The information contained within this announcement is deemed by the Company to constitute inside information stipulated under the Market Abuse Regulation (EU) No. 596/2014, as retained as part of the law of England and Wales. Upon the publication of this announcement via the Regulatory Information Service, this inside information is now considered to be in the public domain.

Press release

23 December 2022

Cellular Goods PLC

('Cellular Goods' or 'the Company')

Annual results

Cellular Goods (LSE: CBX), a UK-based wellness company providing premium consumer products formulated with lab-produced cannabinoids, announces its audited results for the year ended 31 August 2022.

Summary:

Post-period highlights:

Current trading and outlook

Darcy Taylor, Chairman of Cellular Goods, commented: "Despite achieving major operational milestones during the year, significant investment in new products and a broad-scale marketing campaign that meaningfully boosted our brand awareness, it did not translate to our revenue growth expectations due to a challenging market and regulatory environment that is affecting the growth of both the industry and the Company.

"In response, we have halved our annual cost base and continue to look for further cost optimisation as we invest in the business to position it for a significant turnaround when trading conditions normalise. We are also in negotiations for an acquisition to provide greater scale in a highly fragmented market, accelerate growth and generate long-term value for shareholders."

The Company's annual report and accounts will be uploaded to its website www.cellular-goods.com later today.

For further information please contact:

About Cellular Goods PLC:

Cellular Goods is a UK-based wellness company that provides premium products based on lab-made cannabinoids. It was established in August 2018 to develop efficacy-led and research-backed cannabinoid-powered wellness products. The initial focus is on three product verticals: Feel Better, Look Better and Function Better. These three verticals encompass Cellular Goods' premium CBG skincare and CBD wellness with the first products launched in December 2021. The Company's shares are listed on the main market of the London Stock Exchange. www.cellular-goods.com.

CHAIRMAN'S STATEMENT

Introduction

Despite an encouraging start to the year ended 31 August 2022, several regulatory and operational headwinds contributed to a difficult full year for the Company. Our inaugural range of innovative 'Look Better' skincare and 'Feel Better' ingestible products went on sale in the UK on 1 December 2021, less than 12 months after Cellular Goods joined the London Stock Exchange as a start-up. It was a major milestone in our mission to establish the Company as a premium British brand in the cannabinoid wellness space.

Following the product launches, steady progress was made throughout the year to expand our skincare range, invest in our sales infrastructure and our customer relationship management capability to build a strong foundation for long-term growth. We also sharpened our focus with a major investment in a broad-scale marketing and brand building campaign. This initiative was supported by the publication of three white papers aimed at highlighting the benefits of cannabinoids and differentiating our products in a highly fragmented market that is characterised by a myriad of products and brands of variable quality and provenance.

While such investment is essential to fostering brand recognition and loyalty for long-term growth, it takes time for these types of marketing activities to translate into significant revenues and product sales within the premium beauty segment due to entrenched consumer habits.

In addition, the Company was adversely affected by a ruling from the Food Standards Agency ("FSA") in March this year concerning the sale of our CBD ingestibles, forcing us to withdraw from that market segment for the foreseeable future.

We were also hampered by CBD category marketing bans by global online platforms including Facebook/Meta and Google from promoting our skincare products directly to consumers, even though the products are formulated to be fully compliant for sale under English law. While the Company made changes to its media mix to work around these bans, and worked independently and with the industry players to educate the platforms on our category to lift these bans, sales growth was below our expectations. We are optimistic that Facebook/Meta and Google will eventually align with English law, though that timing is unknown. This has negatively impacted our direct-to-consumer channel customer acquisition, increased acquisition costs and reduced the ability to scale this traditionally high return-on-investment channel.

We believe that the operating environment for CBD and CBG-infused beauty products in the UK is also being impacted by a glut of niche brands and products from many companies with subscale operations and resources. This has prompted fierce competition for both online and offline retail space as well as for consumer 'mindspace', leading to cannabinoid confusion, fragmentation and fatigue, thereby slowing adoption of new products.

