Document:

Exhibit 4.2

 

Emerald Health Therapeutics, Inc. 

 

Notice to Reader

 

These consolidated financial statements
are being filed to include statements to clarify that the consolidated financial statements have been filed in accordance with
International Financial Reporting Standards “as issued by the International Accounting Standards Board”. No other changes
have been made to the consolidated financial statements.

 

This notice does not form a part of the consolidated financial
statements. 

 

February 19, 2019

 

     

     

    

 

 

EMERALD HEALTH THERAPEUTICS,
INC.

 

Consolidated Financial Statements

 

For the years ended December 31, 2017 and 2016

(Expressed in Canadian Dollars)

 

     

     

    

 

EMERALD HEALTH THERAPEUTICS, INC.

 

Management’s Responsibility for Financial Reporting

 

The accompanying consolidated financial
statements have been prepared by management and are the responsibility of the Board of Directors of Emerald Health Therapeutics,
Inc. (the “Company”).

 

The consolidated financial statements have
been prepared in accordance with International Financial Reporting Standards and reflect management’s best estimates and
judgments based on currently available information. The Company has developed and maintains a system of internal controls in order
to ensure, on a reasonable and cost effective basis, the reliability of its financial information.

 

The Board of Directors of the Company is
responsible for overseeing management’s performance of its responsibilities for financial reporting and internal control.
The Audit Committee of the Company, which is composed of non-executive directors, meets with management as well as the external
auditors to ensure that management is properly fulfilling its financial reporting responsibilities to the Board of Directors who
approve the financial statements. The external auditors have unrestricted access to the Audit Committee to discuss the scope of
their audits and the adequacy of the system of internal controls.

 

The financial statements have been audited
by Deloitte LLP. Their report outlines the scope of their examination and opinion on the consolidated financial statements.

 

March 29, 2018

 

	/s/ Chris Wagner	 	/s/ Robert Hill
	Chris Wagner	 	Robert Hill
	Chief Executive Officer	 	Chief Financial Officer

 

     

     

    

 

Independent Auditor’s Report

 

To the Shareholders of Emerald Health Therapeutics, Inc.

 

We have audited the accompanying consolidated financial statements
of Emerald Health Therapeutics, Inc., which comprise the consolidated statements of financial position as at December 31, 2017
and December 31, 2016, and the consolidated statements of loss and comprehensive loss, consolidated statements of changes in shareholders’
equity and consolidated statements of cash flow for the years then ended, and a summary of significant accounting policies and
other explanatory information.

 

Management’s Responsibility for the Consolidated Financial
Statements

 

Management is responsible for
the preparation and fair presentation of these consolidated financial statements in accordance with International
Financial Reporting Standards as issued by the International Accounting Standards Board, and for such internal control as
management determines is necessary to enable the preparation of consolidated financial statements that are free from material
misstatement, whether due to fraud or error.

 

Auditor’s Responsibility

 

Our responsibility is to express an opinion on these consolidated
financial statements based on our audits. We conducted our audits in accordance with Canadian generally accepted auditing standards.
Those standards require that we comply with ethical requirements and plan and perform the audit to obtain reasonable assurance
about whether the consolidated financial statements are free from material misstatement.

 

An audit involves performing procedures to obtain audit evidence
about the amounts and disclosures in the consolidated financial statements. The procedures selected depend on the auditor’s
judgment, including the assessment of the risks of material misstatement of the consolidated financial statements, whether due
to fraud or error. In making those risk assessments, the auditor considers internal control relevant to the entity’s preparation
and fair presentation of the consolidated financial statements in order to design audit procedures that are appropriate in the
circumstances, but not for the purpose of expressing an opinion on the effectiveness of the entity’s internal control. An
audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of accounting estimates made
by management, as well as evaluating the overall presentation of the consolidated financial statements.

 

We believe that the audit evidence we have obtained in our audits
is sufficient and appropriate to provide a basis for our audit opinion.

 

Opinion

 

In our opinion, the consolidated financial statements present
fairly, in all material respects, the financial position of Emerald Health Therapeutics, Inc. as at December 31, 2017 and December
31, 2016, and its financial performance and its cash flows for the years then ended in accordance with International Financial
Reporting Standards as issued by the International Accounting Standards Board.

 

	/s/ Deloitte LLP	 
	 	 
	Chartered Professional Accountants	 
	 	 
	March 29, 2018	 
	 	 
	Vancouver, British Columbia	 

 

     

     

    

 

EMERALD HEALTH THERAPEUTICS, INC.

CONSOLIDATED STATEMENTS OF FINANCIAL POSITION

(Expressed in Canadian dollars)

 

 

	 	 	December 31
 2017	 	 	December 31
 2016	 
	 	 	 	 	 	 	 
	ASSETS	 	 	 	 	 	 	 	 
	 	 	 	 	 	 	 	 	 
	Current	 	 	 	 	 	 	 	 
	Cash and cash equivalents (Note 18)	 	$	44,523,145	 	 	$	3,217,205	 
	Accounts receivable (Note 6 and 18)	 	 	278,232	 	 	 	28,701	 
	Biological assets (Note 7)	 	 	114,559	 	 	 	162,986	 
	Inventory (Note 8)	 	 	727,635	 	 	 	160,048	 
	Prepaid expenses	 	 	167,911	 	 	 	32,783	 
	Due from related parties (Note 14)	 	 	324,674	 	 	 	-	 
	Total current assets	 	 	46,136,156	 	 	 	3,601,723	 
	 	 	 	 	 	 	 	 	 
