Document:

Exhibit 4.4

 

 

EMERALD HEALTH THERAPEUTICS,
INC.

 

Condensed Interim Consolidated Financial Statements

 

For the three and nine months ended September 30, 2018 and 2017

 

(Unaudited)

(Expressed in Canadian Dollars)

 

     

     

    

 

EMERALD HEALTH THERAPEUTICS, INC.

CONDENSED INTERIM CONSOLIDATED STATEMENTS OF FINANCIAL POSITION

(Unaudited)

(Expressed in Canadian
dollars) 

	 	 	September 30	 	 	December 31	 
	 	 	2018	 	 	2017	 
	ASSETS	 	 	 	 	 	 	 	 
	 	 	 	 	 	 	 	 	 
	Current	 	 	 	 	 	 	 	 
	Cash and cash equivalents	 	$	52,905,302	 	 	$	44,523,145	 
	Accounts receivable (Note 5)	 	 	1,616,706	 	 	 	278,232	 
	Biological assets (Note 6)	 	 	1,790,278	 	 	 	114,559	 
	Inventory (Note 7)	 	 	2,844,026	 	 	 	727,635	 
	Prepaid expenses	 	 	1,738,323	 	 	 	167,911	 
	Due from related parties (Note 16)	 	 	9,507,248	 	 	 	324,674	 
	Total current assets	 	 	70,401,883	 	 	 	46,136,156	 
	 	 	 	 	 	 	 	 	 
	Plant and equipment (Note 9)	 	 	11,122,335	 	 	 	1,031,335	 
	Plant under construction (Note 10)	 	 	7,054,011	 	 	 	2,772,051	 
	Deposits on materials and equipment (Note 11)	 	 	2,000,000	 	 	 	-	 
	Refundable deposits	 	 	196,391	 	 	 	196,391	 
	Intangible assets (Note 12)	 	 	87,029,194	 	 	 	2,851,855	 
	Goodwill	 	 	169,323	 	 	 	169,323	 
	Long-term investment (Note 13)	 	 	436,132	 	 	 	666,667	 
	Investment in joint venture (Note 14)	 	 	24,228,072	 	 	 	19,907,061	 
	Total non-current assets	 	 	132,235,458	 	 	 	27,594,683	 
	TOTAL ASSETS	 	$	202,637,341	 	 	$	73,730,839	 
	 	 	 	 	 	 	 	 	 
	LIABILITIES	 	 	 	 	 	 	 	 
	 	 	 	 	 	 	 	 	 
	Current liabilities	 	 	 	 	 	 	 	 
	Accounts payable and accrued liabilities	 	$	5,570,227	 	 	$	1,378,645	 
	Current portion of long-term debt (Note 15)	 	 	2,536,758	 	 	 	-	 
	Deferred payment (Note 4)	 	 	22,308,583	 	 	 	-	 
	Payable to joint venture (Note 14)	 	 	-	 	 	 	4,000,000	 
	Due to related parties (Note 16)	 	 	319,091	 	 	 	247,505	 
	Total current liabilities	 	 	30,734,659	 	 	 	5,626,150	 
	 	 	 	 	 	 	 	 	 
	Deferred income tax liability	 	 	-	 	 	 	317,497	 
	TOTAL LIABILITIES	 	$	30,734,659	 	 	$	5,943,647	 
	 	 	 	 	 	 	 	 	 
	SHAREHOLDERS' EQUITY	 	 	 	 	 	 	 	 
	Share capital (Note 17)	 	 	193,262,959	 	 	 	77,912,246	 
	Warrants	 	 	4,360,000	 	 	 	461,772	 
	Contributed surplus	 	 	13,235,310	 	 	 	5,285,709	 
	Accumulated deficit	 	 	(38,955,587	)	 	 	(17,829,369	)
	TOTAL SHAREHOLDERS' EQUITY	 	 	171,902,682	 	 	 	65,830,358	 
	 	 	 	 	 	 	 	 	 
	Non-controlling interest (Note 4)	 	 	-	 	 	 	1,956,834	 
	TOTAL LIABILITIES AND EQUITY	 	$	202,637,341	 	 	$	73,730,839	 
	Nature and continuance of operations (Note 1)	 	 	 	 	 	 	 	 
	Commitments (Note 19)	 	 	 	 	 	 	 	 
	Events after the reporting period (Note 24)	 	 	 	 	 	 	 	 
	On behalf of the Board of Directors:	 	 	 	 	 	 	 	 

 

	/s/ Avtar Dhillon	/s/ Punit Dhillon	 
	Director	 Director	 

 

The accompanying notes form an integral part of these condensed
interim consolidated financial statements

 

    	1

     

    

 

EMERALD HEALTH THERAPEUTICS, INC.

CONDENSED INTERIM CONSOLIDATED STATEMENTS OF LOSS AND COMPREHENSIVE
LOSS

(Unaudited)

(Expressed in Canadian dollars)

 

	 	 	Three months
 ended
 September 30
 2018	 	 	Three months
 ended
 September 30
 2017	 	 	Nine months
 ended
 September 30
 2018	 	 	Nine months
 ended
 September 30
 2017	 
	 	 	 	 	 	 	 	 	 	 	 	 	 
	Revenue	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 
	Sales (Note 22)	 	$	321,070	 	 	$	211,316	 	 	$	978,550	 	 	$	658,292	 
	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 
	Cost of sales	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 
	Cost of goods sold	 	 	300,785	 	 	 	161,136	 	 	 	856,073	 	 	 	517,694	 
	Production costs	 	 	910,497	 	 	 	114,487	 	 	 	1,634,412	 	 	 	438,380	 
	Gain on changes in fair value of biological assets	 	 	(1,302,377	)	 	 	(64,307	)	 	 	(2,674,261	)	 	 	(208,637	)
	Gross margin	 	 	412,165	 	 	 	-	 	 	 	1,162,326	 	 	 	(89,145	)
	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 
	Expenses	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 
	General and administrative	 	 	4,735,075	 	 	 	1,292,148	 	 	 	10,691,659	 	 	 	3,141,208	 
	Sales and marketing	 	 	2,685,549	 	 	 	77,958	 	 	 	3,840,389	 	 	 	282,158	 
	Research and development	 	 	92,568	 	 	 	30,711	 	 	 	273,521	 	 	 	167,274	 
	Depreciation (Note 9 and 12)	 	 	1,217,003	 	 	 	49,567	 	 	 	2,393,459	 	 	 	132,006	 
	Share-based payments (Note 17)	 	 	2,165,851	 	 	 	271,968	 	 	 	6,201,559	 	 	 	842,942	 
	 	 	 	10,896,046	 	 	 	1,722,352	 	 	 	23,400,587	 	 	 	4,565,588	 
	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 
	Loss from operations	 	 	10,483,881	 	 	 	1,722,352	 	 	 	22,238,261	 	 	 	4,654,733	 
	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 
	Share of income from joint venture (Note 14)	 	 	(3,940,373	)	 	 	278,016	 	 	 	(4,321,011	)	 	 	278,016	 
	Interest income	 	 	(222,740	)	 	 	(60,997	)	 	 	(747,240	)	 	 	(118,494	)
	Fair value changes in financial assets (Note 13)	 	 	105,890	 	 	 	-	 	 	 	230,535	 	 	 	-	 
	Deferred income tax recovery	 	 	-	 	 	 	-	 	 	 	(317,497	)	 	 	-	 
	NET LOSS AND COMPREHENSIVE LOSS	 	 	6,426,658	 	 	 	1,939,371	 	 	 	17,083,048	 	 	 	4,814,255	 
	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 
	Net loss and comprehensive loss attributable to:	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 
	Emerald Health Therapeutics, Inc.	 	 	6,345,718	 	 	 	1,939,371	 	 	 	16,676,533	 	 	 	4,814,255	 
	Non-controlling interest	 	 	80,940	 	 	 	-	 	 	 	406,515	 	 	 	-	 
	 	 	 	6,426,658	 	 	 	1,939,371	 	 	 	17,083,048	 	 	 	4,814,255	 
	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 
	Net loss per common share	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 
	Basic and diluted	 	$	0.05	 	 	$	0.02	 	 	$	0.13	 	 	$	0.06	 
	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 
	Weighted average number of common shares outstanding	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 
	Basic and diluted	 	 	136,166,730	 	 	 	93,071,874	 	 	 	127,162,988	 	 	 	85,623,260	 

 

The accompanying notes form an integral part of these condensed
interim consolidated financial statements

 

    	2

     

    

 

EMERALD HEALTH THERAPEUTICS, INC.

CONDENSED INTERIM CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY

(Unaudited)

(Expressed in Canadian dollars)

 

	 	 	Share
    Capital	 	 	Warrants	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 
	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 		 	 	Total	 	 	Non-	 	 	 	 
	 	 	#
    of	 	 	 	 	 	#
    of	 	 		 	 	Contributed	 	 	Accumulated	 	 	Shareholders'	 	 	Controlling	 	 	Total	 
	 	 	Shares	 	 	Amount	 	 	Warrants	 	 	Amount	 	 	Surplus	 	 	Deficit	 	 	Equity	 	 	Interest	 	 	Equity	 
	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 
	Balance, December 31, 2017	 	 	106,787,226	 	 	$	77,912,246	 	 	 	9,707,677	 	 	$	461,772	 	 	$	5,285,709	 	 	$	(17,829,369	)	 	$	65,830,358	 	 	$	1,956,834	 	 	$	67,787,192	 
	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 
	Shares issued on stock option exercises (Note 17)	 	 	817,272	 	 	 	983,039	 	 	 	-	 	 	 	-	 	 	 	(369,050	)	 	 	-	 	 	 	613,989	 	 	 	-	 	 	 	613,989	 
	Units issued on prospectus offerings (Note 17)	 	 	10,000,000	 	 	 	40,740,000	 	 	 	10,000,000	 	 	 	9,060,000	 	 	 	-	 	 	 	-	 	 	 	49,800,000	 	 	 	-	 	 	 	49,800,000	 
	Share issuance costs	 	 	-	 	 	 	(273,628	)	 	 	-	 	 	 	-	 	 	 	-	 	 	 	-	 	 	 	(273,628	)	 	 	-	 	 	 	(273,628	)
	Acquisition of Agro-Biotech (Note 4)	 	 	9,911,894	 	 	 	45,000,000	 	 	 	-	 	 	 	-	 	 	 	-	 	 	 	-	 	 	 	45,000,000	 	 	 	-	 	 	 	45,000,000	 
	Deemed Issuance for acquisition of Northern Vine (Note 4)	 	 	1,093,938	 	 	 	4,000,000	 	 	 	-	 	 	 	-	 	 	 	-	 	 	 	(4,449,685	)	 	 	(449,685	)	 	 	(1,550,319	)	 	 	(2,000,004	)
	Shares issued on warrant exercises (Note 17)	 	 	8,239,863	 	 	 	24,901,302	 	 	 	(8,239,863	)	 	 	(3,044,679	)	 	 	-	 	 	 	-	 	 	 	21,856,623	 	 	 	-	 	 	 	21,856,623	 
	Warrants expired	 	 	-	 	 	 	-	 	 	 	(3,056,050	)	 	 	(2,117,093	)	 	 	2,117,093	 	 	 	-	 	 	 	-	 	 	 	-	 	 	 	-	 
	Share-based payments (Note 17)	 	 	-	 	 	 	-	 	 	 	-	 	 	 	-	 	 	 	6,201,558	 	 	 	-	 	 	 	6,201,558	 	 	 	-	 	 	 	6,201,558	 
	Net loss and comprehensive loss	 	 	-	 	 	 	-	 	 	 	-	 	 	 	-	 	 	 	-	 	 	 	(16,676,533	)	 	 	(16,676,533	)	 	 	(406,515	)	 	 	(17,083,048	)
	Balance, September 30, 2018	 	 	136,850,193	 	 	$	193,262,959	 	 	 	8,411,764	 	 	$	4,360,000	 	 	$	13,235,310	 	 	$	(38,955,587	)	 	$	171,902,682	 	 	$	-	 	 	$	171,902,682	 
	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 
	Balance, December 31, 2016	 	 	67,794,698	 	 	$	9,756,732	 	 	 	8,489,451	 	 	$	-	 	 	$	3,043,099	 	 	$	(9,097,537	)	 	$	3,702,294	 	 	$	-	 	 	$	3,702,294	 
	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 
	Shares issued on stock option exercise	 	 	453,000	 	 	 	308,658	 	 	 	-	 	 	 	-	 	 	 	(135,747	)	 	 	-	 	 	 	172,911	 	 	 	-	 	 	 	172,911	 
	Units issued on prospectus offering	 	 	24,870,100	 	 	 	36,260,901	 	 	 	-	 	 	 	-	 	 	 	-	 	 	 	-	 	 	 	36,260,901	 	 	 	-	 	 	 	36,260,901	 
	Warrants issued on prospectus offering	 	 	-	 	 	 	-	 	 	 	12,690,250	 	 	 	4,679,773	 	 	 	-	 	 	 	-	 	 	 	4,679,773	 	 	 	-	 	 	 	4,679,773	 
	Share issuance costs	 	 	-	 	 	 	(3,149,516	)	 	 	-	 	 	 	-	 	 	 	-	 	 	 	-	 	 	 	(3,149,516	)	 	 	-	 	 	 	(3,149,516	)
	Compensation options	 	 	-	 	 	 	(350,098	)	 	 	-	 	 	 	-	 	 	 	350,098	 	 	 	-	 	 	 	-	 	 	 	-	 	 	 	-	 
	Share-based payments	 	 	-	 	 	 	-	 	 	 	-	 	 	 	-	 	 	 	842,942	 	 	 	-	 	 	 	842,942	 	 	 	-	 	 	 	842,942	 
	Net loss and comprehensive loss	 	 	-	 	 	 	-	 	 	 	-	 	 	 	-	 	 	 	-	 	 	 	(4,814,255	)	 	 	(4,814,255	)	 	 	-	 	 	 	(4,814,255	)
	Balance, September 30, 2017	 	 	93,117,798	 	 	$	42,826,677	 	 	 	21,179,701	 	 	$	4,679,773	 	 	$	4,100,392	 	 	$	(13,911,792	)	 	$	37,695,050	 	 	$	-	 	 	$	37,695,050	 

 

The accompanying notes form an integral part of these condensed
interim consolidated financial statements

 

    	3

     

    

 

EMERALD HEALTH THERAPEUTICS, INC.

CONDENSED INTERIM CONSOLIDATED STATEMENTS OF CASH FLOW

(Unaudited)

(Expressed in Canadian dollars)

 

	 	 	Nine months
 ended
 September 30
 2018	 	 	Nine months
 ended
 September 30
 2017	 
	 	 	 	 	 	 	 
	Operating activities	 	 	 	 	 	 	 	 
	Net loss	 	$	(17,083,048	)	 	$	(4,814,255	)
	Items not involving cash	 	 	 	 	 	 	 	 
	Depreciation	 	 	2,393,459	 	 	 	132,006	 
	Gain on changes in fair value of biological assets	 	 	(2,674,261	)	 	 	(208,637	)
	Fair value changes in financial assets	 	 	230,535	 	 	 	-	 
	Share-based payments	 	 	6,201,559	 	 	 	842,942	 
	Share of loss from joint venture	 	 	(4,321,011	)	 	 	278,016	 
	Interest expense	 	 	144,261	 	 	 	-	 
	Deferred income tax recovery	 	 	(317,497	)	 	 	-	 
	Changes in non-cash operating working capital	 	 	 	 	 	 	 	 
	Accounts receivable	 	 	(1,233,683	)	 	 	(196,863	)
	Due from related parties	 	 	(1,182,574	)	 	 	(132,538	)
	Prepaid expenses	 	 	(1,569,486	)	 	 	(145,983	)
	Inventory and biological assets	 	 	(506,703	)	 	 	(454,469	)
	Accounts payable and accrued liabilities	 	 	2,918,467	 	 	 	(26,419	)
	Due to related parties	 	 	149,494	 	 	 	(29,145	)
	Net cash flows used in operating activities	 	 	(16,850,488	)	 	 	(4,755,345	)
	 	 	 	 	 	 	 	 	 
	Investing activities	 	 	 	 	 	 	 	 
	Investment in joint venture (Note 14)	 	 	(12,000,000	)	 	 	(12,227,259	)
	Acquisition of assets, net of cash acquired (Note 4)	 	 	(22,634,061	)	 	 	-	 
	Acquisition of business, net of cash acquired (Note 4)	 	 	(2,000,000	)	 	 	-	 
	Deposits on equipment	 	 	(2,000,000	)	 	 	(19,147	)
	Purchase of plant and equipment	 	 	(8,050,364	)	 	 	(1,160,868	)
	Purchase of intangible assets	 	 	(5,183	)	 	 	-	 
	Refundable deposits	 	 	-	 	 	 	(196,391	)
	Net cash flows used in investing activities	 	 	(46,689,608	)	 	 	(13,603,665	)
	 	 	 	 	 	 	 	 	 
	Financing activities	 	 	 	 	 	 	 	 
	Principal payment on long-term debt	 	 	(57,221	)	 	 	-	 
	Proceeds from prospectus offering	 	 	49,800,000	 	 	 	40,940,674	 
	Share issuance costs	 	 	(291,137	)	 	 	(3,149,516	)
	Stock option exercises	 	 	613,989	 	 	 	172,911	 
	Warrant exercises	 	 	21,856,622	 	 	 	-	 
	Net cash flows generated from financing activities	 	 	71,922,253	 	 	 	37,964,069	 
	 	 	 	 	 	 	 	 	 
	Increase in cash and cash equivalents	 	 	8,382,157	 	 	 	19,605,059	 
	Cash and cash equivalents, beginning of period	 	 	44,523,145	 	 	 	3,217,205	 
	Cash and cash equivalents, end of period	 	$	52,905,302	 	 	$	22,822,264	 

 

The accompanying notes form an integral part of these condensed
interim consolidated financial statements

 

    	4

     

    

 

EMERALD HEALTH THERAPEUTICS, INC.

