CANADA HOUSE WELLNESS GROUP INC. (Formerly Abba Medix Group Inc.) Management s Discussion and Analysis

Transcription

1 Management s Discussion and Analysis

2 MANAGEMENT S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS This Management s Discussion and Analysis ( MD&A ) of Canada House Wellness Group Inc. (the Company ), formerly Abba Medix Group Inc. was prepared in accordance with National Instrument Continuous Disclosure Obligations and should be read in conjunction with the audited consolidated financial statements and related notes thereto of the Company for the years ended July 31, 2016 and 2015 (the Financial Statements ). The Company files its consolidated financial statements, press releases and other required disclosure documents on the SEDAR database at The Company prepared the Financial Statements in accordance with International Financial Reporting Standards ( IFRS ). Except where otherwise indicated, all financial information reflected herein is expressed in Canadian Dollars. This MD&A may contain information and declarations on the future performance of the Company that are, by nature, forward looking. These declarations reflect management s expectations regarding future events based on assumptions and uncertainties that are subject to the risk factors identified in the Risks and Uncertainties section of this MD&A. Readers are hereby cautioned. The Financial Statements and MD&A of the Company in respect of the year ended July 31, 2016 were reviewed and approved by the Board of Directors of the Company on November 25, The effective date of the MD&A is November 25, OVERVIEW The Company was incorporated under the Business Corporations Act (British Colombia) and continued under the Canada Business Corporations Act. The Company is listed on the Canadian Stock Exchange (the CSE ) under the symbol CHV and was previously traded under the symbol ABA. The address of the registered office is 1773 Bayly Street, Pickering, Ontario. Business Overview Abba Medix Corp. ( Abba Corp. and together with the Company, the Group ), a wholly-owned subsidiary of the Company, is an Ontario corporation established in 2013 to capitalize on the changing rules governing medical marijuana production in Canada. On April 1, 2014, Health Canada repealed the Marihuana Medical Access Regulations (the MMAR ) and enacted the Marihuana for Medical Purposes Regulations (the MMPR ) which established the new regulatory framework governing the production and distribution of medical cannabis for patients across Canada. Abba Corp. filed an application with Health Canada in November of 2013 to obtain a license to cultivate and sell medical cannabis (the License ) and become a licensed producer (a Licensed Producer ) under the MMPR (now the Access to Cannabis for Medical Purposes Regulations ACMPR ). Abba Corp. has secured a 45,000 square foot facility in Pickering, Ontario (the Facility ) to support its production plans and has invested over $1,700,000 in the first phase of the plan that includes 14,500 square feet of production space. Upon receipt of the License, Abba Corp. will continue to build out the Facility as production demand increases and financing allows. While there can be no guarantee as to the successful outcome of Abba Corp. s application for the License, nor as to the timeframe within which such application will be processed by Health Canada, 2

3 it is the Group s goal to create one of the most technologically advanced and secure facilities in Canada in compliance with applicable rules and regulations. Business Developments during the Year Ended July 31, 2016 Since becoming a reporting issuer in March 2015, the Group has been very active in pursuing its plan to be one of the market leaders in the rapidly growing medical cannabis industry. It is the Group s vision to become a fully integrated medical cannabis producer, in all its allowable forms, selling direct to patients under the MMPR (now ACMPR). Abba Corp. is still awaiting approval of its 14,500 square foot state-of-the-art production Facility in Pickering, Ontario. The Facility will be ready to commence operations upon the receipt of the License, and the Company is working closely with Health Canada on a regular basis to ensure that the Facility and the associated standard operating procedures are in compliance with the MMPR (now ACMPR) and ready for a pre-license inspection by Health Canada. Abba Corp. s application is in the review stage of the licensing process, as is more particular described in Risks and Uncertainties Licensing Requirements under the MMPR/ACMPR. The Canadian medical cannabis marketplace continues to experience changes at a rapid pace. On June 11, 2015 the Supreme Court of Canada, in a case titled R v. Smith ( Smith ), held that the restriction on the use of non-dried forms of cannabis for medical cannabis users violates the right to liberty and security of individuals in a manner that is arbitrary and not in keeping with the principles of fundamental justice. As a result, the Supreme Court of Canada declared Sections 4(1) and 5(2) of the Controlled Drugs and Substances Act ("CDSA"), which prohibit the possession and trafficking of nondried forms of cannabis, are of no force and effect to the extent that they prohibit a person with medical authorization from possessing cannabis other than dried cannabis. This ruling means medical cannabis patients authorized to possess and use medical cannabis are not limited to using dried forms of cannabis and may consume cannabis other than dried cannabis for medical purposes. On July 8, 2015 Health Canada issued certain exemptions under the CDSA, permitting Licensed Producers to produce and sell cannabis oil and fresh cannabis buds and leaves, in addition to dried cannabis (this did not permit Licensed Producers to sell plant material that can be used to propagate cannabis). As a response to the decision rendered on February 24, 2016 in Allard v. Canada ( Allard ), the Federal Government introduced new regulations, the ACMPR. On August 24, 2016 the ACMPR replaced the MMPR as the regulations governing Canada s medical cannabis program. The ACMPR enables an individual to produce their own cannabis for personal use, or designate someone to produce it for them, however, the ACMPR also substantively incorporates the regulatory framework established under the MMPR for Licensed Producers, including allowing patients to purchase cannabis directly from Licensed Producers. In addition, the ACMPR enable the production and sale by Licensed Producers of starting materials, including cannabis seeds and plants. The decision of the Federal Court in Allard and the decision of the Supreme Court of Canada in Smith, both had significant impact on the operating assumptions of the industry. Management continues to monitor the industry very closely from every direction and continues to seek opportunities that can be expected to bring value to the Company and its shareholders. During the year ended July 31, 2015, the Company completed the construction of the first phase of the Facility comprising 19,000 square feet of commercial space, encompassing offices, flowering rooms, vegetative rooms, a nursery and required vault and storage space. As a result, the Facility has the capacity to produce an expected production of 104kg of cannabis per month, subject to the 3

