Annual Report to Shareholders
Annual Report to Shareholders

Perth, Oct 31, 2016 AEST (ABN Newswire) - MMJ PhytoTech Ltd (googlechartASX:MMJ) is pleased to provide the company's Annual Report to shareholders.

MANAGING DIRECTOR'S REPORT

The Company's most notable achievement in FY2016 was the securing of a cultivation license under the Marihuana for Medical Purposes Regulations ('MMPR') for our flagship Duncan Facility in Canada.

To put this into perspective, MMJ is now the only Australian-based company to have successfully secured a Canadian medical cannabis cultivation licence, and one of very few global operators with the capacity to legally produce commercial quantities of THC containing cannabis in a federally regulated market.

Importantly, operating within a highly regulated, federal system also allows for the importing and exporting of narcotics across national borders, which will enable MMJ to penetrate new regulated markets as they emerge.

In line with the Board's strategy to position MMJ as a leader in the rapidly evolving medical and recreational cannabis markets in Canada, the Company announced post year end that it would be pursuing the listing of United Greeneries and Satipharm on the TSX-V.

A key driver behind the transaction is to provide shareholders with the opportunity to benefit from the significant value currently being realised by TSX-V listed cannabis producers such as Aphria, Canopy and Aurora. The Board believes the reverse takeover of Top Strike Resources Limited is a timely and compelling opportunity and we look forward to delivering considerable increased value to our shareholders.

Canadian Recreational Cannabis Market - A First Mover Opportunity

MMJ views the Canadian recreational cannabis market as a significant near-term growth catalyst for the Company, and it is critical that our shareholders understand the significance of establishing a firstmover advantage in this market.

The Canadian recreational cannabis market has a conservative estimated value of CAD$5 billion per annum, and it is widely expected that existing licensed producers under the current MMPR will have a significant first-mover advantage as early stage suppliers to this market, with only the distribution separating the regulatory regime of medical and recreational cannabis.

The commercial magnitude of recreational cannabis use becoming legalised is comparable to the end of the prohibition on alcohol in North America. With wide consensus in the population, Canadians expect to have full recreational liberation of cannabis implemented within FY 2017. I am very proud that our group of companies has provided our shareholders with the ground level investment opportunity that comes with the first mover options in this new and unprecedented market, which will likely spread over the civilized world within the next couple of years.

Significant Advances in Clinical Trials

Having successfully completed a Phase 1 Clinical Trial of the Company's proprietary oral delivery Gelpell-CBD capsules in March 2016, our Israel-based subsidiary, PhytoTech Therapeutics, is now focused on the commencement of its Phase 2 Clinical Trial, aimed at measuring the efficacy of the capsules for reducing seizures in children with intractable epilepsy.

The team was extremely buoyed by the positive outcomes of the Phase 1 Clinical Study, which not only highlighted the safety and tolerability of our oral delivery formulations, but also demonstrated a superior performance in comparison to market leader GW Pharmaceuticals' Sativex product.

Looking ahead, the Company is eagerly awaiting the outcomes of the Phase 2 Clinical Study as we firmly believe it has the potential to be a significant growth catalyst for our shareholders in the future.

Strengthened Management Team

MMJ also took the necessary steps to strengthen its senior management team and advisory personnel, with two key appointments.

In June, the Company appointed Mr Stanislav Sologubov as Chief Executive Officer of Satipharm AG in Switzerland. Mr Sologubov is an international sales and marketing expert with more than 15 years' experience working with global healthcare companies including Johnson & Johnson and Bausch + Lomb. Mr Sologubov brings with him a wealth of pharmaceutical industry knowledge and will be a key component in driving increased sales for MMJ throughout key markets in Europe.

Post year end, the Company appointed Catherine Harvey as Chief Operations Officer. Based in Sydney, Catherine brings senior corporate experience in the pharmaceutical industry to the team and will play a significant role in the Group's international expansion strategy.

Conclusion and FY2017 Outlook

Taking into account the developments post year end, FY2017 is set to be another highly productive year for MMJ, with a number of key catalysts set to be executed over the next 12 months. The Board views the soon to be legalised Canadian recreational market as a game-changing opportunity for MMJ, and our vision to provide shareholders with a direct exposure to this market via a strategic TSX-V listing as one of only 34 Licensed Producers in Canada will further amplify this opportunity.