	Plant and equipment (Note 10)	 	 	1,031,335	 	 	 	529,188	 
	Plant under construction (Note 10)	 	 	2,772,051	 	 	 	-	 
	Refundable deposits (Note 14)	 	 	196,391	 	 	 	-	 
	Intangible assets (Note 11)	 	 	2,851,855	 	 	 	45,418	 
	Goodwill (Note 11)	 	 	169,323	 	 	 	-	 
	Long-term investment (Note 12)	 	 	666,667	 	 	 	-	 
	Investment in joint venture (Note 13)	 	 	19,907,061	 	 	 	-	 
	Total non-current assets	 	 	27,594,683	 	 	 	574,606	 
	 	 	 	 	 	 	 	 	 
	TOTAL ASSETS	 	$	73,730,839	 	 	$	4,176,329	 
	 	 	 	 	 	 	 	 	 
	LIABILITIES	 	 	 	 	 	 	 	 
	 	 	 	 	 	 	 	 	 
	Current liabilities	 	 	 	 	 	 	 	 
	Accounts payable and accrued liabilities	 	$	1,378,645	 	 	$	376,339	 
	Payable to joint venture (Note 13)	 	 	4,000,000	 	 	 	-	 
	Due to related parties (Note 14)	 	 	247,505	 	 	 	97,696	 
	Total current liabilities	 	 	5,626,150	 	 	 	474,035	 
	 	 	 	 	 	 	 	 	 
	Deferred income tax liability (Note 20)	 	 	317,497	 	 	 	-	 
	 	 	 	 	 	 	 	 	 
	TOTAL LIABILITIES	 	$	5,943,647	 	 	$	474,035	 
	 	 	 	 	 	 	 	 	 
	SHAREHOLDERS' EQUITY	 	 	 	 	 	 	 	 
	Share capital (Note 15)	 	 	77,912,246	 	 	 	9,756,732	 
	Warrants	 	 	461,772	 	 	 	-	 
	Contributed surplus	 	 	5,285,709	 	 	 	3,043,099	 
	Accumulated deficit	 	 	(17,829,369	)	 	 	(9,097,537	)
	TOTAL SHAREHOLDERS' EQUITY	 	 	65,830,358	 	 	 	3,702,294	 
	 	 	 	 	 	 	 	 	 
	Non-controlling interest	 	 	1,956,834	 	 	 	-	 
	 	 	 	 	 	 	 	 	 
	TOTAL LIABILITIES AND EQUITY	 	$	73,730,839	 	 	$	4,176,329	 
	 	 	 	 	 	 	 	 	 
	Nature and continuance of operations (Note 1)	 	 	 	 	 	 	 	 
	Commitments (Note 17)	 	 	 	 	 	 	 	 
	Events after the reporting period (Note 23)	 	 	 	 	 	 	 	 
	 	 	 	 	 	 	 	 	 
	On behalf of the Board of Directors:	 	 	 	 	 	 	 	 

 

	/s/ Punit Dhillon	 	/s/ Chris Wagner
	Director	Director

 

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

 

    	1

     

    

 

EMERALD HEALTH THERAPEUTICS, INC.

CONSOLIDATED STATEMENTS OF LOSS AND COMPREHENSIVE LOSS

(Expressed in Canadian dollars)

 

 

	 	 	Year ended
 December
    31
 2017	 	 	Year ended
 December 31
 2016	 
	 	 	 	 	 	 	 
	Revenue	 	 	 	 	 	 	 	 
	Sales	 	$	937,654	 	 	$	253,321	 
	 	 	 	 	 	 	 	 	 
	Cost of sales	 	 	 	 	 	 	 	 
	Cost of goods sold	 	 	637,751	 	 	 	193,793	 
	Production costs	 	 	749,174	 	 	 	606,767	 
	Gain on changes in fair value of biological assets	 	 	(163,754	)	 	 	(197,293	)
	Gross margin	 	 	(285,517	)	 	 	(349,946	)
	 	 	 	 	 	 	 	 	 
	Expenses	 	 	 	 	 	 	 	 
	General and administrative (Note 22)	 	 	5,070,447	 	 	 	1,220,775	 
	Sales and marketing	 	 	428,541	 	 	 	271,118	 
	Research and development	 	 	207,500	 	 	 	301,526	 
	Depreciation (Note 10 and 11)	 	 	282,450	 	 	 	116,348	 
	Loss on disposal of equipment (Note 10)	 	 	481	 	 	 	-	 
	Share-based payments (Note 15)	 	 	2,822,495	 	 	 	680,788	 
	 	 	 	8,811,914	 	 	 	2,590,555	 
	 	 	 	 	 	 	 	 	 
	Loss from operations	 	 	9,097,431	 	 	 	2,940,501	 
	 	 	 	 	 	 	 	 	 
	Share of loss from joint venture	 	 	322,578	 	 	 	-	 
	Interest revenue	 	 	(161,518	)	 	 	-	 
	Fair value changes in financial assets (Note 12)	 	 	(416,667	)	 	 	-	 
	Income tax expense (Note 20)	 	 	-	 	 	 	-	 
	NET LOSS AND COMPREHENSIVE LOSS	 	 	8,841,824	 	 	 	2,940,501	 
	 	 	 	 	 	 	 	 	 
	Net loss and comprehensive loss attributable to:	 	 	 	 	 	 	 	 
	Emerald Health Therapuetics, Inc.	 	 	8,731,832	 	 	 	2,940,501	 
	Non-controlling interest	 	 	109,992	 	 	 	-	 
	 	 	 	8,841,824	 	 	 	2,940,501	 
	 	 	 	 	 	 	 	 	 
	Net loss per common share 
 Basic and diluted	 	$	0.10	 	 	$	0.05	 
	 	 	 	 	 	 	 	 	 
	Weighted average number of common shares outstanding
 Basic and diluted	 	 	88,447,612	 	 	 	54,264,687	 

 

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

 

    	2

     

    

 

EMERALD HEALTH THERAPEUTICS, INC.

CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY

(Expressed in Canadian dollars)

 

 

	 	 	Share Capital	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 
	 	 	Without
    Par Value	 	 	Warrants	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 
	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	Total	 	 	Non-	 	 	 	 
	 	 	# of	 	 	 	 	 	# of	 	 	 	 	 	Contributed	 	 	Accumulated	 	 	Shareholders'	 	 	Controlling	 	 	Total	 
	 	 	Shares	 	 	Amount	 	 	Warrants	 	 	Amount	 	 	Surplus	 	 	Deficit	 	 	Equity	 	 	Interest	 	 	Equity	 
	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 
	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 exercises (Note 15)	 	 	1,531,250	 	 	 	1,699,945	 	 	 	-	 	 	 	-	 	 	 	(579,885	)	 	 	-	 	 	 	1,120,060	 	 	 	-	 	 	 	1,120,060	 
	Units issued on prospectus
    offerings (Note 15)	 	 	24,870,100	 	 	 	36,260,901	 	 	 	12,690,250	 	 	 	4,679,773	 	 	 	-	 	 	 	-	 	 	 	40,940,674	 	 	 	-	 	 	 	40,940,674	 
	Share issuance costs	 	 	-	 	 	 	(3,168,869	)	 	 	-	 	 	 	-	 	 	 	-	 	 	 	-	 	 	 	(3,168,869	)	 	 	-	 	 	 	(3,168,869	)
	Compensation options	 	 	-	 	 	 	(350,098	)	 	 	-	 	 	 	-	 	 	 	350,098	 	 	 	-	 	 	 	-	 	 	 	-	 	 	 	-	 
	Shares issued on warrant
    exercises (Note 15)	 	 	11,845,075	 	 	 	32,314,959	 	 	 	(11,845,075	)	 	 	(4,396,189	)	 	 	 	 	 	 	-	 	 	 	27,918,770	 	 	 	-	 	 	 	27,918,770	 
	Shares issued on compensation
    option exercises (Note 15)	 	 	746,103	 	 	 	1,398,676	 	 	 	373,051	 	 	 	178,188	 	 	 	(350,098	)	 	 	- 	 	 	 	1,226,766	 	 	 	-	 	 	 	1,226,766	 
	Acquisition of Northern
    Vine Canada Inc. (Note 5)	 	 	-	 	 	 	-	 	 	 	-	 	 	 	-	 	 	 	-	 	 	 	-	 	 	 	-	 	 	 	2,066,826	 	 	 	2,066,826	 
	Share-based payments (Note
    15)	 	 	-	 	 	 	-	 	 	 	-	 	 	 	-	 	 	 	2,822,495	 	 	 	-	 	 	 	2,822,495	 	 	 	-	 	 	 	2,822,495	 
	Net
    loss and comprehensive loss	 	 	-	 	 	 	-	 	 	 	-	 	 	 	-	 	 	 	-	 	 	 	(8,731,832	)	 	 	(8,731,832	)	 	 	(109,992	)	 	 	(8,841,824	)
	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	 
	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 
	Balance, December 31, 2015	 	 	46,070,841	 	 	$	3,076,966	 	 	 	-	 	 	$	-	 	 	$	2,666,874	 	 	$	(6,157,036	)	 	$	(413,196	)	 	$	-	 	 	$	(413,196	)
	Shares issued on conversion
    of debt (Note 15)	 	 	12,592,606	 	 	 	2,314,261	 	 	 	-	 	 	 	-	 	 	 	-	 	 	 	-	 	 	 	2,314,261	 	 	 	-	 	 	 	2,314,261	 
	Shares issued on private
    placement (Note 15)	 	 	8,489,451	 	 	 	3,835,926	 	 	 	8,489,451	 	 	 	-	 	 	 	-	 	 	 	-	 	 	 	3,835,926	 	 	 	-	 	 	 	3,835,926	 
	Shares issued on stock
    option exercise (Note 15)	 	 	641,800	 	 	 	577,739	 	 	 	-	 	 	 	-	 	 	 	(304,563	)	 	 	-	 	 	 	273,176	 	 	 	-	 	 	 	273,176	 
	Share issuance costs	 	 	-	 	 	 	(48,160	)	 	 	-	 	 	 	-	 	 	 	-	 	 	 	-	 	 	 	(48,160	)	 	 	-	 	 	 	(48,160	)
	Share-based payments (Note
    15)	 	 	-	 	 	 	-	 	 	 	-	 	 	 	-	 	 	 	680,788	 	 	 	-	 	 	 	680,788	 	 	 	-	 	 	 	680,788	 
	Net
    loss and comprehensive loss	 	 	-	 	 	 	-	 	 	 	-	 	 	 	-	 	 	 	-	 	 	 	(2,940,501	)	 	 	(2,940,501	)	 	 	-	 	 	 	(2,940,501	)
	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	 

 

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

 

    	3

     

    

 

EMERALD HEALTH THERAPEUTICS, INC.

