Discover Wellness Solutions Inc - Interim / Quarterly Report 2021

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Discover Wellness Solutions Inc. (formerly RMMI Corp.)

MANAGEMENT'S DISCUSSION AND ANALYSIS

AS AT AND FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 2021 and 2020

The following is Management's Discussion and Analysis (“ MD&A ”) of the financial results of Discover Wellness Solutions Inc. (formerly RMMI Corp.) (“ Discover Wellness ” or the “ Company ”) for the three and six months ended June 30, 2021 and 2020. This MD&A should be read in conjunction with the unaudited condensed interim consolidated financial statements for the three and six months ended June 30, 2021 and 2020 and the audited consolidated financial statements for the years ended December 31, 2020 and 2019. The unaudited condensed interim consolidated financial statements were prepared in accordance with International Accounting Standards (“IAS”) 34, Interim Financial Reporting . Unless otherwise noted, all financial information is expressed in Canadian dollars. This MD&A is based on information available as of August 30, 2021 and was reviewed and approved by the board of directors of Discover Wellness on August 30, 2021.

This MD&A contains forward-looking information within the meaning of Canadian securities laws, and the use of non-GAAP measures. Refer to “Forward Looking Statements” and “Non-IFRS Financial Measures” included within this MD&A.

This MD&A, the Company’s annual audited consolidated financial statements, press releases and other disclosure documents required to be filed by applicable securities laws have been filed in Canada on SEDAR at www.sedar.com. Additional information can also be found on the Company’s website at www.discoverwellnesssolutions.ca.

BUSINESS OVERVIEW

Discover Wellness is a licensed producer and processor under the Cannabis Act (Canada). The registered office is located at Suite 500, 707 – 5 Street SW, Calgary, Alberta, T2P 0Y3.

The Company completed a name change from RMMI Corp. to Discover Wellness on December 22, 2020. The Company was incorporated under the Business Corporations Act (Alberta) on February 6, 2018. The Company completed its initial public offering on September 24, 2018 and became a listed entity on the Canadian Securities Exchange (“CSE” or the “Exchange”) and now trades under the symbol “WLNS”.

On October 11, 2019, the Company received its cannabis cultivation, processing, and medical sales licence (the “Licence”) from Health Canada under Canada’s Cannabis Act. On February 8, 2021, the Company received an industrial hemp license from Health Canada. The Company owns a facility in Newell County, Alberta (the “Newell Property”) which is undergoing renovation to become a hemp processing facility.

GOING CONCERN

The Company is in a development stage and has not commenced commercial operations or generated any revenue. Commencement of operations depends on obtaining adequate financing to become operational. During the period ended June 30, 2021, the Company incurred a net loss and comprehensive loss of $2,729,200 (2020 - $1,388,809) and utilized cash of $927,690 (2020 - $371,021) in operations. At June 30, 2021, the Company had an accumulated deficit of $9,684,617 (December 31, 2020 - $6,955,417) and its current assets exceeded current liabilities by $4,109,203 (December 31. 2020 – current liabilities exceeded current assets by $5,494,779). In the past, the Company has been successful in raising capital to fund development however there is no guarantee of future success.

The Company’s secured noteholders have agreed to a restructuring of the secured notes whereby the principal amount of the notes plus all accrued and unpaid interest and fees at May 31, 2020 were converted into a $1,500,000 principal amount loan repayable over a one-year period starting October 2020. The noteholders further agreed to further changes in the repayment schedule while maintaining the October 31, 2021 maturity date. Further, on December 11, 2020 the Company closed a private placement receiving gross proceeds of $2,731,028.

Management is of the opinion that in the future, sufficient working capital can be obtained from external financing and operating cash flow to settle the Company’s liabilities and commitments as they become due, although there is a

risk that funding will not be available on a timely basis or on terms acceptable to the Company. The Company has incurred operating losses since inception indicating the existence of material uncertainties that may cast significant doubt on the Company’s ability to continue as a going concern. The Company’s strategy in 2021 to continue as a going concern include:

maintaining the low general and administrative cost structure that was instituted in 2020 when staffing was reduced and the head office lease was terminated;
selling a portion of the hemp biomass purchased in December 2020 to monetize inventory;
continue to assess debt and equity capital markets for fund raising opportunities; and
• pursue strategic transactions to enhance shareholder value and liquidity.

The COVID-19 pandemic and measures adopted by governments to mitigate the pandemic’s spread have not significantly impacted Discover Wellness. There is still uncertainty over how the outbreak will impact the Company’s business in the future.

BUSINESS PLAN UPDATE

On June 2, 2020, the Company announced an intention to re-focus operations to hemp and production of high quality and high purity CBD products (the “Strategic Shift”).

