodged an 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 $1.6m (US$1.2m) and are expected to be received from the IRS in FY2022, to further boost the Group cash reserves. The current cash flow forecasts support the business as a going concern and the Group has the capacity, if necessary, to defer discretionary expenditure including reducing headcount and corporate costs in the current cash flow forecast period to take steps to moderate the cash outflows of the business as needed. Basis of preparation These general purpose ﬁnancial statements have been prepared in accordance with Australian Accounting Standards and Interpretations issued by the Australian Accounting Standards Board (‘AASB’) and the Corporations Act 2001, as appropriate for for-proﬁt oriented entities. These ﬁnancial statements also comply with International Financial Reporting Standards as issued by the International Accounting Standards Board (‘IASB’). Historical cost convention The ﬁnancial statements have been prepared under the historical cost convention. Critical accounting estimates The preparation of the ﬁnancial statements requires the use of certain critical accounting estimates. It also requires management to exercise its judgement in the process of applying the Group’s accounting policies. The areas involving a higher degree of judgement or complexity, or areas where assumptions and estimates are signiﬁcant to the ﬁnancial statements, are disclosed in Note 3. Parent entity information In accordance with the Corporations Act 2001, these ﬁnancial statements present the results of the Group only. Supplementary information about the parent entity is disclosed in Note 31. Principles of consolidation The consolidated ﬁnancial statements incorporate the assets and liabilities of all subsidiaries of Elixinol Wellness Limited as at 31 December 2021 and the results of all subsidiaries for the period then ended. Subsidiaries are all those entities over which the Group has control. The Group controls an entity when the Group is exposed to, or has rights to, variable returns from its involvement with the entity and has the ability to affect those returns through its power to direct the activities of the entity. Subsidiaries are fully consolidated from the date on which control is transferred to the Group. They are de-consolidated from the date that control ceases. Intercompany transactions, balances and unrealised gains on transactions between entities in the Group are eliminated. Unrealised losses are also eliminated unless the transaction provides evidence of the impairment of the asset transferred. Accounting policies of subsidiaries have been changed where necessary to ensure consistency with the policies adopted by the Group. The acquisition of subsidiaries is accounted for using the acquisition method of accounting. A change in ownership interest, without the loss of control, is accounted for as an equity transaction, where the difference between the consideration transferred and the book value of the share of the non-controlling interest acquired is recognised directly in equity attributable to the parent. Where the Group loses control over a subsidiary, it derecognises the assets including goodwill, liabilities and non-controlling interest in the subsidiary together with any cumulative translation differences recognised in equity. The Group recognises the fair value of the consideration received and the fair value of any investment retained together with any gain or loss in proﬁt or loss. Operating segments Operating segments are presented using the ‘management approach’, where the information presented is on the same basis as the internal reports provided to the Chief Operating Decision Makers (‘CODM’). The CODM is responsible for the allocation of resources to operating segments and assessing their performance. Refer to Note 4. C o m p a n y O v e r v e w i F Y 2 0 2 1 i H g h l i g h t s i K e y A c h e v e m e n t s a n d M i l e s t o n e s i F n a n c a i l R e p o r t S h a r e h o d e r l I n f o r m a t i o n 39 F I N A N C I A L R E P O R T Notes to the Consolidated Financial Statements for the year ended 31 December 2021 NOTE 2: SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) Foreign currency translation Foreign currency transactions Foreign currency transactions are translated into the individual entity’s functional currency using the exchange rates prevailing at the dates of the transactions. Foreign exchange gains and losses resulting from the settlement of such transactions and from the translation at ﬁnancial period-end exchange rates of monetary assets and liabilities denominated in foreign currencies are recognised in proﬁt or loss. Foreign operations The assets and liabilities of foreign operations are translated into Australian dollars using the exchange rates at the reporting date. The revenues and expenses of foreign operations are translated into Australian dollars using the average exchange rates, which approximate the rates at the dates of the transactions, for the period. All resulting foreign exchange differences are recognised in other comprehensive income through the foreign currency reserve in equity. The foreign currency reserve is recognised in proﬁt or loss when the foreign operation or net investment is disposed of. Revenue recognition The Group recognises revenue as follows: Revenue from contracts with customers Revenue is recognised at an amount that reflects the consideration to which the Group is expected to be entitled in exchange for transferring goods or services to a customer. For each contract with a customer, the Group: identiﬁes the contract with a customer; identiﬁes the performance obligations in the contract; determines the transaction price which takes into account estimates of variable consideration and the time value of money; allocates the transaction price to the separate performance obligations on the basis of the relative stand-alone selling price of each distinct good or service to be delivered; and recognises revenue when or as each performance obligation is satisﬁed in a manner that depicts the transfer to the customer of the goods or services promised. Variable consideration within the transaction price, if any, reflects concessions provided to the customer such as discounts, rebates and refunds, any potential bonuses receivable from the customer and any other contingent events. Such estimates are determined using either the ‘expected value’ or ‘most likely amount’ method. The measurement of variable consideration is subject to a constraining principle whereby revenue will only be recognised to the extent that it is highly probable that a signiﬁcant reversal in the amount of cumulative revenue recognised will not occur. The measurement constraint continues until the uncertainty associated with the variable consideration is subsequently resolved. Amounts received that are subject to the constraining principle are recognised as a refund liability. Sale of goods - hemp products Sale of goods revenue is recognised when its performance obligation to transfer control of the goods to the customer is satisﬁed which occurs either at the point of sale or when delivery is completed by way of shipping the product to the location speciﬁed by the customer and the ownership risks have therefore passed to the customer pursuant to the contract. The Group sells a variety of hemp based products in the wholesale market. These sales relate to both the manufacture and distribution of hemp derived ﬁnished products and hemp food based products manufactured by the Group. The Group does not act in the capacity as agent in any customer contracts. General invoices are issued to customers on delivery with 30 day payment terms. Government grants Grants from the government are recognised at their fair value when there is reasonable assurance that the grant will be received and the consolidated entity will comply with all attached conditions. Government grants relating to costs are deferred and recognised in proﬁt or loss as other income over the periods necessary to match them with the costs that they are intended to compensate. Interest Interest income is recognised as interest accrues using the effective interest method. This is a method of calculating the amortised cost of a ﬁnancial asset and allocating the interest income over the relevant period using the effective interest rate, which is the rate that exactly discounts estimated future cash receipts through the expected life of the ﬁnancial asset to the net carrying amount of the ﬁnancial asset. Other revenue Other revenue is recognised when it is received or when the right to receive payment is established. 40 Elixinol Wellness Limited | Annual Report 2021 Notes to the Consolidated Financial Statements for the year ended 31 December 2021 F I N A N C I A L R E P O R T NOTE 2: SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) Research activities Expenditure on research activities is recognised as an expense in the period in which it is incurred. Income tax The income tax expense or beneﬁt for the period is the tax payable on that period’s taxable income based on the applicable income tax rate for each jurisdiction, adjusted by the changes in deferred tax assets and liabilities attributable to temporary differences, unused tax losses and the adjustment recognised for prior periods, where applicable. An income tax beneﬁt will arise for the ﬁnancial year where an income tax loss is incurred and, where permitted to do so, is carried-back against a qualifying prior period’s tax payable to generate a refundable tax offset. Deferred tax assets and liabilities are recognised for temporary differences at the tax rates expected to be applied when the assets are recovered or liabilities are settled, based on those tax rates that are enacted or substantively enacted, except for: – When the deferred income tax asset or liability arises from the initial recognition of goodwill or an asset or liability in a transaction that is not a business combination and that, at the time of the transaction, affects neither the accounting nor taxable proﬁts – When the taxable temporary difference is associated with interests in subsidiaries, associates or joint ventures, and the timing of the reversal can be controlled and it is probable that the temporary difference will not reverse in the foreseeable future Deferred tax assets are recognised for deductible temporary differences and unused tax losses only if it is probable that future taxable amounts will be available to utilise those temporary differences and losses. The carrying amount of recognised and unrecognised deferred tax assets are reviewed at each reporting date. Deferred tax assets recognised are reduced to the extent that it is no longer probable that future taxable proﬁts will be available for the carrying amount to be recovered. Previously unrecognised deferred tax assets are recognised to the extent that it is probable that there are future taxable proﬁts available to recover the asset. Deferred tax assets and liabilities are offset only where there is a legally enforceable right to offset current tax assets against current tax liabilities and deferred tax assets against deferred tax liabilities; and they relate to the same taxable authority on either the same taxable entity or different taxable entities which intend to settle simultaneously. Elixinol Wellness Limited (the ‘head entity’) and its wholly-owned Australian subsidiaries have formed an income tax consolidated group under the tax consolidation regime. In addition, Elixinol Wellness Limited (the ‘head entity’) and its wholly-owned US subsidiaries have also formed an income tax consolidation group within the US jurisdiction. Therefore, the head entity and each subsidiary (in both Australian and the US) in each tax consolidated group continue to account for their own current and deferred tax amounts. In addition to its own current and deferred tax amounts, the head entity also recognises the current tax liabilities (or assets) and the deferred tax assets arising from unused tax losses and unused tax credits assumed from each subsidiary in the tax consolidated groups. Assets or liabilities arising under tax funding agreements with the tax consolidated entities are recognised as amounts receivable from or payable to other entities in the tax consolidated groups. The tax funding arrangement ensures that the intercompany charge equals the current tax liability or beneﬁt of each tax consolidated group member, resulting in neither a contribution by the head entity to the subsidiaries nor a distribution by the subsidiaries to the head entity. Current and non-current classiﬁcation Assets and liabilities are presented in the statement of ﬁnancial position based on current and non-current classiﬁcation. An asset is classiﬁed as current when: it is either expected to be realised or intended to be sold or consumed in the Group’s normal operating cycle; it is held primarily for the purpose of trading; it is expected to be realised within 12 months after the reporting period; or the asset is cash or cash equivalent unless restricted from being exchanged or used to settle a liability for at least 12 months after the reporting period. All other assets are classiﬁed as non-current. A liability is classiﬁed as current when: it is either expected to be settled in the Group’s normal operating cycle; it is held primarily for the purpose of trading; it is due to be settled within 12 months after the reporting period; or there is no unconditional right to defer the settlement of the liability for at least 12 months after the reporting period. All other liabilities are classiﬁed as non-current. Deferred tax assets and liabilities are always classiﬁed as non-current. C o m p a n y O v e r v e w i F Y 2 0 2 1 i H g h l i g h t s i K e y A c h e v e m e n t s a n d M i l e s t o n e s i F n a n c a i l R e p o r t S h a r e h o d e r l I n