4 terms and conditions of the License. The completion of the second and third phases of the Company s Facility has been postponed until the Company raises sufficient financing. Acquisition of NB Inc. and The Longevity Project Corp. During the year ended July 31, 2016, the Company entered into a Share Exchange Agreement (the Acquisition Agreement ) to acquire all of the issued and outstanding shares of NB Inc., doing business as Marijuana for Trauma, ( MFT ) and The Longevity Project Corp. ( TLP ) (the Acquisition ), in exchange for the following consideration: i. A cash payment of $250,000; ii. iii. The issue of such number of common shares of the Company as would represent approximately 66% of all of the Company s issued and outstanding common shares immediately post-acquisition (being 64,272,824 common shares); and Cash payments totaling $4,000,000 payable over a period of up to three years from the closing date with the timing of such payments dependent upon MFT and TLP, on a continued basis achieving certain EBITDA performance targets at certain milestones. Subsequent to July 31, 2016, the Acquisition was completed through the issuance of 64,272,824 common shares of the Company and a cash payment of $250,000 to the shareholders of the MFT and TLP. As at July 31, 2016, $50,000 of the payment due on close was included in prepaid expenses. During the year ended July 31, 2016, the Company incurred transaction costs of $116,359 with respect to this transaction. MFT is a veteran owned and operated company whose mission is to improve the quality of life for anyone suffering from post-traumatic stress disorder, chronic pain and/or other medical conditions. MFT does not currently grow or distribute cannabis. MFT provides services to assist their patients in selecting a Licensed Producer, identify appropriate strains, and consult and support patients regarding the use of medical cannabis. Since its inception, MFT has directly supported hundreds of veterans across the country with first class service and care. MFT continues to provide a community environment for those engaged in the process of healing with a focus on support during the various steps of the program. MFT is currently in 8 locations and now boasts 2,200 clients as of January 31, MFT s goal is to service 15,000 clients in 25 locations across the country by TLP, through its client services platforms, including the Plants Not Pills program, has provided resources to Canadians considering medical cannabis as an alternative to prescription medication. They have assembled a team of knowledgeable wellness consultants who guide and support clients in understanding safe and effective treatments for their conditions. The foundation of the Company s business after completion of the Acquisition will be to aggressively expand the footprint of wellness centres across Canada to provide veteran and first responder wellness services. Beyond the basic wellness services currently offered, services and products ancillary and adjuvant to cannabinoid therapy through integrated clinical offerings are currently being investigated. These extended clinical services are fully accretive to the current business and will further the mission and vision of the Company to meaningfully improve the quality of lives for veterans and first responders. 4