On October 14, 2020, the Company entered into strategic alliance and hemp purchase agreement with SynerGenetics Bioscience Inc. (“SG”) (the “SG Transaction”), a leading plant genetics technology company focused on the development of novel hemp strains with high-CBD content and other hemp-derived cannabinoid cultivars. In connection with the SG Transaction, the Company entered into a purchase agreement for the purchase of premium high-CBD hemp flower and biomass from SG and entered into a definitive strategic alliance agreement which provides the Company with exclusivity over SG’s high-CBD genetics in Canada and assumption of its hemp CBD flower, biomass and concentrate business globally. The Company purchased 250,000 kilograms of high-CBD hemp biomass from SG under the purchase agreement in December 2020. The dried, bagged and binned hemp biomass is stored at the farmer’s warehouse in Ontario, Canada and the Company accesses the hemp on an as-needed basis.

The SG strategic alliance agreement allows that Company to partner with farmers directly to cultivate high-CBD industrial hemp using SG seeds. This provides the Company more flexibility on selecting its own farming partners. The Company has not engaged in any hemp farming activities for the 2021 cultivation season. The Company will consider its industrial hemp cultivation needs before the 2022 cultivation season.

As a result of the Strategic Shift, RMMI has changed its name to Discover Wellness as management is of the view that the new name more accurately reflects the business of the Company moving forward.

Since December 2020, no material renovation work has been completed at the Newell Facility due initially to a stoppage for work-flow planning and other design and engineering work. This design and engineering work resulted in several scenarios being considered. At this time, the Company is seeking additional capital to complete the Licenced Area (as defined below) of the Newell Facility under the lower capital and shorter time period (approximately three months after work is re-restarted) scenario so that it may start operations and generate revenue. The Company is not able to process its hemp (or undertake any cannabis activities) at its Newell Facility until renovations are completed in the Licenced Area. The Company has been and is pursuing two other avenues of revenue to monetize this inventory: 1) sell a portion of the CBD biomass as biomass to third parties that wish to process the CBD biomass into CBD products for their own use and 2) entering in revenue sharing tolling arrangements with third party processors where, generally, the Company would provide the CBD biomass for no up-front cost, the third party processor would process the CBD biomass into CBD products and the Company and the third party would share the revenue from the sale of the CBD products. These avenues for revenue do not require the Newell Facility to be completed and operational.

Further, on March 2, 2021, Discover Wellness announced that it entered into a Memorandum of Understanding on Co-operation on Arrangement of Hemp Business in Thailand with Quad Play (“QP”) of Thailand (the “MOU”). The Company also amended its SG strategic alliance agreement at this time to include Thailand as an exclusive territory for the Company. At this time, QP has received its Thailand government import permit for the purchase and importation of the seeds. The Company is preparing certain analysis required under the import permit including a

non-GMO study and will apply for a Canadian export permit for exportation of the seeds. Once all permits and documentation have been received and in good, acceptable order, the Company will export the seeds to QP and the sale will be completed. Timing for obtaining the permits and documentation are uncertain as this is the first time that the Company has undertaken these activities and timing relies on availability and attention of third parties, including the Government of Canada, which is hard to predict.

OVERALL PERFORMANCE

Key Selected Information

The following table provides a summary of the Company’s financial operations. For more detailed information, refer to the Company’s financial statements.

	(unaudited) As at and for the three-month periods ended June 30 2021 2020	(unaudited) As at and for the six-month periods ended June 30
		2021 2020
Revenue Net loss and comprehensive loss Basic and diluted loss per share Total assets Total long-term liabilities Working capital/(deficit) Shareholders’ equity	$NIL $NIL $1,879,557 $945,876 $0.04 $0.07 $12,516,736 $6,889,178 $60,000 $440,000 $4,109,203 $(1,463,682) $10,691,345 $4,858,336	$NIL $NIL $2,729,200 $1,388,309 $0.05 $0.10 $12,516,736 $6,889,178 $60,000 $440,000 $4,109,203 $(1,463,682) $10,691,345 $4,858,336

To date, the Company has not generated any revenue, given its stage of operations. The Company’s financial success will be dependent on several factors including its ability to become operational.

For the three and six months ended June 30, 2021, the Company had no revenue and reported a net loss and total comprehensive loss of $1,879,557 and $2,729,200, respectively, with basic and diluted loss per share of $0.04 and $0.07, respectively. In comparison, in the three months ended June 30, 2020, the Company had no revenue and reported a net loss and total comprehensive loss of $945,876 and $1,388,309, respectively, with basic and diluted loss per share of $0.07 and $0.10, respectively.

The higher net loss in 2021 compared to 2020 is as a result of operating expense, higher general and administrative, an impairment in 2021, an allowance for doubtful accounts in 2021, higher share-based compensation expenses partially offset by lower interest and financing costs related to the Company’s outstanding secured notes in 2021 compared to 2020.

As at June 30, 2020, while the Company had an accumulated deficit of $9,684,617 due to its stage of operations, the Company had a working capital surplus of $4,109,203 (2020 – accumulated deficit of $5,032,670 and working capital deficiency of $1,463,682) primarily due to the Company undertaking private placements in 2020 and investing in inventory.