CONSOLIDATED STATEMENTS OF CASH FLOW 

(Expressed in Canadian dollars)

 

 

	 	 	Year ended
 December 31
 2017	 	 	Year ended
 December 31
 2016	 
	 	 	 	 	 	 	 
	Operating activities	 	 	 	 	 	 	 	 
	Net loss	 	$	(8,841,824	)	 	$	(2,940,501	)
	Items not involving cash	 	 	 	 	 	 	 	 
	Depreciation	 	 	282,450	 	 	 	116,349	 
	Gain on changes in fair value of biological assets	 	 	(163,754	)	 	 	(197,293	)
	Fair value changes on financial assets	 	 	(416,667	)	 	 	-	 
	Share-based payments	 	 	2,822,495	 	 	 	680,788	 
	Share of loss from joint venture	 	 	322,578	 	 	 	-	 
	Accrued interest	 	 	-	 	 	 	(8,433	)
	Loss on disposal of assets	 	 	481	 	 	 	1,943	 
	Changes in non-cash operating working capital	 	 	 	 	 	 	 	 
	Accounts receivable	 	 	(223,847	)	 	 	13,439	 
	Due from related parties	 	 	(324,674	)	 	 	-	 
	Prepaid expenses	 	 	(133,245	)	 	 	(5,047	)
	Inventory and biological assets	 	 	(333,027	)	 	 	45,324	 
	Accounts payable and accrued liabilities	 	 	(878,853	)	 	 	164,141	 
	Due to related parties	 	 	71,901	 	 	 	81,632	 
	Net cash flows used in operating activities	 	 	(7,815,986	)	 	 	(2,047,658	)
	 	 	 	 	 	 	 	 	 
	Investing activities	 	 	 	 	 	 	 	 
	Investment in joint venture (Note 13)	 	 	(16,229,639	)	 	 	-	 
	Acquisition of business, net of cash acquired (Note 5)	 	 	68	 	 	 	-	 
	Purchase of long-term investment (Note 12)	 	 	(250,000	)	 	 	-	 
	Purchase of plant and equipment	 	 	(2,257,022	)	 	 	(183,225	)
	Purchase of intangible assets	 	 	-	 	 	 	(61,771	)
	Proceeds from disposal of plant and equipment	 	 	-	 	 	 	999	 
	Refundable deposits	 	 	(196,391	)	 	 	-	 
	Net cash flows used in investing activities	 	 	(18,932,984	)	 	 	(243,997	)
	 	 	 	 	 	 	 	 	 
	Financing activities	 	 	 	 	 	 	 	 
	Proceeds from prospectus offering	 	 	40,940,674	 	 	 	-	 
	Proceeds from private placement	 	 	-	 	 	 	3,835,926	 
	Stock option exercises	 	 	1,120,060	 	 	 	273,176	 
	Share issuance costs	 	 	(3,151,360	)	 	 	(48,160	)
	Warrant exercises	 	 	27,918,770	 	 	 	-	 
	Compensation option exercises	 	 	1,226,766	 	 	 	-	 
	Repayment of advances from related parties	 	 	-	 	 	 	(186,313	)
	Advances from related parties	 	 	-	 	 	 	1,552,395	 
	Net cash flows generated from financing activities	 	 	68,054,910	 	 	 	5,427,024	 
	 	 	 	 	 	 	 	 	 
	Increase in cash and cash equivalents	 	 	41,305,940	 	 	 	3,135,369	 
	Cash and cash equivalents, beginning of year	 	 	3,217,205	 	 	 	81,836	 
	Cash and cash equivalents, end of year	 	$	44,523,145	 	 	$	3,217,205	 

 

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

 

    	4

     

    

 

	EMERALD HEALTH THERAPEUTICS, INC.
	NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 
	For the years ended December 31, 2017 and 2016 
	(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 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) on July 31, 2007 as Firebird Capital Partners Inc. and changed its
name to Firebird Energy Inc. in December 2012. On September 4, 2014, the Company completed the acquisition of all of the issued
and outstanding common shares of Thunderbird Biomedical Inc. (“Thunderbird”), by way of a reverse takeover (the “RTO”)
under the rules of the TSX Venture Exchange (the “TSXV”) and concurrently changed its name to T-Bird Pharma, Inc. Thunderbird
became a wholly owned subsidiary of the Company. In June 2015, the Company changed its name to Emerald Health Therapeutics, Inc.
and Thunderbird changed its name to Emerald Health Botanicals Inc. (“Botanicals”). On February 23, 2018 Botanicals
changed its name to Emerald Health Therapeutics Canada Inc. (“EHTC”). The Company’s registered office is at Suite
2600 Oceanic Plaza, 1066 West Hastings Street, Vancouver, BC, V6E 3X1.

 

The Company owns 100% of the
shares of EHTC, a private Victoria, British Columbia based company which was incorporated pursuant to the Business Corporations
Act (British Columbia) on January 28, 2013. The principal business of EHTC is the production and sale of medical cannabis pursuant
to the Access to Cannabis for Medical Purposes Regulations.

 

On June 6, 2017, the Company
and EHTC entered into a joint venture arrangement with respect to EHTC’s 50% equity interest in Pure Sunfarms Corp., for
the purpose to produce, cultivate and distribute wholesale cannabis and cannabis extracts for therapeutic and non-therapeutic use
purposes, if permitted by applicable law.

 

EHTC owns 100% of the shares
of Emerald Health Farms Inc. (“Farms”), a holding company incorporated pursuant to the Business Corporations Act (British
Columbia) on September 7, 2017. In March 2018, Farms changed its name to Pure Sunfarms Canada Inc.

 

On November 17, 2017 the EHTC
acquired control of Northern Vine Canada Inc. (“Northern Vine”) and holds 53% of Northern Vine’s issued and outstanding
shares. Northern Vine is a Licensed Dealer under the provisions of the Canadian Controlled Drugs and Substances Act. Northern Vine’s
laboratory facility is located in Langley, British Columbia.

 

These consolidated financial
statements have been prepared by management on a going concern basis which assumes that the Company will be able to realize its
assets and discharge its liabilities in the normal course of business for the foreseeable future. As at December 31, 2017, the
Company had not yet achieved profitable operations and had accumulated losses of $17,829,369 (December 31, 2016 - $9,097,537) since
its inception. The Company however, has sufficient liquidity to continue operations in the future, satisfy its commitments and
repay its liabilities arising from normal business operations as they become due.