5 Following the completion of the Acquisition, in addition to pursuing the License under the ACMPR, the Company will continue to carry on the respective business of MFT and TLP. A rollout of total health clinics across Canada is anticipated upon completion of the Acquisition. Adhering to best clinical practices, patients of these clinics are properly medically managed and supported with services and products ancillary and adjuvant to cannabinoid therapy through integrated clinical offerings. Beyond the basic wellness services currently offered, services and products ancillary and adjuvant to cannabinoid therapy through integrated clinical offerings are currently being investigated. These extended clinical services are fully accretive to the current business and will further the mission and vision of the company to meaningfully improve the quality of lives for veterans and first responders. When, and if, Abba Corp. successfully obtains a License, Abba Corp. will produce and sell medical cannabis in Canada pursuant to the ACMPR. The Company will continue to provide patients with wellness services and subsequent total health solutions, primarily to the veteran patient and first responder population in support of cannabinoid therapy through its nationwide network of clinical wellness centers. The Acquisition resulted in the Company having 12 clinics across the country, with the intention to double the number of clinics over the next six months. The Company will offer a full range of support and professional services, including medical cannabis, mental health services, complementary and alternative medical services. Following the close of the Acquisition, the Company completed a share consolidation whereby each pre-consolidation common share of the Company was exchanged for one post-consolidation common share of the Company, on the basis of one (1) post-consolidation common share for every one and one half pre-consolidation common shares (the "Consolidation"). All units of common shares, warrants and options, along with unit prices, have been retroactively restated for all periods on a post-consolidation basis in this MD&A. In connection with the Acquisition, the Company completed a private placement offering (the Offering ) for gross proceeds of $6,025,000. The Offering consisted of 19,001,000 equity units (the Equity Units ) and 1,275 convertible debenture units (the Convertible Debenture Units ). Each Equity Unit consists of one common share and warrant which will entitle the holder to purchase one common share of the Company at a price of $0.40 per share for a period of 24 months following the issuance of the warrant. Each Convertible Debenture Unit consists of one 8.5% secured convertible debenture ( Convertible Debentures ) with a principal amount of $1,000 with a maturity date ( Maturity Date ) of 48 months from the date of issuance, and 1,000 detachable convertible debenture warrants (each, a CD Warrant ). Each Convertible Debenture shall be convertible at the holder s option into fully-paid common shares of the Company (each a CD Share ) at any time prior to the Maturity Date at a conversion price of $0.40 per CD Share being a ratio of 2,500 CD Shares per $1,000 principal amount of Convertible Debentures. Each CD Warrant shall be exercisable into one common share of the Company (each, a CD Warrant Share ) at a price of: (a) $0.40 per CD Warrant Share between the date the escrow release conditions are met (the Escrow Release Date ) and the date that is 24 months from the Escrow Release Date; (b) $0.75 per CD Warrant Share between the date that is 24 months from the Escrow Release Date and the date that is 36 months from the Escrow Release Date; and (c) $1.00 per CD Warrant between the date that is 36 months from the Escrow Release date and the Maturity Date. 5

6 In connection with the Offering, the Company paid commissions and expenses of $410,141 and issued 2,410,100 compensation options to the agent (the Compensation Options ). Each Compensation Option is exercisable at any time up to 36 months following the Escrow Release Date, to acquire one Equity Unit from treasury at the Equity Offering Price (as defined in the Compensation Options). In connection with the Acquisition, the Corporation has changed its name to "Canada House Wellness Group Inc.", and the Consolidation. A special meeting of the Shareholders of the Corporation was called and took place on October 18, 2016 (the "Meeting") where Shareholders approved, among other things, a change of the Corporation's name to "Canada House Wellness Group Inc." (the "Name Change") and the Consolidation. A management information circular in respect of the Meeting was delivered to Shareholders and filed on SEDAR. The Acquisition constituted a "fundamental change" under CSE Policy 8 and therefore, the Common Shares of the Corporation have been halted from trading and remained halted until November 9, 2016 at which point the Common Shares began trading under the name Canada House Wellness Group Inc. and the ticker symbol CHV. Going Concern The Financial Statements have been prepared on the going concern basis, which presumes that the Company will be able to realize its assets and discharge its liabilities in the normal course of business for the foreseeable future. As of November 25, 2016, Abba Corp. has yet to receive its License from Health Canada. The Company has incurred substantial losses to date and has an accumulated deficit of $12,077,302 as at July 31, The Group s ability to continue as a going concern is dependent upon, but not limited to, obtaining the License, becoming a Licensed Producer, its ability to raise financing necessary to discharge its liabilities as they become due and its ability to generate positive cash flows from operations. To date, the Group has not generated revenue from operations. During the year ended July 31, 2016, the Company incurred a net loss of $2,947,106. As at July 31, 2016, the Company had current assets of $240,011 and current liabilities of $3,405,952 resulting in a working capital deficiency of $3,165,941. The Company intends to negotiate settlements with various vendors for amounts included in accounts payable and accrued liabilities as at July 31, 2016, as the Company disagrees with some amounts charged by the vendors. If the Company is successful in negotiating payments for less than the amounts included in accounts payable and accrued liabilities, the difference will be recognized in the period in which settlement occurs. These conditions have resulted in material uncertainties that may cast significant doubt about the Group s ability to continue as a going concern in the foreseeable future. The Financial Statements do not give effect to adjustments that may be necessary, should the Group be unable to continue as a going concern. If the going concern assumption is not used then the adjustments required to report the Group s assets and liabilities at liquidation values could be material to the Financial Statements. 6

7 Selected Information Table The following table summarizes certain financial data related to the Company and should be read in conjunction with the Company s audited financial statements for the years ended July 31, 2016 and As at and for the As at and for the Year Year Ended July 31, Ended July 31, $ $ Loss for the period (2,947,106) (8,875,420) Current assets 240, ,291 Non-current assets 1,734,556 1,749,298 Current liabilities 3,405,952 2,524,908 Non-current liabilities 187,786 15,929 Working capital (deficiency) (3,165,941) (2,214,617) Deferred income tax liability 37, Share capital 8,296,114 7,996,114 Shareholders equity (deficit) (1,619,171) (481,248) Loss per share basic and diluted (0.07) (0.24) Quarterly Results Fiscal Quarter Year ended July 31, 2016 Net earnings (loss) per Revenues Net income (loss) share - basic and diluted $ $ $ Quarter ended July 31, (1,764,929) (0.05) Quarter ended April 30, (406,053) (0.01) Quarter ended January 31, (302,219) - Quarter ended October 31, (473,905) (0.01) Year ended July 31, 2015 Quarter ended July 31, (1,607,955) (0.03) Quarter ended April 30, (6,441,133) (0.16) Quarter ended January 31, (331,209) (0.02) Quarter ended October 31, (495,123) (0.03) 7

