CANN GROUP LIMITED — Interim / Quarterly Report 2017

May 2, 2017

ASX ANNOUNCEMENT

4 MAY 2017

SPECIAL PURPOSE FINANCIAL REPORT FOR THE HALFYEAR ENDED 31 DECEMBER 2016 OF CANN GROUP LIMITED

Following is a copy of the Special Purpose Financial Report for the halfyear ended 31 December 2016 of Cann Group Limited.

Mr Richard Baker

Company Secretary

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Cann Group Limited and its controlled entities

ABN 25 603 949 739

Special Purpose Financial Report for the half year ended 31 December 2016

Cann Group Limited – Special Purpose Financial Statements ABN 25 603 949 739

CONTENTS TO FINANCIAL REPORT

Corporate Information	1
Directors’ report	2
Auditor’s independence declaration	4
Annual financial statements
Statement of profit or loss and other comprehensive income	5
Statement of financial position	6
Statement of changes in equity	7
Statement of cash flows	8
Notes to the financial statements	9
Directors’ declaration	13
Independent auditor’s report	14

Cann Group Limited – Special Purpose Financial Statements ABN 25 603 949 739

CORPORATE INFORMATION

These Special Purpose financial statements are of Cann Group Limited (the company ) and its 100% owned subsidiaries, including Cannproducts Pty Ltd (incorporated and domiciled in Victoria, Australia), Cannoperations Pty Ltd (incorporated and domiciled in Victoria, Australia), Cann IP Pty Ltd (incorporated and domiciled in Victoria, Australia) and Cann Investments Pty Ltd (incorporated and domiciled in Victoria, Australia) (together, the Group ). Unless otherwise stated, all amounts are presented in $AUD.

A description of the company’s operations and of its principal activities is included in the review of operations and activities in the Directors’ Report on pages 2 to 3. The directors’ report is not part of the financial statements.

Directors

Mr Allan McCallum Chairman Mr Philip Jacobsen Deputy Chairman Mr Geoff Pearce Non-executive Director Mr Doug Rathbone Non-executive Director Secretary Richard Baker Company Secretary and CFO

Registered Office

Auditor

C/- Salmon Giles Pty Ltd William Buck Level 2, 409 St Kilda Road Level 20, 181 William Street Melbourne Vic 3004 Melbourne, VIC 3000

Lawyers

William Ross – Lawyers and Advisors Level 27, 101 Collins Street Melbourne Vic 3000

Contact Information

Ph: (03) 9095 7088 Web Site: www.canngrouplimited.com

Page 1

Cann Group Limited – Special Purpose Financial Statements ABN 25 603 949 739

Directors’ report

The Directors of Cann Group Limited submit herewith the Special Purpose financial statements of the Company for the half year ended 31 December 2016.

Directors

Mr Allan McCallum (Chairman)

Mr Philip Jacobsen (Deputy Chairman)

Mr Geoff Pearce (Non-executive Director)

Mr Doug Rathbone (Non-executive Director)

Principal activities

The principal activities of the group during the period consisted of developing a cultivation and a technology structure to cultivate and process cannabis for manufacturing into medicinal cannabis products.

Operating results

The company incurred an operating loss of $925,785 after income tax for the half year ended 31 December 2016 (2015: $705,503)

Review of Operations

Significant developments have occurred over the last six months since Cann Group Limited (“the Company”) issued its Annual Report to Shareholders including:

• completion of the construction of Secure Cultivation Rooms 1 and 2 and the commencement of hemp growing for research and development purposes;

• research and development operations to add to Cann’s knowledge base;

• lodgement of applications for a “medicinal cannabis licence” (cultivation for supply for human medicinal use) and a “cannabis research licence” (cultivation solely for research purposes);

• entry into collaborations for the following activities:

• executed Technical Services Agreement for Technical Advice with Agriculture Victoria Services and negotiation of four further Technical Services Agreements for Genetics Importation and Preparation, Access to Agriculture Victoria Services cannabis strains, Testing Services and Extraction Services;

• executed a Memorandum of Understanding with Anandia Laboratory’s in Canada for genetics transfer and collaboration regarding genetic breeding, cultivation and research; and

• executed a Mutual Confidentiality Deed with La Trobe University to facilitate negotiations regarding a possible research project collaboration;

