COMPANY OVERVIEW Invictus MD Strategies Corp. is a publicly traded company listed on the TSX Venture Exchange (“TSXV”) under the symbol “IMH”, as well as "8IS1" on the Frankfurt Stock Exchange and "IVITF" on the OTCBB. The Company is primarily engaged in the investment, acquisition, and development of synergistic businesses in an effort to increase and sustain growth, value and profits. The unaudited condensed interim consolidated financial statements as at and for the three and nine months ended October 31, 2017 and 2016, include Invictus MD Strategies Corp. and its subsidiaries (together referred to as “Invictus MD” or the “Company”), and the Company’s interest in affiliated companies. The Company’s major subsidiaries include Acreage Pharms Ltd. (“Acreage Pharms”), Future Harvest Development Ltd. (“Future Harvest”) and Poda Technologies Ltd. (“Poda”). The Company’s major investments include an ownership interest in AB Laboratories Inc. (“AB Labs”) and AB Ventures Inc. (“AB Ventures”). Acreage Pharms is a licensed producer of medical cannabis in Canada pursuant to the Access to Cannabis for Medical Purposes Regulations (“ACMPR”). Future Harvest produces and sells plant fertilizers, nutrients and other supplies for hydroponics. Poda is engaged in the development of a new and improved technology to vaporize cannabis. AB Labs is a licensed producer of medical cannabis in Canada pursuant to the ACMPR, and AB Ventures is in the application phase for a license to produce medical cannabis under ACMPR. Invictus MD was incorporated on February 11, 2014, under the Business Corporations Act (British Columbia). The head office is located at 300 – 15047 Marine Drive, White Rock, British Columbia, Canada, V4B 1C5, and the registered and records office is located at 10th floor, 595 Howe Street, Vancouver, British Columbia, Canada, V6C 2T5. BUSINESS OVERVIEW Acreage Pharms Ltd. On February 7, 2017, the Company entered into a binding letter of intent (“LOI”) for an option to acquire 100% (the “Option”) of the outstanding shares of a Late Stage Applicant (the “Optionco”) under the ACMPR, from its current shareholders. In early January 2017, Optionco had its pre-license inspection from Health Canada and expected to receive a license to cultivate under the ACMPR in short order. On April 11, 2017, Acreage Pharms, for which Invictus MD has the option to acquire 100%, began their new cultivation cycle, having received their license to cultivate under the ACMPR, on March 29, 2017. Acreage Pharms has a 6,800- square foot purpose-built production facility within 60,000 square feet of secured perimeter for its current Phase 1 production facility located on 150 acres in Edson, Alberta. On April 25, 2017, the Company acquired 100% of the issued and outstanding shares of Acreage Pharms (the “Acquisition”) by exercising its share purchase option previously announced on February 7, 2017. Invictus MD Strategies Corp. For the three and nine months ended October 31, 2017 Management’s Discussion and Analysis Page 3 of 17 The aggregate consideration paid by the Company to the two former Acreage Pharms shareholders was comprised of: (i) 20,000,000 common shares of the Company; (ii) $6,000,000 in cash; (iii) and 3,000,000 warrants with an exercise price of $1.50, one-third of such warrants expiring every six months after the Acquisition’s closing date of April 25, 2017. The warrants have a fair value of $3,130,768, calculated using the Black-Scholes option pricing model assuming one-third of the warrants will expire every six months following the date the option is exercised, an average risk-free interest rate of 0.60%, an expected dividend rate of 0%, and an average expected annual volatility of 146%. On September 25, 2017, the Company announced that construction of the Phase 2 development, a purpose-built, multiple room production facility, is well underway at Acreage Pharms, with construction expected to be completed by end of January 2018. Utilizing best practices learned from previous developments, the design was optimized to increase it to 32,000 square feet. The new facility will house nine, 1,600 square foot flowering rooms, maximizing available floor space and allowing for a fully controlled and optimized environment, facilitating harvest every two weeks, and enabling the grow teams to complete all their procedures in the same day. Additionally, a second level 8 vault will be constructed giving Acreage Pharms the ability to store $60,000,000 of cannabis product at a given time. The capital costs of constructing the Phase 2 facility remain within the $6,000,000 that was initially budgeted. Given the location of Acreage Pharms in Edson, Alberta, electricity for the facility is one of the lowest rates in Canada. Additionally, there are no fees related to the disposal of water at the facility given it will be processed utilizing a septic tank and drain field method. These factors among others will allow Acreage Pharms to be very competitive while producing high-quality cannabis. On October 22, 2017, Health Canada removed the previously disclosed production capacity restriction at Acreage Pharms and extended the existing ACMPR license through to March 2020. In addition, Acreage Pharms has converted a vegetative room into a flowering room, thereby