NOTES TO CONDENSED INTERIM CONSOLIDATED FINANCIAL STATEMENTS

For the three and nine months ended September 30, 2018 and
2017

(Unaudited)

	(Expressed in Canadian dollars)

 

		1.	NATURE AND CONTINUANCE OF OPERATIONS

 

Emerald Health Therapeutics,
Inc. (the "Company"), is classified as a Tier 1 Venture Issuer on the TSXV, with its common shares (“Common Shares”)
listed under the trading symbol “EMH”. The Company is also traded on the OTCQX, with its Common Shares listed under
the trading symbol “EMHTF”. The Company was incorporated pursuant to the Business Corporations Act (British Columbia),
and its registered office is at Suite 2600 Oceanic Plaza, 1066 West Hastings Street, Vancouver, BC, V6E 3X1.

 

On May 2, 2018 the Company acquired
100% of the issued and outstanding shares of Agro-Biotech Sciences Inc. and its affiliate Agro-Biotech Property Holdings Inc. (together
“Agro-Biotech”). The principle business of Agro-Biotech Sciences Inc. is the production of dried cannabis flower. The
principle business of Agro-Biotech Property Holdings Inc. is to hold the land and building occupied by Agro-Biotech Sciences Inc.
for cannabis production.

 

The Company owns 100% of the
shares of Emerald Health Therapeutics Canada Inc. (“EHTC”), a company incorporated pursuant to the Business Corporations
Act (British Columbia). The principle business of EHTC is the production and sale of cannabis pursuant to the Cannabis Act
(Canada) (the “Cannabis Act”).

 

Through EHTC’s 50% equity
interest in Pure Sunfarms Corp. (“Pure Sunfarms”), the Company cultivates and intends to distribute wholesale cannabis
and cannabis extracts for therapeutic and non-therapeutic use purposes.

 

Through EHTC’s 100% owned
subsidiary, Northern Vine Canada Inc. (“Northern Vine”), a Licensed Dealer under the provisions of the Canadian
Controlled Drugs and Substances Act, the Company operates a laboratory facility located in Langley, British Columbia.

 

		2.	BASIS OF PRESENTATION

 

These condensed interim consolidated
financial statements do not include all disclosures normally provided in annual financial statements and should be read in conjunction
with the Company’s audited financial statements for the year ended December 31, 2017. Accordingly, accounting policies, estimates,
and judgements applied are the same as those applied in the Company’s financial statements for the year ended December 31,
2017, unless otherwise indicated. The Company assesses its accounting estimates and judgements every reporting period.

 

The Company’s interim results are not necessarily
indicative of its results for a full year.

 

		a)	Statement of Compliance

 

These condensed interim consolidated
financial statements have been prepared in accordance with International Financial Reporting Standards (“IFRS”) and
its interpretations and comply with International Accounting Standard (“IAS”) 34 Interim Financial Reporting.

 

    	5

     

    

 

EMERALD HEALTH THERAPEUTICS, INC.

NOTES TO CONDENSED INTERIM CONSOLIDATED FINANCIAL STATEMENTS

For the three and nine months ended September 30, 2018 and
2017

(Unaudited)

	(Expressed in Canadian dollars)

 

These condensed interim consolidated
financial statements were authorized for filing by the Board of Directors on November 29, 2018.

 

		b)	Basis of measurement

 

These condensed interim consolidated
financial statements have been prepared on a going concern basis, at historical cost except for certain financial instruments and
biological assets, which are measured at fair value.

 

		c)	Basis of consolidation

 

These condensed interim consolidated
financial statements include the accounts of the Company and its subsidiaries. All intercompany transactions and balances are eliminated
on consolidation. Subsidiaries are all entities over which the Company has control. The Company controls an entity when the Company
is exposed to, or has rights to, variable returns from its involvement with the entity and has the ability to affect those returns
through its power over the entity.

 

The subsidiaries of the Company
at September 30, 2018 and December 31, 2017 include the following:

 

	 	 	Ownership Interest	 
	Name of subsidiary	 	September 30, 2018	 	 	December 31, 2017	 
	 	 	 	 	 	 	 
	Agro-Biotech Sciences Inc.	 	 	100	%	 	 	N/A	 
	Agro-Biotech Property Holdings Inc.	 	 	100	%	 	 	N/A	 
	Emerald Health Therapeutics Canada Inc. ("EHTC")	 	 	100	%	 	 	100	%
	Pure Sunfarms Canada Inc. ("PSC")	 	 	100	%	 	 	100	%
	Northern Vine Canada Inc. ("Northern Vine")	 	 	100	%	 	 	53	%

 

		d)	Functional and presentation currency

 

The Company and its subsidiaries’
functional currency is Canadian dollars. All dollar amounts presented are in Canadian dollars unless otherwise specified.

 

		3.	ACCOUNTING POLICIES

 

These condensed interim consolidated
financial statements have been prepared using the same accounting policies as those used in the Company’s annual financial
statements at December 31, 2017 with the exceptions noted below.

 

    	6

     

    

 

EMERALD HEALTH THERAPEUTICS, INC.

NOTES TO CONDENSED INTERIM CONSOLIDATED FINANCIAL STATEMENTS

For the three and nine months ended September 30, 2018 and
2017

(Unaudited)

	(Expressed in Canadian dollars)

 

Biological Assets

 

The Company measures biological
assets consisting of cannabis on plants at fair value less cost to sell up to the point of harvest, which becomes the basis for
the cost of finished goods inventories after harvest. Seeds are measured at fair market value, except for a portion which are restricted
with respect to distribution due to the conditions under which they were acquired that are measured at cost.

 

Gains or losses arising from
changes in fair value less cost to sell are included in the results of operations of the related period.

 

Production Costs

 

Production costs includes costs
incurred in the period that relate to the production and growth of cannabis plants. Costs include labour directly related to growing
activities, growing medium and supplies, nutrients, rent, and electricity.

 

Inventory

 

Inventories of dried cannabis
consist of harvested cannabis and purchased cannabis and are valued at the lower of cost and net realizable value. Inventories
of harvested cannabis are transferred from biological assets at their fair value at harvest, which becomes the deemed cost. Any
subsequent post-harvest costs incurred to dry and package the product are capitalized to inventory to the extent that cost is less
than net realizable value.

 

Inventories of cannabis oils
are derived from dried cannabis and may include the deemed cost of inventory that arose from the fair value measurement of biological
assets. Additional costs to produce, test and package cannabis oils are capitalized to inventory to the extent that cost is less
than net realizable value.

 

Goods for resale are measured
at the lower of cost and net realizable value. Supplies and consumables are valued at cost.

 

Net realizable value is determined
as the estimated selling price in the ordinary course of business less the estimated costs of completion and the estimated costs
necessary to make the sale. Cost is determined using the average cost basis.

 

Warrants

 

Warrants issued as part of unit
offerings subsequent to December 31, 2017, have been measured by the relative fair value approach. Under the relative fair value
approach, the total proceeds of a unit offering are allocated to the components of the unit in proportion to their relative fair
values, as determined by using the Black-Scholes Option-Pricing Model.

 

    	7

     

    

 

EMERALD HEALTH THERAPEUTICS, INC.

NOTES TO CONDENSED INTERIM CONSOLIDATED FINANCIAL STATEMENTS

For the three and nine months ended September 30, 2018 and
2017

(Unaudited)

	(Expressed in Canadian dollars)

 

Financial Instruments

 

Effective
January 1, 2018, the Company adopted IFRS 9 Financial Instruments (“IFRS 9”),
which replaced IAS 39 Financial Instruments: Recognition and Measurement (“IAS
39”). The standard eliminates the existing IAS 39 categories of held to maturity, available-for-sale and loans and receivable.

 

The adoption of this standard
did not have a material impact on the measurement of the Company’s financial instruments in these condensed interim consolidated
financial statements, however additional disclosures have been provided.

 

The following table summarizes
the original measurement categories under IAS 39 and the new measurement categories under IFRS 9 for each class of the Company’s
financial assets and financial liabilities:

 

	 	IAS 39	 	IFRS 9
	 	Classification	 	Classification
	Financial Assets	 	 	 
	Cash	FVTPL	 	FVTPL
	Cash equivalents	Amortized cost 	 	Amortized cost
	Accounts receivable	Amortized cost 	 	Amortized cost
	Due from related parties	Amortized cost 	 	Amortized cost
	Refundable deposits	Amortized cost 	 	Amortized cost
	Long-term investment	FVTPL	 	FVTPL
	 	 	 	 
	Financial Liabilities	 	 	 
	Accounts payable and accrued liabilities	Amortized cost 	 	Amortized cost
	Payable to joint venture	Amortized cost 	 	Amortized cost
	Due to related parties	Amortized cost 	 	Amortized cost

 

The following are new accounting policies for financial
instruments:

 

Financial assets

 

The Company classifies its financial
assets as either subsequently measured at amortized cost, at fair value through other comprehensive income, or at fair value through
profit or loss. Upon initial recognition, management determines the classification of its financial assets based upon the purpose
for which the financial assets were acquired. Measurement and classification of financial assets is determined based on the entity’s
business model for managing the financial assets and the contractual cash flow characteristics of the financial asset. Management
may, at initial recognition, irrevocably designate a financial asset as measured at fair value through profit or loss to prevent
a measurement or recognition inconsistency.

 

    	8

     

    

 

EMERALD HEALTH THERAPEUTICS, INC.

NOTES TO CONDENSED INTERIM CONSOLIDATED FINANCIAL STATEMENTS

For the three and nine months ended September 30, 2018 and
2017

(Unaudited)

	(Expressed in Canadian dollars)

 

Financial assets are derecognized
when they mature or are sold and substantially all the risks and rewards of ownership have been transferred.

 

Financial liabilities

 

The Company initially recognizes
financial liabilities at fair value and are subsequently measured at amortized cost.

 

Revenue from Contracts with Customers

 

Effective January 1, 2018, the
Company adopted IFRS 15 Revenue from Contracts with Customers. The Company recognizes revenue from contracts with customers
based on a five-step model, which is applied to all contracts with customers.

 

There were no changes required
to the statements of financial position or statements of loss and comprehensive loss as a result of adopting this standard, other
than enhanced disclosures.

 

New accounting pronouncements, issued but not yet
adopted

 

IFRS 16, Leases –
replaces the guidance in IAS 17 Leases and establishes principles for the recognition, measurement, presentation and disclosure
of leases, with the objective of ensuring that lessees and lessors provide relevant information that faithfully represents those
transactions.

 

IFRS 16 applies to annual reporting
periods beginning on or after January 1, 2019. The Company is assessing the impact of this new standard on its consolidated financial
statements.

 

		4.	ACQUISITIONS

 

Northern Vine Canada Inc. –
Increase of Ownership

 

On November 17, 2017, the Company
acquired control of Northern Vine by way of shares purchased from treasury resulting in ownership of 53% of the issued and outstanding
shares of Northern Vine.

 

On May 15, 2018, the Company
increased its ownership of Northern Vine to 65% by way of additional shares purchased from treasury for $2.75 million paid in cash.

 

On August 14, 2018, the Company
increased its ownership in Northern Vine to 100% by purchasing all of the shares of Northern Vine held by Abattis Bioceuticals
Corp (“Abattis”). The Company paid $2 million in cash and issued 1,093,938 Common Shares valued at $4 million, for
total consideration of $6 million.

 

In the event that the Company
receives gross revenue of $10 million or more within thirty-six months ended August 9, 2021, from the sale of products or services
introduced by Abattis, the Company will issue additional Common Shares with a deemed value of $4 million.

 

If the Company had increased
its interest at the beginning of the year there would have been no change to revenue or net loss as Northern Vine is a consolidated
subsidiary. The net loss attributable to the Company would have increased by $406,517 and the net
loss attributable to the non-controlling interest would have decreased by $406,517.

 

    	9

     

    

 

EMERALD HEALTH THERAPEUTICS, INC.

NOTES TO CONDENSED INTERIM CONSOLIDATED FINANCIAL STATEMENTS

For the three and nine months ended September 30, 2018 and
2017

(Unaudited)

	(Expressed in Canadian dollars)

 

The increase in the Company’s ownership interest
was accounted for as an equity transaction.

 

Upon the initial acquisition
of 53% ownership, the non-controlling interest was measured by proportionate share in the recognized amounts of the identifiable
net assets. The change in non-controlling interest at the time of the May 15, 2018 transaction and the acquisition of the non-controlling
interest at the time of the August 14, 2018 transaction were also measured by the proportionate share of net identifiable assets
method.

 

The equity transaction is as follows for the increase
to 65% ownership:

 

	 	 	Preliminary	 
	 	 	$	 
	Net assets acquired	 	 	2,750,000	 
	Non-controlling interest	 	 	(1,292,500	)
	12% reduction of non-controlling interest	 	 	770,296	 
	Reduction to equity	 	 	522,204	 
	Total purchase price	 	 	2,750,000	 

 

Acquisition of Non-Controlling Interest:

 

	 	 	$	 
	Initial amount at acquisition, November 17, 2017	 	 	2,066,826	 
	Loss attributed as at December 31, 2017	 	 	(109,992	)
	Non controlling interest of 47% as at December 31, 2017	 	 	1,956,834	 
	 	 	 	 	 
	Loss attributed January 1, 2018 to May 15, 2018	 	 	(232,342	)
	Increase due to issuance of shares from treasury for cash consideration	 	 	1,292,500	 
	12% reduction of non-controlling interest	 	 	(770,296	)
	Non-controlling interest of 35% as at May 16, 2018	 	 	2,246,696	 
	 	 	 	 	 
	Loss attributed May 16, 2018 to August 14, 2018	 	 	(174,175	)
	Non-controlling interest of 35% as at August 14, 2018	 	 	2,072,521	 
	 	 	 	 	 
	35% reduction of non-controlling interest	 	 	(2,072,521	)
	Nil non-controlling interest as at September 30, 2018	 	 	-	 

 

Nominal transaction costs were expensed during the
nine months ended September 30, 2018.

 

    	10

     

    

 

EMERALD HEALTH THERAPEUTICS, INC.

NOTES TO CONDENSED INTERIM CONSOLIDATED FINANCIAL STATEMENTS

For the three and nine months ended September 30, 2018 and
2017

(Unaudited)

	(Expressed in Canadian dollars)

 

Agro-Biotech

 

On May 2, 2018, the Company acquired
100% of the issued and outstanding shares of Agro-Biotech Sciences Inc. and its affiliate Agro-Biotech Property Holdings Inc. (together
“Agro-Biotech”), and the shareholder loans payable by Agro-Biotech, for total consideration of $90 million, subject
to adjustment, payable 50% in cash and 50% in Common Shares (the “Purchase Price”). The Company paid $22.5 million
in cash upon closing and $45 million was satisfied by the issuance of 9,911,894 Common Shares of which 4,955,947 Common Shares
will be held in escrow until May 1, 2019 pursuant to an escrow agreement (Note 17). The remaining $22.5 million in cash is payable
on May 1, 2019.

 

Until such time as the remaining
$22.5 million cash payment is made, 21,491,603 shares, being equal to 25% of the outstanding Agro-Biotech Sciences Inc. shares,
and 750 shares, being equal to 25% of the outstanding Agro-Biotech Property Holdings Inc. shares, will be held in escrow.

 

Agro-Biotech is a Licensed Producer under the Cannabis
Act.

 

Management has determined that
on the date of acquisition, Agro-Biotech did not have significant processes or outputs, therefore Agro-Biotech does not meet the
definition of a business under IFRS 3 Business Combinations. As a result, the transaction was accounted for as an asset
acquisition.

 

The total purchase price of the
acquisition and the fair value of the net assets acquired of Agro-Biotech are disclosed below:

 

	 	 	$	 
	Cash	 	 	22,500,000	 
	Deferred payment, present value of final $22.5 million cash payable May 2019 22,171,857	 	 	 	 
	Portion specified as purchase of shareholder loans	 	 	(3,933,591	)
	9,911,894 Common Shares	 	 	45,000,000	 
	Transaction costs	 	 	153,967	 
	Total purchase price	 	 	85,892,233	 

 

    	11

     

    

 

EMERALD HEALTH THERAPEUTICS, INC.

NOTES TO CONDENSED INTERIM CONSOLIDATED FINANCIAL STATEMENTS

For the three and nine months ended September 30, 2018 and
2017

(Unaudited)

	(Expressed in Canadian dollars)

 

	 	 	$	 
	Cash	 	 	19,906	 
	Amounts receivable	 	 	104,791	 
	Prepaid expenses	 	 	926	 
	Property and equipment	 	 	6,311,123	 
	Intangible assets	 	 	86,095,532	 
	Total assets	 	 	92,532,278	 
	Accounts payable and accrued liabilities	 	 	(120,010	)
	Current portion of long-term debt	 	 	(2,586,444	)
	Shareholder loans	 	 	(3,933,591	)
	Total liabilities	 	 	(6,640,045	)
	 	 	 	 	 
	Net assets acquired	 	 	85,892,233	 

 

Prior to the purchase date, Pivot Pharmaceuticals
Inc. served a statement of claim against Agro-Biotech. The Company believes that the claim is without merit. See Note 23 Claim
against Agro-Biotech.

 

		5.	ACCOUNTS RECEIVABLE

 

The Company’s accounts receivable is comprised
of:

 

	 	 	September 30
 2018	 	 	December 31
 2017	 
	 	 	$	 	 	$	 
	Goods and Services Tax refund receivable	 	 	1,127,544	 	 	 	186,410	 
	Interest receivable	 	 	355,068	 	 	 	24,438	 
	Other	 	 	134,094	 	 	 	67,384	 
	 	 	 	1,616,706	 	 	 	278,232	 

 

Accounts receivable are neither impaired nor past
due.

 

    	12

     

    

 

EMERALD HEALTH THERAPEUTICS, INC.