I wish to take this opportunity to thank our staff and contractors who have played such a significant role in delivering our key milestones during the year, as the commitment and expertise of our staff is the driving force behind the business. I would also like to thank our valued shareholders for their ongoing support to date, and I look forward to reporting further success this year as MMJ continues towards becoming a global leader in the emerging international medical and recreational cannabis sectors.

DIRECTOR'S REPORT

Principal activities during the period

The principal activities of the Group during the 2016 financial year consisted of:

- Completion of the acquisition of Canadian based company, MMJ Bioscience Inc;

- Progression of MMPR license in respect of the Group's medical cannabis cultivation facilities in Canada;

- Production and distribution of cannabinoid-based food supplements throughout Europe; and

- Pharmaceutical research and development of delivery technologies for the effective administration of cannabinoids.

Further details on the activities of the Group during the reporting period are set out in the Review of Operations section below.

Significant changes in the state of affairs

During the 2016 financial year, the Company completed the acquisition of Canadian based company MMJ Bioscience Inc and subsequently changed its name to MMJ PhytoTech Limited. As a result of the acquisition, the Group now controls operations across the entire Medical Cannabis value chain through the following core business units:

- United Greeneries - the Group's Canadianbased cultivation division which owns and operates the Group's federally licensed Duncan Facility. The Company also owns a second growing facility in Lucky Lake, Saskatchewan which is in the early stages of the MMPR license application process.

- Satipharm - the Group's European cannabisbased, pharmaceutical, nutraceutical and cosmetics processing and distribution division which holds a number of key international partnerships for the production and distribution of cannabinoid-based pharmaceutical, nutraceutical and wellness products.

- PhytoTech Therapeutics - the Group's Israelbased research and development division which is primarily focused on the development and commercialisation of new and existing delivery systems and devices that have the potential to deliver safe, effective and measured doses of medical cannabis to patients.

Subsequent to the end of the reporting period, MMJ advised that it had signed a binding Term Sheet with TSX-V listed company Top Strike Resources Limited (TSX-V: TSR) ("Top Strike"), for Top Strike to acquire 100% of the issued shares of United Greeneries and Satipharm respectively. The aggregate sale price of United Greeneries and Satipharm (C$40 million) represents approximately 97% of MMJ's market capitalisation (undiluted and based on a share price of A$0.24).

The transaction remains subject to a number of conditions, including shareholder approval. Post spin out, MMJ shareholders will, through their shareholdings in MMJ, have an indirect ownership in a fully-financed, growth-focused cannabis company with two key operating brands in United Greeneries and Satipharm.

Review of Operations

Successful merger between PhytoTech Medical Limited and MMJ Bioscence Inc.

In July 2015, PhytoTech Medical Limited announced the successful completion of its merger with MMJ Bioscience Inc., creating Australia's first vertically integrated medical cannabis company. The entity was subsequently rebranded as MMJ PhytoTech Limited, with a consolidated composition of executive Board and Management personnel from both companies.

Importantly, the merger strategically combined operations spanning the entire MC value chain, from cultivation, development and distribution of pharmaceutical and nutraceutical products.

MMJ Bioscience Inc. was a highly suitable merger proposition, as it possessed a complimentary asset base, a strong management team and the shared vision of realising value through vertical integration and control of the entire MC supply chain.

MMJ Bioscience Inc. also had a comparable vertical integration strategy in place, having developed R&D operations in Canada and Europe and created a European subsidiary, Satipharm, which had designed a CBD supplement. In addition, MMJ Bioscience Inc. had forged key relationships with suppliers, universities and other related players globally that would add considerable value to the Company's future pharmaceutical initiatives. The combined entity now has the capacity to establish a highly scalable footprint within favourable regulatory markets worldwide.

The Company received all regulatory approvals for the completion of the transaction in July 2015. The acquisition was purely scrip based, with PhytoTech issuing an initial 51,000,000 ordinary shares, with up to a further 17,000,000 deferred shares issued in two tranches based on the achievement of key milestones; the first of which was achieved in on 28 June 2016 following the successful grant of an MMPR license at the Group's Duncan Facility in Canada, resulting in the issue of tranche one of the deferred shares (being 8,500,000 shares) in July 2016.

Cultivation Division

A number of key operational milestones were achieved in the Company's cultivation division during FY2016, with the most significant being the successful granting of the MMPR for the Company's flagship Duncan Production Facility on 28 June 2016.