Outlook

In 2021, the Company will continue advancing its business plan of becoming a producer and seller through its industrial hemp licence. The Company’s priorities include:

Complete renovations and purchase equipment for expansion of its processing capacity;
Install processing equipment;
Hire additional employees;
Produce CBD products and derivatives;
Pursue strategic transactions to protect and enhance shareholder value; and
Continue product development and consumer education.

In 2021 until the date of this MD&A, Discover Wellness has advanced its business plan by entering into a Memorandum of Understanding on Co-operation on Arrangement of Hemp Business in Thailand and entering into a sales agreement to provide industrial hemp to a Canadian processor.

RESULTS OF OPERATIONS

Revenue

Discover Wellness is in a development stage and commencement of commercial operations depends on raising additional capital to become operational under its standard cannabis licence. As such, the Company has not yet earned any revenue. As of June 30, 2021, the Company has not sold any of its hemp biomass to other licenced users as large volume industrial hemp buyers had already purchased their biomass supply demand before the 2020 harvest. Also, the demand for industrial hemp is moving towards a revenue sharing toll processing arrangements for CBD products. To this extent, the Company is pursuing relationships with third party processors whereby, generally, the Company will provide industrial hemp at no up-front cost, the third party will process the hemp into CBD products, the two parties will jointly market and sell the CBD products and there will be a sharing of revenue. Once the Newell Facility has completed renovations to its Licenced Area, the Company intends to process its industrial hemp into CBD products in its own facility as well as continuing to partner with third party processors to process its hemp in order to convert the industrial hemp into CBD products as quickly as possible.

Operating Expenses

In 2021, the Company incurred $73,009, primarily in the three months ended March 31, 2021, in operating expenses relating to the storage and transportation of its inventory (2020 - $NIL). The Company incurs the following costs to complete a sale of hemp biomass: obtain certificates of analysis on the biomass to be sold, transports a small sample to the customer for customer testing, packaging (and potentially milling) the biomass into barrels, bags or boxes at the customer’s request and transports the biomass to the customer. The Company generally incurs these costs as a cost of sale.

General and Administration Expenses

Discover Wellness’s general and administration expenses for the three and six months ended June 30, 2021 were $516,116 and $1,105,182, respectively, compared to $207,485 and $435,418, respectively, in the 2020 period.

	(unaudited) For the three-month periods ended June 30 2020 2020	(unaudited) For the six-month periods ended June 30
		2020 2020
Salaries, fees and employee benefit expenses for employees and consultants to oversee the affairs of the Company Legal, auditor and other professional fees and services Public company costs Other general and administrative expenses	$74,852 $96,121 63,038 49,610 345,232 5,687 32,997 56,067	$152,283 $247,092 157,814 51,276 729,504 17,678 65,584 119,372
Total	$516,119 $207,485	$1,105,185 $435,418

Total general and administrative expenses for 2021 are higher than 2020 due to:

Fewer staff members in the 2021 period compared to 2020, resulting in lower salaries and related expenses;
• Engagement of financial and other advisors in the 2021 period resulting in higher financial advisory, legal and related costs; and

Increased public company costs in investor relations and marketing in 2021.

In 2021, with the SG hemp purchase and Strategic Alliance completed, the Company desired to increase its public markets profile to increase trading volume and liquidity in its shares. An increased public markets profile was also expected to help the Company with sales leads and identify and develop other industry relationships. Due to these factors, the Company decided to invest in investor relations and corporate marketing efforts. The Issuer entered into five (5) agreements primary related to corporate marketing and some included investor relations activities. Four (4) of these agreements were for six (6) months of services and one (1) agreement was for 12 months of services. In 2021, the Company has expensed approximately $670,000 related to corporate marketing and investor relation activities. All marketing and investor relation activities have been paid for with $75,000 remaining in prepaid expenses.

Total general and administrative expenses in the second half of 2021 are expected be lower as compared to the first half of 2021. The Company has not continued to invest in public relations and marketing in Q3 2021 and due to the delay in achieving operations, has not increased its staffing or activity levels which would result in higher general and administrative costs.

Interest and Financing Costs

On September 13, 2019, the Company issued secured notes totaling $1,000,000 to fund working capital costs. Certain members of RMMI’s executives and board of directors participated in the financing. The secured notes carry a 12% per annum interest rate, with an original maturity date of December 31, 2019 and are secured by a fixed charge on all present and after acquired property of the Company until the loan is repaid in full. A 5% facility fee was payable at the original maturity. The secured notes were extended from their original maturity date of December 31, 2019 and 5% extension fees accrue monthly.

On June 30, 2020, the secured note lenders agreed to a restructuring and repayment proposal. The principal amount of the loan plus all accrued and unpaid interest and fees converted into a $1,500,000 new loan. The new loan balance earns 12% annual interest starting October 1, 2020 and will be repaid monthly based on a standard mortgage repayment schedule with a one-year amortization. In October 2020 and January 2021, the noteholders agreed to further changes in the repayment schedule while maintaining the maturity of the secured notes as October 31, 2021. Security on the new loan remains the same as the original secured notes. As part of the restructuring and repayment proposal, the Company issued 1,500,000 common share purchase warrants on July 13, 2020 with a $0.255 exercise price and term expiring June 30, 2023 to the secured note lenders. The Black-Scholes option model was used in calculating the fair value of the warrants issued using a nil dividend yield, an interest rate of 0.25% and an expected volatility of 248%. The fair value of these warrants totaled $375,000 and was recognized the profit and loss with a corresponding increase to shareholders’ equity.