NOTES TO CONDENSED INTERIM CONSOLIDATED FINANCIAL STATEMENTS

For the three and nine months ended September 30, 2018 and
2017

(Unaudited)

	(Expressed in Canadian dollars)

 

		6.	BIOLOGICAL ASSETS

 

The Company’s biological assets consist of cannabis
seeds and cannabis plants. Changes in the Company’s biological assets are as follows:

 

	 	 	September 30
 2018	 	 	December 31
 2017	 
	 	 	$	 	 	$	 
	Carrying amount, beginning of period	 	 	114,559	 	 	 	162,986	 
	Costs incurred until harvest	 	 	-	 	 	 	218,874	 
	Effect of unrealized changes in fair value of biological assets	 	 	2,674,261	 	 	 	(1,977	)
	Biological assets purchased	 	 	3,841	 	 	 	-	 
	Biological assets sold	 	 	(133,680	)	 	 	-	 
	Transferred to inventory upon harvest	 	 	(868,703	)	 	 	(265,324	)
	Carrying amount, end of period	 	 	1,790,278	 	 	 	114,559	 

 

As at September 30, 2018, included
in the carrying amount of biological assets is $28,570 (December 31, 2017 - $25,113) in seeds and $1,761,708 (December 31, 2017
- $89,446) in live plants.

 

The significant assumptions used in determining the
fair value of cannabis plants are as follows:

 

		·	plant waste based on various stages of growth;

		·	yield per plant;

		·	selling price, less costs to sell;

		·	percentage of costs incurred to date compared
to the total costs to be incurred (to estimate the fair value of an in-process plant); and

		·	costs incurred for each stage of plant
growth.

 

As at September 30, 2018, on
average, the biological assets were 43% complete as to the next expected harvest date, compared to a 40% average stage of completion
as at September 30, 2017.

 

Biological assets are classified
as Level 3 on the fair value hierarchy. Significant unobservable inputs used to fair value biological assets include the Company’s
estimate of the yield of medical cannabis per plant. A 5% increase or decrease in the estimated yield of cannabis per plant would
result in an increase or decrease in the fair value of biological assets of $88,085 at September 30, 2018 (December 31, 2017 -
$4,472).

 

    	13

     

    

 

EMERALD HEALTH THERAPEUTICS, INC.

NOTES TO CONDENSED INTERIM CONSOLIDATED FINANCIAL STATEMENTS

For the three and nine months ended September 30, 2018 and
2017

(Unaudited)

	(Expressed in Canadian dollars)

 

		7.	INVENTORY

 

The Company’s inventory is comprised of:

 

	 	 	September 30
 2018	 	 	December 31
 2017	 
	 	 	$	 	 	$	 
	Dried cannabis	 	 	1,926,986	 	 	 	524,651	 
	Cannabis oils	 	 	461,624	 	 	 	190,116	 
	Goods for resale	 	 	2,496	 	 	 	3,727	 
	Supplies and consumables	 	 	452,920	 	 	 	9,141	 
	 	 	 	2,844,026	 	 	 	727,635	 

 

Inventory expensed and included
in cost of sales during the three and nine months ended September 30, 2018 was $300,785 and $856,073 (three and nine months ended
September 30, 2017 – $161,136 and $517,694). The fair value change in biological assets included in cost of goods sold during
the three and nine months ended September 30, 2018 was $7,228 and $136,927 (three and nine months ended September 30, 2017 - $123,810
and $233,164).

 

		8.	COST OF GOODS SOLD

 

Cost of sales represents the
deemed cost of inventory that arose from the fair value measurement of biological assets, subsequent post-harvest costs capitalized
to inventory, purchased dried cannabis, costs to produce cannabis oils capitalized to inventory (including the deemed cost of dried
inventory that arose from the fair value measurement of biological assets that were used to produce cannabis oils), and packaging
costs.

 

    	14

     

    

 

EMERALD HEALTH THERAPEUTICS, INC.

NOTES TO CONDENSED INTERIM CONSOLIDATED FINANCIAL STATEMENTS

For the three and nine months ended September 30, 2018 and
2017

(Unaudited)

	(Expressed in Canadian dollars)

 

		9.	PLANT AND EQUIPMENT

 

	 	 	Land	 	 	Building	 	 	Leasehold

    improvements	 	 	Growing,
    lab 
 and extract 
 equipment	 	 	Other

    equipment	 	 	Total	 
	 	 	$	 	 	$	 	 	$	 	 	$	 	 	$	 	 	$	 
	Cost	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 
	Balance, December 31, 2016	 	 	-	 	 	 	-	 	 	 	184,929	 	 	 	455,779	 	 	 	52,253	 	 	 	692,961	 
	Additions	 	 	-	 	 	 	-	 	 	 	59,242	 	 	 	299,675	 	 	 	42,931	 	 	 	401,848	 
	Acquired through Northern Vine	 	 	-	 	 	 	-	 	 	 	30,300	 	 	 	237,271	 	 	 	-	 	 	 	267,571	 
	Disposals	 	 	-	 	 	 	-	 	 	 	-	 	 	 	-	 	 	 	(911	)	 	 	(911	)
	Balance, December 31, 2017	 	 	-	 	 	 	-	 	 	 	274,471	 	 	 	992,725	 	 	 	94,273	 	 	 	1,361,469	 
	Additions	 	 	-	 	 	 	987,864	 	 	 	1,484,564	 	 	 	1,327,664	 	 	 	451,173	 	 	 	4,251,265	 
	Acquired through Agro-Biotech	 	 	476,041	 	 	 	2,703,568	 	 	 	2,562,326	 	 	 	237,793	 	 	 	331,395	 	 	 	6,311,123	 
	Disposals	 	 	-	 	 	 	-	 	 	 	-	 	 	 	-	 	 	 	(1,343	)	 	 	(1,343	)
	Balance, September 30, 2018	 	 	476,041	 	 	 	3,691,432	 	 	 	4,321,361	 	 	 	2,558,182	 	 	 	875,498	 	 	 	11,922,514	 
	Accumulated depreciation	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 
	Balance, December 31, 2016	 	 	-	 	 	 	-	 	 	 	46,004	 	 	 	96,951	 	 	 	20,818	 	 	 	163,773	 
	Additions	 	 	-	 	 	 	-	 	 	 	33,605	 	 	 	113,702	 	 	 	19,484	 	 	 	166,791	 
	Disposals	 	 	-	 	 	 	-	 	 	 	-	 	 	 	-	 	 	 	(430	)	 	 	(430	)
	Balance, December 31, 2017	 	 	-	 	 	 	-	 	 	 	79,609	 	 	 	210,653	 	 	 	39,872	 	 	 	330,134	 
	Additions	 	 	-	 	 	 	52,803	 	 	 	137,560	 	 	 	207,232	 	 	 	72,749	 	 	 	470,344	 
	Disposals	 	 	-	 	 	 	-	 	 	 	-	 	 	 	-	 	 	 	(299	)	 	 	(299	)
	Balance, September 30, 2018	 	 	-	 	 	 	52,803	 	 	 	217,169	 	 	 	417,885	 	 	 	112,322	 	 	 	800,179	 
	Net book value	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 
	At December 31, 2017	 	 	-	 	 	 	-	 	 	 	194,862	 	 	 	782,072	 	 	 	54,401	 	 	 	1,031,335	 
	At September 30, 2018	 	 	476,041	 	 	 	3,638,629	 	 	 	4,104,192	 	 	 	2,140,297	 	 	 	763,176	 	 	 	11,122,335	 

 

		10.	PLANT UNDER CONSTRUCTION

 

During 2017, site preparation
began on the Company’s new self-constructed plant located in Metro Vancouver, British Columbia. As at September 30, 2018
$7,054,011 (December 31, 2017 - $2,772,051) of expenditures were capitalized. Construction on the new asset is expected to continue
throughout 2018, at the time the asset is ready for its intended use depreciation will commence.

 

		11.	DEPOSITS ON MATERIALS AND EQUPMENT

 

Deposits on equipment as at September
30, 2018 consist of $2,000,000 funds held in trust for materials for the Company’s self-constructed plant located in Metro
Vancouver (December 31, 2017 - $Nil).

 

    	15

     

    

 

EMERALD HEALTH THERAPEUTICS, INC.

NOTES TO CONDENSED INTERIM CONSOLIDATED FINANCIAL STATEMENTS

For the three and nine months ended September 30, 2018 and
2017

(Unaudited)

	(Expressed in Canadian dollars)

 

		12.	INTANGIBLE ASSETS

 

Intangible assets are initially recorded at cost,
or at fair value on the acquisition date if acquired through a business combination. Depreciation is recognized on a straight-line
basis over the estimated useful life of the intangible asset.

 

The estimated useful lives are as follows:

 

		·	Computer
Software – 2 to 4 years

		·	Health
Canada License – Lease term or useful life of the facility

 

The estimated useful lives and residual values are
reviewed at each year-end and depreciation is adjusted on a prospective basis, if necessary.

 

The Company’s intangible assets continuity is
as follows:

 

	 	 	Health Canada
 License	 	 	Computer 
 Software	 	 	Total	 
	 	 	$	 	 	$	 	 	$	 
	Cost	 	 	 	 	 	 	 	 	 	 	 	 
	Balance, December 31, 2016	 	 	-	 	 	 	62,135	 	 	 	62,135	 
	Acquired through Northern Vine	 	 	2,922,096	 	 	 	-	 	 	 	2,922,096	 
	Balance, December 31, 2017	 	 	2,922,096	 	 	 	62,135	 	 	 	2,984,231	 
	Acquired through Agro-Biotech	 	 	86,095,532	 	 	 	-	 	 	 	86,095,532	 
	Additions	 	 	-	 	 	 	5,183	 	 	 	5,183	 
	Balance, September 30, 2018	 	 	89,017,628	 	 	 	67,318	 	 	 	89,084,946	 
	 	 	 	 	 	 	 	 	 	 	 	 	 
	Accumulated depreciation	 	 	 	 	 	 	 	 	 	 	 	 
	Balance, December 31, 2016	 	 	-	 	 	 	16,717	 	 	 	16,717	 
	Additions	 	 	87,446	 	 	 	28,213	 	 	 	115,659	 
	Balance, December 31, 2017	 	 	87,446	 	 	 	44,930	 	 	 	132,376	 
	Additions	 	 	1,908,930	 	 	 	14,446	 	 	 	1,923,376	 
	Balance, September 30, 2018	 	 	1,996,376	 	 	 	59,376	 	 	 	2,055,752	 
	 	 	 	 	 	 	 	 	 	 	 	 	 
	Net book value	 	 	 	 	 	 	 	 	 	 	 	 
	At December 31, 2017	 	 	2,834,650	 	 	 	17,205	 	 	 	2,851,855	 
	At September 30, 2018	 	 	87,021,252	 	 	 	7,942	 	 	 	87,029,194	 

 

    	16

     

    

 

EMERALD HEALTH THERAPEUTICS, INC.

NOTES TO CONDENSED INTERIM CONSOLIDATED FINANCIAL STATEMENTS

For the three and nine months ended September 30, 2018 and
2017

(Unaudited)

	(Expressed in Canadian dollars)

 

		13.	LONG-TERM INVESTMENTS

 

On November 27, 2017 the Company
purchased 1,666,667 units of Avricore Health Inc. (“Avricore”, formerly VANC Pharmaceuticals Inc.), a related party,
pursuant to a subscription agreement dated November 7, 2017. Each unit entitled the holder to 1,666,667 common shares and 1,666,667
common share purchase warrants. The common shares of Avricore are traded on the TSX Alpha Exchange under the symbol “AVCR.”

 

Each warrant entitles the holder
to purchase one common share at the price of $0.20 per share. The warrants expire November 27, 2022, or earlier if the accelerated
exercise provision is enacted. If the closing sales price trades at $0.25 or higher for 10 consecutive trading days, and Avricore,
within 5 days of such event, provides notice by way of news release to the holders of the warrants of the early expiry of the warrants,
then the warrants shall expire 30 days from the date of notice.

 

	 	 	Fair value
 December 31
 2017	 	 	Change in 
 fair value	 	 	Fair value
 September 30
 2018	 
	 	 	$	 	 	$	 	 	$	 
	Level 1 on fair value hierarchy	 	 	 	 	 	 	 	 	 	 	 	 
	Avricore – shares	 	 	500,000	 	 	 	(250,000	)	 	 	250,000	 
	 	 	 	 	 	 	 	 	 	 	 	 	 
	Level 2 on fair value hierarchy	 	 	 	 	 	 	 	 	 	 	 	 
	Avricore - warrants	 	 	166,667	 	 	 	19,465	 	 	 	186,132	 
	 	 	 	666,667	 	 	 	(230,535	)	 	 	436,132	 

 

The fair value of the warrants
was calculated using the Black-Scholes option-pricing model with the following assumptions: expected life of 4.15 years, risk free
interest rate of 2.28%, expected annualized volatility of 117.11% and nil expected dividend yield.

 

		14.	INVESTMENT IN JOINT VENTURE

 

The Company has contributed $20
million in cash to the joint venture as at September 30, 2018. As at September 30, 2018 the amount payable to Pure Sunfarms was
$Nil (December 31, 2017 - $4,000,000).

 

On July 5, 2018, the Company
and Village Farms International, Inc. (together, the “Shareholders”) entered into a Shareholder Loan Agreement (the
“Loan Agreement”) with Pure Sunfarms, whereby, as at September 30, 2018, the Shareholders had each contributed $8,000,000
in the form of a demand loan to Pure Sunfarms. The loan amounts will initially bear simple interest at the rate of 8% per annum,
calculated annually. Interest will accrue and be payable upon demand being made by both Shareholders.

 

    	17

     

    

 

EMERALD HEALTH THERAPEUTICS, INC.

NOTES TO CONDENSED INTERIM CONSOLIDATED FINANCIAL STATEMENTS

For the three and nine months ended September 30, 2018 and
2017

(Unaudited)

	(Expressed in Canadian dollars)

 

Profits and losses resulting
from upstream and downstream transactions between the Company and its associate are recognized in the Financial Statements only
to the extent of unrelated investor's interests in the associates. Unrealized losses are eliminated unless the transaction provides
evidence of an impairment of the asset transferred.

 

Summarized financial information for Pure Sunfarms
is set out below:

 

	 	 	September 30
 2018	 	 	December 31
 2017	 
	 	 	$	 	 	$	 
	Non-current assets	 	 	55,104,705	 	 	 	23,144,466	 
	Current assets (a)	 	 	18,491,011	 	 	 	17,381,496	 
	Total assets	 	 	73,595,716	 	 	 	40,525,962	 
	 	 	 	 	 	 	 	 	 
	Non-current liabilities	 	 	-	 	 	 	-	 
	Current liabilities	 	 	25,598,850	 	 	 	1,171,118	 
	Total liabilities	 	 	25,598,850	 	 	 	1,171,118	 
	 	 	 	 	 	 	 	 	 
	(a) includes cash and cash equivalents	 	 	1,654,376	 	 	 	2,906,910	 
	 	 	 	 	 	 	 	 	 
	Income (loss) and comprehensive
    income (loss) (b)	 	 	8,642,021	 	 	 	(645,156	)
	 	 	 	 	 	 	 	 	 
	(b) includes income tax recovery	 	 	-	 	 	 	238,620	 
	 	 	 	 	 	 	 	 	 
	The Company’s investment in Pure Sunfarms is as follows:	 	 	 	 	 	 	 	 
	 	 	 	 	 	 	 	 	 
	Balance at January 1, 2017	 	 	 	 	 	 	-	 
	Investment in Joint Venture	 	 	 	 	 	 	20,000,000	 
	Transaction costs	 	 	 	 	 	 	229,639	 
	Share of loss	 	 	 	 	 	 	(322,578	)
	Balance at December 31, 2017	 	 	 	 	 	 	19,907,061	 
	Share of income	 	 	 	 	 	 	4,321,011	 
	Balance at September 30, 2018	 	 	 	 	 	 	24,228,072	 

 

    	18

     

    

 

EMERALD HEALTH THERAPEUTICS, INC.

NOTES TO CONDENSED INTERIM CONSOLIDATED FINANCIAL STATEMENTS

For the three and nine months ended September 30, 2018 and
2017

(Unaudited)

	(Expressed in Canadian dollars)

 

A reconciliation of the summarized financial information
to the carrying amount of the investment in Pure Sunfarms is set out below:

 

	 	 	September 30
 2018	 	 	December 31
 2017	 
	 	 	$	 	 	$	 
	Total net assets of Pure Sunfarms	 	 	47,996,866	 	 	 	39,354,844	 
	50% ownership interest held by the Company	 	 	23,998,433	 	 	 	19,677,422	 
	Transaction costs	 	 	229,639	 	 	 	229,639	 
	Carrying amount of the investment	 	 	24,228,072	 	 	 	19,907,061	 

 

To date, Pure Sunfarms has not issued dividends.
As a privately held company, there are no quoted market prices available for the shares of Pure Sunfarms.

 

		15.	LONG-TERM DEBT

 

	 	 	 	 	September 30	 	 	December 31	 
	 	 	Maturity Date	 	2018	 	 	2017	 
	 	 	 	 	$	 	 	$	 
	National Bank of Canada mortgage variable interest of bank rate plus 0.65%	 	February 2019	 	 	2,536,757	 	 	 	-	 
	 	 	 	 	 	 	 	 	 	 	 
	Less: current portion	 	 	 	 	(2,536,757	)	 	 	-	 
	 	 	 	 	 	 	 	 	 	 	 
	Long-term portion	 	 	 	 	-	 	 	 	-	 

 

The mortgage held by National
Bank of Canada, has an amortization period of twenty years, is payable monthly in the amount of $11,444 plus interest, and is secured
by the property held by Agro-Biotech Property Holdings Inc.

 

During the three and nine months
ended September 30, 2018, the Company paid $34,874 and $52,797 (three and nine months ended September 30, 2017 – $Nil) in
interest on mortgage.

 

		16.	RELATED PARTY TRANSACTIONS

 

With Emerald Health Sciences Inc.

 

Emerald Health Sciences Inc.
(“Sciences”) charged the Company $1,050,000 and $3,150,000 during the three and nine months ended September 30, 2018
(September 30, 2017 - $599,250 and $1,271,521) for services related to financing, business development, investor relations and
acquisition activities, in accordance with the amended management agreement. Sciences charged the Company $Nil during the three
and nine months ended September 30, 2018 (September 30, 2017 - $67,488 and $244,485) for invoices paid on behalf of the Company.
As of September 30, 2018, the Company owed $Nil (December 31, 2017 - $125,486) to Sciences, this amount is included in the due
to related parties caption on the condensed interim consolidated statements of financial position and is non-interest bearing.
As of September 30, 2018, Sciences owed the Company $32,996 for invoices paid on behalf of Sciences, this amount is included in
the due from related parties caption on the condensed interim consolidated statements of financial position.