f o r m a t i o n 41 F I N A N C I A L R E P O R T Notes to the Consolidated Financial Statements for the year ended 31 December 2021 NOTE 2: SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) Cash and cash equivalents Cash and cash equivalents includes cash on hand, deposits held at call with ﬁnancial institutions, other short-term, highly liquid investments with original maturities of three months or less that are readily convertible to known amounts of cash and which are subject to an insigniﬁcant risk of changes in value. Trade and other receivables Trade receivables are initially recognised at fair value and subsequently measured at amortised cost using the effective interest method, less any allowance for expected credit losses. Trade receivables are generally due for settlement within 30 - 45 days. An impairment analysis is performed at each reporting date using a provision matrix to measure expected credit losses. The provision rates are based on days past due for groupings of various customers with similar loss patterns (i.e. by product type, country). The calculation reflects the probability-weighted outcome, the time value of money and reasonable and supportable information that is available at the reporting date about past events, current conditions and forecasts of future economic conditions. Generally, trade receivables are written-off if past due for more than 90 days and are not subject to enforcement activity. Other receivables are recognised at amortised cost, less any allowance for expected credit losses. Inventories Raw materials, work in progress and ﬁnished goods are stated at the lower of cost and net realisable value on a ‘ﬁrst in ﬁrst out’ basis. Cost comprises of direct materials and delivery costs, direct labour, import duties and other taxes, an appropriate proportion of variable and ﬁxed overhead expenditure based on normal operating capacity. Costs of purchased inventory are determined after deducting rebates and discounts received or receivable. Net realisable value is the estimated selling price in the ordinary course of business less the estimated costs of completion and the estimated costs necessary to make the sale. Associates Associates are entities over which the Group has signiﬁcant influence but not control or joint control. Investments in associates are accounted for using the equity method. Under the equity method, the share of the proﬁts or losses of the associate is recognised in proﬁt or loss and the share of the movements in equity is recognised in other comprehensive income. Investments in associates are carried in the statement of ﬁnancial position at cost plus post-acquisition changes in the Group’s share of net assets of the associate. Goodwill relating to the associate is included in the carrying amount of the investment and is neither amortised nor individually tested for impairment. Dividends received or receivable from associates reduce the carrying amount of the investment. When the Group’s share of losses in an associate equals or exceeds its interest in the associate, including any unsecured long-term receivables, the Group does not recognise further losses, unless it has incurred obligations or made payments on behalf of the associate. The Group discontinues the use of the equity method upon the loss of signiﬁcant influence over the associate and recognises any retained investment at its fair value. Any difference between the associate’s carrying amount, fair value of the retained investment and proceeds from disposal is recognised in proﬁt or loss. Property, plant and equipment Plant and equipment is stated at historical cost less accumulated depreciation and impairment. Historical cost includes expenditure that is directly attributable to the acquisition of the items. Depreciation is calculated using diminishing value bases, so as to write off the net cost over its expected useful life. The following bases are used in the calculation of depreciation: Leasehold improvements Furniture, ﬁttings and equipment Computer equipment Machinery 20% over the unexpired period of the lease 12 to 30% 30 to 50% The residual values, useful lives and depreciation methods are reviewed, and adjusted if appropriate, at each reporting date. Leasehold improvements are depreciated over the unexpired period of the lease or the estimated useful life of the assets, whichever is shorter. 42 Elixinol Wellness Limited | Annual Report 2021 Notes to the Consolidated Financial Statements for the year ended 31 December 2021 F I N A N C I A L R E P O R T NOTE 2: SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) An item of property, plant and equipment is derecognised upon disposal or when there is no future economic beneﬁt to the Group. Gains and losses between the carrying amount and the disposal proceeds are taken to proﬁt or loss. Right-of-use assets A right-of-use asset is recognised at the commencement date of a lease. The right-of-use asset is measured at cost, which comprises the initial amount of the lease liability, adjusted for, as applicable, any lease payments made at or before the commencement date net of any lease incentives received, any initial direct costs incurred, and, except where included in the cost of inventories, an estimate of costs expected to be incurred for dismantling and removing the underlying asset, and restoring the site or asset. Right-of-use assets are depreciated on a straight-line basis over the unexpired period of the lease or the estimated useful life of the asset, whichever is the shorter. Where the Group expects to obtain ownership of the leased asset at the end of the lease term, the depreciation is over its estimated useful life. Right-of use assets are subject to impairment or adjusted for any remeasurement of lease liabilities. The Group has elected not to recognise a right-of-use asset and corresponding lease liability for short-term leases with terms of 12 months or less and leases of low-value assets. Lease payments on these assets are expensed to proﬁt or loss as incurred. Intangible assets Intangible assets acquired as part of a business combination, other than goodwill, are initially measured at their fair value at the date of the acquisition. Intangible assets acquired separately are initially recognised at cost. Indeﬁnite life intangible assets are not amortised and are subsequently measured at cost less any impairment. Finite life intangible assets are subsequently measured at cost less amortisation and any impairment. The gains or losses recognised in proﬁt or loss arising from the derecognition of intangible assets are measured as the difference between net disposal proceeds and the carrying amount of the intangible asset. The method and useful lives of ﬁnite life intangible assets are reviewed annually. Changes in the expected pattern of consumption or useful life are accounted for prospectively by changing the amortisation method or period. Goodwill Goodwill arises on the acquisition of a business. Goodwill is not amortised. Instead, goodwill is tested annually for impairment, or more frequently if events or changes in circumstances indicate that it might be impaired, and is carried at cost less accumulated impairment losses. Impairment losses on goodwill are taken to proﬁt or loss and are not subsequently reversed. Website and software Signiﬁcant costs associated with the development of the revenue generating aspects of the website, including the capacity of placing orders, are deferred and amortised on a straight-line basis over the period of their expected beneﬁt, being their ﬁnite useful life of 3 years. Signiﬁcant costs associated with software are deferred and amortised on a straight-line basis over the period of their expected beneﬁt, being their ﬁnite life of 4 years. Patents and trademarks Signiﬁcant costs associated with patents and trademarks are capitalised as an asset. These costs are not subsequently amortised as they are considered to be indeﬁnite life assets because there is no foreseeable limit to the cash flows generated by them and they have no legal, contractual, regulatory, economic, or competitive limiting factors. Patents and trademarks are tested annually for impairment. Customer relationships Customer contracts acquired in a business combination are amortised on a straight-line basis over the period of their expected beneﬁt, being their ﬁnite useful life of 5 years. Brand names Brand names acquired in a business combination are not amortised as they are considered to be indeﬁnite life assets because there is no foreseeable limit to the cash flows generated by them and they have no legal, contractual, regulatory, economic, or competitive limiting factors. Brand names are tested annually for impairment. C o m p a n y O v e r v e w i F Y 2 0 2 1 i H g h l i g h t s i K e y A c h e v e m e n t s a n d M i l e s t o n e s i F n a n c a i l R e p o r t S h a r e h o d e r l I n f o r m a t i o n 43 F I N A N C I A L R E P O R T Notes to the Consolidated Financial Statements for the year ended 31 December 2021 NOTE 2: SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) Impairment of non-ﬁnancial assets Goodwill and other intangible assets that have an indeﬁnite useful life are not subject to amortisation and are tested annually for impairment, or more frequently if events or changes in circumstances indicate that they might be impaired. Other non-ﬁnancial assets are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount may not be recoverable. An impairment loss is recognised for the amount by which the asset’s carrying amount exceeds its recoverable amount. Recoverable amount is the higher of an asset’s fair value less costs of disposal and value-in-use. The value-in-use is the present value of the estimated future cash flows relating to the asset using a pre-tax discount rate speciﬁc to the asset or cash-generating unit to which the asset belongs. Assets that do not have independent cash flows are grouped together to form a cash-generating unit. Trade and other payables These amounts represent liabilities for goods and services provided to the Group prior to the end of the ﬁnancial year and which are unpaid. Due to their short-term nature they are measured at amortised cost and are not discounted. The amounts are unsecured and are usually paid within 30 days of recognition. Contract liabilities A contract liability is the obligation to transfer goods or services to a customer for which the Group has received consideration (or an amount of consideration is due) from the customer. If a customer pays consideration before the Group transfers goods or services to the customer, a contract liability is recognised when the payment is made or the payment is due (whichever is earlier). Contract liabilities are recognised as revenue when the Group performs under the contract. Borrowings Loans and borrowings are initially recognised at the fair value of the consideration received, net of transaction costs. They are subsequently measured at amortised cost using the effective interest method. Lease liabilities A lease liability is recognised at the commencement date of a lease. The lease liability is initially recognised at the present value of the lease payments to be made over the term of the lease, discounted using the interest rate implicit in the lease or, if that rate cannot be readily determined, the Group’s incremental borrowing rate. Lease payments comprise of ﬁxed payments less any lease incentives receivable, variable lease payments that depend on an index or a rate, amounts expected to be paid under residual value guarantees, exercise price of a purchase option when the exercise of the option is reasonably certain to occur, and any anticipated termination penalties. The variable lease payments that do not depend on an index or a rate are expensed in the period in which they are incurred. Lease liabilities are measured at amortised cost using the effective interest method. The carrying amounts are remeasured if there is a change in the following: future lease payments arising from a change in an index or a rate used; residual guarantee; lease term; certainty of a purchase option and termination penalties. When a lease liability is remeasured, an adjustment is made to the corresponding right-of use asset, or to proﬁt or loss if the carrying amount of the right-of-use asset is fully written down. Finance costs Finance costs attributable to qualifying assets are capitalised as part of the asset. All other ﬁnance costs are expensed in the period in which they are incurred. Employee beneﬁts Short-term employee beneﬁts Liabilities for wages and salaries, including non-monetary beneﬁts, annual leave and long service leave expected to be settled wholly within 12 months of the reporting date are measured at the amounts expected to be paid when the liabilities are settled. Deﬁned contribution superannuation expense Contributions to deﬁned contribution superannuation plans are expensed in the period in which they are incurred. 