 

    	5

     

    

 

	EMERALD HEALTH THERAPEUTICS, INC.
	NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 
	For the years ended December 31, 2017 and 2016 
	(Expressed in Canadian dollars)

 

		2.	BASIS OF PRESENTATION

 

		a)	Statement of Compliance

 

These consolidated financial
statements have been prepared in accordance with International Financial Reporting Standards (“IFRS”) as issued by the International Accounting Standards Board.

 

The annual consolidated financial
statements were authorized for filing by the Board of Directors on March 29, 2018.

 

		b)	Basis of measurement

 

These 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 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 December 31, 2017
include the following:

 

	Name of subsidiary	 	Ownership Interest	 
	Emerald Health Therapeutics Canada Inc. ("EHTC")	 	 	100	%
	Pure Sunfarms Canada Inc. ("PSC")	 	 	100	%
	Northern Vine Canada Inc. ("Northern Vine")	 	 	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 

 

Cash and cash equivalents

 

Cash and cash equivalents include
cash and redeemable short-term investment certificates with a maturity of less than one year held at major financial institutions.

 

    	6

     

    

 

	EMERALD HEALTH THERAPEUTICS, INC.
	NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 
	For the years ended December 31, 2017 and 2016 
	(Expressed in Canadian dollars)

 

Biological assets

 

The Company measures biological
assets consisting of medical 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.

 

Inventory

 

Inventories of dried cannabis
consists 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 deemed cost. Any subsequent
post-harvest costs are capitalized to inventory to the extent that cost is less than net realizable value. 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. Cannabis oils are derived from
dried cannabis and are measured at the lower of cost and net realizable value. Goods for resale are measured at the lower of cost
and net realizable value. Supplies and consumables are valued at cost.

 

Plant and equipment

 

Plant and equipment is carried
at cost less accumulated depreciation. Plant and equipment are depreciated over their expected lives based on the following:

 

		·	Leasehold
improvements – lesser of useful life or term of lease

		·	Growing
equipment – 5 to 10 years straight line

		·	Lab
equipment – 5 years straight line

		·	Computers
– 3 years straight line

 

In the year of acquisition, depreciation
for plant and equipment is recorded once the asset is available for use.

 

An item of plant and equipment
is derecognized upon disposal or when no future economic benefits are expected to arise from the continued use of the asset. Any
gain or loss arising on disposal of the asset, determined as the difference between the net disposal proceeds and the carrying
amount of the asset, is recognized in profit or loss.

 

Residual values and estimated useful lives are reviewed
annually.

 

    	7

     

    

 

	EMERALD HEALTH THERAPEUTICS, INC.
	NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 
	For the years ended December 31, 2017 and 2016 
	(Expressed in Canadian dollars)

 

Plant under construction

 

Expenditures for plant under
construction are capitalized to the statement of financial position and will be amortized over the life of the asset, commencing
at the time the asset is ready for its intended use. At each balance sheet date, the Company considers whether there is objective
evidence of impairment of the asset, and if so, will write down the asset to its recoverable value.

 

Intangible Assets

 

Intangible assets are recorded
at cost and amortized over their estimated useful lives at the following annual rate:

 

		·	Computer
software – 2 to 3 years straight line

		·	Health
Canada licenses – term plus renewal term of the leased facility site

 

Estimated useful lives are reviewed annually.

 

Investment in joint venture

 

IFRS 11, Joint Arrangements,
and IAS 28, Investments in Associates and Joint Ventures establishes the criteria for accounting for joint ventures. Investments
in joint ventures are accounted for using the equity method. The equity method involves recording the initial investment at cost
and subsequently adjusting the carrying value of the investment for the proportionate share of the profit or loss, other comprehensive
income or loss and any other changes in the joint venture’s net assets such as dividends. At each balance sheet date, the
Company considers whether there is objective evidence of impairment in the joint venture. If there is such evidence, the Company
will determine the amount of impairment to record, if any, in relation to the joint venture.

 

Business combinations

 

The Company uses the acquisition
method of accounting for business combinations, whereby the purchase consideration is allocated to the fair value of the identifiable
assets and liabilities at the date of acquisition. Preliminary fair values allocated at a reporting date are finalized as soon
as the relevant information becomes available, within a period not to exceed twelve months from the acquisition date with retrospective
restatement of the impact of adjustments to those preliminary fair values effective as at the acquisition date. Acquisition related
costs are expensed as incurred.

 

When the cost of the acquisition
exceeds the fair value attributable to the Company’s share of the identifiable net assets, the difference is recorded as
goodwill. If the cost of the acquisition is less than the fair value attributable to the Company’s share of the identifiable
net assets the difference is recognized in the consolidated statements of loss.

 

Non-controlling interests are
measured either at fair value or at the non-controlling interests’ proportionate share of the recognized amounts of the acquirers’
identifiable net assets at the date of acquisition. The choice of measurement is made on a transaction by transaction basis.

 

    	8

     

    

 

	EMERALD HEALTH THERAPEUTICS, INC.
	NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 
	For the years ended December 31, 2017 and 2016 
	(Expressed in Canadian dollars)

 

In a business combination achieved
in stages, the Company remeasures any previously held equity interest at its acquisition date fair value and recognizes any gain
or loss in the consolidated statements of loss.