8 RESULTS OF OPERATIONS Revenues The Company did not have any revenue for the years ended July 31, 2016 and 2015 as it is in the process of obtaining the License and completing construction of the Facility. Expenses Total expenses for the year ended July 31, 2016 were $2,947,106. Included in these figures is noncash share-based compensation expense related to the fair value of 450,000 stock options issued to directors during the year ended July 31, 2015 which amounted to $60,935 ( $29,690) for the 2016 fiscal year. Total expenses for the year ended July 31, 2015 were $8,881,752, as Abba Corp. incurred significant expenses in connection with completing the reverse take-over transaction (the 2015 RTO ). The Company incurred consulting fees expenses of $801,750 during the year ended July 31, 2016, which include fees charged by the Company s current and former Chief Executive Officers and current and former Chief Financial Officers, as well as other fees paid to external consultants for services in connection with business development, product development and investor relations. During the year ended July 31, 2015, consulting fees expenses amounted to $1,043,271. These amounts include fees paid for services related to the preparation of the License application, fees paid to a strategic advisor as well fees paid to the Company s former CEO and CFO. Salaries and benefits expense for the year ended July 31, 2016 were $172,037. The Company started the 2016 fiscal year with seven employees but had reduced the number of employees to two by July 31, 2016 in an effort to reduce operating costs. The Company incurred salaries and benefits expenses of $339,529 year ended July 31, The Company commenced the year ended July 31, 2015 with two employees and had added five additional employees to its staff by July 31, The Company incurred advertising and promotional expenses during the year ended July 31, 2016 of $45,527. These costs primarily relate to fees paid to an advisor with respect to strategic brand development. Advertising and promotional expenses of $252,725 were incurred during the comparative year ended July 31, 2015, and were related to the development and purchase of various promotional materials. Professional fees of $325,586 were incurred during the year ended July 31, 2016, and include general legal, accounting and securities advisory services. Professional fees of $360,570 were incurred during the year ended July 31, 2015 that related to general legal and accounting services. The decreased level of expense year-over-year is the result of a significant reduction in the amount of legal fees charged to the Company during the 2016 fiscal year. In order to complete the construction of the first phase of the Facility, as well as to fund working capital requirements, the Company issued promissory notes with an aggregate face value of $450,000 and convertible promissory notes with an aggregate face value of $575,000 during the years ended July 31, 2016 and 2015, upon which $85,282 of interest expense was incurred during the year ended July 31, The Company incurred interest accretion expense of $5,348 related to the deemed discount on the convertible promissory notes (see note 13 of the Financial Statements) during the year ended July 31, Interest expense and interest accretion expense for the year ended July 31, 2015 amounted to $19,256 and $23,893 respectively. The Company also incurred interest expense of $7,978 and $2,936 on short-term advances from a related party during the years ended July 31, 2016 and 2015 respectively. 8

9 Occupancy expenses of $231,782 related to rent and utilities were incurred during the year ended July 31, These amounts were consistent with occupancy expenses of $232,961 incurred during the year ended July 31, During the year ended July 31, 2016, the Company wrote off an amount of $103,627 owed by a former subsidiary as bad debt expense. Prior to the year ended July 31, 2016, the former subsidiary had filed returns claiming refunds of GST and QST from which they were to repay the amounts owed to the Company. During the year ended July 31, 2016, the Company was notified by the former subsidiary that its refund claims for GST and QST were reduced to such an amount that it would be unable to pay the amounts owed to the Company. During the year ended July 31, 2015, Abba Corp. incurred transaction costs of $5,864,807 related to the 2015 RTO completed during the fiscal year ended July 31, During the year ended July 31, 2016, the Company incurred transaction costs of $116,359 related to the Acquisition Agreement. The Company also incurred additional transaction costs of $725,437 as a result of extending the expiry period of the warrants issued to consultants upon completion of the reversetakeover completed during the fiscal year ended July 31, This increase in the fair value of the warrants resulting from the extension of the expiry period has been recorded as transaction costs during the year ended July 31, The Company commenced amortization of its computer equipment, security equipment and office furniture and equipment during the year ended July 31, As such, the Company incurred amortization expense of $81,382. The remaining expenses incurred during the year ended July 31, 2016 relate to various operating expenses that include, but are not limited to, insurance, listing and filing fees, travel and general office expenses, as well as the fair value of stock options granted to directors that continued to vest during the periods ended July 31, CHANGE IN FINANCIAL POSITION The following table summarizes certain financial data related to the Company and should be read in conjunction with the Company s consolidated financial statements for the year ended July 31, For the Year Ended July 31, 2016 For the Year Ended July 31, 2015 $ $ Cash flow used in operating activities (460,159) (2,254,848) Cash flow used in investing activities (11,837) (1,266,554) Cash flow generated by financing activities 535,906 3,313,754 Net increase (decrease) in cash 63,910 (207,648) Operating Activities Cash flows used in operating activities were $460,159 for the year ended July 31, 2016, compared to cash flows used of $2,254,848 for the year ended July 31, The decrease in the amount of cash used in operating activities is primarily attributable to a reduction in the Company s activity 9