On December 11, 2020, some secured note holders, who opted to participate in the private placement, had their secure note principal amount totaling $212,500 and accrued interest totaling $4,960 utilized for issuance of common shares to them.

On December 18, 2020, the Company repaid $64,375 principal amount of the secured notes pro-rata to each note holder.

January 29, 2021, $61,500 of accrued extension fees were exchanged for 246,000 common shares issued to certain secured note holders who elected to receive a portion of their extension fees in Discover Wellness common shares.

During the three- and six-month periods ended June 30, 2021, interest and fees totaled $37,000 and $73,000, respectively, and was recognized in the profit or loss (2020 - $238,948 and $418,948, respectively). The accrued interest and fees included in the accounts payable and accrued liabilities as at June 30, 2021 totaled $209,994 (December 31, 2020 - $198,494).

Lease Finance Expense

The Company’s lease expired on June 30, 2020 and the Company did not have any lease liabilities at June 30, 2021. In the six months ended June 30, 2020, $440 was recorded as a lease finance expense.

Share-based Compensation

Share-based Compensation
	(unaudited) For the three-month periods ended June 30 2021 2020	(unaudited) For the six-month periods ended June 30
		2021 2020
Non-cash share-based compensation expense	$123,500 $9,000	$263,000 $29,000

During the three and six months ended June 30, 2021, the Company issued NIL and 405,000 options, respectively (three and six months ended June 30, 2020 – NIL options) and issued NIL and 1,100,000 restricted share units (“RSUs”), respectively (2020 periods – NIL RSUs).

The share-based compensation expense recognized during the three- and six-months ended June 30, 2021 was $126,500 and $263,000 (three- and six-months ended June 30, 2020 - $9,000 and $29,000, respectively) including $50,500 and $123,500, respectively, for options and $76,000 and $139,500, respectively, for RSUs. During the six months ended June 30, 2021, NIL options were exercised (Six month ended June 30, 2020 – NIL options exercised).

The increase in share-based compensation expense in the 2021 period compared to the 2020 period is primarily due to the issuance of options and RSUs in 2021 versus NIL options and RSUs issued in 2020.

Impairment

At June 30, 2021, due to indicators of impairment, Discover Wellness assessed impairment on the Company’s property, plant and equipment. This assessment lead to cannabis cultivation equipment being impaired by $25,000 to reflect estimated fair value. Buildings and improvements have been impaired $1,00,000 to reflect estimated fair value. There is a high degree of uncertainty related to the fair value of cannabis equipment and building and improvements due to the highly specialized nature of these assets, the location of the Company’s land and building and the lack of available market value information to assess fair value.

In 2020, as a result of the Strategic Shift, the Company impaired some of its property, plant and equipment. Cannabis cultivation equipment has been impaired $25,000 to reflect estimated fair value for the equipment. Buildings and improvements has been impaired $45,000 to eliminate the remaining net book value related to the leasehold improvements for the hemp cultivation testing program.

At June 30, 2021, the Company assessed the fair value of its other assets and did not record any other impairments.

Transaction costs

In 20202, the Strategic Shift has resulted in certain transaction costs totaling $404,464 in the first six months on 2020 including severance costs for the Company’s prior President and Chief Executive Officer, write-off of certain deposits on equipment and legal and financial advisory costs.

The Company had placed deposits on certain long lead-time equipment necessary for cannabis cultivation equipment. With the change in the Company’s focus to hemp and CBD products, $145,370 of these deposits are not expected to be recoverable and have been expensed as transaction costs.

The Company did not incur any Transaction costs in 2021.

Allowance for doubtful accounts

The Company made deposits on certain long lead-time equipment that are no longer needed. In Q2 2021, Discover Wellness recorded an allowance for doubtful accounts of $42,832 related to the vendor deposit refund (three and six months ended June 30, 2020 - $NIL). The vendor did not make the last two payments to Discover Wellness and indicated to Discover Wellness that they were seeking new financing which would allow them to complete the payments to the Company. Due to uncertainty related to the vendor’s ability to obtain new financing, Discover Wellness recorded an allowance for doubtful accounts on the full balance outstanding ($121,311 remaining at December 31, 2020). Discover Wellness also recorded an allowance for doubtful accounts related to GST receivable due to uncertainty related to its ability to collect GST input tax credits paid to third parties as the Company has not earned any revenue since inception.

Outstanding share data

The Company is authorized to issue an unlimited number of voting common shares and preferred shares with no par value. At the date of this MD&A, the Company has 53,218,036 common shares issued and outstanding, 4,524,560 warrants, 1,100,000 Restricted Share Units and 2,480,000 options outstanding.