44 Elixinol Wellness Limited | Annual Report 2021 Notes to the Consolidated Financial Statements for the year ended 31 December 2021 F I N A N C I A L R E P O R T NOTE 2: SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) Share-based payments Equity-settled share-based compensation beneﬁts are provided to employees. Equity-settled transactions are awards of shares, or options over shares, that are provided to employees in exchange for the rendering of services. The cost of equity-settled transactions are measured at fair value on grant date. Fair value is independently determined using the Monte Carlo option pricing model that takes into account the exercise price, the term of the option, the impact of dilution, the share price at grant date and expected price volatility of the underlying share, the expected dividend yield and the risk free interest rate for the term of the option, together with non-vesting conditions that do not determine whether the Group receives the services that entitle the employees to receive payment. No account is taken of any other vesting conditions. The cost of equity-settled transactions are recognised as an expense with a corresponding increase in equity over the vesting period. The cumulative charge to proﬁt or loss is calculated based on the grant date fair value of the award, the best estimate of the number of awards that are likely to vest and the expired portion of the vesting period. The amount recognised in proﬁt or loss for the period is the cumulative amount calculated at each reporting date less amounts already recognised in previous periods. Market conditions are taken into consideration in determining fair value. Therefore any awards subject to market conditions are considered to vest irrespective of whether or not that market condition has been met, provided all other conditions are satisﬁed. If equity-settled awards are modiﬁed, as a minimum an expense is recognised as if the modiﬁcation has not been made. An additional expense is recognised, over the remaining vesting period, for any modiﬁcation that increases the total fair value of the share-based compensation beneﬁt as at the date of modiﬁcation. If the non-vesting condition is within the control of the Group or employee, the failure to satisfy the condition is treated as a cancellation. If the condition is not within the control of the Group or employee and is not satisﬁed during the vesting period, any remaining expense for the award is recognised over the remaining vesting period, unless the award is forfeited. If equity-settled awards are cancelled, it is treated as if it has vested on the date of cancellation, and any remaining expense is recognised immediately. If a new replacement award is substituted for the cancelled award, the cancelled and new award is treated as if they were a modiﬁcation. Fair value measurement When an asset or liability, ﬁnancial or non-ﬁnancial, is measured at fair value for recognition or disclosure purposes, the fair value is based on the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date; and assumes that the transaction will take place either: in the principal market; or in the absence of a principal market, in the most advantageous market. Fair value is measured using the assumptions that market participants would use when pricing the asset or liability, assuming they act in their economic best interests. For non-ﬁnancial assets, the fair value measurement is based on its highest and best use. Valuation techniques that are appropriate in the circumstances and for which sufficient data are available to measure fair value, are used, maximising the use of relevant observable inputs and minimising the use of unobservable inputs. Issued capital Ordinary shares are classiﬁed as equity. Incremental costs directly attributable to the issue of new shares or options are shown in equity as a deduction, net of tax, from the proceeds. Earnings per share Basic earnings per share Basic earnings per share is calculated by dividing the proﬁt attributable to the owners of Elixinol Wellness Limited, excluding any costs of servicing equity other than ordinary shares, by the weighted average number of ordinary shares outstanding during the ﬁnancial year, adjusted for bonus elements in ordinary shares issued during the ﬁnancial year. C o m p a n y O v e r v e w i F Y 2 0 2 1 i H g h l i g h t s i K e y A c h e v e m e n t s a n d M i l e s t o n e s i F n a n c a i l R e p o r t S h a r e h o d e r l I n f o r m a t i o n 45 F I N A N C I A L R E P O R T Notes to the Consolidated Financial Statements for the year ended 31 December 2021 NOTE 2: SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) Diluted earnings per share Diluted earnings per share adjusts the ﬁgures used in the determination of basic earnings per share to take into account the after income tax effect of interest and other ﬁnancing costs associated with dilutive potential ordinary shares and the weighted average number of shares assumed to have been issued for no consideration in relation to dilutive potential ordinary shares. Goods and Services Tax (‘GST’) and other similar taxes Revenues, expenses and assets are recognised net of the amount of associated GST, unless the GST incurred is not recoverable from the tax authority. In this case it is recognised as part of the cost of the acquisition of the asset or as part of the expense. Receivables and payables are stated inclusive of the amount of GST receivable or payable. The net amount of GST recoverable from, or payable to, the tax authority is included in other receivables or other payables in the statement of ﬁnancial position. Cash flows are presented on a gross basis. The GST components of cash flows arising from investing or ﬁnancing activities which are recoverable from, or payable to the tax authority, are presented as operating cash flows. Commitments and contingencies are disclosed net of the amount of GST recoverable from, or payable to, the tax authority. Rounding of amounts The Company is of a kind referred to in Corporations Instrument 2016/191, issued by the Australian Securities and Investments Commission, relating to ‘rounding-off’. Amounts in this report have been rounded off in accordance with that Corporations Instrument to the nearest thousand dollars, or in certain cases, the nearest dollar. New Accounting Standards and Interpretations not yet mandatory or early adopted Australian Accounting Standards and Interpretations that have recently been issued or amended but are not yet mandatory, have not been early adopted by the Group for the annual reporting period ended 31 December 2021. The Group has not yet assessed the impact of these new or amended Accounting Standards and Interpretations. NOTE 3: CRITICAL ACCOUNTING JUDGEMENTS, ESTIMATES AND ASSUMPTIONS The preparation of the ﬁnancial statements requires management to make judgements, estimates and assumptions that affect the reported amounts in the ﬁnancial statements. Management continually evaluates its judgements and estimates in relation to assets, liabilities, contingent liabilities, revenue and expenses. Management bases its judgements, estimates and assumptions on historical experience and on other various factors, including expectations of future events, management believes to be reasonable under the circumstances. The resulting accounting judgements and estimates will seldom equal the related actual results. The judgements, estimates and assumptions that have a signiﬁcant risk of causing a material adjustment to the carrying amounts of assets and liabilities (refer to the respective notes) within the next ﬁnancial year are discussed below. Coronavirus (COVID-19) pandemic Judgement has been exercised in considering all the possible ﬁnancial effects and impacts that the COVID-19 pandemic has had, or may have, on the Group based on known information and how this impacts the measurement, presentation and disclosure in the Group year report. This consideration extends to the nature of the products and services offered, customers, supply chain, staffing and geographic regions in which the Group operates. Allowance for expected credit losses The allowance for expected credit losses assessment requires a degree of estimation and judgement. It is based on the lifetime expected credit loss, grouped based on days overdue, and makes assumptions to allocate an overall expected credit loss rate for each group. These assumptions include recent sales experience, historical collection rates, the impact of the COVID-19 pandemic and forward-looking information that is available. The allowance for expected credit losses is calculated based on the information available at the time of preparation. The actual credit losses in future years may be higher or lower. Provision for impairment of inventories The provision for impairment of inventories assessment requires a degree of estimation and judgement. The level of the provision is assessed by taking into account the recent sales experience, the ageing of inventories and other factors that affect inventory obsolescence. 46 Elixinol Wellness Limited | Annual Report 2021 Notes to the Consolidated Financial Statements for the year ended 31 December 2021 F I N A N C I A L R E P O R T NOTE 3: CRITICAL ACCOUNTING JUDGEMENTS, ESTIMATES AND ASSUMPTIONS (CONTINUED) Impairment of non-ﬁnancial assets other than goodwill and other indeﬁnite life intangible assets The Group assesses impairment of non-ﬁnancial assets other than goodwill and other indeﬁnite life intangible assets at each reporting date by evaluating conditions speciﬁc to the Group and to the particular asset that may lead to impairment. If an impairment trigger exists, the recoverable amount of the asset is determined. This involves assessing the value of the asset at fair value less costs of disposal and using value-in-use models which incorporate a number of key estimates and assumptions. Refer to Note 16. Income tax The Group is subject to income taxes in the jurisdictions in which it operates. Signiﬁcant judgement is required in determining the provision for income tax. There are many transactions and calculations undertaken during the ordinary course of business for which the ultimate tax determination is uncertain. The Group recognises liabilities for anticipated tax audit issues based on the Group’s current understanding of the tax law. Where the ﬁnal tax outcome of these matters is different from the carrying amounts, such differences will impact the current and deferred tax provisions in the period in which such determination is made. Refer to Note 8. Recovery of deferred tax assets Deferred tax assets are recognised for deductible temporary differences only if the Group considers it is probable that future taxable amounts will be available to utilise those temporary differences and losses. Refer to Note 8. NOTE 4: OPERATING SEGMENTS Identiﬁcation of reportable operating segments The Group is organised into three operating segments: Americas, Australia and Europe. There is one single business segment, being the sale of nutraceutical and related hemp products. These operating segments are based on the internal reports that are reviewed and used by the Board of Directors (who are identiﬁed as the Chief Operating Decision Makers (‘CODM’)) in assessing performance and in determining the allocation of resources. There is no aggregation of operating segments. The CODM reviews Adjusted EBITDA (earnings before interest, tax, depreciation and amortisation), adjusted for impairment and share-based payments. The accounting policies adopted for internal reporting to the CODM are consistent with those adopted in the ﬁnancial statements. The information provided to the CODM is on a monthly basis. Types of products and services The principal products and services of each of these operating segments are as follows: Americas Australia Europe This includes the trading results of Elixinol LLC (‘Elixinol Americas’) and its investments and joint ventures in the US through the manufacture and distribution of hemp derived cannabidiol (‘CBD’) products. This includes the results from the operations of Elixinol Wellness (Byron Bay) Pty Ltd (formerly known as Hemp Foods Australia Pty Ltd) (‘Hemp Foods Australia’). This includes the results from trading operations of Elixinol BV and Elixinol Ltd (together ‘Elixinol Europe’) and through the manufacture and distribution of hemp derived CBD products. ‘Unallocated’ represents corporate, being Elixinol Wellness Limited (corporate). Intersegment transactions Intersegment transactions were made at market rates. Intersegment transactions are eliminated on consolidation. Intersegment receivables, payables and loans Intersegment loans are initially recognised at the consideration received. Intersegment loans receivable and loans payable that earn or incur non-market interest are not adjusted to fair value based on market interest rates. Intersegment loans are eliminated on consolidation. Major customers During the year ended 31 December 2021, 17% of sales were derived from three major customers (31 December 2020: 9% of sales were derived from three major customers). C o m p a n y O v e r v e w i F Y 2 0 2 1 i H g h l i g h t s i K e y A c h e v e m e n t s a n d M i l e s t o n e s i F n a n c a i l R e p o r t S h a r e h o d e r l I n f o r m a t i o n 47 F I N A N C I A L R E P O R T Notes to the Consolidated Financial Statements for the year ended 31 December 2021 NOTE 4: OPERATING SEGMENTS (CONTINUED) Operating segment information - Continuing operations Group - 2021 Revenue Sales to external customers Total revenue Adjusted EBITDA Depreciation and amortisation Impairment of intangibles Impairment of assets Interest income Finance costs Share-based payments Loss before income tax benefit Income tax benefit Loss after income tax benefit Assets Segment assets Total assets Liabilities Segment liabilities Total liabilities Americas $’000 Australia $’000 Europe $’000 Unallocated $’000 Total $’000 4,783 4,783 4,086 4,086 469 469 – – 9,338 9,338 (5,492) (203) (2,321) (3,480) (11,496) (1,490) (186) (3,679) 47 (92) (194) (17,090) 65 (17,025) 25,332 25,332 6,255 6,255 8,981 2,960 793 12,598 2,599 1,502 335 1,819 48 Elixinol Wellness Limited | Annual Report 2021 Notes to the Consolidated Financial Statements for the year ended 31 December 2021 F I N A N C I A L R E P O R T NOTE 4: OPERATING SEGMENTS (CONTINUED) Group – 2020 Revenue Sales to external customers Total revenue Adjusted EBITDA Depreciation and amortisation Impairment of intangibles Impairment of assets Interest income Finance costs Share-based payments Loss before income tax expense Income tax expense Loss after income tax expense Assets Segment assets Total assets Liabilities Segment liabilities Total liabilities Geographical information Americas Australia Europe Unallocated Americas $’000 Australia $’000 Europe $’000 Unallocated $’000 Total $’000 8,510 8,510 4,156 4,156 2,344 2,344 – – 15,010 15,010 (14,170) (283) (4,470) (4,300) (23,223) (3,213) (39,178) (35,008) 100 (49) 293 (100,278) (4,200) (104,478) 42,470 42,470 6,819 6,819 2020 $’000 6,476 76 416 148 11,565 1,533 2,469 26,903 3,243 1,107 946 1,523 Sales to external customers Geographical non-current assets* 2020 $’000 8,510 4,156 2,344 – 2021 $’000 4,663 758 – 323 2021 $’000 4,783 4,086 469 – * Geographical non-current assets exclude those relating to discontinued operations. The geographical non-current assets above are exclusive of, where applicable, ﬁnancial instruments, deferred tax assets, post-employment beneﬁts assets and rights under insurance contracts. 