As a result of these factors, revenues grew at a slower pace than expected. Full-year revenue increased to £0.03m (2021: £nil) while the pre-tax loss rose to £5.99m, up from £3.33m in the previous year.

In the light of the prevailing headwinds, the Company has taken remedial measures to significantly reduce its cash burn and improve performance. These actions include a 56% reduction in the overall cost base, achieved through lower management and staff costs, consultancy fees and administrative expenses. Following a broad-scale marketing and brand building campaign during the second half, which has established Cellular Goods' name in the sector, the Company has now streamlined its media spend down from previous levels. Media however remains vital to our long-term prospects as it increases consumer awareness of our brand which rose from negligible levels to parity with, or above, key competitors who have been in the market considerably longer than the Company.

Strategy and Operational Review

Proposed acquisition and rationale of the deal

As part of our long-term strategy, we entered discussions to acquire Cannaray Brands in a transaction that would constitute a reverse takeover of Cellular Goods. The initial consideration is to be determined, with an announcement to be made in due course. These discussions, which are subject to an application being made to the Financial Conduct Authority, are progressing and we will provide an update in due course.

The Cannaray subsidiary is a leading consumer CBD brand in the UK and offers a range of high-quality ingestibles CBD products (such as oils, gummies, capsules) which are sold in the UK and sold through 1,500 retailer outlets including leading high street supermarkets and direct-to-consumer branded websites. Their ingestible products also fill an important gap in our own portfolio and will strengthen our product offering in ingestibles, which is one of the largest and fastest growing segments of the CBD consumer goods sector. Cannaray has also developed a leading marketing approach via a partnership with TV and Radio presenter Claudia Winkleman, and national TV advertising on Channel 4. Following discussions with Cannaray Limited, the Company is no longer going to acquire Love CBD Health Ltd as part of the transaction.

The proposed acquisition, if completed, is intended to create long-term value for shareholders by bringing together complementary businesses to provide growth opportunities, scale benefits and an enhanced market presence. The deal will also help to achieve a key medium-term intention of the Company to expand its product range to include a complementary range of grown CBD containing products. Given the headwinds in the cannabinoid sector, the Directors consider it prudent to accelerate the Company's plans with the proposed acquisition, which will provide existing recognisable brands and a diverse range of grown CBD products to complement the Company's own lab-produced cannabinoid consumer products.

CBD market opportunity

Notwithstanding the near-term challenges faced by the Company, the UK is the world's second-largest CBD market, behind the United States. Demand for CBD grew during the COVID-19 pandemic, with the market now estimated as worth £690 million per annum, up from £400 million in 2020 and more than twice the estimate of £300 million in 2019. The market is estimated to surpass £1bn annually by 2025 with an anticipated CAGR of 40.4% throughout 2020-2025. The CBD market is now worth more than both the Vitamin C and D markets in the wellness sector, with products generally available on the shelves in retail stores and online. (Source: New Frontier Data)

I would also like to thank our many shareholders for their support and patience while we navigate the current challenges and look to improvement in our performance in the year ahead.

Operational review

The Company's initial focus was on three product verticals: a premium CBG skincare range and CBD-based ingestibles range, and a topical athletic recovery products range, which will launch in 2023.

The inaugural range of skincare products and ingestibles was launched on 1 December 2021 via the Company's online ecommerce platform. Customer order intake for the face oil and after shave moisturiser commenced immediately followed by the face serum in March 2022. The Look Better range was launched on Amazon Marketplace in late February 2022, thereby enabling our products to be sold through the UK's largest retailer for the first time.

The launch generated much media and consumer interest including in leading publications such as Vogue and Men's Health. However, it did not convert into customer orders at the rate envisaged by the Company. A major factor for the disappointing revenue performance was a decision by leading online platforms including Facebook and Google to prohibit advertising of cannabinoid infused products on their platforms. As part of a wider industry effort, we continue to lobby these US-based platforms for the ban to be lifted, but progress has been slow even as, ironically, many US states relax their laws governing the sale of cannabis and CBD infused products under their jurisdictions.