CAPITAL EXPENDITURES

The Company owns land and buildings in Newell County, Alberta. The Newell Property consists of two buildings, a 23,000 square foot main building and a 5,000 square foot warehouse. The Health Canada licenced building is in the 23,000 square foot facility. Within the 23,000 square foot facility, approximately half is within the Health Canada licenced area (the “Licenced Area”) and the other half is partially renovated expansion space (not licenced by Health Canada for cannabis operations).

The Licenced Area was originally designed for primarily aeroponics cultivation of cannabis and included ancillary space for product drying, light processing, packaging, secured storage, shipping and receiving and administrative space. The original renovation work for aeroponics cultivation ended in July 2019. Approximately $5.4 million had been invested in design, engineering, renovations and HVAC equipment in the main building for this phase of work. The Company received its Health Canada standard cultivation, processing and medical sales licence in October 2019. The Company did not initiate cultivation activities at that time because the Company did not have enough capital to fund the purchase of aeroponics equipment and other equipment nor the capital to fund working capital until the Company was able to generate revenue.

For the period ended June 30, 2021, the Company incurred $65,259 (2020 – $54,529) of costs related to the retrofitting of the property. For both periods, expenses primarily relate to construction. The buildings and improvements are not considered available for use (construction in progress) and are not subject to depreciation.

During the period ended June 30, 2021, the Company did not purchase any furniture and equipment (2020 - $nil).

In June 2020, after a strategic review, the Issuer decided to shift its focus from aeroponics cultivation to hemp processing and CBD products. The Licenced Area is licenced for both cultivation and processing and the renovations completed in 2019 are usable for both cultivation and processing. With the shift in strategy from cultivation to hemp processing, some of the space had to be repurposed with additional work to complete the installation of HVAC and other utility hookup. In June 2020 and continuing to December 2020, the repurposing and utility hookups were initiated. Approximately $400,000 has been invested in this phase of work. All material equipment for renovations and initial processing operations have been purchased. Since December 2020, no material renovation work has been completed due initially to a stoppage for work-flow planning and other design and engineering work.

LIQUIDITY AND CAPITAL RESOURCES

For the six months ended June 30, 2021, Discover Wellness used net cash in operating activities totalling $927,690 (2020 - $371,021). The 2021 net cash in operating activities was used primarily to fund general and administrative expenses versus in 2020 net cash was used to fund general and administrative expenses as well but was partially offset by changes in non-cash working capital.

For the six months ended June 30, 2021, Discover Wellness used net cash in investing activities totalling $78,354 (2020 - $19,589). In both years, the cash was primarily used for the redevelopment of the Company’s Property.

For the six months ended June 30, 2021, Discover Wellness used $24,798 cash in financing activities (2020 - $19,301). In 2021 the majority of the use of cash related to a change in non-cash working capital versus in 2020 the use of cash related to the repayment of the lease liability.

As at June 30, 2021, the Company had working capital surplus of $4,109,203 (2020 – working capital deficiency of $1,463,682). The change in working capital balance in 2021 primarily relates to the cash received with the 2020 private placements and inventory purchased.

The Company expects to initially spend approximately $500,000 in capital expenditures on renovations and utility hook-ups at the Newell Property to become operational. The Company will need to raise additional debt and/or equity financing to fund capital expenditures and working capital requirements to achieve commercial operations.

FINANCIAL INSTRUMENTS, FAIR VALUE AND RISK MANAGEMENT

At June 30, 2021, the Company’s financial instruments consist of cash, loan receivable, accounts payable and accrued liabilities, secured notes and the CEBA loan.

Fair value hierarchy

Financial instruments recorded at fair value are classified using a fair value hierarchy that reflects the significance of the inputs used in making the measurements.

The fair values of the Company’s financial instruments approximate their carrying values due to the relatively shortterm maturity of these instruments.

Risk Management

Market risk is the risk that the fair value of future cash flows of a financial asset or a financial liability will fluctuate because of changes in market prices. The Company’s market risk is comprised of credit risk, liquidity risk, interest rate risk, and foreign currency risk.

Credit risk

Credit risk is the risk of loss associated with the counterparty's inability to fulfil its payment obligations. Financial instruments that potentially subject the Company to concentrations of credit risks consist principally of cash and cash equivalents, other receivables, and loan receivable. All of the Company’s cash was held at one financial institution on June 30, 2021, which is a Canadian Chartered Bank. Management believes that the risk of loss is minimal, but the Company is subject to concentration of credit risk.

An allowance for doubtful accounts was recognized for the full amount of other receivables at June 30, 2021 (December 31, 2020 – other receivables of $183,784). In Q2 2021, Discover Wellness recorded an allowance for doubtful accounts of $42,832 related to the vendor deposit refund and $95,494 related to GST receivable for a total of $138,326 (three and six months ended June 30, 2020 - $NIL). The vendor did not make the last two payments to Discover Wellness and indicated to Discover Wellness that they were seeking new financing which would allow them to complete the payments to the Company. Due to uncertainty related to the vendor’s ability to obtain new financing, Discover Wellness recorded an allowance for doubtful accounts on the full balance outstanding. Discover Wellness also recorded an allowance for doubtful accounts related to GST receivable due to uncertainty related to its ability to collect GST input tax credits paid to third parties as the Company has not earned any revenue since inception.