 

Revenue recognition

 

Revenue is recognized at the
fair value of consideration received or receivable. Revenue from the sale of goods is recognized when all of the following conditions
have been satisfied:

 

		·	the Company has transferred to the buyer
the significant risks and rewards of ownership of the goods;

		·	the Company retains neither continuing
managerial involvement to the degree usually associated with ownership nor effective control over the goods sold;

		·	the amount of revenue can be measured
reliably;

		·	it is probable that the economic benefits
associated with the transaction will flow to the entity; and

		·	the costs incurred or to be incurred in
respect of the transaction can be measured reliably.

 

Management deems the above to
have been satisfied when the customer receives the goods.

 

Income taxes

 

Income tax expense comprises
current and deferred tax. Income tax is recognized in profit or loss except to the extent that it relates to items recognized directly
in equity. Current tax expense is the expected tax payable on taxable income for the year, using tax rates enacted or substantively
enacted at period end, adjusted for amendments to tax payable with regard to previous years.

 

Deferred tax is recorded using
the liability method, providing for temporary differences, between the carrying amounts of assets and liabilities for financial
reporting purposes and the amounts used for taxation purposes. Temporary differences are not provided for the initial recognition
of assets or liabilities that affect neither accounting nor taxable loss, and differences relating to investments in subsidiary
to the extent that they will probably not reverse in the foreseeable future. The amount of deferred tax provided is based on the
expected manner of realization or settlement of the carrying amount of assets and liabilities, using tax rates enacted or substantively
enacted at the end of the reporting period. A deferred tax asset is recognized only to the extent that it is probable that future
taxable profits will be available against which the asset can be utilized.

 

Loss per share

 

Basic loss per share is computed
by dividing net loss for the year by the weighted average number of common shares of the Company (the “Common Shares”)
outstanding during the year. The Company uses the treasury stock method for calculating diluted loss per share. When the Company
is in a loss position, all potential share issuances on the exercise of options or warrants is anti-dilutive. In the event of a
loss position, diluted loss per share is the same a basic loss per share.

 

    	9

     

    

 

	EMERALD HEALTH THERAPEUTICS, INC.
	NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 
	For the years ended December 31, 2017 and 2016 
	(Expressed in Canadian dollars)

 

Segment reporting

 

The Company has one reportable
operating segment relating to the production and sales of medical cannabis pursuant to the Access to Cannabis for Medical Purposes
Regulations.

 

Leases

 

The determination of whether
an arrangement is, or contains, a lease is based on the substance of the arrangement at the date of inception; whether fulfilment
of the arrangement is dependent on the use of a specific asset or assets or the arrangement conveys a right to use the asset, even
if that right is not explicitly specified in an arrangement.

 

A leased asset is depreciated
over the useful life of the asset. However, if there is no reasonable certainly that the Company will obtain ownership by the end
of the lease term, the asset is depreciated over the shorter of the estimated useful life of the asset and the lease term.

 

Operating lease payments are
recognized as an operating expense in profit or loss on a straight-line basis over the lease term.

 

Foreign currency translation

 

Transactions in currencies other
than the Canadian dollar are recorded at exchange rates prevailing on the dates of the transactions. At the end of each reporting
period, monetary assets and liabilities denominated in foreign currencies are translated at the period end exchange rate while
non-monetary assets and liabilities are translated at historical rates. Revenues and expenses are translated at the exchange rates
approximating those in effect on the date of the transactions. Exchange gains and losses arising on translation are included in
net loss.

 

Financial instruments

 

Financial assets 

 

The Company classifies its financial assets into one
of the following categories as follows:

 

Fair value through profit or
loss: This category comprises derivatives and financial assets acquired principally for the purpose of selling or repurchasing
in the near term. They are carried at fair value with changes in fair value recognized in profit or loss. Cash, biological assets
and long-term investments have been classified under this category.

 

Loans and receivables: These
assets are non-derivative financial assets with fixed or determinable payments that are not quoted in an active market. They are
carried at amortized cost using the effective interest method less any provision for impairment. Cash equivalents, accounts receivable,
due from related party, and refundable deposits have been classified under this category.

 

Held to maturity investments:
These assets are non derivative financial assets with fixed or determinable payments and fixed maturities that the Company's management
has the positive intention and ability to hold to maturity. These assets are measured at amortized cost using the effective interest
method less any provision for impairment.

 

    	10

     

    

 

	EMERALD HEALTH THERAPEUTICS, INC.
	NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 
	For the years ended December 31, 2017 and 2016 
	(Expressed in Canadian dollars)

 

Available for sale: Non-derivative
financial assets not included in the above categories are classified as available for sale. They are carried at fair value with
changes in fair value recognized in other comprehensive income (loss). Where a prolonged or significant decline in the fair value
of an available for sale financial asset constitutes objective evidence of impairment, the amount of the loss is removed from accumulated
other comprehensive income (loss) and recognized in profit or loss.

 

All financial assets except those
measured at fair value through profit or loss are subject to review for impairment at least at each reporting date. Financial assets
are impaired when there is objective evidence of impairment as a result of one or more event that have occurred after initial recognition
of the asset and that event has an impact on the estimated future cash flows of the financial asset or the group of financial assets.

 

Financial liabilities

 

The Company classifies its financial liabilities into
one of two categories as follows:

 

Fair value through profit
or loss: This category comprises derivatives and financial liabilities incurred principally for the purpose of selling or repurchasing
in the near term. They are carried at fair value with changes in fair value recognized in profit or loss.

 

Other financial liabilities:
This category consists of liabilities carried at amortized cost using the effective interest method. Accounts payable and accrued
liabilities, payable to joint venture and due to related parties have been classified under this category.