 

    	19

     

    

 

EMERALD HEALTH THERAPEUTICS, INC.

NOTES TO CONDENSED INTERIM CONSOLIDATED FINANCIAL STATEMENTS

For the three and nine months ended September 30, 2018 and
2017

(Unaudited)

	(Expressed in Canadian dollars)

 

During the nine months ended
September 30, 2018 Sciences exercised 4,077,687 warrants at a price of $0.27 per warrant for total gross proceeds to the Company
of $1,100,975.

 

As of September 30, 2018, Sciences
held an aggregate of 43,234,242 shares, representing 32% (December 31, 2017 – 45,156,555 shares, representing 42%) of the
issued and outstanding Common Shares and it held 4,411,764 (December 31, 2017 – 8,489,451) common share purchase warrants
of the Company.

 

With the Company’s joint venture

 

As of September 30, 2018, Pure
Sunfarms owes the Company $1,475,827 (December 31, 2017 - $324,674) for expenditures made on behalf of the joint venture. As of
September 30, 2018, the Company owes to Pure Sunfarms $259,560 (December 31, 2017 - $nil). These amounts are included in the respective
due to and due from related parties captions on the condensed interim consolidated statements of financial position, and are non-interest
bearing.

 

On July 5, 2018, the Company
and Village Farms International, Inc. (together, the “Shareholders”) entered into a Shareholder Loan Agreement (the
“Loan Agreement”) with Pure Sunfarms, whereby, as at September 30, 2018, the Shareholders had each contributed $8,000,000
in the form of a demand loan to Pure Sunfarms. This loan amount can be found in the Consolidated Statements of Financial Position
within the Due from Related Parties balance. The loan amounts will initially bear simple interest at the rate of 8% per annum,
calculated annually. Interest will accrue and be payable upon demand being made by both Shareholders.

 

With a company controlled by the Company’s
Executive Chairman

 

During the year ended December
31, 2017, the Company entered into a 30-year lease with a company (the “Landlord”) that is controlled by Dr. Avtar
Dhillon, the Executive Chairman of the Company with respect to land in Metro Vancouver, British Columbia on which the Company is
constructing its new production facility. During the three and nine months ended September 30, 2018, the Company paid to the Landlord
$89,189 and $255,658 (September 30, 2017 - $86,471) in rent, $48,168 (September 30, 2017 - $Nil) for building permits, $40,699
(September 30, 2017 - $Nil) for invoices paid on behalf of the Company and a $60,000 (September 30, 2017 - $Nil) damage deposit.
The Landlord also charged the Company $7,666 and $45,647 during the three and nine months ended September 30, 2018 (September 30,
2017 - $144,979) for services related to construction of the Company’s new facility. As of September 30, 2018, the Company
owed $7,666 (December 31, 2017 - $77,244) to the Landlord, this amount is included in the due to related parties caption on the
condensed interim consolidated statements of financial position and is non-interest bearing.

 

    	20

     

    

 

EMERALD HEALTH THERAPEUTICS, INC.

NOTES TO CONDENSED INTERIM CONSOLIDATED FINANCIAL STATEMENTS

For the three and nine months ended September 30, 2018 and
2017

(Unaudited)

	(Expressed in Canadian dollars)

 

With a company whose CEO is also a director of
the Company

 

The Company holds 1,666,667 common shares and 1,666,667
common share purchase warrants of Avricore as described in Note 13. The CEO of Avricore is also a director of the Company.

 

Remuneration of directors and key management of
the Company

 

The remuneration awarded to directors and to senior
key management including the Executive Chairman, the President, the Chief Executive Officer, and the Chief Financial Officer, includes
the following expenses recognized during the period:

 

	 	 	For the nine	 	 	For the nine	 	 	For the nine	 	 	For the nine	 
	 	 	months ended	 	 	months ended	 	 	months ended	 	 	months ended	 
	 	 	September 30, 2018	 	 	September 30, 2017	 	 	September 30, 2018	 	 	September 30, 2017	 
	 	 	$	 	 	$	 	 	$	 	 	$	 
	Wage and short-term benefits	 	 	256,204	 	 	 	139,598	 	 	 	734,554	 	 	 	465,461	 
	Share-based payments (Note 17)	 	 	1,117,755	 	 	 	42,696	 	 	 	3,133,291	 	 	 	130,052	 
	 	 	 	1,373,959	 	 	 	182,294	 	 	 	3,867,845	 	 	 	595,513	 

 

Included in the due to related
parties caption on the condensed interim consolidated statements of financial position at September 30, 2018 is $51,865 (December
31, 2017 - $44,775) due to related parties with respect to key management personnel and expense reimbursements and are non-interest
bearing.

 

In the event that senior key
management employment agreements are terminated by the Company, other than for just cause, such officers are entitled to a minimum
severance amount equal to six months of salary.

 

These transactions are in the
normal course of the operations on normal commercial terms and conditions.

 

		17.	SHARE CAPITAL

 

Authorized

 

		·	Unlimited
number of Common Shares without par value

		·	Unlimited
number of preferred shares without par value, issuable in series

 

Issued

 

		·	136,850,193
Common Shares (December 31, 2017 – 106,787,226)

		·	Nil
preferred shares (December 31, 2017 - Nil)

 

    	21

     

    

 

EMERALD HEALTH THERAPEUTICS, INC.

NOTES TO CONDENSED INTERIM CONSOLIDATED FINANCIAL STATEMENTS

For the three and nine months ended September 30, 2018 and
2017

(Unaudited)

	(Expressed in Canadian dollars)

 

During the nine months ended September 30, 2018 the outstanding
share capital increased by 30,062,967 Common Shares due to the following transactions:

 

		·	A prospectus offering (the “January
2018 Offering”) completed January 8, 2018, for 3,000,000 units of the Company at a price of $5.00 per unit, for gross proceeds
of $15,000,000. Each unit consisted of one Common Share and one common share purchase warrant of the Company, with each warrant
entitling the holder to acquire an additional Common Share at an exercise price of $6.00 for a period of 36 months from the closing
date;

		·	A prospectus offering completed February
14, 2018, for 3,000,000 units of the Company at a price of $6.00 per unit, for gross proceeds of $18,000,000. Each unit consisted
of one Common Share and one common share purchase warrant of the Company, with each warrant entitling the holder to acquire an
additional Common Share at an exercise price of $7.00 for a period of 6 months from the closing date. The warrants expired, unexercised
on August 13, 2018;

		·	A prospectus offering completed May 22,
2018, for 4,000,000 units of the Company at a price of $4.20 per unit, for gross proceeds of $16,800,000. Each unit consisted of
one Common Share and one common share purchase warrant of the Company, with each warrant entitling the holder to acquire an additional
Common Share at an exercise price of $5.20 for a period of 18 months from the closing date;

		·	Issued 9,911,894 shares for the acquisition
of Agro-Biotech as described in Note 4;

		·	Issued 1,093,938 shares for the acquisition
of Northern Vine as described in Note 4;

		·	A total of 4,077,687 warrants were exercised
at an exercise price of $0.27 for gross proceeds of $1,100,975;

		·	A total of 443,350 warrants were exercised
at an exercise price of $2.00 for gross proceeds of $886,700;

		·	A total of 718,826 warrants were exercised
at an exercise price of $2.60 for gross proceeds of $1,868,948;

		·	A total of 3,000,000 warrants were exercised
at an exercise price of $6.00 for gross proceeds of $18,000,000; and

		·	A total of 817,272 stock options were
exercised ranging in exercise price from $0.03 to $4.25 for gross proceeds of $983,039.

 

Escrowed Common Shares

 

The shares issued as part of
the purchase price of Agro-Biotech are subject to an Escrow Agreement. Under the agreement, 50% of the shares issued to the prior
owners of Agro-Biotech remain in escrow until May 2019. As at September 30, 2018, 4,955,947 Common Shares (December 31, 2017 –
Nil) were held in escrow.

 

Share based payments

 

The Board of Directors has the
discretion to determine to whom options will be granted, the number and exercise price of such options and the terms and time frames
in which the options will vest and be exercisable. The exercise price of the options must be no less than the closing market price
of the Common Shares on the day preceding the grant.

 

    	22

     

    

 

EMERALD HEALTH THERAPEUTICS, INC.

NOTES TO CONDENSED INTERIM CONSOLIDATED FINANCIAL STATEMENTS

For the three and nine months ended September 30, 2018 and
2017

(Unaudited)

	(Expressed in Canadian dollars)

 

	 	 	Number of Options	 	 	Weighted Average
 Exercise Price	 
	 	 	 	 	 	$	 
	Balance at December 31, 2016	 	 	5,758,200	 	 	 	0.53	 
	Granted	 	 	5,905,000	 	 	 	2.67	 
	Forfeited	 	 	(270,836	)	 	 	1.38	 
	Exercised	 	 	(1,531,250	)	 	 	0.73	 
	Balance at December 31, 2017	 	 	9,861,114	 	 	 	1.76	 
	Granted	 	 	2,017,500	 	 	 	4.41	 
	Forfeited	 	 	(72,500	)	 	 	4.46	 
	Exercised	 	 	(817,272	)	 	 	0.75	 
	Balance at September 30, 2018	 	 	10,988,842	 	 	 	2.30	 

 

During the nine months ended
September 30, 2018, the Company granted 2,017,500 stock options to employees and consultants. The stock options granted had exercise
prices between $2.49 and $6.68, have expiry dates of five years and vest over three years. The weighted average fair value of the
stock options granted was $2.28. The weighted average trading share price of the options exercised during the nine months ended
September 30, 2018 was $5.56.

 

The fair values of the options
granted during the nine months ended September 30, 2018 and 2017 were determined on the date of the grant using the Black-Scholes
option pricing model with the following assumptions:

 

	 	 	September 30
 2018	 	 	September 30
 2017	 
	Risk free interest rate	 	 	1.73% - 2.14%	 	 	 	0.74% - 1.16%	 
	Expected life of options (years)	 	 	3	 	 	 	1-3	 
	Expected annualized volatility	 	 	80	%	 	 	80	%
	Expected dividend yield	 	 	Nil	 	 	 	Nil	 
	Weighted average Black-Scholes value of each option	 	$	2.28	 	 	$	0.59	 

 

Volatility was estimated by using
the historical volatility of other companies that the Company considers comparable that have similar trading and volatility history.
The expected life in years represents the period of time that options granted are expected to be outstanding. The risk-free rate
is based on Canada government bonds with a remaining term equal to the expected life of the options.

 

    	23

     

    

 

EMERALD HEALTH THERAPEUTICS, INC.

NOTES TO CONDENSED INTERIM CONSOLIDATED FINANCIAL STATEMENTS

For the three and nine months ended September 30, 2018 and
2017

(Unaudited)

	(Expressed in Canadian dollars)

 

Incentive stock options outstanding and exercisable
at September 30, 2018 are summarized as follows:

 

	 	 	 	 	 	 	 	 	 	Outstanding	 	 	 	 	 	Exercisable	 
	Range of
 exercise
 prices	 	 	Quantity	 	 	Remaining
 contractual
 life (years)	 	 	Weighted
 average
 exercise
 price	 	 	Quantity	 	 	Weighted
 average
 exercise
 price	 
	$	 	 	 	 	 	 	 	 	$	 	 	 	 	 	$	 
	 	0.175 - 0.43	 	 	 	926,673	 	 	 	1.61	 	 	 	0.35	 	 	 	876,663	 	 	 	0.36	 
	 	0.44 - 0.50	 	 	 	1,500,000	 	 	 	1.57	 	 	 	0.45	 	 	 	1,500,000	 	 	 	0.45	 
	 	0.51 - 0.94	 	 	 	1,545,218	 	 	 	3.00	 	 	 	0.72	 	 	 	1,170,221	 	 	 	0.72	 
	 	0.95 - 1.25	 	 	 	1,134,447	 	 	 	3.66	 	 	 	1.21	 	 	 	540,419	 	 	 	1.21	 
	 	1.26 - 1.49	 	 	 	993,754	 	 	 	3.88	 	 	 	1.34	 	 	 	275,703	 	 	 	1.34	 
	 	1.50 - 3.40	 	 	 	1,012,500	 	 	 	4.47	 	 	 	2.86	 	 	 	271,250	 	 	 	2.69	 
	 	3.41 - 4.23	 	 	 	120,000	 	 	 	4.73	 	 	 	3.89	 	 	 	18,750	 	 	 	4.05	 
	 	4.24 - 4.25	 	 	 	2,621,250	 	 	 	4.23	 	 	 	4.25	 	 	 	656,250	 	 	 	4.25	 
	 	4.26 - 5.44	 	 	 	615,000	 	 	 	4.65	 	 	 	4.68	 	 	 	75,833	 	 	 	4.91	 
	 	5.45 - 6.68	 	 	 	520,000	 	 	 	4.38	 	 	 	5.92	 	 	 	130,000	 	 	 	5.92	 
	 	 	 	 	 	10,988,842	 	 	 	3.44	 	 	 	2.300	 	 	 	5,515,089	 	 	 	1.38	 

 

The Company recorded share-based
compensation expense related to the incentive stock options of $1,673,354 and $4,736,171 for the three and nine months ended September
30, 2018 ($276,598 and $809,887 for the three and nine months ended September 30, 2017). The expense has been charged to the condensed
interim consolidated statements of loss and comprehensive loss.

 

    	24

     

    

 

EMERALD HEALTH THERAPEUTICS, INC.

NOTES TO CONDENSED INTERIM CONSOLIDATED FINANCIAL STATEMENTS

For the three and nine months ended September 30, 2018 and
2017

(Unaudited)

	(Expressed in Canadian dollars)

 

Restricted share units

 

The Board of Directors has the
discretion to determine to whom restricted share units (“RSUs”) will be granted, the number granted, and the terms
and time frames in which the RSUs will vest and be settled.

 

	 	 	Number of RSUs	 	 	Weighted average
 fair value per unit
 at issue	 
	 	 	 	 	 	$	 
	Balance at December 31, 2016	 	 	-	 	 	 	-	 
	Granted	 	 	825,000	 	 	 	3.73	 
	Balance at December 31, 2017	 	 	825,000	 	 	 	3.73	 
	Granted	 	 	5,000	 	 	 	5.67	 
	Balance at September 30, 2018	 	 	830,000	 	 	 	3.74	 

 

During the nine months ended
September 30, 2018, the Company issued 5,000 RSUs to an employee, which vest on January 12, 2019 and settle in Common Shares. The
Company recorded share-based compensation expense related to the RSUs of $492,496 and $1,465,388 for the three and nine months
ended September 30, 2018 ($19,833 and $33,055 for the three and nine months ended September 30, 2017) to the condensed interim
consolidated statement of loss and comprehensive loss.

 

    	25

     

    

 

EMERALD HEALTH THERAPEUTICS, INC.

NOTES TO CONDENSED INTERIM CONSOLIDATED FINANCIAL STATEMENTS

For the three and nine months ended September 30, 2018 and
2017

(Unaudited)

	(Expressed in Canadian dollars)

 

		18.	WARRANTS

 

	 	 	Number of
 Warrants	 	 	Weighted
 Average
 Exercise Price	 
	 	 	 	 	 	$	 
	Balance at December 31, 2016	 	 	8,489,451	 	 	 	0.57	 
	 	 	 	 	 	 	 	 	 
	Issued in February 2017	 	 	5,117,500	 	 	 	2.00	 
	Issued in April 2017	 	 	7,572,750	 	 	 	2.60	 
	Issued upon exercise of compensation units	 	 	153,525	 	 	 	2.00	 
	Issued upon exercise of compensation units	 	 	219,526	 	 	 	2.60	 
	Exercised	 	 	(11,845,075	)	 	 	2.36	 
	Balance at December 31, 2017	 	 	9,707,677	 	 	 	0.80	 
	 	 	 	 	 	 	 	 	 
	Issued in January 2018	 	 	3,000,000	 	 	 	6.00	 
	Issued in February 2018	 	 	3,000,000	 	 	 	7.00	 
	Issued in May 2018	 	 	4,000,000	 	 	 	5.20	 
	Exercised	 	 	(8,239,863	)	 	 	2.65	 
	Expired	 	 	(3,056,050	)	 	 	6.91	 
	Balance at September 30, 2018	 	 	8,411,764	 	 	 	2.92	 
	 	 	 	 	 	 	 	 	 
	Expire:	 	 	 	 	 	 	 	 
	November 2021	 	 	4,411,764	 	 	 	0.85	 
	November 2019	 	 	4,000,000	 	 	 	5.20	 
	Balance at September 30, 2018	 	 	8,411,764	 	 	 	2.92	 

 

		17.	COMMITMENTS

 

Operating leases

 

The Company has entered into
certain operating lease commitments for land, office space and temporary housing through 2047. The future minimum lease payments
for the next five years and thereafter are as follows:

 

    	26

     

    

 

EMERALD HEALTH THERAPEUTICS, INC.

NOTES TO CONDENSED INTERIM CONSOLIDATED FINANCIAL STATEMENTS

For the three and nine months ended September 30, 2018 and
2017

(Unaudited)

	(Expressed in Canadian dollars)

 

	 	 	Remainder
    of
 2018	 	 	2019	 	 	2020	 	 	2021	 	 	2022	 	 	2023	 	 	Thereafter	 
	 	 	$	 	 	$	 	 	$	 	 	$	 	 	$	 	 	$	 	 	$	 
	Production facilities	 	 	46,560	 	 	 	152,117	 	 	 	21,290	 	 	 	-	 	 	 	-	 	 	 	-	 	 	 	-	 
	Equipment	 	 	5,400	 	 	 	21,600	 	 	 	19,800	 	 	 	-	 	 	 	-	 	 	 	-	 	 	 	-	 
	Office space	 	 	23,940	 	 	 	95,760	 	 	 	39,900	 	 	 	-	 	 	 	-	 	 	 	-	 	 	 	-	 
	Temporary housing	 	 	18,900	 	 	 	24,300	 	 	 	-	 	 	 	-	 	 	 	-	 	 	 	-	 	 	 	-	 
	Land (Note 16)	 	 	80,000	 	 	 	320,000	 	 	 	320,000	 	 	 	320,000	 	 	 	320,000	 	 	 	320,000	 	 	 	7,440,000	 
	Total	 	 	174,800	 	 	 	613,777	 	 	 	400,990	 	 	 	320,000	 	 	 	320,000	 	 	 	320,000	 	 	 	7,440,000	 

 

During the year ended December 31, 2017, the Company
entered into agreements for the supply of material and labour to build greenhouses. The Company committed to payments of $1,501,030
during the remainder of the year ended December 31, 2018.