• execution of a short-term lease (to 31 March 2017) with a glasshouse facility owner for shared use of a glasshouse facility at the La Trobe University Precinct whilst the terms of the longer-term lease for exclusive use of that facility are negotiated;

• resignation of Mr Michael Murchison as a Director of the Company on 28 October 2016;

• Cann Global LLC ceased to be a subsidiary of the Company and ownership was transferred to Michael Murchison (a former Director and shareholder) on 1 November 2016; and

• execution of Employment Agreements with staff employed in the following roles:

  • Chief Executive Officer;

  • Company Secretary and Chief Financial Officer;

  • Legal and Regulatory Affairs Officer; and

  • Operations Officer.

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Cann Group Limited – Special Purpose Financial Statements ABN 25 603 949 739

Directors’ report

Subsequent Events

On 17 February 2017 the Australian Government Department of Health, Office of Drug Control granted Cannoperations Pty Ltd a Cannabis Research Licence No. 001/17 for its southern facility.

On 21 February 2017 the Company allotted 160,000 ordinary shares and 160,000 options exercisable at $0.15 on or before 31 March 2017 (expiry date) on the same terms as those shares and options issued pursuant to the Company’s Information Memorandum dated 11 April 2016, in lieu of payment for consulting services.

On 1 March 2017 the Company cancelled all of the Class A Performance Rights on issue having received written consent from all holders of Class A Performance Rights.

On 7 March 2017 the Company entered into a sublease for additional premises to cultivate cannabis in a glasshouse facility.

On 8 March 2017 the Australian Government Department of Health, Office of Drug Control granted Cannoperations Pty Ltd a Medicinal Cannabis Licence No. MC001/17 for its southern facility.

There were no other matters or circumstances that have arisen since the end of the half-year which significantly affected or may significantly affect the operation of the group, the results of those operations, or the state of affairs of the group in future financial years.

Future developments

Other than matters referred to elsewhere in this report, further information as to the likely developments in the operations of the Company have not been included in this report because the directors believe it would be likely to result in unreasonable prejudice to the Company. Likely developments of the operations of the Company will be influenced by the corporate fundraising activities of the Company.

Dividends

No dividend has been proposed or paid.

Auditor’s independence declaration

The auditor’s independence declaration is attached to this Directors’ report on page 4.

Signed in accordance with a resolution of the directors

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Mr Allan McCallum Chairman

14 March 2017

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Cann Group Limited – Special Purpose Financial Statements ABN 25 603 949 739

Statement of profit or loss and other comprehensive income for the half year ended 31 December 2016

Note	31 December 2016 31 December 2015 $ $
Revenue Administration and corporate costs Depreciation Employee benefits expense Finance costs Marketing costs Occupancy expenses Research & development Professional fees Performance rights expense Travel expenses Other expenses Loss before income tax Income tax expense Loss attributable to members of the company Other comprehensive income Total comprehensive loss attributable to members of the company Basic and diluted loss per share (cents) 3	2,725 5,052 (330,216) (269,728) (55,438) (3,175) (223,766) (73,422) (501) (6,031) - (43,517) (77,729) (35,104) (128,628) (144,953) (53,397) (7,283) (38,381) (52,739) (17,123) (58,499) (3,331) (16,105)
	(925,785) (705,503) - -
	(925,785) (705,503) - -
	(925,785) (705,503)
	2.3 2.8

The accompanying notes form part of these financial statements

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Cann Group Limited – Special Purpose Financial Statements ABN 25 603 949 739

Statement of financial position as at 31 December 2016

Note	31 December 2016 $	30 June 2016 $
ASSETS CURRENT ASSETS Cash and cash equivalents Trade receivables and other assets TOTAL CURRENT ASSETS NON-CURRENT ASSETS Plant and equipment Rental bond TOTAL NON-CURRENT ASSETS TOTAL ASSETS LIABILITIES CURRENT LIABILITIES Unsecured trade and other payables TOTAL CURRENT LIABILITIES TOTAL LIABILITIES NET ASSETS EQUITY Issued capital 4 Performance rights reserve Accumulated losses TOTAL EQUITY	352,516 76,395 428,911 555,724 35,000 590,724 1,019,635 159,711 159,711 159,711 859,924 4,434,115 553,790 (4,127,981) 859,924	1,344,055 5,519
		1,349,574
		486,759 35,000
		521,758
		1,871,332
		181,849
		181,849
		181,849
		1,689,483
		4,376,271 515,409 (3,202,197)
		1,689,483