9,338 15,010 5,744 7,116 C o m p a n y O v e r v e w i F Y 2 0 2 1 i H g h l i g h t s i K e y A c h e v e m e n t s a n d M i l e s t o n e s i F n a n c a i l R e p o r t S h a r e h o d e r l I n f o r m a t i o n 49 F I N A N C I A L R E P O R T Notes to the Consolidated Financial Statements for the year ended 31 December 2021 NOTE 5: REVENUE Sale of goods Disaggregation of revenue The disaggregation of revenue from contracts with customers is as follows: Group 2021 $’000 2020 $’000 9,338 15,010 Group – 2021 Geographical regions Americas Australia Europe * Other includes bulk and private label. Group – 2020 Geographical regions Americas Australia Europe * Other includes bulk and private label. e-Commerce $’000 Retail $’000 Other* $’000 Total $’000 3,027 470 154 3,651 4,236 345 320 4,901 1,503 2,821 315 4,639 2,944 2,876 1,882 7,702 253 795 – 1,048 4,783 4,086 469 9,338 1,330 935 142 8,510 4,156 2,344 2,407 15,010 Timing of revenue recognition All revenue is recognised when goods are transferred at a point in time. NOTE 6: OTHER INCOME Net foreign exchange gain/(loss) Net loss on disposal of property, plant and equipment Government grants (COVID-19) Sub-lease income and other Other income Group 2021 $’000 84 (76) 1,984 437 2,429 2020 $’000 (67) (262) 365 224 260 50 Elixinol Wellness Limited | Annual Report 2021 Notes to the Consolidated Financial Statements for the year ended 31 December 2021 F I N A N C I A L R E P O R T NOTE 6: OTHER INCOME (CONTINUED) Government grants (COVID-19) During the year the Group received payments from the Australian Government amounting to $nil (31 December 2020: $188,000) as part of its ‘Boosting Cash Flow for Employers’ scheme in response to the Coronavirus (‘COVID-19’) pandemic. Eligible employers with aggregated annual turnover of less than $50,000,000 are eligible to receive payments of between $20,000 and $100,000 which are credited against amounts owed on an activity statement and based on Pay As You Go (‘PAYG’) withheld on employee’s salary and wages for the period March to September 2020. Such amounts have been treated as government grants in the ﬁnancial statements, are non-taxable, and are recognised as income once there is reasonable assurance that the Group will comply with any required conditions which is practically at the time that a liability for PAYG withholding tax is incurred and salaries are paid. During the year, the Group has received JobKeeper support payments from the Australian Government amounting to $42,000 (31 December 2020: $177,000) which are passed on to eligible employees. These have been recognised as government grants in the ﬁnancial statements and recorded as other income over the periods in which the related employee beneﬁts are recognised as an expense. These grants are taxable. During the year, the Group has received a Business Growth Grant from the Australian Government amounting to $64,000 (31 December 2020: $nil) which was in relation to marketing and export of goods. This grant has been recognised as government grants in the ﬁnancial statements and recorded as other income. The grant is taxable. During the year, the Group received NSW COVID-19 Business Grant and NSW COVID-19 JobSaver Payment from the NSW Government amounting to $248,000 which was in relation to COVID-19 relief from decline in turnover from extended lockdowns impacting the business. These grants have been recognised as government grants in the ﬁnancial statements and recorded as other income. These grants are taxable. During the year, the Group has accrued US Employee Retention Credits totalling $1,630,000 (31 December 2020: $nil) which is in relation to the application for refundable tax credits which were made available under the Coronavirus Aid, Relief, and Economic Security Act (CARES Act). Due to an extensive processing backlog at the Internal Revenue Service (‘IRS’) no cash has yet been received and the total $1.6 million is now expected to be received in FY2022. NOTE 7: EXPENSES C o m p a n y O v e r v e w i F Y 2 0 2 1 i H g h l i g h t s i K e y A c h e v e m e n t s a n d M i l e s t o n e s Loss before income tax includes the following specific expenses: Cost of sales Cost of sales Depreciation and amortisation Property, plant and equipment (Note 14) Right-of-use assets (Note 15) Intangibles (Note 16) Total depreciation and amortisation Impairment of intangibles Goodwill Website and software Patents and trademarks Customer relationships Brand names Total impairment of intangibles Group 2021 $’000 2020 $’000 4,442 8,344 346 713 431 1,490 – 204 (18) – – 1,495 1,181 537 3,213 28,712 – – 1,187 9,279 186 39,178 i F n a n c a i l R e p o r t S h a r e h o d e r l I n f o r m a t i o n 51 F I N A N C I A L R E P O R T Notes to the Consolidated Financial Statements for the year ended 31 December 2021 NOTE 7: EXPENSES (CONTINUED) Impairment of other assets Inventory Leasehold improvements Motor vehicles Computer equipment Machinery Land and buildings - right-of-use Prepayments, deposits and other Investments accounted for using the equity method Total impairment of other assets Finance costs Interest and finance charges paid/payable on lease liabilities Superannuation expense Defined contribution superannuation expense Group 2021 $’000 2020 $’000 2,778 (42) 3 11 596 – 333 – 18,853 2,937 – – 3,079 704 4,701 4,734 3,679 35,008 92 49 195 184 52 Elixinol Wellness Limited | Annual Report 2021 Notes to the Consolidated Financial Statements for the year ended 31 December 2021 NOTE 8: INCOME TAX Income tax expense/(benefit) Current tax Deferred tax - origination and reversal of temporary differences Adjustment recognised for prior periods Aggregate income tax expense/(benefit) Deferred tax included in income tax expense/(benefit) comprises: Decrease in deferred tax assets Numerical reconciliation of income tax expense/(benefit) and tax at the statutory rate Loss before income tax benefit/(expense) Tax at the statutory tax rate of 25% (2020: 26%) Tax effect amounts which are not deductible/(taxable) in calculating taxable income: Impairment of goodwill Impairment of assets Other non-deductible permanent differences Transfer pricing adjustment Adjustment recognised for prior periods Current year tax losses not recognised Current year temporary differences not recognised Prior year tax losses recognised now written off Prior year temporary differences recognised now written off Difference in overseas tax rates Income tax expense/(benefit) F I N A N C I A L R E P O R T Group 2021 $’000 2020 $’000 4 – (69) (65) (435) 4,626 9 4,200 – 4,626 (17,090) (100,278) (4,273) (26,072) – 10,186 (227) (312) 17 – 35 54 (4,483) (16,109) (69) 6,157 (2,137) – – 467 (65) 9 8,489 5,250 4,402 (95) 2,254 4,200 As a consequence of the application of anti-inversion rules in the USA applying to the Group, the Group is treated as a resident of the USA for US tax purposes and a resident of Australia for Australian income tax purposes. Tax losses not recognised Deferred tax assets are recognised for unused tax losses to the extent that it is probable that taxable proﬁt will be available against which the losses can be utilised. The Group has a $18,140,000 (31 December 2020: $14,664,000) of of tax effected revenue losses which have not been brought to account at 31 December 2021. Prior year deferred tax assets (‘DTA’) and deferred tax liabilities (‘DTL’) are disclosed as net DTA as they arise within the same tax jurisdiction and follow the rules for netting off. Income tax refund due Income tax refund due Group 2021 $’000 2020 $’000 541 509 C o m p a n y O v e r v e w i F Y 2 0 2 1 i H g h l i g h t s i K e y A c h e v e m e n t s a n d M i l e s t o n e s i F n a n c a i l R e p o r t S h a r e h o d e r l I n f o r m a t i o n 53 F I N A N C I A L R E P O R T Notes to the Consolidated Financial Statements for the year ended 31 December 2021 NOTE 8: INCOME TAX (CONTINUED) Provision for income tax Provision for income tax NOTE 9: CASH AND CASH EQUIVALENTS Current assets Cash at bank NOTE 10: TRADE AND OTHER RECEIVABLES Current assets Trade receivables Less: Allowance for expected credit losses Government grant receivable Other receivables GST recoverable Receivable from sub-lease Interest receivable Non-current assets Receivable from sub-lease Group 2021 $’000 2020 $’000 – 29 Group 2021 $’000 2020 $’000 12,649 27,743 Group 2021 $’000 2020 $’000 1,001 (468) 533 1,647 562 133 95 – 2,245 (1,249) 996 – 65 126 – 4 2,970 1,191 183 – Allowance for expected credit losses The Group has recognised a loss of $62,000 (31 December 2020: $855,000) in proﬁt or loss in respect of the expected credit losses for the year ended 31 December 2021. The ageing of the receivables and allowance for expected credit losses provided for above are as follows: Expected credit loss rate Carrying amount Group Not overdue 1 to 30 days overdue 31 to 60 days overdue 61 to 90 days overdue Over 90 days overdue 54 Elixinol Wellness Limited | Annual Report 2021 2021 % 1% 1% 6% 8% 2020 % 2021 $’000 1% 1% 6% 8% 278 232 11 14 466 1,001 99% 95% Allowance for expected credit losses 2021 $’000 2020 $’000 3 2 1 1 461 468 4 5 11 4 1,225 1,249 2020 $’000 378 339 185 50 1,293 2,245 Notes to the Consolidated Financial Statements for the year ended 31 December 2021 NOTE 10: TRADE AND OTHER RECEIVABLES (CONTINUED) Movements in the allowance for expected credit losses are as follows: Opening balance Additional provisions recognised Receivables written off during the year as uncollectable Closing balance NOTE 11. INVENTORIES Current assets Raw materials - at cost Less: Provision for impairment Work in progress - at cost Less: Provision for impairment Finished goods - at cost Less: Provision for impairment Stock in transit - at cost F I N A N C I A L R E P O R T Group 2021 $’000 1,249 62 (843) 468 2020 $’000 1,103 855 (709) 1,249 Group 2021 $’000 2020 $’000 7,514 (7,331) 183 302 (266) 36 2,176 (380) 1,796 186 2,201 18,216 (16,269) 1,947 1,977 (1,338) 639 5,025 (3,226) 1,799 350 4,735 Raw materials, work in progress and ﬁnished goods are stated at the lower of cost and net realisable value. Net realisable values have been reviewed taking into account estimated future demand of ﬁnished goods, expiration dates on inventory and current market prices. With the transition to a fully outsourced, remaining raw materials on hand at 31 December 2021 fully impaired will be scrapped or disposed off in Q1 FY2022. Since the COVID-19 was declared a pandemic by the World Health Organisation in March 2020, the Company has observed a signiﬁcant reduction in consumer demand particularly in bricks and mortar retail distribution channels and the demand has been slower to recover than expected. This reduction in demand has resulted in the Company reassessing how much on hand inventory is estimated to be consumed in the production and sale of Elixinol branded products prior to inventory approaching its shelf life. To the extent that inventory is considered excess to its core strategy, the Company has then considered the net realisable value of excess inventory with reference to the current commodities market for hemp biomass, extracts and distillates. The Company has also sought to sell the excess raw materials and bulk materials in the market. Lower overall consumer demand for hemp commodities in conjunction with oversupply in the market has led to a signiﬁcant decrease in net realisable values and an impairment and write-off of inventories has been recognised in the ﬁnancial statements. C o m p a n y O v e r v e w i F Y 2 0 2 1 i H g h l i g h t s i K e y A c h e v e m e n t s a n d M i l e s t o n e s i F n a n c a i l R e p o r t S h a r e h o d e r l I n f o r m a t i o n 55 F I N A N C I A L R E P O R T Notes to the Consolidated Financial Statements for the year ended 31 December 2021 NOTE 12: PREPAYMENTS, DEPOSITS AND OTHER Current assets Prepayments Security deposits Other deposits NOTE 13: INVESTMENTS ACCOUNTED FOR USING THE EQUITY METHOD Non-current assets Investment in associate - Altmed Pets LLC Group 2021 $’000 2020 $’000 1,057 170 – 1,227 893 198 85 1,176 Group 2021 $’000 2020 $’000 2,617 2,316 Interests in associates Interests in associates are accounted for using the equity method of accounting. Information relating to associates of the Group are set out below: Name H&W Holdings LLC* Altmed Pets LLC* * Holding through Elixinol LLC Summarised ﬁnancial information Principal place of business / Country of incorporation United States of America United States of America Summarised statement of financial position Current assets Non-current assets Total assets Current liabilities Non-current liabilities Total liabilities Net assets Summarised statement of profit or loss and other comprehensive income Revenue Expenses Loss before income tax Other comprehensive income Total comprehensive loss Ownership interest 2021 % – 25.43% 2020 % 19.88% 25.43% Altmed Pets LLC 2021 $’000 2020 $’000 2,207 383 2,590 1,552 – 1,552 1,038 13,035 (13,510) (475) – (475) 3,890 130 4,020 1,788 704 2,492 1,528 12,180 (15,495) (3,315) – (3,315) 56 Elixinol Wellness Limited | Annual Report 2021 Notes to the Consolidated Financial Statements for the year ended 31 December 2021 F I N A N C I A L R E P O R T NOTE 13: INVESTMENTS ACCOUNTED FOR USING THE EQUITY METHOD (CONTINUED) Reconciliation of the Group's carrying