 

		20.	FINANCIAL INSTRUMENTS

 

The classification of the Company’s financial
instruments, as well as their carrying amounts and fair values, are as follows:

 

	 	 	September 30, 2018	 	 	December 31, 2017	 
	 	 	Fair Value	 	 	Carrying Value	 	 	Fair Value	 	 	Carrying Value	 
	 	 	$	 	 	$	 	 	$	 	 	$	 
	Financial Assets	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 
	FVTPL	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 
	Long-term investment	 	 	436,132	 	 	 	436,132	 	 	 	666,667	 	 	 	666,667	 
	Amortized cost	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 
	Cash and cash equivalents	 	 	52,905,302	 	 	 	52,905,302	 	 	 	44,523,145	 	 	 	44,523,145	 
	Accounts receivable	 	 	1,616,706	 	 	 	1,616,706	 	 	 	91,822	 	 	 	91,822	 
	Due from related parties	 	 	9,507,248	 	 	 	9,507,248	 	 	 	324,674	 	 	 	324,674	 
	Refundable deposits	 	 	196,391	 	 	 	196,391	 	 	 	196,391	 	 	 	196,391	 
	Financial Liabilities	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 
	Amortized cost	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 
	Accounts payable and  accrued liabilities	 	 	5,570,227	 	 	 	5,570,227	 	 	 	1,378,645	 	 	 	1,378,645	 
	Current portion of  long-term debt	 	 	2,536,758	 	 	 	2,536,758	 	 	 	-	 	 	 	-	 
	Deferred payment	 	 	22,308,583	 	 	 	22,308,583	 	 	 	-	 	 	 	-	 
	Payable to joint venture	 	 	-	 	 	 	-	 	 	 	4,000,000	 	 	 	4,000,000	 
	Due to related parties	 	 	319,091	 	 	 	319,091	 	 	 	247,505	 	 	 	247,505	 

 

    	27

     

    

 

EMERALD HEALTH THERAPEUTICS, INC.

NOTES TO CONDENSED INTERIM CONSOLIDATED FINANCIAL STATEMENTS

For the three and nine months ended September 30, 2018 and
2017

(Unaudited)

	(Expressed in Canadian dollars)

 

The carrying value of the cash
and cash equivalents, accounts receivable (excluding statutory receivable balances), due from related parties, refundable deposits,
accounts payable and accrued liabilities, current portion of long-term debt, deferred payment, payable to joint venture and amounts
due to related parties, approximate the fair value because of the short-term nature of these instruments.

 

Fair value hierarchy financial
instruments recorded at fair value at the statement of financial position dates are classified using the fair value hierarchy,
which reflects the significance of the inputs used in making the measurements. The fair value hierarchy has the following levels:

 

Level 1 – Valuation based
on quoted prices [unadjusted] in active markets for identical assets or liabilities.

 

Level 2 – Valuation techniques
based on inputs other than quoted prices included in Level 1 that are observable for the asset or liability, either directly or
indirectly.

 

Level 3 – Valuation techniques
using inputs for the asset or liability that are not based on observable market data.

 

There have been no transfers
between fair value levels during the year.

 

The Company’s financial
instruments that are recorded at fair value are presented in the following table:

 

	 	 	Fair Value Measurement	 	 	 	 
	 	 	Level 1	 	 	Level 2	 	 	Level 3	 	 	Total	 
	 	 	$	 	 	$	 	 	$	 	 	$	 
	As at September 30, 2018	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 
	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 
	Financial Assets	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 
	Long-term investments	 	 	250,000	 	 	 	186,132	 	 	 	-	 	 	 	436,132	 
	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 
	As at December 31, 2017	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 
	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 
	Financial Assets	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 
	Long-term investments	 	 	500,000	 	 	 	166,667	 	 	 	-	 	 	 	666,667	 

 

    	28

     

    

 

 

EMERALD HEALTH THERAPEUTICS, INC.

NOTES TO CONDENSED INTERIM CONSOLIDATED FINANCIAL STATEMENTS

For the three and nine months ended September 30, 2018 and
2017

(Unaudited)

	(Expressed in Canadian dollars)

 

		21.	SEGMENT INFORMATION

 

Segment reporting is prepared
on the same basis that the Company’s President, who is the Company’s chief operating decision maker, manages the business,
makes operating decisions and assesses performance. The Company operates in four reportable segments: Emerald
Health Therapeutics, Inc. - corporate administration and branding and marketing; EHTC
- the production and sale of cannabis pursuant to the Cannabis Act; Agro-Biotech -
the production of cannabis pursuant to the Cannabis Act; and Northern Vine - laboratory
services. As at September 30, 2018 and December 31, 2017, all the Company’s operations and assets are located in Canada.
A summary and reconciliations of the reportable segments are provided below:

 

	 	 	Emerald
 Health
 Therapeutics,
 Inc.	 	 	EHTC	 	 	Northern
 Vine	 	 	Agro-
 Biotech	 	 	Total	 
	 	 	$	 	 	$	 	 	$	 	 	$	 	 	$	 
	For the three months ended September 30, 2018	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 
	Sales	 	 	-	 	 	 	318,555	 	 	 	2,515	 	 	 	-	 	 	 	321,070	 
	Interest revenue	 	 	222,533	 	 	 	207	 	 	 	-	 	 	 	-	 	 	 	222,740	 
	Gain / (loss) from operations	 	 	(6,506,469	)	 	 	(4,082,360	)	 	 	(518,621	)	 	 	623,569	 	 	 	(10,483,881	)
	Net income (loss) and comprehensive income (loss)	 	 	(6,389,826	)	 	 	(141,780	)	 	 	(518,621	)	 	 	623,569	 	 	 	(6,426,658	)
	Share of income from joint venture	 	 	-	 	 	 	3,940,373	 	 	 	-	 	 	 	-	 	 	 	3,940,373	 
	For the three months ended September 30, 2017	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 
	Sales	 	 	-	 	 	 	211,316	 	 	 	-	 	 	 	-	 	 	 	211,316	 
	Interest revenue	 	 	60,976	 	 	 	21	 	 	 	-	 	 	 	-	 	 	 	60,997	 
	Loss from operations	 	 	(1,236,778	)	 	 	(485,574	)	 	 	-	 	 	 	-	 	 	 	(1,722,352	)
	Net loss and comprehensive loss	 	 	(1,175,832	)	 	 	(763,539	)	 	 	-	 	 	 	-	 	 	 	(1,939,371	)

 

    	29

     

    

 

EMERALD HEALTH THERAPEUTICS, INC.

NOTES TO CONDENSED INTERIM CONSOLIDATED FINANCIAL STATEMENTS

For the three and nine months ended September 30, 2018 and
2017

(Unaudited)

	(Expressed in Canadian dollars)

 

	 	 	Emerald

    Health
 Therapeutics,
 Inc.	 	 	EHTC	 	 	Northern

    Vine	 	 	Agro-

    Biotech	 	 	Total	 
	 	 	$	 	 	$	 	 	$	 	 	$	 	 	$	 
	For the nine months ended September 30,
    2018	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 
	Sales	 	 	-	 	 	 	970,515	 	 	 	8,035	 	 	 	-	 	 	 	978,550	 
	Interest revenue	 	 	747,033	 	 	 	207	 	 	 	-	 	 	 	-	 	 	 	747,240	 
	Gain / (loss) from operations	 	 	(15,073,454	)	 	 	(6,468,044	)	 	 	(1,593,978	)	 	 	897,215	 	 	 	(22,238,261	)
	Net income (loss) and
    comprehensive income (loss)	 	 	(14,556,956	)	 	 	(2,146,826	)	 	 	(1,276,481	)	 	 	897,215	 	 	 	(17,083,048	)
	Share
    of income from joint venture	 	 	-	 	 	 	4,321,011	 	 	 	-	 	 	 	-	 	 	 	4,321,011	 
	For the nine months ended September 30,
    2017	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 
	Sales	 	 	-	 	 	 	658,292	 	 	 	-	 	 	 	-	 	 	 	658,292	 
	Interest revenue	 	 	118,473	 	 	 	21	 	 	 	-	 	 	 	-	 	 	 	118,494	 
	Loss from operations	 	 	(2,966,753	)	 	 	(1,687,980	)	 	 	-	 	 	 	-	 	 	 	(4,654,733	)
	Net
    loss and comprehensive loss	 	 	(2,848,280	)	 	 	(1,965,975	)	 	 	-	 	 	 	-	 	 	 	(4,814,255	)

 

		22.	SALES

 

A summary of the Company’s sales by product
line is provided in the table below:

 

	 	 	For the three	 	 	For the three	 	 	For the nine	 	 	For the nine	 
	 	 	months ended	 	 	months ended	 	 	months ended	 	 	months ended	 
	 	 	September 30, 2018	 	 	September 30, 2017	 	 	September 30, 2018	 	 	September 30, 2017	 
	Dried Cannabis	 	 	132,511	 	 	 	126,332	 	 	 	421,170	 	 	 	452,894	 
	Cannabis Oils	 	 	185,183	 	 	 	83,468	 	 	 	540,363	 	 	 	200,347	 
	Other	 	 	3,376	 	 	 	1,516	 	 	 	17,017	 	 	 	5,051	 
	Total	 	 	321,070	 	 	 	211,316	 	 	 	978,550	 	 	 	658,292	 

 

		23.	CLAIM AGAINST AGRO-BIOTECH

 

On February 21, 2018, Agro-Biotech
and its former shareholders entered into a non-binding letter of intent (“LOI”) with Pivot Pharmaceuticals Inc. (“Pivot”)
for the potential sale of Agro-Biotech. The parties were unable to agree to final terms and the LOI was terminated. On April 24,
2018 Agro-Biotech was served a statement of claim (the “Claim”) from Pivot which alleges that Agro-Biotech and its
former shareholders failed to negotiate in good faith. Pivot is seeking damages of $72.4 million. The Company believes that the
Claim is without merit and intends on defending the itself to the fullest extent possible.

 

    	30

     

    

 

 

EMERALD HEALTH THERAPEUTICS, INC.

NOTES TO CONDENSED INTERIM CONSOLIDATED FINANCIAL STATEMENTS

For the three and nine months ended September 30, 2018 and
2017

(Unaudited)

	(Expressed in Canadian dollars)

 

No amount has been accrued in
these financial statements in respect of the Claim. Any costs ultimately assessed against the Company in respect of this Claim
and will be recorded in the period in which actual determination of the liability, if any, is made.

 

		24.	EVENTS AFTER THE REPORTING PERIOD

 

Emerald Health Naturals, Inc.

 

On April 17, 2018, the Company
entered into a binding agreement with Emerald Health Bioceuticals, Inc. (“EHB”), 1160305 BC Ltd., GAB Innovations,
Inc. and Dr. Gaetano, a director of Sciences with respect to Emerald Health Naturals (“EHN”). The Company will invest
$5,000,000 for 51% ownership of EHN and EHB will grant EHN the exclusive Canadian distribution rights to EHB’s product line
for 49% ownership of EHN. EHB’s product line consists of nutritional supplements, which use non-cannabis, non-psychoactive
plant-based ingredients to provide potentially beneficial support to the body’s endocannabinoid system.

 

Subsequent to September 30, 2018,
the Company received TSXV conditional approval for the transaction.

 

Factors R&D Technology, Inc.

 

On August 27, 2018 the Company
signed a term sheet with Factors R&D Technology, Inc. (“FTI”), in which FTI will provide pharmaceutical-grade,
industrial-scale manufacturing capacity as well as expertise in GMP-level extraction, softgel production, and packaging. FTI will
provide the Company with access to a facility capable of processing up to 1 million kg of biomass annually and softgel production
capacity of up to 600 million capsules per year. The Company will pay an initial $5 million fee to FTI to cover the initial costs
of transition to cannabis extraction. As part of this arrangement, EHN will issue shares to FTI representing 25% of its issued
shared capital. This share issue is expected to reduce the Company’s future ownership of EHN to 38%.

 

Options granted subsequent to period end

 

Subsequent to September 30, 2018,
the Company granted 321,000 options to purchase Common Shares with exercise prices between $3.40 and $4.60. These options vest
over three years with an expiry date five years from the grant date.

 

    	31Exhibit 4.5

 

 

EMERALD HEALTH THERAPEUTICS, INC.

 

MANAGEMENT DISCUSSION AND ANALYSIS

For the three and nine months ended September 30, 2018

 

Dated: November 29, 2018

 

     

     

    

 

TABLE OF CONTENTS

 

	Forward-Looking Statements	3
	 	 
	Overview 	6
	 	 
	Recent Developments and Events after the Reporting Period	7
	 	 
	Disclosure of Outstanding Share Data	13
	 	 
	Summary of Quarterly Results	13
	 	 
	Results of Operations	14
	 	 
	Additional Disclosure for Venture Issuers Without Significant Revenue	19
	 	 
	Liquidity and Capital Resources	19
	 	 
	Operating, Investing and Financing Activities	20
	 	 
	Financial Risk Management	21
	 	 
	Measurement uncertainty and impairment assessments	21
	 	 
	Transactions with Related Parties	21
	 	 
	Proposed Transactions	23
	 	 
	Critical Accounting Policies and Estimates	23
	 	 
	Changes in Accounting Standards not yet Effective	23
	 	 
	Off-Balance Sheet Arrangements	23
	 	 
	Risks and Uncertainties	23

 

    	- 2 -

     

    

 

Forward-Looking Statements

 

Certain statements contained in this Management
Discussion and Analysis (“MD&A”) constitute forward-looking information or forward-looking statements under applicable
securities laws (collectively, “forward-looking statements”). These statements relate to future events or future performance,
business prospects or opportunities of Emerald Health Therapeutics, Inc. and its subsidiaries (together the “Company”
or “Emerald”). All statements other than statements of historical fact may be forward-looking statements. Any statements
that express or involve discussions with respect to predictions, expectations, beliefs, plans, projections, objectives, assumptions
or future events or performance (often, but not always, using words or phrases such as “seek”, “anticipate”,
“plan”, “continue”, “estimate”, “expect”, “may”, “will”,
“project”, “predict”, “forecast”, “potential”, “targeting”, “intend”,
“could”, “might”, “should”, “believe” and similar expressions) are not statements
of historical fact and may be “forward-looking statements”.

 

Examples of forward-looking statements
in this MD&A include, but are not limited to, statements in respect of: the Company’s intention to significantly increase
its production of cannabis and cannabis oils through a multi-phase expansion plan; the building of a Health Canada licensed production
facility to expand growing capability; the conversion to cannabis production of the remaining six hundred thousand-square foot
(remaining 14 acres) greenhouse facility located on a 50-acre parcel of land in Delta, British Columbia (with ancillary buildings)
provided by Village Farms International Inc. (“Village Farms”) to Pure Sunfarms Corp. (“Pure Sunfarms”),
the Company’s joint venture with Village Farms; the development of Pure Sunfarms as a standalone entity; that the entire
1.1 million square foot space at Delta 3 (as defined below) will be in production by 2019; the optimization, and rapid and cost
effective acceleration of cannabis production by Pure Sunfarms; the exercise by Pure Sunfarms to lease or purchase additional greenhouses
from Village Farms; the potential aggregate production capacity of Delta 1, Delta 2 (each as defined below) and Delta 3; the purchase
by the Company of 40% of Pure Sunfarms’ production in 2018 and 2019; the expansion of the Company’s operations in Metro
Vancouver, British Columbia; the Company’s expectation of requirements for quantities of cannabidiol (“CBD”)
oil; payment of an additional $22.5 million in cash in respect of the acquisition of Agro-Biotech Sciences Inc. and its affiliate
Agro-Biotech Property Holdings Inc. (together “Agro-Biotech”) and the planned expansion of Agro-Biotech’s facility
and its production of cannabis; the Company’s expectation that the acquisition of Agro-Biotech will strengthen its ability
to market products in Eastern Canada; the high-yield production of the Agro-Biotech facility; the investment by the Company of
$5.0 million for a 51% ownership of Emerald Health Naturals Inc. (“EHN”); the grant by Emerald Health Bioceuticals,
Inc. (“EHB”) to EHN of the exclusive Canadian distribution rights to EHB’s product line for 49% ownership of
EHN; the expansion of Northern Vine Canada Inc.’s (“Northern Vine”) operations; the receipt of excise duty licenses
from the Canada Revenue Agency; the Company’s intention to use proceeds of financings to fund the completion of capital projects
and potential future expansion and acquisitions, including partnership transactions, for research and development and to expand
the Company’s existing extraction capabilities, and for working capital and general corporate purposes; the quality, suitability
for sale and cannabinoid concentration in the hemp harvested through the supply agreement with Emerald Health Hemp Inc. (“EHH”);
the suitability of infrastructure at the facility of Factors R&D Technology, Inc. (“FTI”) and FTI’s extraction
of hemp biomass into CBD oil on behalf of Emerald; the services to be provided by FTI to the Company; the entering into of an exclusive
agreement between EHN and FTI; potential proceeds from the exercise of the Company’s outstanding common share purchase warrants;
the acceleration by the Company of the expiry date of the Company’s outstanding warrants; actions taken by the Company to
maintain or adjust its capital structure; increases to the Company’s plant diversity and product offering; improvements to
the Company’s cultivation, manufacturing and standardization processes; partnerships with professional organizations in connection
with educating medical service providers about medical cannabis products; the development of distribution channels for non-medical
cannabis products in Canada; management's anticipation of longterm future profitability; potential effects of regulations under
the Cannabis Act (as defined below) and related legislation introduced by provincial governments; communications with medical doctors
and other healthcare professionals; the undertaking of clinical research to study the effects of the Company’s products on
client health; the Company’s longer term strategy of becoming a leading provider of quality products for the broader adult
recreational cannabis market; the ability of the Company to take advantage of the legalization of adult use recreational cannabis;
the Company’s intention to fully defend the Claim (as defined below) and possible outcomes of such Claim; the Company’s
intentions to acquire and/or construct additional cannabis production and manufacturing facilities and to expand the Company’s
marketing and sales initiatives; benefits received by the Company from its transactions with Emerald Health Sciences Inc. (“Sciences”),
a control person of the Company, and the opportunities that such transactions provide; rapid production capacity expansion; the
Company building valuable intellectual property in Canada which could lead to accelerated sales growth and profit margins; and
future sales opportunities in other emerging medical markets and the effect that each risk factor will have on the Company.