10 during fiscal While fiscal 2015 saw significant activity with respect to completing the 2015 RTO as well as the continuation of the Company s License application, the Company scaled back operations in fiscal 2016 while it awaits approval of its License application. Investing Activities Cash flows used in investing activities were $11,837 for the year ended July 31, 2016, compared to cash flows used of $1,266,554 for the year ended July 31, The decrease in the amount of cash used in investing activities is primarily attributable to the construction of the Company s Facility which had been the primary focus of Abba Corp s efforts throughout the year ended July 31, 2015 while its application for the License was being processed by Health Canada. The Company has completed the first phase of the Facility and has delayed the construction of any subsequent phase until it is able to raise sufficient capital. As such, there were no significant expenditures on plant and equipment during the year ended July 31, Financing Activities Cash flows provided by financing activities were $535,906 for year ended July 31, During the year ended July 31, 2016, the Company issued 2,000,000 common shares of the Company for proceeds of $300,000 and issued convertible promissory notes for proceeds of $275,000. Cash flows provided by financing activities during the year ended July 31, 2015 of $3,313,754 were related to the issuance of share capital for proceeds of $2,420,900, promissory notes of $450,000, convertible promissory notes of $300,000 as well as short-term borrowings form a related party of $163,130. Consolidated Statements of Financial Position The total current assets of the Company amounted to $240,011 as at July 31, 2016, compared to $310,291 as at July 31, The most significant changes between the two dates relates to the write-off of amounts of GST and QST receivable from a former subsidiary of the Company, as well as the refund of HST paid in prior periods, and a reduction to prepaid expenses as services were received during the year ended July 31, The Company s current liabilities as at July 31, 2016 amounted to $3,405,952 compared to $2,524,908 as at July 31, The most significant change in the current liabilities between the two periods is with respect to an increase in accounts payable and accrued liabilities related to operating expenses incurred during the year ended July 31, The Company intends to negotiate settlements with various vendors for amounts included in accounts payable and accrued liabilities as at July 31, 2016, as the Company disagrees with some amounts charged by the vendors. If the Company is successful in negotiating payments for less than the amounts included in accounts payable and accrued liabilities, the difference will be recognized in the period in which settlement occurs. During the year ended July 31, 2016, the Company received subscriptions of $300,000 for 3,000,000 common shares of the Company. Issued and Outstanding Shareholders Equity Share Capital The Company s shares are traded on the CSE under the symbol CHV (formerly ABA ). 10

11 During the year ended July 31, 2016, the Company issued 2,000,000 common shares of the Company related to gross proceeds of $300,000 pursuant to a non-brokered private placement. Subsequent to July 31, 2016, the Company: i. Issued 1,600,001 common shares pursuant to three services agreements with consultants as described later in the Subsequent Events section of this MD&A. ii. iii. iv. Issued 64,272,824 common shares pursuant to the Acquisition described previously in this MD&A. Cancelled 12,000,000 common shares that were previously issued and outstanding. Completed the Consolidation pursuant to which, one post-consolidation common share was issued for each one and one-half common shares held immediately prior to the Consolidation. v. Issued 19,001,000 common shares of the Company pursuant to the Offering described previously in this MD&A. As of November 25, 2016, the Company has 116,384,076 issued and outstanding voting participating common shares. Warrants As of November 25, 2016, the Company had the following warrants outstanding: i. 3,674,482 warrants are exercisable at $0.375 per share. During the year ended July 31, 2016, the expiry of the warrants was extended to March 13, All other terms and conditions of the warrant remain unchanged. ii. 19,001,000 warrants exercisable at $0.40 per share exercisable until November 7, iii. 1,275,000 CD Warrants exercisable at a price of: a. $0.40 per CD Warrant Share between the date the escrow release conditions are met (the Escrow Release Date ) and the date that is 24 months from the Escrow Release Date; b. $0.75 per CD Warrant Share between the date that is 24 months from the Escrow Release Date and the date that is 36 months from the Escrow Release Date; and c. $1.00 per CD Warrant between the date that is 36 months from the Escrow Release Date and the Maturity Date. iv. 1,333,334 warrants exercisable at $0.25 per share exercisable until November 7, v. 15,000,000 warrants exercisable at $0.25 per share exercisable until November 7, Stock Options As of November 25, 2016, the Company had the following options outstanding: i. 100,000 options exercisable at $0.69 per share until June 5, 2020; 11