As outlined above, the granting of the MMPR licence by Health Canada is a significant value catalyst for MMJ and its shareholders, as it positions MMJ as one of a select number of Licensed Producers globally with the capacity to cultivate MC on a commercial scale.

Importantly, production from the Duncan Facility will provide MMJ with a secure and legal source of pharmaceutical grade MC, and will enable near-term revenues to be generated from the sale of MC within Canada, and potentially via exports to other regulated MC markets, including Australia.

The significance of the Canadian regulatory system is highlighted by the fact that it falls under federal Canadian law, which enables imports and exports across national borders. The Canadian system also enables wide and easy consumer access to MC products and provides the required framework for the large scale commercial production of MC and related extracts.

Duncan Facility - Low Cost Expansion Strategy

On 3 August 2016, MMJ reported that United Greeneries had executed a binding letter of intent with Cowichan Tribes in respect to the leasing of a 13-acre strategic land package located immediately adjacent to the Company's existing Duncan Facility. MMJ estimates that the additional land could support up to 10 acres of greenhouse production space potentially yielding approx. 25,000 kg/year of cannabis, an increase of 25 times the current production capacity.

The LOI grants MMJ an option to lease at least 13 acres of the 40-acre strategic land package directly adjacent to the existing Duncan Facility until 1 June 2017. Additionally, the agreement provides that MMJ can increase the acreage beyond 13 acres if needed upon exercise of the option.

In consideration for the option to lease, the Company has agreed to pay Cowichan Tribes C$1,000 per month until the earlier of the expiry of the option agreement on 1 June 2017, or the entry into a lease agreement. Additionally, MMJ has committed to work with a Cowichan Tribes employment liaison on an ongoing basis to identify any employment opportunities at its current or expanded United Greeneries operations for Cowichan band community members.

Pharmaceutical Processing

Gelpell European Sales

During FY2016, MMJ continued to grow its pharmaceutical processing division, with a particular focus on boosting the sales of Satipharm products throughout regulated markets throughout Europe, with the Company's first revenues generated through the sale of its CBD Capsules.

The Company recorded revenue of A$255,340 for the year ending 30 June 2016 which were lower than originally forecast due to transaction processor, Paypal, suspending all Satipharm accounts. The Company overcame this challenge by partnering with UK supplement distributor, Prima Sport, who are now selling 10 mg and 100 mg Satipharm CBD Gelpell Gastro resistant Microgel Capsules via a dedicated online store at www.premiumcbd.co.uk in order to test a direct internet sales model.

Satipharm is also in the process of developing several new cosmetic and dietary products that it intends to market to EU-based customers in the near-term.

In June 2016, MMJ strengthened its senior management team with the appointment of Mr Stanislav Sologubov as Chief Executive Officer of Satipharm Switzerland. Mr Sologubov will focus on accelerating sales of Satipharm's medical cannabis consumer health products in Europe. With the midterm goal of establishing a robust, multi-product cash flow stream to fund MMJ's clinical development and pharmaceutical processing initiatives.

Based on the market insights collected within first 12 months of sales and the latest commercial and regulatory trends in the European market, the Company has re-branded its Satipharm portfolio of products and is working towards establishing its own CBD distribution platform that includes an online e-commerce platform as well as distribution relationships with major pharmaceutical retailers and wholesalers. The Company will provide an update in due course.

Satipharm Entry into Australian Market

In April 2016, MMJ advised that it had entered into binding Letters of Intent ("LOI") with two strategic partners to facilitate the Company's entry into the Australian market.

Fresh Therapeutics Compounding Pharmacy ("Fresh Therapeutics"), based in New South Wales, has agreed to partner with MMJ to import and develop a dispensary model for Satipharm's existing MC products under the current legal framework in Australia.

The partnership will initially focus on the distribution of Satipharm's exclusive Gelpell gastro-resistant Microgel capsules, while it also provides significant scope for the joint development of a dispensary network for all future products by MMJ, as the legal environment in Australia continues to progress and evolve.

In addition, an LOI was also signed with Epilepsy Action Australia to advance the availability, access and acceptance of MC in Australia through research, advocacy and education. This cooperative agreement will aim to drive the education process within the Australian market, and will incorporate clinical research into cannabis-based treatment options for epilepsy.

Epilepsy Action Australia is a leading advocacy group for epileptic patients and their families in Australia with a membership of over 100,000. This partnership will play a key role in allowing MMJ to leverage its position as an industry leader in the Australian MC field and to participate in discussions around the development of regulatory framework where appropriate.