 

    	- 3 -

     

    

 

Forward-looking 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. The reader of these statements is cautioned that any such statements are not guarantees of
future performance and actual results or developments may differ materially from those projected in the forward-looking statements.
These forward-looking statements involve risks and uncertainties relating to, among others: market price of cannabis; securing
product supply; continued availability of capital financing and general economic, market or business conditions; reliance on cultivation,
production and sales licenses to produce and sell medical cannabis and cannabis oils issued to the Company under the Cannabis Act
and its ability to maintain these licenses; regulatory risks relating to the Company’s compliance with the Cannabis Regulations;
regulatory approvals for expansion of current production facility, development of new production facilities and greenhouse retrofits
by the Company and Pure Sunfarms; Pure Sunfarms' and the Company’s reliance on their respective licenses to cultivate and
sell cannabis under the Cannabis Act and their respective abilities to maintain such licenses; Northern Vine’s reliance on
its dealer license to provide analytical testing of cannabis and production of CBD issued to it under the Cannabis Act and its
ability to maintain this license; the Company’s ability to execute its multiphase expansion plan and its plans with Pure
Sunfarms; the Company’s ability to execute a definitive agreement with FTI; changes in laws, regulations and guidelines;
changes in government; changes in government policy; increased competition in the cannabis market; the limited operating history
of the Company; the Company’s reliance on key persons; failure of counterparties to perform contractual obligations; difficulties
in securing additional financing; unfavourable publicity or consumer perception of the cannabis industry; the impact of any negative
scientific studies on the effects of cannabis; demand for labour; difficulties in construction or in obtaining qualified contractors
to complete greenhouse retrofits; actual operating and financial performance of facilities, equipment and processes relative to
specifications and expectations; results of litigation; the Company’s ability to develop and commercialize pharmaceutical
products; failure to obtain regulatory approval for pharmaceutical products; changes in the Company’s over-all business strategy;
restrictions of the TSX Venture Exchange on the Company’s business; and the Company’s assumptions stated herein being
correct. See “Risks and Uncertainties” in this MD&A and other factors described in the Company’s Annual Information
Form under the heading “Risk Factors”.

 

    	- 4 -

     

    

 

The Company believes that the expectations
reflected in any 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 Company does not intend, and does not assume any
obligation, to update these forward-looking statements, except as required by applicable laws. Actual results may differ materially
from those expressed or implied by such forward-looking statements.

 

    	- 5 -

     

    

 

Management’s Discussion and Analysis

 

The following MD&A is prepared as of
November 29, 2018 and is intended to assist the understanding of the results of operations and financial condition of the Company.

 

This MD&A should be read in conjunction
with the unaudited condensed interim consolidated financial statements and accompanying notes of the Company for the three and
nine months ended September 30, 2018 which have been prepared in accordance with International Financial Reporting Standards (“IFRS”)
and International Accounting Standard 34 Interim Financial Reporting (“IAS 34”). The reader should also refer
to the audited financial statements and MD&A for the year ended December 31, 2017. This MD&A contains forward-looking statements
that are subject to risk factors set out in a cautionary note contained herein. All figures are in Canadian dollars unless otherwise
noted.

 

Other information related to the Company,
including the Company’s most recent Annual Information Form (“AIF”) and financial statements referred to herein
are available on the Canadian Securities Administrator’s website at www.sedar.com.

 

Overview

 

The Company is a publicly traded company
with headquarters in Victoria, British Columbia, Canada. Common shares of the Company (the “Common Shares”) are listed
on the TSX Venture Exchange (the “TSXV”) under the trading symbol “EMH”. The Company is classified as a
Tier 1 Venture Issuer on the TSXV. The Company also trades on the OTCQX® Best Market, operated by OTC Markets Group
under the ticker symbol “EMHTF”, and on the Frankfurt Exchange, under the symbol “TBD”.

 

The subsidiaries and joint ventures of the Company at September
30, 2018 are:

 

	Name of Entity	 	Ownership	 
	Agro-Biotech Sciences Inc.	 	 	100	%
	Agro-Biotech Property Holdings Inc.	 	 	100	%
	Emerald Health Therapeutics Canada Inc. (formerly Emerald Health Botanicals)	 	 	100	%
	Pure Sunfarms Canada Inc.	 	 	100	%(1)
	Northern Vine Canada Inc.	 	 	100	%
	Pure Sunfarms Corp.	 	 	50	%

 

Note:

(1) Pure Sunfarms Corp. has an option to acquire at any time
100% of the common shares of Pure Sunfarms Canada Inc. from the Company.

 

Through its operations, subsidiaries, and
joint venture the Company plans to serve the Canadian legal cannabis market and future demand in the therapeutic and non-therapeutic
adult use market based on three pillars: 1) Product innovation; 2) Branding and Sales; 3) Production and raw material sourcing.

 

    	- 6 -

     

    

 

Recent Developments and Events after the Reporting Period

 

Legalization of cannabis

 

On June 21, 2018 Bill C-45 received Royal
Assent enacting the Cannabis Act (Canada) (the “Cannabis Act”) and providing legal access to cannabis for medical
and adult use, and to control and regulate its production, distribution and sale in Canada. On July 11, 2018, the final regulations
under the Cannabis Act, including the Cannabis Regulations, were published by the Government of Canada. The Cannabis Act and Cannabis
Regulations came into effect on October 17, 2018.

 

Canada is the first G7 country and the
second country in the world to federally legalize cannabis for medical and adult recreational use. Licenses issued under the Access
to Cannabis for Medical Purposes Regulations (“ACMPR”) are now deemed to be issued under the Cannabis Act provided
the License holder meets certain requirements including the satisfaction of various administrative requirements through the Health
Canada-operated Cannabis Tracking and Licensing System. The Company expects to have the licenses issued to it under the ACMPR formally
transitioned to the Cannabis Act and Cannabis Regulations and such licenses will be in the form of various combinations of licenses
for sale (for medical use and, subject to their respective approvals, to provinces/territories for resale for recreational use),
licenses for standard cultivation and licenses for standard processing. The Company has also applied for and either received or
is in the process of receiving excise duty licenses from the Canada Revenue Agency. The legal adult use market is a significant
new market for the Company and in addition to the Cannabis Act, which provides regulations from the federal government, each province
and territory regulates the distribution, sale, taxation and use of legalized adult use recreational cannabis.

 

Cannabis Sales Agreements –
Adult-use Markets

 

Subsequent to the three months ended September
30, 2018, the Company completed its first shipments of adult-use cannabis, fulfilling its initial supply scheduling, product and
volume commitments in British Columbia, and Newfoundland and Labrador following the legalization of adult-use cannabis.

 

On September 10, 2018 the Company was selected
as an authorized cannabis supplier by the Newfoundland Labrador Liquor Corporation (“NLC”) to supply cannabis products
to the NLC to serve the adult use market in the province of Newfoundland and Labrador.

 

On September 6, 2018, it was announced
that the Company had been selected as an approved supplier by the Ontario Cannabis Retail Corporation, operating as the Cannabis
Retail Store (“OCS”) to supply the OCS with its cannabis products.

 

On July 24, 2018 the Company signed a Memorandum
of Understanding (“MOU”) with the British Columbia Liquor Distribution Branch (“BCLDB”) to supply the Company’s
cannabis products to the BCLDB to serve the adult-use market in British Columbia.

 

The Company continues discussions with
other provinces and expects to announce additional supply commitments in early 2019. As with British Columbia, Ontario and Newfoundland
and Labrador, the Company’s focus is not on how quickly it can enter into supply agreements, but to ensure achievement of
terms that provide the best long-term return for the Company and its shareholders.

 

    	- 7 -

     

    

 

Expansion projects

 

The Company’s joint venture, Pure
Sunfarms, continues to move towards achieving its goal of large-scale, high-quality, low-cost cannabis production. On July 27,
2018, Pure Sunfarms received its cannabis sales license from Health Canada. Subsequently, Pure Sunfarms has received amendments
to its cultivation license to expand cannabis production to 550,000 square feet at its 1.1 million-square foot (25-acre) greenhouse
facility located on a 50-acre parcel of land in Delta, British Columbia (“Delta 3”). Additional space continues to
be developed at Delta 3, with the entire 1.1 million square foot site expected to be in production in 2019.

 

On August 21, 2018, the Company announced
the appointment of Mandesh Dosanjh as President and Chief Executive Officer of Pure Sunfarms. Mr. Dosanjh joined Pure Sunfarms
in October 2018 following his role as Senior Vice President, Supply Chain and Wholesale, at the Liquor Control Board of Ontario
(“LCBO”) where he led LCBO’s supply chain division as the LCBO prepared for the legalization of adult-use cannabis.
Under his leadership, Pure Sunfarms is expected to continue to develop as a stand-alone entity focused on the cultivation, processing
and sale of cannabis products in order to maximize the return on investment of its shareholders. Both the Company and its joint
venture partner, Village Farms International, Inc. (“Village Farms”) each hold 50% of the outstanding shares of Pure
Sunfarms and therefore neither individually controls Pure Sunfarms. The Company and Pure Sunfarms will each be free to enter into
its own sales arrangements and bring to market products of its choosing under its own brand identity.

 

The combination of Emerald’s cannabis
experience with Village Farms’ experience as a leading North American greenhouse produce grower is expected to optimize the
path to rapidly and cost effectively accelerate large scale, high quality, low cost Canadian cannabis production.

 

Pure Sunfarms also holds options to lease
or purchase from Village Farms a second 1.1 million square foot (25 acre) greenhouse (“Delta 2”) and a 2.6 million
square foot (60 acre) greenhouse (“Delta 1”). Both Delta 2 and Delta 1 are located adjacent to Delta 3. Combined, these
three greenhouse assets provide Pure Sunfarms with a total potential aggregate production capacity of up to 4.8 million square
feet (110 acres).

 

The Company also continues to move forward
with its second expansion project in Metro Vancouver, British Columbia.

 

Supply Agreements

 

On September 26, 2018 the Company entered
into a long-term supply agreement to obtain harvested hemp chaff, plant material consisting of mainly flower and leaf. The supply
agreement was signed with EHH to purchase CBD containing hemp biomass for extraction into CBD oil. The supply agreement is for
four years (five harvests) with an option to extend for an additional two years. Five hundred acres of hemp was harvested in October
2018 from farms located in Manitoba and Prince Edward Island and one thousand acres is expected to be harvested in each subsequent
year of the agreement. CBD yield from the 2018 harvest has yet to be determined, pending analysis and extraction. EHH is a wholly-owned
subsidiary of Sciences and is therefore a related party of the Company.

 

Management is very interested in the economic
potential of CBD as a therapeutic agent and this supply agreement is important to the Company’s expected requirement for
large quantities of CBD.

 

    	- 8 -

     

    

 

On April 30, 2018 the Company entered into
a supply agreement with Pure Sunfarms whereby the Company has agreed to purchase 40% of Pure Sunfarms’ production in 2018
and 2019, at a set price per gram. This agreement secures a significant source of cannabis for the Company as it endeavours to
become an important supplier of high-quality cannabis and value add cannabis products in the adult-use cannabis market. It also
provides Pure Sunfarms with a certainty of sales at known prices for a substantial portion of its production while it builds out
its sales and marketing capabilities.

 

Acquisitions and Strategic Transactions 

 

Agro-Biotech

 

On May 2, 2018 the Company acquired 100%
of the issued and outstanding shares of Agro-Biotech, and the shareholder loans payable by Agro-Biotech, for total consideration
of $90.0 million, subject to adjustment, payable 50% in cash and 50% in Common Shares (the “Purchase Price”). The Company
paid $22.5 million in cash upon closing and $45.0 million was satisfied by the issuance of 9,911,894 Common Shares, of which 4,955,947
Common Shares will be held in escrow until May 1, 2019, pursuant to an escrow agreement. An additional $22.5 million in cash is
payable on May 1, 2019.

 

Until such time as the remaining $22.5
million cash payment is made, 21,491,602 shares, being equal to 25% of the outstanding Agro-Biotech Sciences Inc. shares, and 750
shares, being equal to 25% of the outstanding Agro-Biotech Property Holdings Inc. shares will be held in escrow.

 

Agro-Biotech is a license holder under
the Cannabis Act, located in Saint-Eustache, Quebec. Agro-Biotech’s assets include land and a 75,000 square foot indoor grow
facility. The acquisition increases the Company’s growing capacity and is expected to strengthen its ability to market its
products in Eastern Canada and nationwide.

 

The indoor hydroponic growing facility,
which has access to low-cost energy and water, will be capable of high-yield production of Emerald’s unique cannabis strains,
several of which are currently being grown in Agro-Biotech’s facility. Agro-Biotech’s experience in cannabis cultivation
complements Emerald’s downstream product development focus, which is backed by its depth of pharmaceutical industry R&D
and clinical development expertise, and consumer packaged goods and alcohol beverage marketing experience.

 

Effective November 26, 2018 Thierry Schmidt
was appointed President of Agro-Biotech. Mr. Schmidt brings 20 years of experience in marketing, brand advocacy, and general management;
he has held senior leadership positions at Next Level Energy Inc., L’Oreal Canada, and
British American Tobacco.

 

Agro-Biotech has built out 20,000 square
feet of this facility to date and Emerald expects to have the remainder of the 75,000 square foot facility equipped to produce
high quality dried cannabis flower and be fully operational by early 2019.

 

On April 24, 2018, a statement of claim
(the “Claim”) was served on Agro-Biotech and its former shareholders by Pivot Pharmaceuticals Inc. (“Pivot”),
a party with whom Agro-Biotech and its former shareholders had previously entered into a non-binding letter of intent with respect
to a potential sale of Agro-Biotech. The Claim seeks to recover $72.4 million in damages for loss of profits allegedly suffered
as a result of the bad faith and lack of cooperation by Agro-Biotech and its shareholders in the negotiations surrounding the contemplated
acquisition by Pivot of Agro-Biotech. The Company believes the Claim is without merit and intends to defend the Claim to the fullest
extent possible. See “Risks and Uncertainties - Current Litigation relating to Agro-Biotech Acquisition”.

 

    	- 9 -

     

    

 

Emerald Health Naturals Inc.

 

On April 17, 2018 the Company entered into
a binding letter agreement with EHB (a company related by common ownership), EHN, GAB Innovations, Inc. and Dr. Gaetano Morello,
a director of Sciences, with respect to the formation of the business and operations of EHN (the “Formation Agreement”).
Subject to regulatory approval, the Company has agreed to invest $5.0 million for 51% ownership of EHN and EHB will grant EHN the
exclusive Canadian distribution rights to EHB’s product line for 49% ownership of EHN. EHB’s product line consists
of nutritional supplements, which use non-cannabis, non-psychoactive plant-based ingredients to provide potentially beneficial
support to the body’s endocannabinoid system. The TSXV has given conditional approval to the transaction subject to final
regulatory approval and settlement of the definitive documentation.

 

Subsequent to this agreement, the Company
signed a non-binding term sheet to form a strategic alliance with FTI, described below, which includes a provision for EHN to issue
shares to FTI representing 25% of its issued share capital. This share issue would reduce the Company’s future ownership
of EHN to 38%.

 

The Formation Agreement represents the
Company’s multi-pronged program to market and sell non-cannabis endocannabinoid-supporting nutritional products in Canadian
grocery, natural health product, and pharmacy stores.

 

Factors R&D Technology, Inc.

 

On August 27, 2018 the Company signed a
term sheet to form a strategic alliance with FTI, in which FTI will provide pharmaceutical-grade, industrial-scale manufacturing
capacity as well as expertise in GMP-level extraction, softgel production, and packaging. FTI will provide the Company with access
to a facility capable of processing up to 1 million kg of biomass annually and softgel production capacity of up to 600 million
capsules per year. The Company will pay an initial $5 million fee to FTI to cover the initial costs of transition to cannabis extraction.

 

The term sheet also provides that FTI will
enter into an exclusive agreement with EHN (described above). This will enable the companies to collaborate on product innovation,
marketing, and distribution strategies to provide a range of products containing cannabinoids, where legal, and other herbal formulations
to support the human endocannabinoid system to the Canadian and global health products market. The collaboration will initially
focus on manufacturing, distribution, and sales of EHN’s current product line. As part of this arrangement, EHN will issue
shares to FTI representing 25% of its issued share capital.

 

The term sheet is non-binding and the strategic
alliance is subject to the negotiation and execution of definitive agreements. The strategic alliance and related activities are
also subject to obtaining all necessary regulatory approvals.

 

Northern Vine Canada Inc.

 

On May 15, 2018 the Company exercised its
right to purchase additional common shares of Northern Vine issued from treasury, increasing its ownership of Northern Vine to
65% for $2.75 million, paid in cash at closing.

 

    	- 10 -

     

    

 

On August 15, 2018 the Company increased
its ownership in Northern Vine to 100% by purchasing all of the remaining shares of Northern Vine held by Abattis Bioceuticals
Corp (“Abattis”). The Company paid Abattis $2.0 million in cash and issued 1,093,938 common shares of the Company.

 

The Company has also agreed to pay Abattis
a milestone payment of common shares of the Company, valued at $4.0 million, if Northern Vine and/or the Company receive gross
revenue of $10 million from the sale of products or services introduced by Abattis within thirty-six months ended August 2021.

 

Northern Vine continues to focus on developing
its laboratory services for the cannabis industry and expanding its operations in oil extraction.