12 ii. 2,410,000 Compensation Options, each of which allow the holder to acquire one Equity Unit (see discussion of the Offering previously in this MD&A) at a price of $0.25 per Equity Unit for a period of 36 months following the Escrow Release Date of the Offering; and iii. 5,100,000 stock options each of which allow the holder to acquire one common share at an exercise price of $0.25 for a period of five years from the grant date. Related Party Transactions a) The Company leases plant and office space from Ontario Inc., a company related to one of the Company s corporate shareholders pursuant to three (3) leases that expire on December 31, 2017 and April 30, During the year ended July 31, 2016, the Company was charged occupancy expenses of $224,967 ( $206,785). As at July 31, 2016, prepaid expenses included $51,302 ( $61,302), deferred lease inducement included $11,036 ( $15,603) and accounts payable and accrued liabilities included $132,734 ( $34,299) payable to this company. b) Consulting services in the amount of $62,500 for the year ended July 31, 2016 ( $185,833) were charged by Ezzigroup Inc. a company controlled by Ahmad Rasouli, the former Chief Executive Officer and a former director of the Company. As at July 31, 2016, accounts payable and accrued liabilities included $88,479 ( $33,854) payable to this company, also included in short-term advances from related parties is $119,630 which is payable to this individual. c) During the year ended July 31, 2016, a total of $Nil ( $2,212) of advertising and promotional expenses, and salaries of $4,327 ( $39,808) were paid to Ali Rasouli, an individual related to the former Chief Executive Officer and former director of the Company. d) Professional services in the amount of $16,075 for the year ended July 31, 2016 (2015 $83,699) were charged by Kronis, Rotsztain, Margles Cappel LLP, a law firm of which Paul Cancilla, a former director of the Company, is a partner. As at July 31, 2016, accounts payable and accrued liabilities included $112,745 payable to this law firm (2015 $109,621). e) Professional services in the amount of $80,000 for the year ended July 31, 2016 (2015 $43,000) were charged by Forbes Andersen LLP an accounting firm of which Paul Andersen, a director of the Company, and Michael Johnston, the Company s CFO, are partners. As at July 31, 2016, accounts payable and accrued liabilities included $194,582 payable to this accounting firm ( $106,652). f) Professional services in the amount of $13,860 for the year ended July 31, 2016 (2015 $62,690) were charged by Services Administratifs Richard Vallée Inc., a firm of which Richard Vallée, a director of the Company, and the Company s former CFO, is a partner. As at July 31, 2016, accounts payable and accrued liabilities included $135,604 payable to this firm ( $119,942). g) Consulting services in the amount of $43,750 were charged by Gerry Goldberg, the Company s interim CEO, the full amount of which is included in accounts payable and accrued liabilities as at July 31, h) During the year ended July 31, 2016, the Company expensed directors fees in the amount of $13,250 to Ahmad Rasouli ($1,500), Georges Durst ($2,250), Dennis dos Santos ($500), 12

13 Michel Boucher ($1,250), Nick Migliore ($750), Paul Andersen ($1,500), Paul Cancilla ($1,000), Richard Vallée ($2,250), Gerry Goldberg ($1,250), Brad Rogers ($500) and David Shpilt ($500) resulting in accounts payable and accrued liabilities in the amount of $13,250 as at July 31, 2016 (2015 8,500). i) During the year ended July 31, 2015, the Company granted 300,000 stock options to directors of the Company. The amount of stock-based compensation expense for the year ended July 31, 2016 related to these stock options was $60,935 ( $29,690). All related party transactions were in the normal course of operations and are measured at the exchange amount. Subsequent Events Subsequent to the year ended July 31, 2016: a) The Company completed the Acquisition of NB Inc. and The Longevity Project Corp as discussed previously in this MD&A. b) The Company completed a private placement Offering as discussed previously in this MD&A. c) The Company entered into a Service Agreement with a consultant to replace a Marketing Agreement entered into by the Company during the year ended July 31, 2015, for which the services were not rendered during the time period contemplated in the Marketing Agreement. Pursuant to the Service Agreement, the consultant was to provide services to the Company with respect to, but not limited to, marketing, branding, communications, business development and sales services, review of the Company s business plan and corporate strategy, and review and evaluation of the Company s long-term and short-term marketing and sales objectives for a period deemed to commence on May 1, 2016 and end on September 30, In exchange for the services described above, the Company issued 666,667 common shares and 666,667 warrants. Each warrant shall entitle the holder to purchase one common share at a post-consolidation price of $0.25 for a period of three years following the date of issue. As at July 31, 2016, the Company has recognized consulting expense of $264,059 for services rendered in connection with this agreement. As the common shares and warrants had yet to be issued as of July 31, 2016, $264,059 has been included in contributed surplus to reflect the Company s obligation to issue the common shares and warrants. Subsequent to July 31, 2016, the Company issued the common shares and warrants. d) The Company entered into a Service Agreement with a consultant to replace a previous Services Agreement (the Prior Agreement ) entered into by the Company during the year ended July 31, 2015, for which the services were not rendered during the time period contemplated in the Prior Agreement. Pursuant to the Service Agreement, the consultant was to provide services to the Company with respect to strategic and financial advice on potential funding alternatives, capital structure planning, public listing alternatives, valuation development and related issues, finance strategies, capital structure management and board of director vetting and recruitment for a period deemed to commence on May 1, 2016 and end on September 30, In exchange for the services described above, the Company issued 666,667 common shares and 666,667 warrants. Each warrant shall entitle the holder to purchase one common share at a post-consolidation price of $0.25 for a period 13