amount Opening carrying amount Share of loss after income tax Impairment of investment Reversal of impairment of investment Related party eliminations Foreign exchange Closing carrying amount NOTE 14: PROPERTY, PLANT AND EQUIPMENT Non-current assets Land - at cost Leasehold improvements - at cost Less: Accumulated depreciation Less: Impairment Furniture, fittings and equipment - at cost Less: Accumulated depreciation Motor vehicles - at cost Less: Accumulated depreciation Computer equipment - at cost Less: Accumulated depreciation Machinery - at cost Less: Accumulated depreciation Less: Impairment Altmed Pets LLC 2021 $’000 2020 $’000 2,316 (121) – 121 96 205 2,617 8,095 (795) (4,734) – – (250) 2,316 Group 2021 $’000 2020 $’000 – 364 (183) (124) 57 162 (126) 36 59 (44) 15 693 (639) 54 5,776 (1,063) (3,567) 1,146 1,308 376 360 (116) (165) 79 174 (102) 72 63 (34) 29 737 (523) 214 5,711 (1,039) (2,971) 1,701 2,471 C o m p a n y O v e r v e w i F Y 2 0 2 1 i H g h l i g h t s i K e y A c h e v e m e n t s a n d M i l e s t o n e s i F n a n c a i l R e p o r t S h a r e h o d e r l I n f o r m a t i o n 57 F I N A N C I A L R E P O R T Notes to the Consolidated Financial Statements for the year ended 31 December 2021 NOTE 14: PROPERTY, PLANT AND EQUIPMENT (CONTINUED) Reconciliations Reconciliations of the written down values at the beginning and end of the current and previous ﬁnancial year are set out below: Group Balance at 1 January 2020 Additions Disposals De-classified as held-for-sale Exchange differences Impairment of assets Depreciation expense Balance at 31 December 2020 Additions Disposals De-classified as held-for-sale Exchange differences Impairment of assets Depreciation expense Balance at 31 December 2021 – (2,611) – (38) – – 376 – (401) – 25 – – – Leasehold improve- ments $’000 Furniture, fittings and equipment $’000 Land $’000 Motor vehicles $’000 Computer equipment $’000 Machinery $’000 Total $’000 3,025 3,262 110 – – 13 49 (2,937) 1 (8) 25 (4) – 46 – – – (3) – 484 56 – – (4) – 5,758 12,685 204 (284) 261 (2,903) 88 126 (187) (187) (3,079) (6,016) (308) (52) (14) (322) (799) (1,495) 79 – – – (6) 42 (58) 57 72 5 (3) – (3) – (35) 36 29 – – – 2 (3) (13) 15 214 8 (11) – 4 1,701 171 (156) – 116 2,471 184 (571) – 138 (11) (596) (568) (150) (90) (346) 54 1,146 1,308 NOTE 15: RIGHT-OF-USE ASSETS Non-current assets Land and buildings - right-of-use Less: Accumulated depreciation Less: Impairment Group 2021 $’000 2020 $’000 4,039 (2,162) (704) 1,173 4,540 (2,424) (704) 1,412 The Group leases land and buildings for its offices, warehouses and retail outlets under agreements of between 2 to 5 years with, in some cases, options to extend. The leases have various escalation clauses. On renewal, the terms of the leases are renegotiated. 58 Elixinol Wellness Limited | Annual Report 2021 Notes to the Consolidated Financial Statements for the year ended 31 December 2021 F I N A N C I A L R E P O R T NOTE 15: RIGHT-OF-USE ASSETS (CONTINUED) Reconciliations Reconciliations of the written down values at the beginning and end of the current and previous ﬁnancial year are set out below: Group Balance at 1 January 2020 Disposals De-classified as held for sale Exchange differences Impairment of assets Depreciation expense Balance at 31 December 2020 Lease liability remeasured Disposals Exchange differences Depreciation expense Balance at 31 December 2021 For other AASB 16 and lease related disclosures refer to the following: – Refer to Note 7 for interest on lease liabilities and other lease payments; – Refer to Note 20 for lease liabilities at 31 December 2021; – Refer to Note 24 for maturity analysis of lease liabilities; and – Refer to the consolidated statement of cash flows for repayment of lease liabilities. Land and buildings - right- of-use $’000 4,323 (1,007) 187 (206) (704) (1,181) 1,412 450 (36) 60 (713) 1,173 C o m p a n y O v e r v e w i F Y 2 0 2 1 i H g h l i g h t s i K e y A c h e v e m e n t s a n d M i l e s t o n e s i F n a n c a i l R e p o r t S h a r e h o d e r l I n f o r m a t i o n 59 F I N A N C I A L R E P O R T Notes to the Consolidated Financial Statements for the year ended 31 December 2021 NOTE 16: INTANGIBLES Non-current assets Goodwill - at cost Less: Impairment Website and software - at cost Less: Accumulated amortisation Less: Impairment Patents and trademarks - at cost Less: Impairment Customer relationships - at cost Less: Accumulated amortisation Less: Impairment Brand names - at cost Less: Impairment Group 2021 $’000 2020 $’000 76,191 (76,191) – 1,195 (634) (245) 316 149 (2) 147 2,475 (1,256) (1,219) – 10,668 (10,668) – 463 76,191 (76,191) – 1,068 (370) (41) 657 125 (2) 123 2,470 (1,114) (1,219) 137 10,668 (10,668) – 917 Reconciliations Reconciliations of the written down values at the beginning and end of the current and previous ﬁnancial year are set out below: Group Balance at 1 January 2020 Additions Exchange differences Impairment of assets* Amortisation expense Balance at 31 December 2020 Additions Disposals Exchange differences Impairment of assets Amortisation expense Balance at 31 December 2021 * All impairment in 2020 relates to the Americas CGU segment. 60 Elixinol Wellness Limited | Annual Report 2021 Goodwill $’000 28,226 – 486 (28,712) – – – – – – – – Website and software $’000 Patents and trademarks $’000 Customer relation- ships $’000 Brand names $’000 Total $’000 993 – (50) – (286) 657 127 – 25 (204) (289) 316 90 33 – – – 123 23 (17) – 18 – 147 1,563 9,122 39,994 – 12 – 157 33 605 (1,187) (9,279) (39,178) (251) 137 – – 5 – (142) – – – – – – – – – (537) 917 150 (17) 30 (186) (431) 463 Notes to the Consolidated Financial Statements for the year ended 31 December 2021 F I N A N C I A L R E P O R T NOTE 16: INTANGIBLES (CONTINUED) Impairment testing of goodwill Goodwill was fully impaired in FY2020 and this impairment cannot be reversed. Refer below for the key assumptions and determination of recoverable amount in FY2020. Determination of recoverable amount The recoverable amount of the CGUs are determined based on value in use model using discounted cash flow projections based on ﬁnancial forecasts covering a ﬁve-year period with a terminal growth rate applied thereafter. The Group performed its annual impairment test in December 2019, however as a result of trading performance during H1 FY2020 from the COVID-19 pandemic, indicators of impairment existed for Elixinol LLC as at half-year balance sheet date. Therefore, impairment testing was performed in June 2020. The cash flow projections which are used in determining any impairment require management to make signiﬁcant estimates and judgements. Key assumptions in preparing the cash flow projections are set out below. Each of the assumptions is subject to signiﬁcant judgement about future economic conditions and the development of the rapid regulatory changes to the industries in which the CGU’s operate in and uncertainty of the future impact of COVID-19. Management has applied their best estimates to each of these variables but cannot warrant their outcome. Management has determined that there had been an impairment for Elixinol LLC as at 30 June 2020. In determining the impairment required at 30 June 2020, Management also took into consideration that the market capitalisation of the Group was below the book value of its equity, however this was not the determining factor and at any particular point in time, the market capitalisation does not necessary determine the value of the CGU’s. Key assumptions Elixinol LLC The key assumptions on which management based its cash flow projections when determining the value in calculations for Elixinol LLC are set out below. These assumptions were considered to be consistent with industry market participant expectations. – the revenue growth reflected management’s expectation of growth in the short to medium term based on market growth expectations; – expenditure assumed to decrease in sales and marketing and employee beneﬁts expense, decrease in working capital as inventory levels are reduced and by operational efficiencies reducing cash burn; – limited planned and committed capital expenditure to support production capabilities; – terminal growth rate of 2.0% after 5 years; and – the pre-tax discount rate applied to cash flow projections was 19.6% which represents management’s best estimate of the average of the rates of return required by providers of debt and equity capital to compensate for the time value of money and the perceived risk or uncertainty of the cash flows, weighted in proportion to the market value of the debt; and equity capital provided. The estimated recoverable amounts of Elixinol LLC were below the carrying amounts of intangible and tangible assets of the CGU, therefore an impairment charge of $39,178,000 was recognised in FY2020. NOTE 17: TRADE AND OTHER PAYABLES Current liabilities Trade payables GST and sales tax payable Credit cards Other payables Refer to Note 24 for further information on ﬁnancial instruments. Group 2021 $’000 2020 $’000 1,362 1,818 43 179 624 128 144 705 2,208 2,795 C o m p a n y O v e r v e w i F Y 2 0 2 1 i H g h l i g h t s i K e y A c h e v e m e n t s a n d M i l e s t o n e s i F n a n c a i l R e p o r t S h a r e h o d e r l I n f o r m a t i o n 61 F I N A N C I A L R E P O R T Notes to the Consolidated Financial Statements for the year ended 31 December 2021 NOTE 18: CONTRACT LIABILITIES Current liabilities Contract liabilities Reconciliation Reconciliation of the written down values at the beginning and end of the current and previous financial year are set out below: Opening balance Payments received in advance Transfer to revenue - performance obligations satisfied in previous periods Closing balance Group 2021 $’000 2020 $’000 94 89 89 94 (89) 94 157 89 (157) 89 Unsatisﬁed performance obligations The aggregate amount of the transaction price allocated to the performance obligations that are unsatisﬁed at the end of the reporting period was $94,000 as at 31 December 2021 ($89,000 as at 31 December 2020) and is expected to be recognised as revenue in future periods as follows: Within 6 months NOTE 19: BORROWINGS Current liabilities Insurance premium funding Non-current liabilities Related party loan from Raw With Life Group 2021 $’000 94 2020 $’000 89 Group 2021 $’000 2020 $’000 428 – 250 250 Refer to Note 24 for further information on ﬁnancial instruments. Prior to its acquisition by Elixinol Wellness Limited, Hemp Foods Australia entered into a Shareholder Loan Deed with Raw With Life, an entity controlled by Mr Paul Benhaim, whereby Raw With Life agreed to lend $250,000 to Hemp Foods Australia. The loan is made on an unsecured basis, with no interest currently payable. Hemp Foods Australia undertakes to repay the loan subject to achievement of predeﬁned performance milestones. This is a related party agreement, as Raw With Life holds (as at the date of this report) approximately 9.4% of the shares in Elixinol Wellness Limited. The Group assessed the fair value of the loan at the reporting date and the amount is not materially different from its carrying value. 62 Elixinol Wellness Limited | Annual Report 2021 Notes to the Consolidated Financial Statements for the year ended 31 December 2021 NOTE 20: LEASE LIABILITIES Current liabilities Lease liability Non-current liabilities Lease liability Lease make good provision F I N A N C I A L R E P O R T Group 2021 $’000 2020 $’000 747 920 1,223 67 1,290 1,482 92 1,574 Refer to Note 24 for further information on ﬁnancial instruments. NOTE 21: ISSUED CAPITAL Ordinary shares - fully paid 315,778,066 313,227,117 218,058 217,730 Group 2021 Shares 2020 Shares 2021 $’000 2020 $’000 Movements in ordinary share capital Details Balance Institutional Entitlement Offer Retail Entitlement Offer Issue of Shares Share Purchase Plan Offer Share issue transaction costs Share issue transaction costs Performance rights exercised Performance rights exercised Performance rights exercised Performance rights exercised Performance rights exercised Balance Date Shares Issue price $'000 1 January 2020 14 May 2020 2 June 2020 20 November 2020 18 December 2020 137,761,002 26,712,850 28,230,102 48,209,265 72,313,898 31 January 2021 28 February 2021 31 May 2021 31 August 2021 21 October 2021 468,750 854,430 379,747 379,272 468,750 $0.200 $0.200 $0.170 $0.170 $0.000 $0.000 $0.000 $0.000 $0.000 188,771 5,343 5,646 8,196 12,293 (2,519) 217,730 (110) 87 135 60 69 87 Balance 31 December 2020 313,227,117 31 December 2021 315,778,066 218,058 Ordinary shares Ordinary shares entitle the holder to participate in dividends and the proceeds on the winding up of the Company in proportion to the number of and amounts paid on the shares held. The fully paid ordinary shares have no par value and the Company does not have a limited amount of authorised capital. On a show of hands every member present at a meeting in person or by proxy shall have one vote and upon a poll each share shall have one vote. Share buy-back There is no current on-market share buy-back. C o m p a n y O v e r v e w i F Y 2 0 2 1 i H g h l i g h t s i K e y A c h e v e m e n t s a n d M i l e s t o n e s i F n a n c a i l R e p o r t S h a r e h o d e r l I n f o r m a t i o n 63 F I N A N C I A L R E P O R T Notes to the Consolidated Financial Statements for the year ended 31 December 2021 NOTE 21: ISSUED CAPITAL (CONTINUED) Capital risk management The Group’s objectives when managing capital is to safeguard its ability to continue as a going concern, so that it can provide returns for shareholders and beneﬁts for other stakeholders and to maintain an optimum capital structure to reduce the cost of capital. Capital is regarded as total equity, as recognised in the statement of ﬁnancial position, plus net debt. Net debt is calculated as total borrowings less cash and cash equivalents. In order to maintain or adjust the capital structure, the Group may adjust the amount of dividends paid to shareholders, return capital to