Clinical Development

MMJ's Israel-based subsidiary, PhytoTech Therapeutics is implementing two oral licensed technologies - the PNL and Gelpell(R) - to develop its cannabis based prescription drugs.

The first clinical indications are:

1. Treatment of intractable epilepsy in children using CBD containing PTL101 capsules; and

2. Treatment of spasticity related symptoms associated with multiple sclerosis patients using its PTL201 capsules.

Phase 1 Clinical Trial

Phase 1 Clinical Study was commenced at the end of 2015. The multi-arm, randomised, 5-crossover study addressed the safety and performance of 5 different treatments on 15 healthy volunteers / 14 completers:

- Two dose THC:CBD PNL capsules;

- Two dose CBD Gelpell capsules; and

- Sativex as the reference drug.

The results for the Phase 1 Clinical Study were received in March 2016 and demonstrated a sound safety profile for oral delivery of THC and CBD at the tested doses. None of the adverse events ("AEs") typical of Sativex(R) (i.e., mouth ulcerations, pain and soreness of the oral mucosa) were reported in this study. Our two formulations were well tolerated and all reported AEs were mild-moderate and self-resolving.

Moreover, the PNL and Gelpell technologies both enhanced the absorption and bioavailability of THC and CBD, in comparison to Sativex(R).

Absorption when delivered via the PNL-based platforms was characterised by an immediate rise in plasma THC and CBD levels, which remained detectable for at least 8 hours post administration.

The Gelpell-CBD pellets were administered in gastroresistant hard capsules and therefore were associated with delayed onset. In spite of the delay, the delivery duration of CBD10 hard capsule was similar to that of Sativex(R) and in the case of CBD100, significant amounts of CBD were observed even after 24 hours (see Figure 2 in the link below). Dose proportionality was observed between CBD10 and CBD100 capsules.

Taken together, the heightened bioavailability of the tested orally delivered formulations and their impressive safety profiles, provide a feasible means of safely and effectively delivering both THC and CBD in a user-friendly manner. Moreover, the oral dosage form ensures highly consistent exposure, which comes arm-in-arm with higher therapeutic predictability and improved compliance. The tested oral capsules have long shelf life and can be stored at room temperature, further simplifying handling and overall convenience of use.

Characterisation of the Gelpell(R) - CBD micro-gelatine pellets

Satipharm's flagship, Gelpell(R) technology, is based on seamless natural gelatin pellets under 2mm that bind and protect the active compound. The natural pellets do not contain filling and or any emulsifiers which help to avoid irritation of gastric mucosa. The gelatin matrix pellets dispense over the gastrointestinal (GI) system to achieve a constant GItransit time. Maximised surface to volume ratio also contributes to enhanced bioavailability. The pellets are packed in hard gastro-resistant capsules or can be mixed directly with foods such as yogurts if required.

The technology has the potential to be a significant value catalyst for MMJ as its delivery mechanism provides a solution for the known issues with the absorption variance associated with oral delivery of cannabinoids.

PK & Bioavailability Results of Gelpell(R) - CBD Capsules in Comparison to Sativex

Figure 1 in the link below illustrates a comparison of plasma concentration over time (PK) of CBD 10 mg versus GW Pharmaceutical's Sativex, Figure 2 in the link below shows the PK of the 100 mg CBD versus 10mg CBD. Figure 3 in the link below demonstrated the relative bioavailability of Gelpell- CBD 10 mg versus Sativex.

PK results of PNL-THC: CBD capsules in Comparison to Sativex

The below graphs illustrate a comparison of plasma concentration over time (PK) of THC 7.0 mg & 10 mg, versus GW Pharmaceutical's Sativex (see Figure 4 in the link below), and CBD 7.0 mg & 10 mg versus Sativex (see Figure 5 in the link below).

Results summary:

- Safety and tolerable profile with no significant side effects;

- Higher bioavailability of the Gelpell CBD 10 in comparison to Sativex;

- Dose proportionality between Gelpell CBD 10 mg to CBD 100 mg; and

- 24 hours exposure time in the plasma for the CBD 100 mg.

Results summary:

- Safe and tolerable profile with no significant side effects;

- Consistent results;

- 1.2-1.3-fold higher bioavailability in comparison to Sativex;

- Very rapid onset; and

- 8 hours' exposure time in the blood.