14 of three years following the date of issue. As at July 31, 2016, the Company has recognized consulting expense of $264,059 for services rendered in connection with this agreement. As the common shares and warrants had yet to be issued as of July 31, 2016, $264,059 has been included in contributed surplus to reflect the Company s obligation to issue the common shares and warrants. Subsequent to July 31, 2016, the Company issued the common shares and warrants. e) The Company cancelled 12,000,000 common shares of the Company in connection with the Acquisition. f) The Company completed the Consolidation as discussed previously in this MD&A. g) The Company granted an aggregate of 5,100,000 stock options to certain of its directors, officers and employees, each entitling the holder to acquire one common share at an exercise price of $0.25 for a period of five years from the grant date. h) The Company granted an aggregate of 15,000,000 warrants to certain of its directors, an officer and a consultant, each entitling the holder to acquire one common share at an exercise price of $0.25 for a period of five years from the grant date. i) The Company had 33,333 stock options expire unexercised. Off Balance Sheet Arrangements To the best of management s knowledge, there are no off-balance sheet arrangements that have, or are reasonably likely to have, a current or future effect on the results of operations or financial condition of the Company. Statement of Compliance The Company s consolidated financial statements have been prepared in accordance with International Financial Reporting Standards ( IFRS ) as issued by the International Accounting Standards Board ( IASB ) and their interpretations issued by the IFRS Interpretations Committee ( IFRIC ) and were approved by the Company s Board of Directors on November 25, Basis of Presentation The Financial Statements, presented in Canadian Dollars, have been prepared on a historical cost basis except for certain financial instruments which are measured at fair value. Basis of Consolidation The Financial Statements include the accounts of the Company and its wholly-owned subsidiary, Abba Corp. The financial statements of subsidiaries are included in the consolidated financial statements from the date that control commences until the date control ceases. Abba Corp. is controlled by the Company, as the Company is exposed, or has rights, to variable returns from its involvement with Abba Corp. and has the ability to affect those returns through its power over Abba Corp. by way of its ownership of all of the issued and outstanding common shares of Abba Corp. 14

15 The functional currency of the Company and Abba Corp. is the Canadian Dollar, which is the presentation currency of the consolidated financial statements. Intercompany balances and transactions, and unrealized gains arising from intercompany transactions are eliminated in preparing the consolidated financial statements. Recent Accounting Pronouncements and Amendments Not Yet Effective IAS 1 Presentation of Financial Statements was amended by the IASB in December The amendments are designed to further encourage companies to apply professional judgement in determining what information to disclose in their financial statements. For example, the amendments make clear that materiality applies to the whole of financial statements and that the inclusion of immaterial information can inhibit the usefulness of financial disclosures. Furthermore, the amendments clarify that companies should use professional judgement in determining where and in what order information is presented in the financial disclosures. The effective date is for annual periods beginning or after January 1, Entities may still choose to apply IAS 1 immediately, but are not required to do so. IFRS 9 Financial Instruments was issued in final form in July 2014 by the IASB and will replace IAS 39 Financial Instruments: Recognition and Measurement. IFRS 9 uses a single approach to determine whether a financial asset is measured at amortized cost or fair value, replacing the multiple rules in IAS 39. The approach in IFRS 9 is based on how an entity manages its financial instruments in the context of its business model and the contractual cash flow characteristics of the financial assets. Most of the requirements in IAS 39 for classification and measurement of financial liabilities were carried forward unchanged to IFRS 9. The new standard also requires a single impairment method to be used, replacing the multiple impairment methods in IAS 39. IFRS 9 also includes requirements relating to a new hedge accounting model, which represents a substantial overhaul of hedge accounting which will allow entities to better reflect their risk management activities in the financial statements. The most significant improvements apply to those that hedge non-financial risk, and so these improvements are expected to be of particular interest to nonfinancial institutions. IFRS 9 is effective for annual periods beginning on or after January 1, 2018, however early adoption is permitted. IFRS 16 Leases was issued in January 2016 and replaces IAS 17 Leases. Under IAS 17, lessees were required to make a distinction between a finance lease and an operating lease. If the lease was classified as a finance lease, a lease liability was included on the statement of financial position. IFRS 16 now requires lessees to recognize a right of use asset and lease liability reflecting future lease payments for virtually all lease contracts. The right of use asset is treated similarly to other non-financial assets and depreciated accordingly. The lease liability accrues interest. The IASB has included an optional exemption for certain short term leases and leases of low value assets; however, this exemption can only be applied by lessees. Under IFRS 16, a contract is, or contains, a lease if the contract conveys the right to control the use of an identified asset for a period of time in exchange for consideration. Control is conveyed where the customer has both the right to direct the identified asset s use and obtain substantially all the economic benefits from that use. IFRS 16 is effective for annual periods beginning on or after January 1, 2019 with early adoption permitted if IFRS 15, Revenue from Contracts with Customers, is also applied. In January 2016, the IASB issued the disclosure initiative amendments to IAS 7, statement of Cash Flow. The amendment will require entities to provide disclosures that enable users of financial statements to evaluate changes in liabilities arising from financing activities, including both changes arising from cash and non-cash changes. 15