shareholders, issue new shares or sell assets to reduce debt. The Group would look to raise capital when an opportunity to invest in a business or company was seen as value adding relative to the current Company’s share price at the time of the investment. The capital risk management policy remains unchanged from the 31 December 2020 Annual Report. NOTE 22: RESERVES Foreign currency translation reserve Share-based payments reserve Group 2021 $’000 8,675 419 9,094 2020 $’000 8,308 663 8,971 Foreign currency translation reserve The reserve is used to recognise exchange differences arising from the translation of the ﬁnancial statements of foreign operations to Australian dollars. Share-based payments reserve The reserve is used to recognise the value of equity beneﬁts provided to employees and directors as part of their remuneration, and other parties as part of their compensation for services. NOTE 23: DIVIDENDS There were no dividends paid, recommended or declared during the current or previous ﬁnancial year. NOTE 24: FINANCIAL INSTRUMENTS Financial risk management objectives The Group’s activities expose it to a variety of ﬁnancial risks: market risk (including foreign currency risk, price risk and interest rate risk), credit risk and liquidity risk. The Group’s overall risk management program focuses on the unpredictability of ﬁnancial markets and seeks to minimise potential adverse effects on the ﬁnancial performance of the Group. Risk management is carried out by senior ﬁnance executives (‘Finance’) under policies approved by the Board of Directors (‘the Board’). These policies include identiﬁcation and analysis of the risk exposure of the Group and appropriate procedures, controls and risk limits. Finance identiﬁes and evaluates ﬁnancial risks within the Group’s operating units. Finance provides reports to the Board on a monthly basis. Market risk Foreign currency risk The Group undertakes certain transactions denominated in foreign currency and is exposed to foreign currency risk through foreign exchange rate fluctuations. Foreign exchange risk arises from future commercial transactions and recognised ﬁnancial assets and ﬁnancial liabilities denominated in a currency that is not the entity’s functional currency. The risk is measured using sensitivity analysis and cash flow forecasting. In addition, the Group is exposed to non-ﬁnancial instrument risk on the translation of foreign subsidiaries from their functional currency to the presentation currency. This presentation risk is separate to the foreign currency risk dealt with in this note. 64 Elixinol Wellness Limited | Annual Report 2021 Notes to the Consolidated Financial Statements for the year ended 31 December 2021 F I N A N C I A L R E P O R T NOTE 24: FINANCIAL INSTRUMENTS (CONTINUED) The carrying amount of the Group’s foreign currency denominated ﬁnancial assets and ﬁnancial liabilities at the reporting date were as follows: Group US dollars Euros Pound Sterling Assets Liabilities 2021 $’000 2020 $’000 – 12 – 12 43 30 53 126 2021 $’000 184 – – 184 2020 $’000 405 43 20 468 The Group had net liabilities denominated in foreign currencies of $172,000 (assets of $12,000 less liabilities of $184,000) as at 31 December 2021 (31 December 2020: net liabilities of $342,000 (assets of $126,000 less liabilities of $468,000)). Based on this exposure, had the Australian dollar weakened or strengthened against these foreign currencies with all other variables held constant, the Group’s proﬁt before tax for the period would have been as follows. The sensitivity analysis carried out by the Group considers the effects on its trade receivables and payables of 5% increase and decrease between the relevant foreign currency and the Australian dollar (reporting currency). Group - 2021 US dollars Euros Pounds Sterling Group - 2020 US dollars Euros Pounds Sterling AUD strengthened Effect on profit before tax $’000 Effect on equity $’000 % change 5% 5% 5% 9 (1) – 8 9 (1) – 8 AUD strengthened Effect on profit before tax $’000 Effect on equity $’000 % change 5% 5% 5% 17 1 (2) 16 17 1 (2) 16 AUD weakened Effect on profit before tax $’000 Effect on equity $’000 (9) 1 – (8) (9) 1 – (8) AUD weakened Effect on profit before tax $’000 (17) (1) 2 (16) Effect on equity $’000 (17) (1) 2 (16) % change 5% 5% 5% % change 5% 5% 5% The percentage change is the expected overall volatility of the signiﬁcant currencies, which is based on management’s assessment of reasonable possible fluctuations taking into consideration movements over the last year and the spot rate at the reporting date. A positive number indicates an increase in proﬁt, a negative number indicates a decrease in proﬁt. The actual foreign exchange loss for the year ended 31 December 2021 was $35,000 (31 December 2020: loss of $32,000). Price risk The Group is not exposed to any signiﬁcant price risk. Interest rate risk The Group is not exposed to any signiﬁcant interest rate risk. C o m p a n y O v e r v e w i F Y 2 0 2 1 i H g h l i g h t s i K e y A c h e v e m e n t s a n d M i l e s t o n e s i F n a n c a i l R e p o r t S h a r e h o d e r l I n f o r m a t i o n 65 F I N A N C I A L R E P O R T Notes to the Consolidated Financial Statements for the year ended 31 December 2021 NOTE 24: FINANCIAL INSTRUMENTS (CONTINUED) Credit risk Credit risk refers to the risk that a counterparty will default on its contractual obligations resulting in ﬁnancial loss to the Group. The Group has a strict code of credit, including obtaining agency credit information, conﬁrming references and setting appropriate credit limits. The maximum exposure to credit risk at the reporting date to recognised ﬁnancial assets is the carrying amount, net of any provisions for impairment of those assets, as disclosed in the statement of ﬁnancial position and notes to the ﬁnancial statements. The Group does not hold any collateral. The Group has adopted a lifetime expected loss allowance in estimating expected credit losses to trade receivables through the use of a provisions matrix using ﬁxed rates of credit loss provisioning. These provisions are considered representative across all customers of the Group based on recent sales experience, historical collection rates and forward- looking information that is available. Consistent with our credit procedures we categorise our receivables based on days past due and we adjust our expected credit losses in relation to those receivables as and when there is a change in days past due in expected receivables. Expected credit loss is initially recognised in respect to a receivable when it is 30 days past due. Liquidity risk Vigilant liquidity risk management requires the Group to maintain sufficient liquid assets (mainly cash and cash equivalents) to be able to pay debts as and when they become due and payable. The Group manages liquidity risk by maintaining adequate cash reserves by continuously monitoring actual and forecast cash flows and matching the maturity proﬁles of ﬁnancial assets and liabilities. Remaining contractual maturities The following tables detail the Group’s remaining contractual maturity for its ﬁnancial instrument liabilities. The tables have been drawn up based on the undiscounted cash flows of ﬁnancial liabilities based on the earliest date on which the ﬁnancial liabilities are required to be paid. The tables include both interest and principal cash flows disclosed as remaining contractual maturities and therefore these totals may differ from their carrying amount in the statement of ﬁnancial position. Weighted average interest rate % 1 year or less $’000 Between 1 and 2 years $’000 Between 2 and 5 years $’000 Over 5 years $’000 Remaining contractual maturities $’000 Group - 2021 Non-derivatives Non-interest bearing Trade payables Other payables Interest-bearing - variable Lease liability Interest-bearing - fixed rate – – 1,362 803 – – – – 3.29% 747 1,016 207 – – – – – 1,362 803 1,970 428 4,563 Insurance premium funding 3.03% Total non-derivatives 428 3,340 – 1,016 – 207 66 Elixinol Wellness Limited | Annual Report 2021 Notes to the Consolidated Financial Statements for the year ended 31 December 2021 F I N A N C I A L R E P O R T NOTE 24: FINANCIAL INSTRUMENTS (CONTINUED) Group - 2020 Non-derivatives Non-interest bearing Trade payables Other payables Interest-bearing - variable Lease liability Total non-derivatives Weighted average interest rate % 1 year or less $’000 Between 1 and 2 years $’000 Between 2 and 5 years $’000 Over 5 years $’000 Remaining contractual maturities $’000 – – 3.18% 1,818 849 920 3,587 – – 615 615 – – 867 867 – – – – 1,818 849 2,402 5,069 The cash flows in the maturity analysis above are not expected to occur signiﬁcantly earlier than contractually disclosed above. NOTE 25: FAIR VALUE MEASUREMENT The carrying amounts of trade and other receivables and trade and other payables are assumed to approximate their fair values due to their short-term nature. The fair value of ﬁnancial liabilities is estimated by discounting the remaining contractual maturities at the current market interest rate that is available for similar ﬁnancial liabilities. NOTE 26: REMUNERATION OF AUDITORS During the ﬁnancial year the following fees were paid or payable for services provided by BDO Audit Pty Ltd, the auditor of the Company, and its network ﬁrms: Audit services - BDO Audit Pty Ltd Audit or review of the financial statements Other services - BDO Services Pty Ltd Taxation compliance services Other advisory services Other services - network firms Taxation services NOTE 27: CONTINGENT LIABILITIES The Group had no contingent liabilities as at 31 December 2021 and 31 December 2020. Group 2021 $ 2020 $ 234,351 252,119 9,472 18,733 63,525 – 72,997 18,733 76,389 19,813 C o m p a n y O v e r v e w i F Y 2 0 2 1 i H g h l i g h t s i K e y A c h e v e m e n t s a n d M i l e s t o n e s i F n a n c a i l R e p o r t S h a r e h o d e r l I n f o r m a t i o n 67 F I N A N C I A L R E P O R T Notes to the Consolidated Financial Statements for the year ended 31 December 2021 NOTE 28: COMMITMENTS Group 2021 $’000 2020 $’000 Capital commitments Committed at the reporting date but not recognised as liabilities, payable: Inventory purchases under contract 71 243 NOTE 29: KEY MANAGEMENT PERSONNEL DISCLOSURES Compensation The aggregate compensation made to directors and other members of key management personnel of the Group is set out below: Group 2021 $ 2020 $ 972,010 860,950 66,746 – – 72,213 29,152 463,562 36,092 (320,066) 1,074,848 1,105,811 Short-term employee benefits Post-employment benefits Long-term benefits Termination benefits Share-based payments NOTE 30: RELATED PARTY TRANSACTIONS Parent entity Elixinol Wellness Limited is the parent entity. Subsidiaries Interests in subsidiaries are set out in Note 32. Associates and other investee Interests in associates are set out in Note 13. Key management personnel Disclosures relating to key management personnel are set out in Note 29 and the remuneration report included in the directors’ report. Transactions between the parent company, its subsidiaries and joint operations are eliminated on consolidation and are not disclosed in this note. 68 Elixinol Wellness Limited | Annual Report 2021 Notes to the Consolidated Financial Statements for the year ended 31 December 2021 F I N A N C I A L R E P O R T Group 2021 $ 2020 $ – – 20,128 4,316 NOTE 30: RELATED PARTY TRANSACTIONS (CONTINUED) Cash flow transactions with related parties The following transactions occurred with related parties: Sale of goods and services: Sale of goods to associates Payment for goods and services: Purchase of goods from associates Receivable from and payable to related parties All transactions were made on normal commercial terms and conditions and at market rates. Loans to/from related parties The following balances are outstanding at the reporting date in relation to loans with related parties: Non-current borrowings: Loan from Raw With Life, an entity controlled by Paul Benhaim, to Hemp Foods Australia Pty Ltd Group 2021 $ 2020 $ 250,000 250,000 Prior to its acquisition by Elixinol Wellness Limited, Hemp Foods Australia entered into a Shareholder Loan Deed with Raw With Life, an entity controlled by Mr Paul Benhaim, whereby Raw With Life agreed to lend $250,000 to Hemp Foods Australia. The loan is made on an unsecured basis, with no interest currently payable. Hemp Foods Australia undertakes to repay the loan subject to achievement of predeﬁned performance milestones. This is a related party agreement, as Raw With Life holds (as at the date of this report) approximately 9.25% of the shares in Elixinol Wellness Limited. The Group assessed the fair value of the loan at the reporting date and the amount is not materially different from its carrying value. Loan transactions were made on negotiated terms and conditions. NOTE 31: PARENT ENTITY INFORMATION Set out below is the supplementary information about the parent entity. Statement of proﬁt or loss and other comprehensive income Loss after income tax Total comprehensive loss Parent 2021 $’000 2020 $’000 (16,658) (16,658) (91,098) (91,098) C o m p a n y O v e r v e w i F Y 2 0 2 1 i H g h l i g h t s i K e y A c h e v e m e n t s a n d M i l e s t o n e s i F n a n c a i l R e p o r t S h a r e h o d e r l I n f o r m a t i o n 69 F I N A N C I A L R E P O R T Notes to the Consolidated Financial Statements for the year ended 31 December 2021 NOTE 31: PARENT ENTITY INFORMATION (CONTINUED) Statement of ﬁnancial position Total current assets Total assets Total current liabilities Total liabilities Equity Issued capital Share-based payments reserve Accumulated losses Total equity Parent 2021 $’000 12,265 20,895 1,365 1,818 2020 $’000 26,744 37,172 863 1,520 218,735 218,408 419 663 (200,077) (183,419) 19,077 35,652 Guarantees entered into by the parent entity in relation to the debts of its subsidiaries Except for the deed of cross guarantee, as detailed in Note 33, the parent entity had no other guarantees