The loan receivable is with SG with whom Discover Wellness has a Strategic Alliance and Purchase agreement with. Discover Wellness has secured the SG loan with 2,000,000 hemp seeds and believes that collection or full recovery is likely.

Liquidity risk

Liquidity risk is the risk that the Company will not be able to meet its financial obligations as they fall due. The Company currently settles its financial obligations with cash. As at June 30, 2021, the Company's financial liabilities consist of accounts payable and accrued liabilities, secured notes and CEBA loan. The Company manages its liquidity risk by reviewing its capital requirements on an ongoing basis. There have been no changes in the Company's strategy with respect to credit/liquidity risk in the year.

In 2021, all cash outflows relating to financial liabilities were repayable within a year totaling $1,765,391, with the exception of the $60,000 CEBA loan which is due December 31, 2022 (December 31, 2020 - $1,962,856 within one year, CEBA loan $60,000 due December 31, 2022).

Interest risk

Interest rate risk is the risk that the fair value of future cash flows of a financial instrument will fluctuate as a result of changes in market interest rates. The Company is currently not exposed to interest rate risk as its debt is at a fixed interest rate.

Currency risk

The operating results and financial position of the Company are reported in Canadian dollars. The Company purchases some equipment that are denominated in United States dollars (“US dollars”). The purchase value of some of the Company’s equipment is subject to currency transaction and translation risks.

On December 30, 2020, the Company was owed US$88,944 from a vendor for a deposit refund. The effect of a $0.01 increase or decrease in US dollars against the Canadian dollar on receivables would result in an increase or decrease of $889 received by the Company. An allowance for doubtful accounts was recognized at June 30, 2021 for the full amount of this vendor receivable.

At June 30, 2021, the Company had no hedging agreements in place with respect to foreign exchange rates. The Company has not entered into any agreements or purchased any instruments to hedge possible currency risks at this time.

CAPITAL MANAGEMENT RISK

The Company’s objectives when managing its capital are to safeguard its ability to continue as a going concern, to meet its capital expenditures for its continued operations, and to maintain a flexible capital structure which optimizes the cost of capital within a framework of acceptable risk. The Company manages the capital structure and makes adjustments in light of changes in economic conditions and the risk characteristics of the underlying assets. To maintain or adjust its capital structure, the Company may issue new shares, issue new debt, or acquire or dispose of assets. As at June 30, 2021, the Company had $1,223,125 of secured notes outstanding (December 31 2020 - $1,223,125). The Company is not subject to externally imposed capital requirements.

Management reviews its capital management approach on an ongoing basis and believes that this approach, given the relative size of the Company, is reasonable. The Company considers its shareholder’s equity as capital which, as at June 30, 2021 is $10,691,346 (December 31, 2020 $13,088,343).

RELATED PARY TRANSACTIONS

The following is a summary of transactions with directors and officers, and companies controlled by directors of the Company. The amounts are measured at the exchange amount which is the fair value of the transactions.

(a) Transactions with related parties for the six months ended June 30:

2021	2020
Legal feespaid orpayable to a firm at which a director of the Companyis apartner: $54,680	$66,658

At June 30, 2021, $10,868 (June 30, 2020 - $68,523) was owing to the law firm at which a director of the Company is a partner. This amount is recorded on the Statement of Financial Position in accounts payable and accrued liabilities and will be paid in the normal course of business. On the Statement of loss, the cost is recorded in general and administrative expenses.

(b) Secured notes

Several officers and directors of the Company participated in the Company’s secured note financing and restructuring and repayment proposal. These related parties are owed their proportionate share of the fees and interest and these amounts are recorded in accounts payable and accrued liabilities.

On October 14, 2020, the Company entered the SG Transaction at which time SG became a related party. In 2020, the Company issued a total of 16,250,000 common shares for the strategic partnership and inventory. Further, Discover Wellness has provided SG with a $500,000 loan.

CONTRACTUAL OBLIGATIONS AND CONTINGENCIES

Purchase of property, plant and equipment

The Company places purchase orders with suppliers in the normal course of business for acquisition of property, plant and equipment related to its Newell facility that had not been supplied or delivered. At June 30, 2021, $nil purchase commitments remain outstanding (June 30, 2020 – commitments of $28,000).

SG hemp purchase and strategic alliance

In connection with the SG Transaction, the Company entered into a purchase agreement for premium high-CBD hemp flower and biomass from SG and entered into a definitive strategic alliance agreement which provides Discover Wellness with exclusivity over SG’s high-CBD genetics in Canada and assumption of its hemp CBD flower, biomass and concentrate business globally. In consideration for the strategic alliance, Discover Wellness issued 3,000,000 Common Shares and will pay SG a cash royalty on the sale of hemp seeds in Canada. As of June 30, 2021, Discover Wellness has taken possession of 250,000 kilograms of high-CBD biomass, issued 12,000,000 Common Shares to SG and completed the strategic alliance agreement with SG. As the amount payable to SG upon subsequent sale of product by Discover Wellness to a third party calculated based on the type of product sold and CBD content of the purchased biomass and is essentially a royalty payment to SG upon eventual final sale hence the Company has no liability for this amount currently. The amount of the cash royalty to be paid varies depending on whether the hemp is processed by the Company, processed by a third party or sold unprocessed. There are uncertainties relating to the amount and timing of the outflow of this payment, especially since the Company is considering all three sales options.