16 The Company has not yet completed its evaluations of the effect of adopting the above standards and amendment and the impact it may have on its consolidated financial statements. Critical Accounting Estimates, Judgements and Assumptions The preparation of the Financial Statements in conformity with IFRS requires management to make judgments, estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the Financial Statements and the reported amounts of income and expenses during the reporting period. The estimates and associated assumptions are based on historical experience and other factors that are considered to be relevant. Actual results may differ from these estimates. The estimates and underlying assumptions are reviewed on an ongoing basis. The key sources of information about judgments, estimates and assumptions uncertainty that have a significant risk of causing material adjustment to the amounts recognized in the Financial Statements are: Going concern - the ability of the Company to continue as a going concern; Valuation of other receivables - the recoverability of other receivables; Estimated useful lives the estimated useful lives of property, equipment and intangible assets and the related depreciation; Income taxes valuation the provision for income tax recovery and the composition of deferred tax assets and liabilities; Share-based payments the inputs used in accounting for share-based payment expense; Options and warrants - valuation of options and warrants included in shareholders equity, including volatility; Financial Instruments - the fair value of financial instruments; Impairment the assessment of events or changes in circumstances that indicate that carrying value of property and equipment may not be recoverable; and Contingencies the inputs used in determining any potential contingencies. Management has determined that judgments, estimates and assumptions reflected in the Financial Statements are reasonable. FINANCIAL INSTRUMENTS Fair Values The carrying amounts for the Company s cash, other receivables, amounts due to / from a related company, short-term advances to/from a related party, accounts payable and accrued liabilities, amounts due to directors, promissory notes and convertible promissory notes approximate their fair values because of the short-term nature of these items. RISKS AND UNCERTAINTIES Carefully consider the following risk factors in addition to the other information contained in this document. The risks presented below may not be all the risks that the Group may face. Additional risks and uncertainties may also impair its business operations. It is believed that these are the factors that could cause actual results to be different from expected and historical results. Other sections of this MD&A include additional factors that could have an effect on the business and financial performance of the business. The markets in which the Group currently compete are very competitive and change rapidly. New risks may emerge and 16

17 management may not be able to predict all of them, or be able to predict how they may cause actual results to be different from those contained in any forward-looking statements. If any of these risks actually occur, the Company s business may be harmed and results of operations and financial condition may suffer. Market risks The Group s securities trade on public markets and the trading value thereof is determined by the evaluations, perceptions and sentiments of both individual investors and the investment community taken as a whole. Such evaluations, perceptions and sentiments are subject to change; both in short term time horizons and longer term time horizons. An adverse change in investor evaluations, perceptions and sentiments could have a material adverse outcome on the Group and its securities. Commodity price risks Cannabis is a developing market, likely subject to volatile and declining prices year over year, as a result of increased competition. Because medical cannabis is a newly commercialized and regulated industry, historical price data is either not available or not predictive of future price levels. the Group believes there is downward pressure on the average price for medical cannabis and has arranged its proposed business accordingly, however, there can be no assurance that price volatility will be favorable to the Group. Pricing will depend on general factors including, but not limited to, the number of licenses granted by Health Canada and the supply such licensees are able to generate, the number of patients who gain physician approval to purchase medical cannabis. An adverse change in the cannabis prices, or in investors beliefs about trends in those prices, could have a material adverse outcome on the Group and its securities. Financing risks Entering the MMPR (now ACMPR) regulated medical cannabis marketplace requires substantial outlay of capital. the Group currently generates no operating revenues; therefore, for the foreseeable future, it will be dependent raising capital through a combination of debt and/or equity offerings. There can be no assurance that the capital markets will remain favorable in the future, and/or that the Group will be able to raise the financing needed to continue its business at favorable terms, or at all. Restrictions on the Company s ability to finance could have a material adverse outcome on the Group and its securities. Credit Risk The Group is not exposed to any significant credit risk as at July 31, The Group s cash is on deposit with a highly rated financial institution in Canada. The Group s HST recoverable is due from the government of Canada. Liquidity Risk Liquidity risk is the risk that an entity will not be able to meet its financial obligations as they come due. The Company s approach to managing liquidity risk is to ensure that it will have sufficient liquidity to meet liabilities when they become due. As July 31, 2016, the Company has current assets of $240,011 and current liabilities of $3,405,952. The Company has a working capital deficiency as at July 31, 2016 of $3,165,941. The Group raises capital as needed to mitigate its liquidity risk. 17