Phase 2 Clinical Trial Update

Following the end of FY2016, MMJ advised that PTL had scheduled the commencement of a Phase 2 Clinical Study into the efficacy of its PTL101 capsules in treating intractable epilepsy in children.

The PTL101 capsules contain organically derived, highly purified CBD (cannabidiol) and are utilising proprietary formulation developed through the Company's Gelpell(R) product technology. The Phase 2 Study is scheduled to commence in Q4 2016 and will be undertaken at a leading healthcare facility in Israel. It is estimated that approximately 100,000 children in North America suffer from intractable epilepsy - a treatment resistant category of the disease, causing uncontrollable seizures.

If successful, the Phase 2 Clinical Trial results will be a key catalyst towards the commercial development of the PTL101 prescription drug for the treatment of intractable epilepsy in children.

MMJ would also like to advise that it is in the final stages of preparing for the commencement of a Phase 2 Clinical Study into the ability of its PTL201 capsules to treat spasticity related symptoms associated with multiple sclerosis patients.

Subsequent Events

Subsequent to the end of the financial period, the Company made the following material announcements:

- On 8 July 2016, MMJ completed the issue of 8,500,000 shares to the original vendors of MMJ Bioscience Inc upon the satisfaction of the first performance milestone under the terms of the merger between the Company and MMJ Bioscience Inc, being the grant of a cultivation license under the Marihuana for Medical Purposes Regulations ("MMPR") by Health Canada in respect of the Group's Duncan Facility in Canada which was achieved on 28 June 2016 ("Milestone 1 Consideration Shares"). In addition, the Company issued a further 255,000 shares to parties who introduced MMJ Bioscience Inc to the Company for the purposes of facilitating the merger transaction between the two companies ("Introducer Shares") and 1,000,000 shares upon the conversion of Class D Performance Rights held by an entity associated with Chairman, Peter Wall.

- On 3 August 2016, MMJ reported that its wholly owned subsidiary, United Greeneries, had executed a binding letter of intent with Cowichan Tribes in respect to the leasing of a 13-acre strategic land package located immediately adjacent to the Company's existing Duncan Facility.

- On 11 August 2016, Mr Ross McKay resigned as a Non-Executive Director of the Company due to increased work commitments associated with his other business interests in Canada.

- On 15 August 2016, MMJ confirmed the appointment of Ms Catherine Harvey as Chief Operations Officer, effective from 1 September 2016. Details of the Ms Harvey's remuneration is set out in the remuneration report in the link below.

- On 15 August 2016, MMJ advised that PhytoTech Therapeutics would be commencing a Phase 2 Clinical Trial into the efficacy of its PTL101 capsules in treating intractable epilepsy in children.

- On 28 September 2016, MMJ advised that it had signed a binding Term Sheet with TSX-V listed company, Top Strike Resources Limited (TSX-V: TSR) ("Top Strike"), for Top Strike to acquire 100% of the issued shares of UG and Satipharm respectively.

The transaction, which remains subject to a number of conditions, including shareholder approval, provides MMJ shareholders with exposure to the rapidly growing recreational and medical cannabis markets in Canada.

Post spin out, MMJ shareholders will, through their shareholdings in MMJ, have an indirect ownership in a fully-financed, growth-focused cannabis company with two key operating brands in UG and Satipharm.

The aggregate sale price of UG and Satipharm (C$40 million) represents approximately 97% of MMJ's current market capitalisation (undiluted and based on a share price of A$0.24).

No other matter or circumstance has arisen since 30 June 2016 that has significantly affected, or may significantly affect:

- the consolidated entity's operations in future financial years, or

- the results of those operations in future financial years, or

- the consolidated entity's state of affairs in future financial years.

To view the report, please visit:
http://abnnewswire.net/lnk/R7U91IOY


About MMJ Group Holdings Ltd

Phytotech Medical ASX:PYL

MMJ Group Holdings Ltd (ASX:MMJ) is a global cannabis investment company. MMJ owns a portfolio of minority investments and aims to invest across the full range of emerging cannabis-related sectors including healthcare, technology, infrastructure, logistics, processing, cultivation, equipment and retail. For MMJ's latest investor presentation and news, please visit: https://www.mmjphytotech.com.au/investors/

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Contact

Investor and Media Enquiries:
Jason Conroy
Chief Executive Officer
T: +61-2-8098-0819
E: info@mmjgh.com.au



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