The accompanying notes form part of these financial statements

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Cann Group Limited – Special Purpose Financial Statements ABN 25 603 949 739

Statement of changes in equity for the half year ended 31 December 2016

	Issued Performance Rights Accumulated Total capital reserve losses equity $ $ $ $
Balance at 1 July 2016 Issue of shares Net costs of issuing shares Vesting of performance rights Comprehensive loss for the period ended 31 December 2016 Balance at 31 December 2016	4,376,270 515,409 (3,202,196) 1,689,483
	72,000 - - 72,000 (14,155) - - (14,155) - 38,381 - 38,381 - - (925,785) (925,785)
	4,434,115 553,790 (4,127,981) 859,924
	Issued Performance Rights Accumulated Total capital reserve losses equity $ $ $ $
Balance at 1 July 2015 Issue of shares Net costs of issuing shares Vesting of performance rights Comprehensive loss for the half-year ended 31 December 2015 Balance at 31 December 2015	1,957,006 431,505 (1,740,186) 648,325
	600,000 - - 600,000 (30,007) - - (30,007) - 52,739 - 52,739 - - (705,503) (705,503)
	2,526,999 484,244 (2,445,689) 565,554

The accompanying notes form part of these financial statements

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Cann Group Limited – Special Purpose Financial Statements ABN 25 603 949 739

Statement of cash flows for the half year ended 31 December 2016

	31 December 2016 31 December 2015 $ $
CASH FLOWS FROM OPERATING ACTIVITIES Receipts from customers Payments to suppliers and employees Interest receipted Net cash flows used in operating activities CASH FLOWS FROM INVESTING ACTIVITIES Acquisition of plant and equipment Net cash flows used in investing activities CASH FLOWS FROM FINANCING ACTIVITIES Proceeds from issues of shares Costs of issuing shares Net cash flows provided by financing activities Net increase / (decrease) in cash held Cash and cash equivalents at the beginning of the period CASH AND CASH EQUIVALENTS AT THE END OF THE PERIOD	- 2,768 (879,357) (675,596) 2,377 2,284
	(876,980) (670,544)
	(124,404) (135,772)
	(124,404) (135,772)
	24,000 1,180,000 (14,155) (30,007)
	9,845 1,149,993
	(991,539) 343,676 1,344,055 450,824
	352,516 794,501

The accompanying notes form part of these financial statements

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Cann Group Limited – Special Purpose Financial Statements ABN 25 603 949 739

Notes to the financial statements

NOTE 1 STATEMENT OF COMPLIANCE AND BASIS OF PREPARATION

Statement of Compliance

These special purpose financial statements are a general purpose financial report prepared in accordance with the requirements of the Corporations Act 2001, Australian Accounting Standard AASB 134: Special Purpose Financial Reporting, Australian Accounting Interpretations and other authoritative pronouncements of the Australian Accounting Standards Board.

It is recommended that this financial report be read in conjunction with the annual financial report for the year ended 30 June 2016 and any public announcements made by Cann Group Limited during the half-year in accordance with continuous disclosure requirements arising under the Corporations Act 2001.

The accounting policies are consistent with those in the June 2016 financial report. The special purpose financial statements do not include full disclosures of the type normally included in an annual financial report.

NOTE 2 SIGNIFICANT ACCOUNTING POLICIES

These special purpose financial statements have been prepared using the same accounting policies as used in the annual financial statements for the year ended 30 June 2016.

These financial statements have been prepared on a going concern basis, notwithstanding the fact that for the halfyear ended 31 December 2016, the Group generated a loss after tax of $925,785 and incurred net cash outflows from operations of $876,980. As at 31 December 2016 the Group had available cash reserves of $352,516. Net investment outflows for the half-year attributable to the construction of plant growing facilities and computer system upgrades were $124,404.