The Company has been informed that there is a commercial dispute between SG and its contract hemp farmer. The Company is observing the discussions between the farmer and SG with the objective of protecting its hemp inventory which is being stored at the farmer’s warehouse.

Contingencies

As of June 30, 2021, the Company was a defendant in a civil claim brought by a former employee and a business related to the former employee for severance obligations and unpaid services. Based on legal advice, the Company believes that the claim is without merit and intends to vigorously defend itself in each of these claims. The Company believes that it will be successful in defending against these claims and therefore has not recorded any provisions related to these matters.

OFF-BALANCE SHEET ARRANGEMENTS

The Company has no off-balance sheet arrangements.

RISK FACTORS

Discover Wellness is in its early stages of development and has recently undergone a strategic shift in its business model away from cannabis cultivation to focus on processing and extraction of hemp biomass into CBD concentrates, as such, Discover Wellness’s business and its securities are subject to various risks and uncertainties. For more information about risk factors relating to Discover Wellness and its business, see heading “Risk Factors” in the annual MD&A dated March 17, 2021 which is found under Discover Wellness’s SEDAR profile at www.sedar.com.

SUMMARY OF QUARTERLY RESULTS

	Q2 2021	Q1 2021	Q4 2020	Q3 2020	Q2 2020	Q1 2020	Q4 2019	Q3 2019
Revenue	$NIL	$NIL	$NIL	$NIL	$NIL	$NIL	$NIL	$NIL
Net loss	$1,879,557	$849,643	$632,314	$1,290,433	$945,876	$442,433	$312,678	$370,792
Basic and diluted loss per share	$0.04	$0.02	$0.03	$0.08	$0.07	$0.02	$0.03	$0.03

In Q2 2021, the Company recorded an $1,025,000 impairment on the value of its property, plant and equipment and recognized an allowance for doubtful accounts on its other receivables, both contributing to the higher net loss in the quarter. The Company incurred $516,119 of general and administration costs, with the increase from the prior year due to increased expenditures on investor relations and corporate marketing.
• In Q1 2021, the Company incurred $589,066 of general and administration costs and incurred $61,905 in property, plant and equipment costs to retrofit its property for the production of hemp and high quality and high purity CBD products.
In Q4 2020 in connection with the SG transaction, the Company accepted delivery of 550,000 lbs of HighCBD biomass. Further, transaction costs related to the Strategic Shift and the SG transaction totaled $72,240 for the quarter, including $65,000 of non-cash transactions. The Company incurred $260,630 of general and administration costs and a second private placement was closed with $2,731,028 gross proceeds raised.
In Q3 2020, the Company progressed with the Strategic Shift including the termination of its agreement with Clearwater and entered a new partnership with SG. Transaction costs and impairment totaled $615,646 including $507,500 in non-cash compensation to a financial advisor, were related to the Strategic Shift. The Clearwater hemp purchase agreement and its termination in itself did not result in any direct Transaction costs. Transaction Costs include legal costs to enter into and to terminate the Clearwater agreement, defence of an employment claim, and certain costs incurred by prior employees while they were employed with the Company which had no continuing value to the Company or were not for the benefit of the Company. The costs related to the Strategic Shift and the non-cash cost of the warrants issued in Q3 2020 for the secured notes restructuring contributed to the Company’s net loss and comprehensive loss for the period. the Company closed a private placement of common shares and received gross proceeds of $753,685 plus an additional $281,251 of subscriptions received in advance.
In Q2 2020, the Company announced the Strategic Shift. Transaction costs and impairment totaled $404,464 and $70,000, respectively, were related to the Strategic Shift. The Company also restructured its secured notes to allow for their repayment over a one-year period starting in October 2020. The costs related to the Strategic Shift and the secured notes interest, fees and restructuring contributed to the Company’s net loss and comprehensive loss for the period.
In Q1 2020, the Company continued to seek additional financing to complete the Newell property. The Company was able to extend the maturity date of its secured notes and incurred interest expense and extension fees on the Secured Notes.
In Q4 2019, the Company received its cultivation, processing and medical sales licence from Health Canada. The secured notes maturity was extended to March 31, 2020 with extension fees accruing on January 1, 2020 and at future dates if the notes remain outstanding. The Company continued to incur general and administrative costs to achieve commercial operations.