in relation to the debts of its subsidiaries as at 31 December 2021 and 31 December 2020. Contingent liabilities The parent entity had no contingent liabilities as at 31 December 2021 and 31 December 2020. Capital commitments - Property, plant and equipment The parent entity had no capital commitments for property, plant and equipment as at 31 December 2021 and 31 December 2020. Signiﬁcant accounting policies The accounting policies of the parent entity are consistent with those of the Group, as disclosed in Note 2, except for the following: – Investments in subsidiaries are accounted for at cost, less any impairment, in the parent entity – Dividends received from subsidiaries are recognised as other income by the parent entity and its receipt may be an indicator of an impairment of the investment 70 Elixinol Wellness Limited | Annual Report 2021 Notes to the Consolidated Financial Statements for the year ended 31 December 2021 F I N A N C I A L R E P O R T NOTE 32: INTERESTS IN SUBSIDIARIES The consolidated ﬁnancial statements incorporate the assets, liabilities and results of the following subsidiaries in accordance with the accounting policy described in Note 2: Name Elixinol LLC Principal place of business / Country of incorporation United States of America EXL International Holdings LLC United States of America Elixinol Wellness (Corporate Services) Pty Ltd *** Elixinol Wellness (Byron Bay) Pty Ltd (trading as Hemp Foods Australia) ** Elixinol Investments Pty Ltd * Elixinol BV Elixinol Ltd Australia Australia Australia Netherlands United Kingdom * ** Elixinol Investment Pty Ltd was dissolved on 11 February 2021 Formerly known as Hemp Foods Australia Pty Ltd *** Formerly known as Elixinol Australia Pty Ltd Ownership interest 2021 % 100% 100% 100% 2020 % 100% 100% 100% 100% 100% – 100% 100% 100% 100% 100% NOTE 33: DEED OF CROSS GUARANTEE The following entities are party to a deed of cross guarantee under which each company guarantees the debts of the others: Elixinol Wellness Limited Elixinol Wellness (Corporate Services) Pty Ltd (formerly known as Elixinol Australia Pty Ltd) Elixinol Investments Pty Ltd Elixinol Wellness (Byron Bay) Pty Ltd (formerly known as Hemp Foods Australia Pty Ltd) Elixinol LLC EXL International Holdings LLC Elixinol BV Elixinol Limited The above companies represent a ‘Closed Group’ for the purposes of the Corporations Instrument, and as there are no other parties to the deed of cross guarantee that are controlled by Elixinol Wellness Limited, they also represent the ‘Extended Closed Group’. By entering into the deed, the wholly-owned entities have been relieved from the requirement to prepare ﬁnancial statements and directors’ report under Corporations Instrument 2016/785 issued by the Australian Securities and Investments Commission. The consolidated statement of proﬁt or loss and other comprehensive income and consolidated statement of ﬁnancial position are substantially the same as the Group and therefore have not been separately disclosed. C o m p a n y O v e r v e w i F Y 2 0 2 1 i H g h l i g h t s i K e y A c h e v e m e n t s a n d M i l e s t o n e s i F n a n c a i l R e p o r t S h a r e h o d e r l I n f o r m a t i o n 71 F I N A N C I A L R E P O R T Notes to the Consolidated Financial Statements for the year ended 31 December 2021 NOTE 34: CASH FLOW INFORMATION Reconciliation of loss after income tax to net cash used in operating activities Loss after income tax benefit/(expense) for the year Adjustments for: Depreciation and amortisation Impairment of non-current assets Impairment of intangibles Impairment of inventory Net loss on disposal of property, plant and equipment Share of loss - associates Share of loss - joint ventures Share-based payments Doubtful debts Others Change in operating assets and liabilities: Decrease/(increase) in trade and other receivables Increase in inventories Increase in income tax refund due Decrease in deferred tax assets Decrease/(increase) in prepayments, deposits and other Decrease in trade and other payables Increase/(decrease) in contract liabilities Increase/(decrease) in provision for income tax Increase/(decrease) in other provisions Increase/(decrease) in accrued expenses Increase in premium funding Net cash used in operating activities Group 2021 $’000 2020 $’000 (17,025) (104,478) 1,490 771 186 2,778 76 – – 194 62 (51) (2,014) (244) – – (51) (619) 5 (29) (115) 87 428 3,213 35,008 39,178 – 262 927 149 (293) 146 115 709 (2,155) (509) 4,307 1,119 (435) (68) 117 92 (25) – (14,071) (22,621) 72 Elixinol Wellness Limited | Annual Report 2021 Notes to the Consolidated Financial Statements for the year ended 31 December 2021 F I N A N C I A L R E P O R T NOTE 34: CASH FLOW INFORMATION (CONTINUED) Changes in liabilities arising from ﬁnancing activities The table below details changes in the Group’s liabilities arising from ﬁnancing activities, including both cash and non- cash changes. Liabilities arising from ﬁnancing activities are those for which cash flows were, or future cash flows will be, classiﬁed in the Group’s consolidated statement of cash flows as cash flows from ﬁnancing activities. Group Balance at 1 January 2020 Net cash used in financing activities Disposals Changes through discontinued operations Exchange differences Balance at 31 December 2020 Net cash used in financing activities Lease liability remeasured Exchange differences Balance at 31 December 2021 NOTE 35: EARNINGS PER SHARE Loss after income tax Non-controlling interest Loss after income tax attributable to the owners of Elixinol Wellness Limited Loan with Raw With Life $’000 Lease liabilities $’000 – – – 250 – 250 – – – 4,665 (1,414) (704) – (53) 2,494 (1,047) 450 140 Total $’000 4,665 (1,414) (704) 250 (53) 2,744 (1,047) 450 140 250 2,037 2,287 Group 2021 $’000 2020 $’000 (17,025) (104,478) – (28) (17,025) (104,506) Number Number Weighted average number of ordinary shares used in calculating basic earnings per share 314,819,959 179,421,047 Weighted average number of ordinary shares used in calculating diluted earnings per share 314,819,959 179,421,047 Basic loss per share Diluted loss per share Cents Cents (5.41) (5.41) (58.25) (58.25) The outstanding performance rights held by directors and employees have not been included to calculate diluted earnings per share as their inclusion would be anti-dilutive. In addition the hurdles have not been met as at the reporting date. C o m p a n y O v e r v e w i F Y 2 0 2 1 i H g h l i g h t s i K e y A c h e v e m e n t s a n d M i l e s t o n e s i F n a n c a i l R e p o r t S h a r e h o d e r l I n f o r m a t i o n 73 F I N A N C I A L R E P O R T Notes to the Consolidated Financial Statements for the year ended 31 December 2021 NOTE 36: SHARE-BASED PAYMENTS The Group has established a long-term incentive share-based payment plan (‘LTIP’). Under the LTIP, the Board at its absolute discretion can issue options and performance rights over ordinary shares in the Company to directors, key management personnel and employees. During the current year 6,694,468 performance rights were issued for nil consideration and the share-based payment debit in the proﬁt and loss was $194,000 that included $182,000 credit for forfeitures and $376,000 debit current period expense. The equity movement was a credit of $194,000 that included $438,000 credit for performance rights exercised as issued capital and $244,000 movement in the share-based payments reserve. During the prior year 3,699,220 performance rights were issued for nil consideration and the share-based payment credited in the proﬁt or loss was $293,000 that included $815,000 credit for forfeitures and $522,000 debit for current period expense. The equity movement was a debit of $293,000. Performance rights are awarded based on the ﬁxed amount to which the individual is entitled. Upon satisfaction of vesting and employment conditions, each performance right will, at the Company’s election, convert to a share on a one-for-one basis or entitle the participant to receive in cash to the value of a share at the Board’s discretion in lieu of an allocation of shares. The performance period of share rights granted in 2020 is from 1 January 2020 to 31 December 2022. The performance period of the grant made in 2019 is three ﬁnancial years in three equal tranches from the ﬁnancial year of granting. For the grant made during 2018, the performance period is from 20 March 2018 to 31 December 2022. The performance period of share rights granted in 2021 is from 1 January 2021 to 31 December 2023. The vesting dates are as follows: Tranche Tranche 1 Tranche 2 Tranche 3 Vesting date Share Rights granted in 2018 Vesting date Share Rights granted in 2019 Vesting date Share Rights granted in 2020 Vesting date Share Rights granted in 2021 28 February 2020 (lapsed) 28 February 2021 (lapsed) 28 February 2022 (lapsed) 28 February 2021 (lapsed) 28 February 2022 (lapsed) 28 February 2023 28 February 2023 28 February 2024 Tranche 4 28 February 2023 Grant dates and details Set out below are summaries of performance rights granted under the plan: 2021 Grant date Expiry date 03/04/2018 15/05/2018 21/09/2019 30/07/2020 30/07/2020 16/10/2020 07/07/2021 07/07/2021 07/07/2021 03/07/2023 15/08/2023 21/12/2024 30/10/2025 30/10/2025 02/01/2026 07/10/2026 07/10/2026 07/10/2026 Balance at the start of the year 60,224 450,000 35,166 937,500 1,356,923 1,234,177 Granted Exercised Expired/ forfeited/ other Balance at the end of the year – – – – – – – – – (30,112) 30,112 (225,000) 225,000 (25,568) 9,598 (937,500) – – – (446,269) 910,654 (1,234,177) – – – – – 751,439 (379,272) (17,772) 354,395 4,609,442 1,333,587 – – (1,484,461) 3,124,981 (1,333,587) – 4,073,990 6,694,468 (2,550,949) (3,562,769) 4,654,740 74 Elixinol Wellness Limited | Annual Report 2021 Notes to the Consolidated Financial Statements for the year ended 31 December 2021 NOTE 36: SHARE-BASED PAYMENTS (CONTINUED) 2020 F I N A N C I A L R E P O R T Granted Exercised Expired/ forfeited/ other Balance at the end of the year Balance at the start of the year 149,181 1,650,000 130,194 450,000 255,810 – – – – – – – – 937,500 1,527,543 1,234,177 2,635,185 3,699,220 – – – – – – – – – (88,957) 60,224 (1,200,000) 450,000 (130,194) (450,000) – – (220,644) 35,166 – 937,500 (170,620) 1,356,923 – 1,234,177 (2,260,415) 4,073,990 Grant date Expiry date 03/04/2018 15/05/2018 01/11/2018 23/05/2019 21/09/2019 30/07/2020 30/07/2020 16/10/2020 03/07/2023 15/08/2023 01/02/2024 23/08/2024 21/12/2024 30/10/2025 30/10/2025 02/01/2026 The weighted average remaining contractual life of performance rights outstanding at the end of the ﬁnancial year was 3.65 years (31 December 2020: 3.97 years). For the performance rights granted during the current ﬁnancial year, the valuation model inputs used to determine the fair value at the grant date, are as follows: Grant date Expiry date Share price at grant date Expected volatility* Dividend yield Risk-free interest rate* Fair value at grant date 07/07/2021 07/10/2026 $0.115 95.60% – – $0.076 * Where no % is stated there are no market vesting conditions attached to the performance rights and vesting condition includes continuity of service. Volatilities, betas and correlations (all using the equally weighted model) are calculated using the Stambaugh method, which handles assets with short price histories (e.g. newly listed stocks) without truncating the histories of all the assets to match the number of prices for the assets with the shortest history. NOTE 37: EVENTS AFTER THE REPORTING PERIOD No matter or circumstance has arisen since 31 December 2021 that has signiﬁcantly affected, or may signiﬁcantly affect the Group’s operations, the results of those operations, or the Group’s state of affairs in future ﬁnancial years. C o m p a n y O v e r v e w i F Y 2 0 2 1 i H g h l i g h t s i K e y A c h e v e m e n t s a n d M i l e s t o n e s i F n a n c a i l R e p o r t S h a r e h o d e r l I n f o r m a t i o n 75 F I N A N C I A L R E P O R T Directors’ Declaration 31 December 2021 In the directors’ opinion: – the attached ﬁnancial statements and notes comply with the Corporations Act 2001, the Accounting Standards, the Corporations Regulations 2001 and other mandatory professional reporting requirements – the attached ﬁnancial statements and notes comply with International Financial Reporting Standards as issued by the International Accounting Standards Board as described in Note 2 to the ﬁnancial statements; – the attached ﬁnancial statements and notes give a true and fair view of the Group’s ﬁnancial position as at 31 December 2021 and of its performance for the ﬁnancial year ended on that date; – there are reasonable grounds to believe that the Company will be able to pay its debts as and when they become due and payable; and – at the date of this declaration, there are reasonable grounds to believe that the members of the Extended Closed Group will be able to meet any obligations or liabilities to which they are, or may become, subject by virtue of the deed of cross guarantee described in Note 33 to the ﬁnancial statements. The directors have been given the declarations required by section 295A of the Corporations Act 2001. Signed in accordance with a resolution of directors made pursuant to section 295(5)(a) of the Corporations Act 2001. On behalf of the directors Oliver Horn Global Chief Executive Officer 25 February 2022 Sydney 76 Elixinol Wellness Limited | Annual Report 2021 Independent Auditor’s Report F I N A N C I A L R E P O R T Tel: +61 2 9251 4100 Fax: +61 2 9240 9821 www.bdo.com.au Level 11, 1 Margaret St Sydney NSW 2000 Australia INDEPENDENT AUDITOR'S REPORT To the members of Elixinol Wellness Limited Report on the Audit of the Financial Report Opinion We have audited the financial report of Elixinol Wellness Limited (the Company) and its subsidiaries (the Group), which comprises the consolidated statement of financial position as at 31 December 2021, the consolidated statement of profit or loss and other comprehensive income, the consolidated statement of changes in equity and the consolidated statement of cash flows for the year then ended, and notes to the financial report, including a summary of significant accounting policies and the directors’ declaration. In our opinion the accompanying financial report of the Group, is in accordance with the Corporations Act 2001, including: (i) Giving a true and fair view of the Group’s financial position as at 31 December 2021 and of its financial performance for the year ended on that date; and (ii) Complying with Australian Accounting Standards and the Corporations Regulations 2001. Basis for opinion We conducted our audit in accordance with Australian Auditing Standards. Our responsibilities under those standards are further described in the Auditor’s responsibilities for the audit of the Financial Report section of our report. We are independent of the Group in accordance with the Corporations Act 2001 and the ethical requirements of the Accounting Professional and Ethical Standards Board’s APES 110 Code of Ethics for Professional Accountants (including Independence Standards) (the Code) that are relevant to our audit of the financial report in Australia. We have also fulfilled our other ethical responsibilities in accordance with the Code. We confirm that the independence declaration required by the Corporations Act 2001, which has been given to the directors of the Company, would be in the same terms if given to the directors as at the time of this auditor’s report. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our opinion. BDO Audit Pty Ltd ABN 33 134 022 870 is a member of a national association of independent entities which are all members of BDO Australia Ltd ABN 77 050 110 275, an Australian company limited by guarantee. BDO Audit Pty Ltd and BDO Australia Ltd are members of BDO International Ltd, a UK company limited by guarantee, and form part of the international BDO network of independent membe r firms. Liability limited by a scheme approved under Professional Standards Legislation. C o m p a n y O v e r v e w i F Y 2 0 2 1 i H g h l i g h t s i K e y A c h e v e m e n t s a n d M i l e s t o n e s i F n a n c a i l R e p o r t S h a r e h o d e r l I n f o r m a t i o n 77 Independent Auditor’s Report continued Key audit matters Key audit matters are those matters that, in our professional judgement, were of most significance in our audit of the financial report of the current period. These matters were addressed in the context of our audit of the financial report as a whole, and in forming our opinion thereon, and we do not provide a separate opinion on these matters. Going concern Key audit matter How the matter was addressed in our audit For the year ended 31 December 2021, the Our procedures included, but were not limited to: Group incurred a net loss of $17m and net cash outflows of $15m indicating a potential going concern issue. The financial report has been prepared on a going concern basis and as the directors’ assessment of the Group’s ability to continue as a going concern can be highly judgemental we identified going concern as a significant risk requiring special audit consideration. Due to these factors, we considered this area to be a key audit matter. • • • • An evaluation of the directors’ assessment of the Group’s ability to continue as a going concern. In particular we reviewed management prepared cashflow forecast for the period to end February 2023; Reviewed the inputs to the cashflow forecast including comparing to prior periods, and known business plans for the future; Assessed management’s ability to accurately forecasting, by review of current performance to prior period forecast; and Reviewed the disclosures in the financial statements to determine whether they are adequate. The directors assessment of going concern is included in note 2 to the financial report. Impairment / Recoverability of non-current assets Key audit matter How the matter was addressed in our audit There is a risk that carrying value of the Our procedures included, but were not limited to: Group’s non-current assets might be impaired if they are unlikely to produce economic benefits in excess of their carrying value. The Group has seen lower than expected revenue growth and demand for its products. Based on these factors, it was identified that impairment indicators exist. Due to the significant assumptions and judgments that are involved in impairment assessments, we have determined that this is a key audit matter. • • • Reviewed and analysed the Group’s value-in-use cash flow models to support the carrying value of non-current-assets; Performed procedures on the forecasts and discounted cash flow models, including assessment of inputs in order to test the impairment analysis; Enquired with management, corroborating assumptions with audit evidence and assessed the judgements made in respect of non-current asset impairment assessments prepared by the Group; • Assessed management’s ability to accurately forecast, by review of current performance to prior period forecast. 78 FINANCIAL REPORTElixinol Wellness Limited | Annual Report 2021 F I N A N C I A L R E P O R T Other information The directors are responsible for the other information. The other information comprises the information in the Group’s annual report for the year ended 31 December 2021, but does not include the financial report and the auditor’s report thereon. Our opinion on the financial report does not cover the other information and we do not express any form of assurance conclusion thereon. In connection with our audit of the financial report, our responsibility is to read the other information and, in doing so, consider whether the other information is materially inconsistent with the financial report or our knowledge obtained in the audit or otherwise appears to be materially misstated. If, based on the work we have performed, we conclude that there is a material misstatement of this other information, we are required to report that fact. We have nothing to report in this regard. Responsibilities of the directors for the Financial Report The directors of the Company are responsible for the preparation of the financial report that gives a true and fair view in accordance with Australian Accounting Standards and the Corporations Act 2001 and for such internal control as the directors determine is necessary to enable the preparation of the financial report that gives a true and fair view and is free from material misstatement, whether due to fraud or error. In preparing the financial report, the directors are responsible for assessing the ability of the Group to continue as a going concern, disclosing, as applicable, matters related to going concern and using the going concern basis of accounting unless the directors either intend to liquidate the Group or to cease operations, or has no realistic alternative but to do so. Auditor’s responsibilities for the audit of the Financial Report Our objectives are to obtain reasonable assurance about whether the financial report as a whole is free from material misstatement, whether due to fraud or error, and to issue an auditor’s report that includes our opinion. Reasonable assurance is a high level of assurance, but is not a guarantee that an audit conducted in accordance with the Australian Auditing Standards will always detect a material misstatement when it exists. Misstatements can arise from fraud or error and are considered material if, individually or in the aggregate, they could reasonably be expected to influence the economic decisions of users taken on the basis of this financial report. A further description of our responsibilities for the audit of the financial report is located at the Auditing and Assurance Standards Board website (http://www.auasb.gov.au/Home.aspx) at: https://www.auasb.gov.au/admin/file/content102/c3/ar1_2020.pdf This description forms part of our auditor’s report. C o m p a n y O v e r v e w i F Y 2 0 2 1 i H g h l i g h t s i K e y A c h e v e m e n t s a n d M i l e s t o n e s i F n a n c a i l R e p o r t S h a r e h o d e r l I n f o r m a t i o n 79 Independent Auditor’s Report continued Report on the Remuneration Report Opinion on the Remuneration Report We have audited the Remuneration Report included in pages 21 to 29 of the directors’ report for the year ended 31 December 2021. In our opinion, the Remuneration Report of Elixinol Wellness Limited, for the year ended 31 December 2021, complies with section 300A of the Corporations Act 2001. Responsibilities The directors of the Company are responsible for the preparation and presentation of the Remuneration Report in accordance with section 300A of the Corporations Act 2001. Our responsibility is to express an opinion on the Remuneration Report, based on our audit conducted in accordance with Australian Auditing Standards. BDO Audit Pty Ltd Leah Russell Director Sydney, 25 February 2022 80 FINANCIAL REPORTElixinol Wellness Limited | Annual Report 2021 Shareholder Information 31 December 2021 The shareholder information set out below was applicable as at 15 February 2022. Distribution of equitable securities Analysis of number of equitable security holders by size of holding: 1 to 1,000 1,001 to 5,000 5,001 to 10,000 10,001 to 100,000 100,001 and over Holding less than a marketable parcel Equity security holders Twenty largest quoted equity security holders The names of the twenty largest security holders of quoted equity securities are listed below: CS THIRD NOMINEES PTY LIMITED (HSBC CUST NOM AU LTD 13 A/C) RAW WITH LIFE PTY LTD (BENHAIM TRADING A/C) CITICORP NOMINEES PTY LIMITED MERRILL LYNCH (AUSTRALIA) NOMINEES PTY LIMITED D & G HEALTH LLC HSBC CUSTODY NOMINEES (AUSTRALIA) LIMITED BNP PARIBAS NOMINEES PTY LTD ACF CLEARSTREAM BNP PARIBAS NOMS PTY LTD (DRP) CS FOURTH NOMINEES PTY LIMITED (HSBC CUST NOM AU LTD 11 A/C) BNP PARIBAS NOMINEES PTY LTD HUB24 CUSTODIAL SERV LTD (DRP A/C) MR ERIC CHI KEUNG WONG PANTHER TRADING PTY LTD (PANTHER A/C) MR JYOTINDRA SUBEDI MR JIA HONG ZHANG BNP PARIBAS NOMINEES PTY LTD (IB AU NOMS RETAILCLIENT DRP) MS XIAO LAN WANG SLT CAPITAL MANAGEMENT PTY LTD MR MICHAEL ERNEST GRANATA (THE GRANATA FAMILY A/C) MR RICHARD FREDERICK DRENNAN MR RONG SEN HUANG SHAREHOLDER I NFORMATIO N Ordinary shares Number of holders 3,281 2,815 1,331 2,670 433 10,530 6,776 % of total shares issued 0.44 2.50 3.35 25.26 68.45 100.00 4.32 Ordinary shares Number held 29,873,698 29,209,217 10,470,605 8,827,697 6,187,688 5,371,421 4,396,957 3,269,386 2,394,216 2,261,302 1,775,226 1,576,471 1,500,283 1,428,888 1,236,061 1,195,288 1,176,471 1,100,000 1,000,000 1,000,000 % of total shares issued 9.46 9.25 3.31 2.79 1.96 1.70 1.39 1.03 0.76 0.72 0.56 0.50 0.47 0.45 0.39 0.38 0.37 0.35 0.32 0.32 115,250,875 36.48 C o m p a n y O v e r v e w i F Y 2 0 2 1 i H g h l i g h t s i K e y A c h e v e m e n t s a n d M i l e s t o n e s i F n a n c a i l R e p o r t S h a r e h o d e r l I n f o r m a t i o n 81 SHA R EHOL DER I NFO RMATIO N Shareholder Information continued Unquoted equity securities Performance rights issued There were no person that holds 20% or more of unquoted performance rights. Substantial holders Substantial holders in the Company are set out below: CS THIRD NOMINEES PTY LIMITED (HSBC CUST NOM AU LTD 13 A/C) RAW WITH LIFE PTY LTD (BENHAIM TRADING A/C) Voting rights The voting rights attached to ordinary shares are set out below: Number on issue Number of holders 16,177,774 28 Ordinary shares Number held 29,873,698 29,209,217 % of total shares issued 9.46 9.25 Ordinary shares On a show of hands every member present at a meeting in person or by proxy shall have one vote and upon a poll each share shall have one vote. There are no other classes of equity securities. Corporate Directory Directors Helen Wiseman - Non-Executive Chair and Non-Executive Director Paul Benhaim - Non-Executive Director Oliver Horn - Executive Director and Global Chief Executive Officer Chief Financial Officer Ron Dufficy Company Secretary Teresa Cleary Kim Bradley-Ware Registered office Level 12, 680 George Street Sydney NSW 2000 Tel: Tel: (02) 4044 4585 (within Australia) +61 (0) 2 4044 4585 (outside Australia) Mailing address PO Box 20547 World Square NSW 2002 Share register Automic Pty Ltd Level 5, 126 Phillip Street Sydney NSW 2000 Tel: Tel: 1300 288 664 (within Australia) +61 (0) 2 9698 5414 (outside Australia) Auditor BDO Audit Pty Ltd Level 11, 1 Margaret Street Sydney NSW 2000 SHAREHOLDER I NFORMATIO N C o m p a n y O v e r v e w i F Y 2 0 2 1 i H g h l i g h t s i K e y A c h e v e m e n t s a n d M i l e s t o n e s Stock exchange listing Elixinol Wellness Limited shares are listed on the Australian Securities Exchange (ASX code: EXL) and trades on the American Over-The-Counter (‘OTC’) marketplace. Website www.elixinolwellness.com Twitter EXLWellness Corporate Governance Statement The Company’s directors and management are committed to conducting the Group’s business in an ethical manner and in accordance with the highest standards of corporate governance. The Company has adopted and substantially complies with the ASX Corporate Governance Principles and Recommendations (4th Edition) (‘Recommendations’) to the extent appropriate to the size and nature of the Group’s operations. The Company has prepared a Corporate Governance Statement which sets out the corporate governance practices that were in operation throughout the ﬁnancial year, identiﬁes any Recommendations that have not been followed, and provides reasons for not following such Recommendations. The Company’s Corporate Governance Statement and policies, which is approved at the same time as the Annual Report, can be found on its website: https://www.elixinolwellness.com/site/About-Us/corporate-governance i F n a n c a i l R e p o r t S h a r e h o d e r l I n f o r m a t i o n 83 www.elixinolwellness.com

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