 

Financings

 

In January, February and May 2018, the
Company completed financings that resulted in total gross proceeds from unit issuances and warrant exercises of $67.8 million (net
proceeds – $67.5 million) and has the potential to a raise an additional $41.8 million if the remaining outstanding warrants
from these financings are exercised prior to expiry. The Company intends to use the proceeds of the financings to fund the completion
of capital projects and potential future expansion and acquisitions, including partnership transactions, for research and development,
to expand the Company’s existing extraction capabilities, and for working capital and general corporate purposes. Below is
a comparison in tabular form of disclosure the Company has previously made about the use of the proceeds of the financings. There
are no significant variances that will impact the Company’s ability to achieve its business objectives.

 

Comparison in tabular form to prior disclosure:

 

	Prior
    Disclosure in Prospectus Supplement dated May 16, 2018	 	Current
    Disclosure
	 	 	 
	
        The estimated net proceeds received by the Company from the
        Treasury Offering will be $16,800,000 which it intends to use to fund the completion of its recently acquired Agro-Biotech facility
        in Quebec, working capital and general corporate purposes. The Company will not receive any of the proceeds related to the Secondary
        Shares sold by the Selling Shareholder in the Secondary Offering.

         

        Although the Company intends to use the net proceeds from the
        Offering as set forth above, the actual allocation of the net proceeds may vary from those allocations set out above, depending
        on future developments in the Company’s business operations or unforeseen events, including those listed under the “Risk
        Factors” section of this Prospectus Supplement and the Prospectus. The Investor is cautioned that, notwithstanding the Company’s
        current intentions regarding the use of the net proceeds of the Treasury Offering, there may be circumstances where a reallocation
        of the net proceeds may be advisable for reasons that management believes, in its discretion, are in the Company’s best interests.
	 	The Company intends to use the proceeds of the financings to fund the completion of capital projects and potential future expansion and acquisitions, including partnership transactions, for research and development, to expand the Company’s existing extraction capabilities, and for working capital and general corporate purposes.

 

On May 22, 2018 the Company closed a prospectus
sale to a single Canadian institutional accredited investor (the “Investor”) of 4,000,000 units pursuant to a supplement
dated May 16, 2018 to the Company’s base shelf prospectus at a price per unit of $4.20 for gross proceeds of $16.8 million.
Each unit consists of one Common Share and one common share purchase warrant of the Company. Each warrant is exercisable into one
Common Share for a period of eighteen months at a price of $5.20 per Common Share with an expiry date of November 22, 2019. In
the event that the closing price of the Common Shares on the TSX Venture Exchange or such other principal stock exchange on which
the Common Shares are then listed is greater than $6.50 per Common Share for a period of twenty consecutive trading days at any
time after the closing on the prospectus sale, the Company may accelerate the expiry date of the warrants by giving notice to the
warrant holders and in such case, the warrants will expire on the 30th day after the date on which notice is given by
the Company.

 

    	- 11 -

     

    

 

On February 14, 2018 the Company closed
a prospectus sale to the Investor of 3,000,000 units pursuant to a supplement dated February 9, 2018 to the Company’s base
shelf prospectus at a price per unit of $6.00 for gross proceeds of $18.0 million. Each unit consists of one Common Share and one
common share purchase warrant of the Company. The warrants expired, unexercised, on August 13, 2018.

 

On January 9, 2018 the Company closed a
prospectus sale to the Investor of 3,000,000 units pursuant to a supplement dated January 5, 2018 to the Company’s base shelf
prospectus at a price per unit of $5.00 for gross proceeds of $15.0 million. Each unit consists of one Common Share and one common
share purchase warrant of the Company. Each warrant was exercisable into one Common Share for a period of three years at a price
of $6.00 per Common Share with an expiry date of January 9, 2021, subject to acceleration. On February 15, 2018 the 3,000,000 warrants
were exercised for total gross proceeds of $18,000,000.

 

Research and development

 

On October 16, 2018 the Company filed 12
provisional US patent applications covering Emerald’s unique Defined Dose cannabis dosage forms and formulations bringing
the total number of provisional US patents filed by the Company to 17. The products aim to provide more precise and constituent
delivery, dosage and formulations.

 

On October 10, 2018 the Company announced
that Northern Vine successfully completed the export of cannabis oil to the United States (U.S.) pursuant to an import permit from
the federal U.S. Drug Enforcement Agency. The CBD oil is expected to be used by a U.S. biopharmaceutical company to develop its
proprietary cannabinoid technology for medical research and development and for its manufacturing process for future clinical trials.
In addition, Northern Vine successfully imported isolated cannabigerol from Spain for medical research and development of plant-based
therapies with unique cannabinoid profiles. Northern Vine also recently received cannabinoid oil imports for medical research and
development from Netherlands and Colombia and has been approved for cannabinoid oil imports from China.

 

On October 3, 2018 the Company announced
that it entered into a research agreement with VivaCell Biotechnologies Spain S.L.U. (“VivaCell”). VivaCell is an institute
focused on cannabis research, which will provide its cannabis-industry-leading contract research organization (CRO) services to
the Company to elucidate the mechanism of action of proprietary formulations and dosage forms that the Company is developing. VivaCell
is a wholly-owned subsidiary of Sciences, who is a control person of the Company. Accordingly, both VivaCell and Sciences are related
parties of the Company.

 

The Company’s research and development
team has been continuing its work to increase plant diversity, as well as improving on its cultivation, manufacturing, and standardization
processes in anticipation of a significant scale up. In addition, the Company continues to develop its product offerings.

 

    	- 12 -

     

    

 

Sales and distribution

 

The Company remains committed to supplying
medical clients with access to high quality medical cannabis and, in partnership with other professional organizations, the Company
intends to continue to communicate with medical doctors and other healthcare professionals, and to provide education and services
to these professionals about medical cannabis products.

 

The Company’s strategy also includes
becoming a leading provider of high quality, low cost products for the broader cannabis market. The Company believes it is well
positioned to benefit from the legalization of non-medical cannabis in Canada.

 

In April 2018 the Company engaged DDB Canada
as its agency of record. DDB Canada will work to launch various brand initiatives and scale the Company’s marketing communication
efforts based on both domestic and global growth plans.

 

The Company’s sales and marketing
team continues to work with the provinces as they develop the distribution channels for non-medical cannabis products across Canada.

 

Disclosure of Outstanding Share Data

 

The Company’s authorized share capital
consists of an unlimited number of Common Shares of which 136,850,193 were issued and outstanding as of September 30, 2018 and
137,193,116 were issued and outstanding as of November 29, 2018, of which 4,955,947 will be held in escrow until May 1, 2019.

 

During the nine months ended September
30, 2018, the Company granted an aggregate of 2,017,500 stock options to directors, employees and consultants. Each option is exercisable
into one Common Share for a period of up to five years. The exercise prices at the time of the grants ranged from $2.49 and $6.68
per share. Subsequent to the period ended September 30, 2018, the Company granted an additional 321,000 stock options, with exercise
prices between $3.40 and $4.60. These options vest over three years with an expiry date five years from the grant date.

 

There were 10,988,842 stock options and
830,000 restricted share units outstanding as of September 30, 2018. As of November 29, 2018, there were 9,793,794 stock options
and 830,000 restricted share units outstanding.

 

There were 8,411,764 warrants outstanding
as of September 30, 2018. As of November 29, 2018, there were 8,411,764 warrants outstanding.

 

Summary of Quarterly Results

 

The financial information in the following
tables summarize selected financial information for the Company for the last eight quarters which was derived from annual financial
statements prepared in accordance with IFRS or interim financial statements prepared in accordance with IFRS applicable to the
preparation of interim financial statements, IAS 34, Interim Financial Reporting:

 

    	- 13 -

     

    

 

	 	 	2018	 	 	2017	 
	 	 	September 30
 ($)	 	 	June 30
 ($)	 	 	March 31
 ($)	 	 	December 31
 ($)	 
	Revenue	 	 	321,070	 	 	 	284,262	 	 	 	373,218	 	 	 	279,362	 
	Share-based payments	 	 	2,165,851	 	 	 	2,081,661	 	 	 	1,954,047	 	 	 	1,979,553	 
	Interest revenue	 	 	222,740	 	 	 	274,436	 	 	 	250,064	 	 	 	43,024	 
	Share of income (loss) from joint venture	 	 	3,940,373	 	 	 	682,431	 	 	 	(301,793	)	 	 	(44,562	)
	Net Loss	 	 	(6,426,658	)	 	 	(5,610,970	)	 	 	(5,045,420	)	 	 	(4,027,569	)
	Net Loss per share (basic and diluted)	 	 	(0.05	)	 	 	(0.04	)	 	 	(0.04	)	 	 	(0.04	)

 

	 	 	2017	 	 	2016	 
	 	 	September 30
 ($)	 	 	June 30
 ($)	 	 	March 31
 ($)	 	 	December 31
 ($)	 
	Revenue	 	 	211,316	 	 	 	245,708	 	 	 	201,268	 	 	 	124,251	 
	Share-based payments	 	 	271,968	 	 	 	369,788	 	 	 	201,186	 	 	 	137,113	 
	Interest Revenue	 	 	60,997	 	 	 	57,497	 	 	 	-	 	 	 	-	 
	Share of income (loss) from joint venture	 	 	(278,016	)	 	 	-	 	 	 	-	 	 	 	-	 
	Net Loss	 	 	(1,939,371	)	 	 	(1,669,026	)	 	 	(1,205,858	)	 	 	(880,424	)
	Net Loss per share (basic and diluted)	 	 	(0.02	)	 	 	(0.02	)	 	 	(0.02	)	 	 	(0.01	)

 

Included in the gross margin for the three
months ended September 30, 2018, is an unrealized gain of $1,302,377 (September 30, 2017: $64,307) on the changes in the fair value
of the Company’s biological assets. Also included in the gross margin for the three months ended September 30, 2018, is a
realized fair value gain of $7,228 (September 30, 2017: $123,810) on the change in biological assets included in the cost of inventory
sold.

 

Results of Operations

 

Quarter ended September 30, 2018

 

The net loss for the quarter ended September
30, 2018 was $6.4 million (loss of $0.05 per share), compared to the net loss of $1.9 million (loss of $0.02 per share) for the
same quarter in the prior year. Diluted loss per share is the same as basic loss per share as the outstanding options and warrants
have an anti-dilutive effect on the loss per share.

 

Factors contributing to the net loss for
the three-month period ended September 30, 2018 include the following:

 

Revenue

 

Revenue for the quarter ended September
30, 2018 was $321,070 compared to $211,316 for the same period in the prior year. The Company had a larger client base and a greater
percentage of sales from oils in the current period resulting in an increase in revenue compared to the prior year. For the quarter
ended September 30, 2018, revenue was comprised of approximately 41% dried product, 58% oils and 1% other, compared to approximately
60% dried product and 39% oils and 1% other in the quarter ended September 30, 2017.

 

    	- 14 -

     

    

 

Cost of Sales

 

Cost of goods sold currently consists of
three main categories: (i) cost of goods sold expensed to inventory (ii) production costs, and (iii) change in the fair value of
biological assets.

 

Cost of goods sold represents the deemed
cost of inventory that arose from the fair value measurement of biological assets, subsequent post-harvest costs capitalized to
inventory, purchased dried cannabis, costs to produce cannabis oils capitalized to inventory (including the deemed cost of dried
inventory that arose from the fair value measurement of biological assets that were used to produce cannabis oils), and packaging
costs. Cost of goods sold expensed to inventory for the quarters ended September 30, 2018 and September 30, 2017 was $300,785 and
$856,073 respectively. The increase in cost of goods sold in the current period is due to the increase in the amount of product
sold by the Company and also to the increase in inventory value of products sold, resulting in a lower margin of revenue over cost
of goods sold.

 

Production costs include all direct and
indirect production related costs, including security, compliance, quality control and quality assurance costs, as well as related
overhead. In addition, all inventory costs in excess of net realizable value are expensed to production costs. In the quarter ended
September 30, 2018, the Company incurred production costs of $910,497 versus $114,487 in the quarter ended September 30, 2017.
The increase is due to more plants cultivated in the three months ended September 30, 2018 as compared to the three months ended
September 30, 2017. In addition, production processes and staffing level modifications increased significantly during the three
months ended September 30, 2018 in anticipation of the adult-use market. This increase resulted in increased production costs when
compared to the three months ended September 30, 2017.

 

Changes in the fair value of biological
assets is part of the Company’s cost of sales due to IFRS standards relating to agriculture and biological assets (i.e. living
plants or animals). This line item represents the change in fair value in biological assets (cannabis plants and seeds) during
the period. The change in biological assets for the quarter ended September 30, 2018 was a gain of $1,302,377 compared to a gain
of $64,307 in the same quarter in the prior year. The increase is due to the number of plants that were growing in the Agro-Biotech
facility during the three months ended September 30, 2018.

 

The Company measures biological assets
consisting of cannabis on plants at fair value less cost to sell up to the point of harvest, which becomes the basis for the cost
of finished goods inventories after harvest. Seeds are measured at fair market value, except for a portion which are restricted
with respect to distribution due to the conditions under which they were acquired that are measured at cost. The significant assumptions
used in determining the fair value of cannabis plants are as follows: plant waste based on various stages of growth; yield per
plant; selling price, less costs to sell; percentage of costs incurred to date compared to the total costs to be incurred (to estimate
the fair value of an in-process plant); and costs incurred for each stage of plant growth.

 

    	- 15 -

     

    

 

Total gross margin is impacted significantly
by the change in fair value for biological assets and the production cycle of those biological assets, resulting in a gross margin
for the three months ended September 30, 2018 of $412,165 as compared to the three months ended September 30, 2017 of $Nil. Gross
margin was also positively impacted by production volumes at the recently acquired Agro-Biotech impacting the current period but
not the comparative period in 2017.

 

Other expenses

 

General and Administrative –
During the quarter ended September 30, 2018 the Company incurred general and administrative expenses of $4.7 million
versus $1.3 million for the quarter ended September 30, 2017. The current quarter included expenses related to a significant increase
in activities including corporate branding, business development, media, and project management in preparation for the legal adult
use market. Additional staff have been hired and office space has been expanded. In the quarter ended September 30, 2018, general
and administrative costs included; salaries and benefits of $853,397 (three months ended September 30, 2017 - $213,795), consulting
and professional services fees of $2,420,084 (three months ended September 30, 2017 - $234,427), corporate branding and media $861,838
(three months ended September 30, 2017 - $247,345), office and insurance of $411,993 (three months ended September 30, 2017 - $110,291)
and travel and accommodation of $187,763 (three months ended September 30, 2017 - $86,290). Included in consulting and professional
service fees, for the quarter ended September 30, 2018, are $1,050,000 in management fees to Sciences as per the amended agreement
effective January 2018, see discussion of the management agreement with Sciences under “Transactions with Related Parties.”

 

Sales and marketing – In the
quarter ended September 30, 2018, the Company incurred sales and marketing expenses of $2,685,549 versus $77,958 in the comparable
2017 prior period. The current period increase reflects the increase in sales and marketing staff and activity as the Company works
towards branding the Company and launching products into the legal adult use market.

 

Research and development –
In the quarter ended September 30, 2018, the Company incurred research and development expenses of $92,568 (three months ended
September 30, 2017 - $30,711). Research and development projects in the current quarter include development and testing of processes
to manufacture new products and designing clinical trials. The prior comparable period included research on cannabis oils and early
stage planning for clinical trials.

 

Share-based compensation –
In the quarter ended September 30, 2018, the Company incurred share-based compensation expenses of $2,165,851 versus $271,968 in
the comparable 2017 prior period. The amounts are compensation expenses related to employee, director and consultant incentive
stock options and restricted share units which are measured at fair value at the date of grant and expensed over the vesting period.
During the current quarter, the Company granted 992,500 stock options to employees and consultants. The increase in the share-based
compensation expense is due to a significantly larger number of granted and outstanding options as at September 30, 2018 then there
were as at September 30, 2017.

 

Share of income from joint venture –
In the quarter ended September 30, 2018, the Company recognized $3,940,373 as its 50% share of the income from the Pure Sunfarms
joint venture, compared to $278,016 as its 50% share of the loss in the quarter ended September 20, 2017. Pure Sunfarms commenced
operations during the three months ended September 30, 2017 and has since begun producing cannabis for sale, receiving its cannabis
sales license from Health Canada on July 27, 2018.

 

    	- 16 -

     

    

 

Year to date September 30, 2018

 

The net loss for the nine-months ended
September 30, 2018 was $17.1 million (loss of $0.13 per share) compared to a net loss of $4.8 million (loss of $0.06 per share)
for the same period in the prior year. Diluted loss per share is the same as basic loss per share as the outstanding options and
warrants have an anti-dilutive effect on the loss per share. Factors contributing to the net loss for the current periods include
the following:

 

	 	 	2018	 	 	2017	 
	 	 	Nine months ended September 30
 ($)	 	 	Nine months ended September 30
 ($)	 
	Revenue	 	 	978,550	 	 	 	658,292	 
	Share-based payments	 	 	6,201,559	 	 	 	842,942	 
	Interest revenue	 	 	747,240	 	 	 	118,494	 
	Share of income (loss) from joint venture	 	 	4,321,011	 	 	 	(278,016	)
	Net Loss	 	 	(17,083,048	)	 	 	(4,814,255	)
	Net Loss per share (basic and diluted)	 	 	(0.13	)	 	 	(0.06	)

 

Included in the gross margin for the nine
months ended September 30, 2018, is an unrealized gain of $2,674,261 (September 30, 2017: $208,637) on the changes in the fair
value of the Company’s biological assets. Also included in the gross margin for the nine months ended September 30, 2018,
is a realized fair value gain of $136,927 (September 30, 2017: $233,164) on the change in biological assets included in the cost
of inventory sold.

 

Revenue

 

Revenue for the nine-month period ended
September 30, 2018 was $978,550 compared to $658,292 in the prior year as the Company’s client base increased. For the year
to date ended September 30, 2018, revenue was comprised of approximately 43% dried product, 55% oils and 2% other, compared to
approximately 69% dried product and 30% oils and 1% other in the prior year to date ended September 30, 2017.

