Preliminary Results for the Year Ended 31 December 2022

Cannasouth Limited (NZX: CBD), (“Cannasouth”, the “Group” or the “Company”) today reported its preliminary results (subject to completion of audit) for the year ended 31 December 2022.

2022 was a year of “firsts” as the Group continued to achieve milestones to develop the Company into New Zealand’s leading, fully operational, medicinal cannabis business.

Establishing compliant manufacturing operations, and sales of pharmaceutical quality medicinal cannabis products is a capital intensive and multi-year process, which has required significant investment and overcoming many regulatory requirements.

The Company has successfully established a world-class team, commercial cultivation operations, manufacturing, and research and development capability to enable it to compete in the rapidly growing domestic and global medicinal cannabis markets.

Cannasouth completed its first commercial-sized cannabis crop through to harvest in our state-of-the-art controlled environment agriculture greenhouse. During the year, the Company has taken three crops through to harvest, with two growing in progress at year end.

The Company has had its first cannabis medicines verified by the Medicinal Cannabis Agency (MCA) in 2022. Despite the long approval process by MCA it was a major step towards revenue generation for the Company and has laid the foundations of a sustainable end-to-end business.

In New Zealand there are over 266,000 people using cannabis for medicinal purposes, of these only 6% obtain it through legal channels. This provides growth opportunity for the Company. As Cannasouth brings new products to market in New Zealand we expect to see more patients transition from the black market to legal prescriptions.

CEO, Mark Lucas says, “We know patients and shareholders are eager to see us bring products to market and we were able to deliver our first products at the end of 2022. The coming year will see the acceleration of these activities.

“For patients, they will see more treatment options at a lower cost. For shareholders, they will see meaningful revenue flows build as the emerging medicinal cannabis industry grows. Our short-term goal is to achieve GMP certification for premium cannabis flower production, which will allow us to register flower products in New Zealand and export to high value, high demand markets like Germany.

“We are extremely grateful for the continued support of our 26,000+ shareholders while we build this complex business from the ground up. Many of our shareholders have been with us since the listing in 2019 and are also patients who understand the potential of cannabis-based therapeutics.

“Some commentators believe the regulatory and quality requirements of the New Zealand scheme are too complex and onerous. But we've invested in the right people and facilities to meet these standards which puts Cannasouth in a strong position to supply New Zealand made products to patients and compete in the global market, all while protecting patient safety and ensuring product efficacy."


Highlights for 2022 included:

* First commercial scale cannabis crop commences in our new state-of-the-art (and unique to New Zealand), sealed controlled-environment greenhouse and processing facility in the Waikato
* First medicinal cannabis medicines verified by the medicinal cannabis agency
* Signed a three-year supplier agreement with leading Germany based WEECO Pharma GMBH
* Findings from our Neuropathic Pain Study released into the public domain
* Cultivation facility achieved GACP certification for cannabis flower production
* Successfully raised $3.2 million from a Shareholder Rights Issue
* Announcing a proposal to merge with Eqalis Group New Zealand Ltd (Eqalis) to form the largest New Zealand based, fully integrated, medicinal cannabis company
* Announcing the divestment of non-core Midwest Pharmaceutics NZ Ltd


Mr Lucas says: “There are no shortcuts in pharmaceutical development. Over the last year our operating costs have increased to reflect a year-round, full-scale production at our state-of-the-art cultivation facility.

“2023 is the year in which meaningful revenue from the sales of medicinal cannabis products and ingredients will begin. From this point Cannasouth will continue to refine and develop its product and IP portfolio to ensure product differentiation and significant revenue flows and market share is established.”


Summary of Financial Results:

Reflecting the cost of commencing commercial cultivation activities (required to produce high-quality flower) that occurred during the year, the Group reported a loss from continuing operations of $7.91 million (2021 $2.56 million) and operating revenue of $141,000 (2021 $206,000). The loss from discontinued operations was $295,000 (2021 $555,000).

Planned investments in ramping up the Group’s operations to establish the Group as a key participant in the emerging medicinal cannabis market in New Zealand contributed to the loss. Establishing compliant operations at our cultivation facility during 2022 required us to increase staffing levels and incur full operating costs during the commissioning period of the greenhouses. This is usual in any new major manufacturing operations in the pharmaceutical industry.

The total increase in operating loss was distorted when compared with the previous year due to the Group recording a one-off gain in the previous year of $1.46 million on its acquisitions held in Cannasouth Cultivation Ltd and Midwest Pharmaceutics NZ Ltd. This gain represented the difference between the carrying value of the investments and the fair value of the assets acquired.

The loss from continuing operations was $7,912,867. For the prior year, adding back the one-off gain of $1,459,551 gives a notional loss from continuing operations of $4,021,905.

The increased loss is primarily a result of a cost of sales incurred in 2022 of $3.26 million (2021 $0) from the commencement of commercial cultivation activities.

Net Assets of the of the Group was $11.88 million (2021 $17.06 million). Cash on hand at 31 December 2022 for the Group was $1.91 million (2021 $5.52 million).


Proposed Merger with Eqalis and Divestment of Midwest

In December 2022 Cannasouth announced a proposal for a 50:50 merger with Bay of Plenty based medicinal cannabis company, Eqalis Group New Zealand Limited (Eqalis).

The Company also announced a sale of assets of Cannasouth’s manufacturing subsidiary, Midwest Pharmaceutics NZ Ltd (Midwest), to Midwest’s major customer Harker Herbal Products Ltd (Harker Herbals) for $2.2 million plus stock at valuation. The sale was settled on 28 February 2023.

The divestment of the Midwest liquid filling assets to Harker Herbals will enable the Group to focus on its core medicinal cannabis business and reduce further capital investment require by Midwest to have it GMP ready for cannabinoid medicines.

The Board believes the proposed merger with Eqalis will create a truly vertically integrated enterprise with revenues from biomass and premium flower production, manufacture of GMP cannabis-based ingredients and cannabis medicines. It will also bring synergistic benefits including expertise, technology, manufacturing capability, product distribution, and licensing, and will increase shareholder value.

Medicinal cannabis products from the new proposed merged company will range from simple oil-based tinctures to next generation pharmaceuticals, while building revenue streams from services such as the independently operated medicinal cannabis clinic RestoreMe and royalties from licensing intellectual property.

The proposed merger will ensure patients have low-cost access to medicinal cannabis and ensure Cannasouth can respond to demand changes in local and global markets.

For further commentary, please read the full market announcement attached.

-ENDS-

For further information visit www.cannasouth.co.nz or contact:

Mark Lucas
CEO / Executive Director
Email: [email protected]
Mobile: 021 484 649

Tony Ho
Chairman
Email: [email protected]
Mobile: +61 (0)417 345 839

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Announcement PDF