For the 12 months from the date of this report, the Directors have determined that the Group is a going concern based upon a cash flow budget prepared by management, which includes the following assumptions:

• revenue derived from provision of raw flower cannabis product to parties holding a manufacturer’s licence (as defined by the Narcotic Drugs Amendment Bill 2016 ) to produce cannabinoid oil for medicinal purposes;

• the exercise of up to 13,486,668 existing options which expire at 5.00pm (AEST) on 31 March 2017 and which if all were exercised would raise $2,023,000;

• future capital raising activities including a fully underwritten Initial Public Offering Prospectus and associated Australian Securities Exchange listing anticipated to commence in the first quarter of calendar year 2017 being an offering of 45,000,000 new shares at an issue price of $0.30 per new share, to raise up to $13,500,000 (before costs and expenses); and

• control of costs, as and where appropriate. In considering this, the Directors note that the Group, with the exception of its lease which was signed on 4 September 2015 and requires annual payments of $110,000, have no committed costs that cannot be varied according to levels of working capital available to the Group.

For these reasons, the Directors believe that the assumption of a going concern basis in the preparation of this financial report is appropriate. The financial report does not include any adjustments in relation to the recoverability or classification of recorded assets, nor the amounts or classification of liabilities that might be necessary should the Company not be able to continue as a going concern.

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Cann Group Limited – Special Purpose Financial Statements ABN 25 603 949 739

Notes to the financial statements

NOTE 3 LOSS PER SHARE

The earnings and weighted average number of ordinary shares used in the calculation of basic earnings per share are as follows:

Net loss attributable to ordinary equity holders (used in calculating basic and diluted EPS) Weighted average number of ordinary shares for the purpose of per share adjusted for share consolidation (no.)	Half-year ended 31 December 2016 $ Half-year ended 31 December 2015 $ (925,785) (705,503)
	39,562,320 25,462,500

Performance Rights have not been included in the weighted average number of ordinary shares as the Group presently has accumulated losses and no certainty of future profits to offset those losses.

NOTE 4 ISSUED CAPITAL

As at 1 July Shares issued during half-year Net costs of issuing shares As at 31 December	Half-year ended 31 December 2016 Half-year ended 31 December 2015 No $ No $ 39,346,668 4,376,270 24,100,000 1,957,006 480,000 72,000 2,400,000 600,000 - (14,155) - (30,007)
	39,826,668 4,434,115 26,500,000 2,526,999

NOTE 5 OPTIONS

The group has on issue 13,326,668 options to purchase ordinary fully paid shares.

The options are exercisable at $0.15 at any time during the period commencing on the date of its issue and expiring on the earlier of 4:00pm (Melbourne, Victoria time) on 31 March 2017 and 4:00pm (Melbourne, Victoria time) on the date of allotment of the new shares under a prospectus issued by the Company in relation to its admission to the Official List of the ASX.

Issue Date Issue Price $ Balance 1 July 2016 29 September 2016 - 22 November 2016 - Balance 30 June 2016	Number of Options 12,846,668 320,000 160,000
	13,326,668

*During the Half-year ended 31 December 2016 the Company issued 480,000 Ordinary Shares at fifteen cents ($0.15) on the same terms as those Shares issued pursuant to the Information Memorandum dated 11 April 2016 and issued one attaching Option at no additional cost for each new share subscribed.

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Cann Group Limited – Special Purpose Financial Statements ABN 25 603 949 739

Notes to the financial statements

NOTE 6 PERFORMANCE RIGHTS

The Company has issued 18,180,000 Performance Rights comprising 11,000,000 Class A Performance Rights and 7,180,000 Class B Performance Rights.

The Performance Rights have the following milestones attached to them, which are their vesting conditions:

(i) Class A Performance Rights : if the Company issues further Shares in addition to the New Shares at $0.375 per Share or higher subject to, if, at any time, the issued capital of the Company is reorganised (including consolidation, subdivision, reduction or return), all rights of a holder of a Performance Right (including the Vesting Conditions) are to be changed in a manner consistent with the Corporations Act and the ASX Listing Rules at the time of the reorganisation; and

(ii) Class B Performance Rights : if the Company applies to be admitted to the Official List of the ASX or a trade sale of the underlying business of the Company or the Company occurs.

The Performance Rights were issued for $0.0001 each and no consideration will be payable upon the vesting of the Performance Rights.