 

Cost of Sales

 

Cost of goods sold increased in the current
period compared to the same period in the prior year due to higher sales volumes and an increase in volumes produced in the current
year.

 

Total gross margin is impacted significantly
by the change in fair value for biological assets and the production cycle of those biological assets, resulting in an improvement
in gross margin for the nine months ended September 30, 2018 of $1,162,326, compared to the nine months ended September 30, 2017
of ($89,145). Gross margin was also positively impacted by the number of plants growing at Agro-Biotech impacting the current period
but not the comparative period in 2017.

 

    	- 17 -

     

    

 

Other expenses

 

General and Administrative –
During the nine-month period ended September 30, 2018, the Company incurred general and administration expenses of $10.7
million versus $3.1 million for the same period ended September 30, 2017. The year-to-date expenses included expenses related to
a significant increase in activities including corporate branding, business development, media, and project management to prepare
for the legal adult use market. Additional staff have been hired and office space has been expanded. For the nine-month period
ended September 30, 2018, general and administrative costs included: Salaries and benefits of $1,887,468 (2017 - $556,682), consulting
and professional services fees of $5,705,757 (2017 - $1,049,598), investor relations and media $1,654,880 (2017 - $545,137), office
and insurance of $1,058,318 (2017 - $358,920) and travel and accommodation of $385,236 (2017 - $230,870).

 

Sales and marketing – For
the nine-month period ended September 30, 2018, the Company incurred sales and marketing expenses of $3,840,389 versus $282,158
in the comparable 2017 prior period. The current period increase reflects the increase in sales and marketing activity as the Company
works towards branding the Company and launching products into the legal adult use market.

 

Research and development –
For the nine-month period ended September 30, 2018, the Company incurred research and development expenses of $273,521 versus $167,274
in the comparable 2017 prior period. Research and development projects in the current year include development and testing of processes
to manufacture capsules, exploration of other new products and planning for upcoming clinical trials.

 

Share-based compensation –
Share-based compensation expense for the nine-month period ended September 30, 2018 was of $6,201,559 compared to $842,942 in the
comparable 2017 prior period. The amounts are compensation expenses related to employee, director and consultant incentive stock
options and restricted share units which are measured at fair value at the date of grant and expensed over the vesting period.
During the current year, the Company granted 2,017,500 stock options and 5,000 restricted share units to employees and consultants.
The increase in the share-based compensation expense is due to a significantly larger number of granted and outstanding options
as at September 30, 2018 as compared to September 30, 2017.

 

Share of income from joint venture –
In the nine months ended September 30, 2018, the Company recognized $4,321,011 as its 50% share of the income from the Pure Sunfarms
joint venture, which commenced operations during the three months ended September 30, 2017. Pure Sunfarms has begun producing cannabis
for sale and received its cannabis sales license from Health Canada on July 27, 2018.

 

    	- 18 -

     

    

 

Additional Disclosure for Venture Issuers Without Significant
Revenue

 

As the Company did not have significant revenue from operations
in either of its last two financial years, the following is a breakdown of the material costs incurred:

 

	 	 	For the three 
 months ended 
 September 30, 
 2018 
 ($)	 	 	For the three 
 months ended 
 September 30, 
 2017 
 ($)	 	 	For the nine 
 months ended 
 September 30, 
 2018 
 ($)	 	 	For the nine 
 months ended 
 September 30, 
 2017 
 ($)	 
	Expensed research and development costs	 	 	92,568	 	 	$	30,711	 	 	 	273,521	 	 	$	167,274	 
	General and administrative expenses	 	 	4,735,075	 	 	$	1,292,148	 	 	 	10,691,659	 	 	$	3,141,208	 
	Purchase of plant and equipment	 	 	3,603,327	 	 	$	428,431	 	 	 	8,553,225	 	 	$	1,160,868	 

 

Liquidity and Capital Resources

 

The Company continually monitors and manages
its cash flow to assess the liquidity necessary to fund operations. The Company manages its capital resources and adjusts it to
take into account changes in economic conditions and the risk characteristics of the underlying assets. To maintain or adjust its
capital resources, the Company may, where necessary, control the amount of working capital, pursue financing or manage the timing
of its capital expenditures. As at September 30, 2018, the Company had positive working capital of $39.7 million.

 

While the Company has incurred losses to
date, management anticipates long-term future profitability of the business, though there can be no assurance that the Company
will gain adequate market acceptance for its products or be able to generate sufficient gross margins to reach profitability.

 

The Company has committed to various projects
which may require significant cash injections over the next 24 months, including the expansion of service and production facilities
of Northern Vine, the Pure Sunfarms retro-fit of Delta 3, and potential retro-fits of Delta 2 and Delta 1; the Company’s
new production facility in Metro Vancouver, British Columbia; and Agro-Biotech’s indoor grow facility. As at September 30,
2018, the Company committed to payments of $1.5 million during the remainder of 2018 for the supply of material and labour to build
greenhouses at the Metro Vancouver site.

 

On July 27, 2018 Northern Vine purchased
the land and building it had previously leased for $956,000 plus applicable taxes.

 

On August 15, 2018, the Company expended
$2.0 million under the agreement to purchase all of the remaining shares of Northern Vine held by Abattis.

 

During the three months ended September
30, 2018, the Company made a demand loan in the amount of $8 million to Pure Sunfarms. See discussion of the demand loan to Pure
Sunfarms under “Transactions with Related Parties.”

 

The Company is obligated to pay an additional
$22.5 million cash on May 1, 2019, under the Agro-Biotech purchase agreement.

 

    	- 19 -

     

    

 

The Company is committed to contributing $5.0 million cash to
EHN in exchange for a 51% initial ownership in EHN upon closing of the transactions provided for in the Formation Agreement.

 

Agro-Biotech has a mortgage held by National Bank of Canada,
secured by the property held by Agro-Biotech Property Holdings Inc. with a maturity date of February 2019. If the mortgage is not
renewed in February 2019, the remaining balance of $2.5 million will be payable.

 

In addition, the Company has entered into operating lease commitments
for land and office space through 2047. The future minimum lease payments for the next five years and thereafter are as follows:

 

	 	 	Due by year ending	 
	 	 	Remainder 
 of 2018	 	 	2019	 	 	2020	 	 	2021	 	 	2022	 	 	2023	 	 	Thereafter	 
	Production facilities	 	$	46,560	 	 	$	152,117	 	 	$	21,290	 	 	$	-	 	 	$	-	 	 	$	-	 	 	$	-	 
	Equipment	 	$	5,400	 	 	$	21,600	 	 	$	19,800	 	 	$	-	 	 	$	-	 	 	$	-	 	 	$	-	 
	Office space	 	$	23,940	 	 	$	95,760	 	 	$	39,900	 	 	$	-	 	 	$	-	 	 	$	-	 	 	$	-	 
	Temporary housing	 	$	18,900	 	 	$	24,300	 	 	$	-	 	 	$	-	 	 	$	-	 	 	$	-	 	 	$	-	 
	Land	 	$	80,000	 	 	$	320,000	 	 	$	320,000	 	 	$	320,000	 	 	$	320,000	 	 	$	320,000	 	 	$	7,440,000	 
	Total	 	$	174,800	 	 	$	613,777	 	 	$	400,990	 	 	$	320,000	 	 	$	320,000	 	 	$	320,000	 	 	$	7,440,000	 

 

Operating, Investing and Financing Activities

 

The chart below highlights the Company’s cash flows:

 

	 	 	For the nine months ended 
 September 30, 2018
 ($)	 	 	For the nine months ended 
 September 30, 2017
 ($)	 
	Net cash provided by (used in):	 	 	 	 	 	 	 	 
	Operating activities	 	$	(16,850,488	)	 	$	(4,755,345	)
	Investing activities	 	$	(46,689,608	)	 	$	(13,603,665	)
	Financing activities	 	$	71,922,253	 	 	$	37,964,069	 
	Increase in cash	 	$	8,382,157	 	 	$	19,605,059	 

 

Cash used in operating activities for the
nine months ended September 30, 2018 was $16.9 million, compared to cash used of $4.8 million in the prior period. The current
period amount reflects the increase in general and administrative expenditures, additional staff costs, the increase in sales and
marketing expenditures, and cash outflows from payments of current liabilities and increase in current assets from the prior year
ended December 31, 2017 and acquired balances during the nine months ended September 30, 2018.

 

Cash used in investing activities for the
nine months ended September 30, 2018 was $46.7 million, compared to cash used of $13.6 million in the prior year. In the current
nine-month period, $22.6 million was used to purchase Agro-Biotech, $4.0 million was used to invest in the Pure Sunfarms joint
venture transaction; $8.0 million was advanced as a demand loan to Pure Sunfarms, $2.0 million was paid as a deposit for the greenhouse
being built at the Metro Vancouver site; $5.0 million was used in construction of the new production facility at the Metro Vancouver
site; and $3.1 million was used to purchase lab extraction and other equipment. The prior year the cash was used for investment
in Pure Sunfarms and construction at the Metro Vancouver site.

 

    	- 20 -

     

    

 

Cash provided by financing activities for
the nine months ended September 30, 2018 was $71.9 million, compared to cash provided of $38.0 million in the prior period. Cash
generated in the current nine-month period included $49.8 million from net proceeds received on the prospectus offerings completed
in January, February and May 2018, $21.9 million received from warrant exercises, and $0.4 million from stock option exercises.

 

Financial Risk Management

 

The Company’s board of directors
has overall responsibility for the establishment and oversight of the Company’s risk management policies on an annual basis.
Management identifies and evaluates the Company’s financial risks and is charged with the responsibility of establishing
controls and procedures to ensure financial risks are mitigated in accordance with the approved policies.

 

Measurement uncertainty and impairment assessments

 

As of September 30, 2018, management of
the Company has determined that no impairment indicators of its assets were present and no additional impairment write-downs in
excess of those that had been previously recorded were required. Management continues to review each of its assets for indications
of impairment.

 

Transactions with Related Parties

 

The Company has entered into transactions
with a control person of the Company, a wholly owned subsidiary of such control person, a company controlled by the Company’s
Executive Chairman, a company whose CEO is also a director of the Company, and with Pure Sunfarms.

 

With Emerald Health Sciences Inc.

 

The Company entered into a management agreement
with Sciences, a control person of the Company, in May 2015, which has subsequently been amended, most recently in January 2018,
under which the Company pays Sciences $350,000 per month. The Company’s relationship with Sciences allows it to advance the
development of its business faster and with fewer resources than would otherwise be possible, and with the benefit of strategic
guidance and expertise in the cannabis industry. Sciences is focused on the medicinal potential of cannabis and cannabinoids with
investment goals designed to leverage the scientific rigor, federal regulatory compliance, and life-science expertise of its entire
Emerald leadership group. Sciences draws upon a large network of professionals with life sciences related expertise, including
corporate pharmaceutical and biotechnology management, business development, product development and marketing experience, research
scientists, medical doctors, naturopathic doctors, and lawyers - many with deep subject matter expertise in cannabis and the endocannabinoid
system - to leverage the Company’s ability to conduct research and development, develop intellectual property, attract talent,
manage operations, conduct mergers and acquisitions, and raise capital.

 

With access to these services, the Company
has been able to identify and select new business opportunities, successfully negotiate and develop key strategic partnerships,
and efficiently secure capital for the Company.

 

    	- 21 -

     

    

 

Management periodically evaluates the terms
of the management agreement for reasonableness and adjusts the fee based on that evaluation. Management believes that the fair
value of the services provided by Sciences through the management agreement is in line with the current management fee.

 

During the nine months ended September
30, 2018, Sciences exercised 4,077,687 warrants at a price of $0.27 per warrant for total gross proceeds to the Company of $1,100,975.

 

As at September 30, 2018, Sciences held
an aggregate of 43,234,242 Common Shares, representing approximately 32% of the issued and outstanding Common Shares and it held
4,411,764 common share purchase warrants of the Company. As at December 31, 2017, Sciences held an aggregate of 45,156,555 Common
Shares, representing approximately 42% of the issued and outstanding Common Shares and it held 8,489,451 common share purchase
warrants of the Company.

 

With a Company which is a Subsidiary of Emerald Health Sciences
Inc.

 

On September 26, 2018 the Company entered
into a long-term supply agreement to obtain harvested hemp chaff, plant material consisting of mainly flower and leaf. The supply
agreement was signed with EHH to purchase CBD containing hemp biomass for extraction into CBD oil. The supply agreement is for
three years with an option to extend for an additional 2 years. Five hundred acres of hemp was harvested in October 2018 from farms
located in Manitoba and Prince Edward Island and one thousand acres is expected to be harvested in each subsequent year of the
agreement. CBD yield from the 2018 harvest has yet to be determined, pending analysis and extraction. EHH is a wholly-owned subsidiary
of Sciences and is therefore a related party of the Company.

 

On October 3, 2018 the Company announced
that it entered into a research agreement with VivaCell. VivaCell is an institute focused on cannabis research, which will provide
its cannabis-industry-leading contract research organization (CRO) services to the Company to elucidate the mechanism of action
of proprietary formulations and dosage forms that the Company is developing. VivaCell is a wholly-owned subsidiary of Sciences,
who is a control person of the Company. Accordingly, both VivaCell and Sciences are related parties of the Company.

 

With a company controlled by the Company’s Executive
Chairman

 

In 2017, the Company entered into a 30-year
lease with a company (the “Landlord”) that is controlled by Dr. Avtar Dhillon, the Executive Chairman of the Company
with respect to land in Metro Vancouver, British Columbia on which the Company is constructing its new production facility. The
lease amount of $80,000 per quarter was determined by an independent valuation. The Landlord also charged the Company $45,647 during
the nine months ended September 30, 2018 (2017 - $144,979) for services related to construction of the Company’s new facility.

 

With a company whose CEO is also a director of the Company

 

As at September 30, 2018, the Company holds
1,666,667 common shares and 1,666,667 common share purchase warrants of Avricore Health Inc. (“Avricore” formerly VANC
Pharmaceuticals Inc) for investment purposes. The CEO of Avricore is also a director of the Company.

 

The 1,666,667 common shares represent 4.3%
of the issued and outstanding common shares of Avricore at the date of this MD&A. Upon exercise of the common share purchase
warrants of Avricore, the Company would hold 3,333,334 common shares of Avricore, representing 8.5% of the issued and outstanding
common shares of Avricore, assuming no other share issuances.

 

    	- 22 -

     

    

 

With the Company’s joint venture

 

The Company also has entered into related
party transactions with Pure Sunfarms. As at September 30, 2018, Pure Sunfarms owes the Company $1.5 million (December 31, 2017
- $0.3 million) for expenditures made on behalf of the joint venture. These expenditures were made to facilitate the administration
of the retro-fit of the Delta 3 property and Health Canada license application. It is anticipated that future related party transactions
with Pure Sunfarms will include the purchase of cannabis from Pure Sunfarms.

 

On July 5, 2018, the Company and Village
Farms (together, the “Shareholders”) entered into a Shareholder Loan Agreement, subsequently amended August 24, 2018
with Pure Sunfarms, whereby the Shareholders agreed to make a demand loan to Pure Sunfarms totaling $16 million ($8 million from
each Shareholder). The loans bear simple interest at the rate of 8% per annum, calculated semi-annually and is payable on demand.

 

Proposed Transactions

 

There are no material decisions by the
Company’s board of directors with respect to any imminent or proposed transactions that have not been disclosed herein.

 

Critical Accounting Policies and Estimates

 

Included in Note 3 of the Company’s
audited consolidated financial statements for the years ended December 31, 2017 and 2016 are the accounting policies and estimates
that are critical to the understanding of the business operations and results of operations. Included in Note 3 of the Company’s
condensed interim consolidated financial statements for the three and nine months ended September 30, 2018 are new accounting policies
and changes to existing accounting policies adopted during the current year.

 

Changes in Accounting Standards not yet Effective

 

There are no relevant changes in accounting
standards applicable to future periods other than as disclosed in the most recent condensed interim consolidated financial statements
for the period ended September 30, 2018.

 

Off-Balance Sheet Arrangements

 

The Company has not entered into any material
off-balance sheet arrangements such as guarantee contracts, contingent interests in assets transferred to unconsolidated entities,
derivative financial obligations, or with respect to any obligations under a variable interest equity arrangement.

 

Risks and Uncertainties

 

The Company’s actual results may
differ materially from those expected or implied by the forward-looking statements and forward-looking information contained in
this interim management discussion and analysis due to the proposed nature of the Company’s business and its present stage
of development. A non-exhaustive list of risk factors associated with the Company are discussed in detail under the heading “Risk
Factors” in the Company’s AIF dated March 29, 2018.

 

    	- 23 -

     

    

 

The following is a non-exhaustive list
of certain additional risk factors associated with the Company that have resulted from new business subsequent to March 29, 2018:

 

Current Litigation Relating to Agro-Biotech Acquisition

 

On February 21, 2018, Agro-Biotech, now
the Company’s wholly-owned subsidiary, and its former shareholders entered into a non-binding letter of intent (the “Letter
of Intent”) with Pivot with respect to a potential sale of Agro-Biotech. The parties entered into negotiations with respect
to definitive documentation relating to such potential sale, however the parties were eventually unable to agree to final terms
and the Letter of Intent terminated. On April 24, 2018, the Claim was served on Agro-Biotech and its former shareholders by Pivot.
The Claim alleges that Agro-Biotech and the then shareholders of Agro-Biotech failed to negotiate in good faith with Pivot and
claims damages in the amount of approximately $72.4 million as loss of profits. The Company retained litigation counsel in Quebec
to advise as to the Claim and conducted in-depth due diligence of the facts surrounding the Claim. The Company believes that the
Claim is without merit and intends on defending the Claim to the fullest extent possible, however the Company cannot reasonably
predict the outcome of the Claim and results of litigation are impossible to determine. As a result, the Company may be subject
to orders made against it for damages which may have a material adverse effect on the Company’s business, financial condition,
financial performance and financial prospectus. Even if the Company is successful in defending the Claim, litigation can redirect
significant Company resources and attention away from the business of the Company which may have a material adverse effect on the
Company’s business, financial condition, financial performance and financial prospects.

 

    	- 24 -

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