 

Impairment of non-financial assets

 

At the end of each reporting
period, the Company’s assets are reviewed to determine whether there is any indication that those assets may be impaired.
If such indication exists, the recoverable amount of the asset is estimated in order to determine the extent of the impairment,
if any. The recoverable amount is the higher of fair value less costs to sell and value in use. Fair value is determined as the
amount that would be obtained from the sale of the asset in an arm’s length transaction between knowledgeable and willing
parties. In assessing value in use, the estimated future cash flows are discounted to their present value using a pre-tax discount
rate that reflects current market assessments of the time value of money and the risks specific to the asset. If the recoverable
amount of an asset is estimated to be less than its carrying amount, the carrying amount of the asset is reduced to its recoverable
amount and the impairment loss is recognized in profit or loss for the period. For an asset that does not generate largely independent
cash inflows, the recoverable amount is determined for the cash generating unit to which the asset belongs.

 

    	11

     

    

 

	EMERALD HEALTH THERAPEUTICS, INC.
	NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 
	For the years ended December 31, 2017 and 2016 
	(Expressed in Canadian dollars)

 

Goodwill

 

Goodwill represents the excess
of the price paid for the acquisition of an entity over the fair value of the net identifiable tangible and intangible assets and
liabilities acquired. Goodwill is allocated to the cash generating unit to which is relates. The Company has determined that the
goodwill associated with all acquisitions belong to the medical cannabis cash generating unit. Currently, the Company has one cash
generating unit.

 

Goodwill is measured as historical
cost and is evaluated for impairment annually or more often if events or circumstances indicate there may be an impairment. Impairment
is determined for goodwill by assessing if the carrying value of a cash generating unit, including the allocated goodwill, exceeds
its recoverable amount determined as the greater of the estimated fair value less costs to sell and the value in use. Impairment
losses recognized in respect of a cash generating unit are first allocated to the carrying value of goodwill and any excess is
allocated to the carrying amount of assets in the cash generating unit. Any goodwill impairment is recorded in income in the period
in which the impairment is identified. Impairment losses on goodwill are not subsequently reversed.

 

Share-based payments

 

The Company grants options to
directors, officers, employees and service providers under the Company’s Omnibus Incentive Plan. The fair value of share
options granted to employees is recognized as an expense over the vesting period with a corresponding increase in equity. An individual
is classified as an employee when the individual is an employee for legal or tax purposes (direct employee) or provides services
similar to those performed by a direct employee, including directors of the Company. At each financial position reporting date,
the amount recognized as an expense is adjusted to reflect the actual number of share options that are expected to vest. In situations
where equity instruments are issued to non-employees and some or all of the goods or services received by the entity as consideration
cannot be specifically identified, they are measured at fair value of the share-based payment.

 

No expense is recognized for
awards that do not ultimately vest except for equity settled transactions for which vesting is conditional upon a market or non-vesting
condition.

 

Share options with a graded vesting
schedule are accounted for as separate grants with different vesting periods and fair values. The fair value is measured using
the Black-Scholes option pricing model taking into account the terms and conditions upon which the share purchase options were
granted.

 

Where the terms of an equity
settled award are modified, the minimum expense recognized is the expense as if the terms had not been modified. An additional
expense is recognized for any modification which increases the total fair value of the share-based payment arrangement, or is otherwise
beneficial to the employee as measured at the date of modification.

 

When an equity award is cancelled,
it is treated as if it vests on the date of the cancellation and any expense not recognized for the award is recognized immediately.

 

    	12

     

    

 

	EMERALD HEALTH THERAPEUTICS, INC.
	NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 
	For the years ended December 31, 2017 and 2016 
	(Expressed in Canadian dollars)

 

Warrants

 

The Company uses the residual
value approach in respect of unit offerings whereby the amount assigned to the warrant is the excess of the unit price over the
trading price of the Company’s shares at the date of issuance, if any, to a maximum fair value of the warrant determined
by using the Black-Scholes Option-Pricing Model.

 

Research and development

 

Research costs are expensed as
incurred. Development expenditures are capitalized only if development costs can be measured reliably, the product or process is
technically and commercially feasible, future economic benefits are probable, and the Company intends to and has sufficient resources
to complete the development to use or sell the assets. Other development expenditures are expensed as incurred. To date, no development
costs have been capitalized.

 

Significant accounting judgments and estimates

 

The preparation of financial
statements in conformity with IFRS requires management to make certain estimates, judgments and assumptions that affect the reported
amounts of assets and liabilities at the date of the financial statements and the reported revenues and expenses during the year.
Actual results may differ from these estimates.

 

Significant estimates are evaluation
and assumptions about the future and other sources of estimation uncertainty that management has made, that could result in a material
adjustment to the carrying amounts of assets and liabilities. Significant estimates used in the preparation of these consolidated
financial statements include, but are not limited to, the following:

 

Biological assets and inventory

 

The Company measures biological
assets consisting of medical cannabis on plants at fair value less cost to sell up to the point of harvest. Calculating the value
requires management to estimate, among others, expected yield on harvest, expected selling price and remaining costs to be incurred
up to the point of harvest.

 

The Company measures inventory
at the lower of cost and net realizable value and estimates selling price, the estimated costs of completion and the estimated
costs necessary to make the sale.

 

Estimated useful lives of plant and equipment and
intangible assets

 

The Company makes estimates and
utilizes assumptions in determining the useful lives and residual value of plant and equipment and intangible assets and related
depreciation. Uncertainties in these estimates relate to technical obsolescence that may change the utilization of certain assets.

 

    	13

     

    

 

	EMERALD HEALTH THERAPEUTICS, INC.
	NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 
	For the years ended December 31, 2017 and 2016 
	(Expressed in Canadian dollars)

 

Provisions and contingencies

 

The amount recognized as a provision,
including legal, contractual, constructive and other exposures or obligations, is the best estimate of the consideration required
to settle the related liability, including any related interest charges, taking into account the risks and uncertainties surrounding
the obligation. In addition, contingencies will only be resolved when one or more future events occur or fail to occur. Therefore,
assessment of contingencies inherently involves the exercise of significant judgment and estimates of the outcome of future events.
The Company assesses its liabilities and contingencies based upon the best information available.