Upon satisfaction of the relevant Performance Rights vesting, each Performance Right will, at the election of the holder, vest and convert as follows:

(i) each Class A Performance Right converts into one Share; and

(ii) each Class B Performance Right converts into one Share.

Based on the above, the performance rights reserve has been calculated as at 30 June 2016 as follows:

Class A B B	Number of rights (post share-split) Grant Date Fair value (post share-split) (cents) Vested 11,000,000 31 January 2015 2.40 100% 7,000,000 31 January 2015 4.80 80% 180,000 1 September 2016 15.00 80% 18,180,000	Total in reserve $ 263,698 268,492 21,600
		553,790

If the Milestone attaching to a Performance Right has not been satisfied in the time periods set out below, it will automatically lapse:

(i) Class A Performance Rights: 3 years from 22 May 2015;

(ii) Class B Performance Rights: 4 years from 22 May 2015;

otherwise, any Performance Right that has not been converted into a Share on or before the date of admission of the Company to the Official List of the ASX will automatically lapse.

NOTE 7 CONTINGENT LIABILITIES

The Company has executed a Terms Sheet with the landlord regarding governing the proposed lease of a glasshouse facility at the La Trobe University Precinct commencing 1 April 2017. Subject to a lease being executed, should the Company invoke the provision allowing the early termination of the lease by the Company prior to 30 April 2017 in the event that the Company’s medicinal cannabis cultivation licence application not be successful, or the Company’s Initial Public Offering not be successful, a break fee of $200,000 (excluding GST) will be payable to the landlord.

The Company has a bank guarantee of $35,000 for the operating premises lease of the company's premises. With the exception of this bank guarantee, the Company currently has no contingent liabilities or commitments at the date of signing this report.

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Cann Group Limited – Special Purpose Financial Statements ABN 25 603 949 739

Notes to the financial statements

NOTE 8 SUBSEQUENT EVENTS

On 17 February 2017 the Australian Government Department of Health, Office of Drug Control granted Cannoperations Pty Ltd a Cannabis Research Licence No. 001/17 for its facility based in south-east Melbourne.

On 21 February 2017 the Company allotted 160,000 ordinary shares and 160,000 options exercisable at $0.15 on or before 31 March 2017 (expiry date) on the same terms as those shares and options issued pursuant to the Company’s Information Memorandum dated 11 April 2016, in lieu of payment for consulting services.

On 1 March 2017 the Company cancelled all of the Class A Performance Rights on issue having received written consent from all holders of Class A Performance Rights.

On 7 March 2017 the Company entered into a sublease for additional premises to cultivate cannabis in a glasshouse facility.

On 8 March 2017 the Australian Government Department of Health, Office of Drug Control granted Cannoperations Pty Ltd a Medicinal Cannabis Licence No. MC001/17 for its facility based in south-east Melbourne.

There were no other matters or circumstances that have arisen since the end of the half-year which significantly affected or may significantly affect the operation of the group, the results of those operations, or the state of affairs of the group in future financial years.

NOTE 9 SEGMENT REPORTING

The Company operates in one industry being research and development of cannabis and cannabis related products within Australia.

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Cann Group Limited – Special Purpose Financial Statements ABN 25 603 949 739

Directors’ declaration

The directors of the Company declare that:

• (1) The financial statements and notes are in accordance with the Corporations Act 2001 , including:

• (a) complying with Accounting Standard AASB 134: Special Purpose Financial Reporting; and

• (b) giving a true and fair view of the company’s financial position as at 31 December 2016 and of its performance for the half-year ended on that date.

• (2) In the directors’ opinion there are reasonable grounds to believe that the company will be able to pay its debts as and when they become due and payable.

This declaration is made in accordance with a resolution of the Board of Directors.

On behalf of the Board

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Mr Allan McCallum Chairman

• 14 March 2017

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Cann Group Limited – Special Purpose Financial Statements ABN 25 603 949 739

Independent Auditor’s Review Report

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Cann Group Limited – Special Purpose Financial Statements ABN 25 603 949 739

Independent Auditor’s Review Report

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Cann Group Limited – Special Purpose Financial Statements ABN 25 603 949 739

Independent Auditor’s Review Report

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