providing additional production capacity. Total capacity is expected to reach 5,000 kg by January 2018 when Acreage Pharms completes its current 32,000 square foot Phase 2 expansion. As at October 31, 2017, the Acreage Pharms Phase 1 facility is operating at full capacity and has approximately 80,000 grams of dried cannabis in its vault, ready for sale once it receives its sales license. Initial harvests in the existing state-of-the-art production facility, using pesticide free growing systems and Good Production Practices, has resulted in high quality, nonirradiated medical cannabis. Acreage Pharms recently completed its sixth harvest, and the yield increased by 30% over the prior harvest from the same room as a result of improved plant spacing and activation of the nutrient delivery system. The facility continues to grow completely pesticide free and the purpose- built facility is out performing management’s expectations for Good Production Practices and over all production values. AB Laboratories Inc. and AB Ventures Inc. On December 23, 2016, the Company acquired 33.33% of AB Laboratories Inc. ("AB Labs"), a Licensed Producer under the ACMPR. Under the terms of the agreement, the Company acquired 33.33% of AB Labs for consideration of $5,000,000 (paid) and 2,400,000 common shares (issued with a fair value of $3,456,000), and payment of $2,000,000 ninety days after closing (paid). On December 23, 2016, the Company acquired 11.76% of AB Ventures Inc. (“AB Ventures”) for consideration of $2,000,000 (paid). In exchange, AB Ventures issued the Company 13.33 common shares and a warrant to acquire an additional 36.66 common shares for $5,500,000. Upon payment of the $5,500,000, the Company will have been issued 49.99 common shares of AB Ventures, representing a 33.33% ownership interest. The Company and AB Ventures agreed to use the proceeds to fund the purchase of land for, construction of, and application to Health Canada for approval of, a facility for cultivation of cannabis under the ACMPR. The Company has the right of first refusal to arrange any initial public offering, reverse take-over, or other going public transaction of AB Labs or AB Ventures following closing. Invictus MD Strategies Corp. For the three and nine months ended October 31, 2017 Management’s Discussion and Analysis Page 4 of 17 On February 9, 2017, AB Ventures acquired 100 acres of land in Hamilton, Ontario. The land acquisition, worth approximately $1,650,000, is scheduled to close in early May 2017 (closed) and will be used for future cannabis cultivation, once licensed under the ACMPR. Plans to construct five production facilities on the new land totaling 100,000 square feet is expected to be completed by 2019, subject to timely receipt of approvals. The entire 100 acres will be available for future expansion. Invictus MD has made a commitment to invest $5,500,000, which will be used to fund the costs of licensing approval under the ACMPR, and constructing the initial 42,000 square foot cultivation facilities. The commitment is in addition to $2,000,000 already funded for the land acquisition plus working capital and will provide the Company with a 33.33% interest in AB Ventures. On March 14, 2017, the Company completed its final commitment with a cash transaction of $2,000,000 to acquire 33.33% of AB Labs. AB Labs is licensed for cultivation under the ACMPR and maintains a 16,000-square foot facility located in Hamilton, Ontario. On April 19, 2017, the Company announced that AB Labs will provide their unique products in Canopy Growth Corporation’s (“Canopy Growth”) (TSX: WEED) curated CraftGrow line on Tweed Main Street’s online store, that brings high quality cannabis grown by a diverse set of producers. On October 22, 2017, Health Canada removed the previously disclosed production capacity restriction at AB Labs and extended the existing ACMPR license for a period of two years. As at October 31, 2017, the AB Labs facility is operating at full capacity and has approximately 65,000 grams of dried cannabis in its vault, ready for sale once it receives its sales license. Update on production capacity and sales licenses On November 27, 2017, the Company announced that through its interests in two ACMPR license holders, its wholly- owned subsidiary Acreage Pharms and its one-third interest in AB Labs, it expects to have annual production capacity of 6,000 kg commencing January 2018, several months before Canada expects cannabis to become recreationally legal. Total current annual production capacity at both locations is approximately 1,500 kg. Both Acreage Pharms and AB Labs have submitted formal requests to Health Canada to amend its license to allow for the sale and distribution of medical cannabis. The issuance of the amendment is subject to, among other things, a regulatory inspection of Acreage Pharms’ and AB Labs’ production facilities and cannot be guaranteed by the Company. However, the Company is confident that both facilities are compliant with all necessary requirements, that they will pass the required inspection, and that the amendment will be issued in due course. The pre-sales license inspection is the last step prior to the issuance of a sales license under the ACMPR.
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