In April 2022 we also took the decision to withdraw our ingestibles range, supplied by Chanelle McCoy Health, from sale in the UK following the imposition of new rules governing the sale of novel foods by the FSA.

Although our products are high quality, safe and identical to other products that are permitted for sale, these are not included in the FSA-approved list for sale. Although we and our supplier have requested the FSA to reconsider the ban, the matter remains in deadlock. We have therefore written down the value of that stock to nil.

Even so, ingestibles accounted for approximately 43% of unit sales and 32% by value for the period up to the time they were pulled from the market, demonstrating their market potential.

In addition to the proposed acquisition of Cannaray Brands Limited, Cellular Goods is also considering overseas markets for its ingestibles as part of its plans to diversify into new territories next year. However, no firm decision has been made at present and, as stated above, the stock value has been written off.

Marketing refocus on sales growth

During the second half of the year, a broad-scale marketing and advertising campaign was undertaken to raise consumer awareness of our brand to engender long-term demand for our products. It is an essential part of establishing a new brand and widely used strategy to gain market share in the consumer brands industry. Although the campaign generated disappointingly low revenue growth during the year, the greater brand awareness created in 2022 has paved the way for the Company to renew focus on delivering near-term sales growth through a more targeted online marketing strategy. This involves marketing initiatives to improve customer experience, loyalty and retention programmes, repeat business, improved email communications as well as more online content marketing to drive engagement and follower growth. A new customer relation management system, brought in during the year to power this revenue drive, is now fully operational.

Marketing channels for promotional spend have been selected carefully to drive strong returns on investment, which include public relations, paid social, affiliate marketing, search engine optimisation, retail partnerships, email and onsite marketing.

UK patent application

As announced previously, a UK priority patent application was filed on 26 April 2022 concerning the use of CBG for skin brightening purposes. Skin brightening is a novel application for CBG and point of difference compared to CBD. It is also a top-line consumer concern across both cosmetic and clinical segments and our filing includes claims for both segments. We are making good progress to respond to follow-up searches/enquiries from the Intellectual Property Office before final submission by Q2 2023.

Post-balance sheet milestones

Our growth plans have advanced further with the achievement of several milestones since the year end. On 21 September 2022, the Look Better range was expanded, as planned, with the introduction of three Rejuvenating products, fronted by international supermodel Helena Christensen, who has been appointed as the 'Face of Cellular Goods'.

The launch has generated a positive response in the UK as well as the US where Christensen is based, resulting a notable uptick in sales orders. Our ecommerce website has been opened to US consumers to capitalise on Christensen's popularity there, and US consumers can now place orders for selected items from the skincare range for shipment to the US.

The Company will assess online traffic and sales to assess potential market demand for selected territories' entry next year to expand its addressable market and revenue base if viable. However, these moves are likely to require further investment in product packaging, marketing and sales support and fulfilment infrastructure. No decision will be taken until the Company is confident of generating a suitable return on its capital.

Our retail strategy received a major boost on 24 October 2022 with the launch of eight skincare products on Debenhams.com, a UK retailer. This is our first major retail distribution deal after Amazon and provides a significant validation of our premium product strategy. It also has the potential to open other retail opportunities in the UK. We are working closely with Debenhams.com to develop new marketing activities to drive sales.

Current trading and outlook

Trading in the first quarter of the 2022/2023 financial year has improved significantly as our brand investment and marketing strategy, together with an expanded skincare range, generate increasing sale momentum from a low base.

As a result, the Company has seen three straight months of sequential growth in revenues during the first quarter. Online sales through our website also continue to grow steadily and accounted for close to 50% of total sales by volume and value during the quarter, driven by strong uptake of our Rejuvenating skincare range. Sales through Amazon are also expected to receive a fillip from our seasonal range during the festive season. We also have seen an encouraging start to US orders, which commenced in early October, followed by our product launch with Debenhams on 24 October 2022.

With the current year off to a positive start, and a streamlined operational structure and a revenue-focused marketing strategy in place, the Board looks to the future with cautious optimism.

Darcy Taylor

Chairman