In Q3 2019, the Company secured notes totaling $1,000,000. Certain members of the Company’s executives and board of directors had participated in the financing in the collective amount of $425,000. The secured notes carried a 12% per annum interest rate, matured December 31, 2019 and are secured by the Newell property. A 5% facility fee was also payable at maturity.
In Q1, Q2 and Q3 2019, the Company continued to renovate its Property for cannabis operations. This investment in property, plant and equipment has contributed to the increase in total assets of the Company and a reduction in it’s working capital balance. The Company continued to incur net losses and comprehensive losses because it had not obtained the necessary licences at September 30, 2019 to be operational and had not earned any revenue, leading to a reduction in shareholders’ equity.

CRITICAL ACCOUNTING ESTIMATES

A summary of the Company's significant accounting estimates is contained in Note 2 to the December 31, 2020 audited consolidated financial statements. The accounting estimates are subject to key judgments about future events, many of which are beyond the Company's control. The significant judgments made by management in applying the Company’s accounting policies and the key sources of estimation uncertainty in the period ended June 30, 2021 were the same as those described in that last annual financial statements.

SIGNIFICANT ACCOUNTING POLICIES

Please refer to the December 31, 2020 audited financial statements and accompanying notes for a description of the significant accounting policies used by the Company. The policies set out in the Company’s December 31, 2020 financial statements were consistently applied to all periods presented.

ADOPTION OF NEW ACCOUNTING STANDARDS

The Company has reviewed all new and revised accounting standards and pronouncements and has determined that there were none issued during the period ended June 30, 2021 that would have a significant impact.

ADDITIONAL DISCLOSURE FOR VENTURE ISSUERS WITHOUT SIGNIFICANT REVENUE

An analysis of the material components of the Company’s general and administrative expenses is disclosed in this MD&A. Applicable disclosure have also been provided under the headings “General and Administrative Expenses” and “Capital Expenditures” to this MD&A.

FORWARD LOOKING STATEMENTS

Certain statements contained in this MD&A constitute “forward-looking statements” or “forward-looking information” within the meaning of the applicable securities legislation (collectively, “ forward-looking statements ”). These statements relate to management’s expectations about future events, results of operations and the Company’s future performance (both operational and financial) and business prospects. All statements other than statements of historical fact are forward-looking statements. Forward-looking statements can be identified by words such as: “anticipate,” “intend,” “contemplate,” “continue,” “propose,” “predict,” “plan,” “goal,” “seek,” “believe,” “project,” “forecast,” “pursue,” “potential,” “objective,” “estimate,” “expect,” “strategy,” “future,” “likely,” “might,” “may,” “shall,” “should,” “could,” “will,” “capable,” and similar references to future periods. These statements involve known and unknown risks, uncertainties and other factors that may cause actual results or events to differ materially from those anticipated in such forward-looking statements. No assurance can be given that these expectations will prove to be correct and such forward-looking statements included in this MD&A should not be unduly relied upon. Unless otherwise indicated, these statements speak only as of the date of this MD&A. In addition, this MD&A may contain forward-looking statements and forward-looking information attributed to third-party industry sources.

This MD&A contains, but are not limited to, the following forward-looking statements

Spend approximately $0.5 million in capital expenditures at the Newell Property to become operational;

Sell hemp to third parties either in a standard sales agreement or through revenue sharing arrangement with third party licenced processors;
Produce CBD products and derivatives;
Continue to assess debt and equity capital markets for fund raising opportunities; and
Pursue strategic transactions to enhance shareholder value and liquidity.

With respect to the forward-looking statements contained in this MD&A, the Company has made assumptions regarding: the ability to raise capital; the continued availability of capital; the ability to obtain financing on acceptable terms; Discover Wellness’s ability to successfully execute its plans and intentions; and the continuation of the current tax and regulation.

We believe the expectations reflected in those forward-looking statements are reasonable, but no assurance can be given that these expectations will prove to be correct and such forward looking statements included in, or incorporated by reference into, this MD&A should not be unduly relied upon. These statements speak only as of the date of this MD&A. The actual results could differ materially from those anticipated in these forward-looking statements as a result of the risk factors. For a detailed discussion of the risk factors, please see heading “ Risk Factors ” included in the Company’s Annual MD&A.

Readers are cautioned that the list of factors in the Company’s MD&A are not exhaustive. The forward-looking statements contained in this MD&A and the documents incorporated by reference herein are expressly qualified by this cautionary statement. The forward-looking statements contained in this document speak only as of the date of this document and the Company does not assume any obligation to publicly update or revise them to reflect new events or circumstances, except as may be required pursuant to applicable securities laws.

NON-IFRS FINANCIAL MEASURES

This MD&A includes reference to “working capital” which is a non-IFRS financial measure. Management believes that working capital, in addition to other conventional financial measures prepared in accordance with IFRS provides information that is helpful to understand the financial condition of the Company. The objective of using working capital is to present readers with a view of the Company from management’s perspective by interpreting the material trends and activities that affect the liquidity and financial position of the Company. This measure is not necessarily comparable to similarly titled measures used by other public companies. “Working capital” is calculated as current assets less current liabilities.

OTHER

Additional information relating to the Company can be found under Discover Wellness’s SEDAR profile at www.sedar.com.