 

Share-based compensation 

 

The fair value of share-based
compensation expense is estimated using the Black-Scholes option pricing model and relies on a number of estimated inputs, such
as the expected life of the option, the volatility of the underlying share price, and the risk-free rate of return. Changes in
the underlying estimated inputs may result in materially different results.

 

Warrants

 

In calculating the fair value
of warrants, management relies on estimated inputs, such as the volatility of the Company’s stock price and the risk-free
rate of return.

 

Business combinations

 

In a business combination, all
identifiable assets, liabilities and contingent liabilities acquired are recorded at their fair values. One of the most significant
estimates relates to the determination of the fair value of these assets and liabilities.

 

Certain fair values may be estimated
at the acquisition date pending confirmation or completion of the valuation process. Where provisional values are used in accounting
for a business combination, they may be adjusted retrospectively in subsequent periods. However, the measurement period will last
for one year from the acquisition date.

 

Goodwill impairment

 

The Company performs a test for
goodwill impairment at each financial year end and whenever events or circumstances indicate the carrying amount of goodwill may
not be recoverable. Determining whether an impairment has occurred requires valuation of the respective CGU, which is estimated
using the discounted cash flow method. A number of estimates are used in this valuation technique, including actual operating results,
future business plan, economic projections and market data.

 

Deferred income taxes

 

In assessing the probability
of realizing deferred income tax assets, management makes estimates related to expectations of future taxable income, applicable
tax opportunities, expected timing of reversals of existing temporary differences and the likelihood that tax positions taken will
be sustained upon examination by applicable tax authorities. In making its assessments, management gives additional weight to positive
and negative evidence that can be objectively verified.

 

    	14

     

    

 

	EMERALD HEALTH THERAPEUTICS, INC.
	NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 
	For the years ended December 31, 2017 and 2016 
	(Expressed in Canadian dollars)

 

Impairment of plant and equipment, plant under
construction and intangible assets

 

Management considers both external
and internal sources of information in determining if there are any indications that the Company’s plant and equipment or
intangible assets are impaired. Management considers the market, economic, and legal environment in which the Company operates
that are not within its control and affect the recoverable amount of its plant and equipment and intangible assets. Management
considers the manner in which the plant and equipment and intangible assets are being used or are expected to be used, and indication
of economic performance of the assets. Where an impairment loss subsequently reverses, the carrying amount of the asset is increased
to the lesser of the revised estimate of recoverable amount, and the carrying amount that would have been recorded had no impairment
loss been recognized previously.

 

		4.	NEW ACCOUNTING PRONOUNCEMENTS, ISSUED BUT NOT YET ADOPTED

 

IFRS 9, Financial Instruments
– replaces the guidance in IAS 39 Financial Instruments; Recognition and Measurement, on the classification and
measurement of financial assets. The standard eliminates the existing IAS 39 categories of held to maturity, available-for-sale
and loans and receivable. Financial assets will be classified into one of two categories on initial recognition, financial assets
measured at amortized cost or financial assets measured at fair value. Gains and losses on re-measurement of financial assets measured
at fair value will be recognized in profit or loss, except that for an investment in an equity instrument which is not held-for-trading,
IFRS 9 provides, on initial recognition, an irrevocable election to present all fair value changes from the investment in other
comprehensive income. The standard also provides a single, forward-looking ‘expected loss’ impairment model and a substantially
reformed approach to additional disclosure. The standard is effective for annual periods beginning on or after January 1, 2018,
with early adoption permitted. The Company has preliminarily determined that there will be no significant changes to the financial
position and financial performance when this standard is applied, but is in the process of finalizing their analysis.

 

IFRS 15, Revenue from Contracts
with Customers – clarifies the principles for recognizing revenue from contracts with customers. IFRS 15 will also result
in enhanced disclosure about revenue, provide guidance for transactions that were not previously addressed comprehensively (i.e.
service revenue and contract modifications) and improve guidance for multiple-element arrangements. The standard is effective for
annual periods beginning on or after January 1, 2018, with early adoption permitted. The Company has preliminarily determined that
there will be no significant changes to the financial position and financial position when this standard is applied other than
additional disclosure, but is in the process of finalizing their analysis.

 

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.

 

    	15

     

    

 

	EMERALD HEALTH THERAPEUTICS, INC.
	NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 
	For the years ended December 31, 2017 and 2016 
	(Expressed in Canadian dollars)

 

IFRS 16 applies to annual reporting
periods beginning on or after January 1, 2019. The extent of the impact of adoption of the standard has not yet been determined.

 

		5.	ACQUISITIONS

 

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 for $2,500,000. Northern Vine is a Licensed Dealer under the provisions of the Canadian Controlled Drugs
and Substances Act and is licensed to provide analytical testing services.

 

The transaction was accounted for as a business combination.

 

As of the date of these consolidated
financial statements, the determination of fair value of assets and liabilities acquired is based on preliminary estimates and
have not been finalized. The Company is currently in the process of measuring deferred income tax assets and liabilities and goodwill
on acquisition. The amounts disclosed in the preliminary fair value below are subject to change.

 

The purchase price was allocated as follows:

 

	 	 	Preliminary	 
	 	 	$	 
	Net assets acquired	 	 	4,397,503	 
	Non-controlling interest	 	 	(2,066,826	)
	Goodwill	 	 	169,323	 
	Total purchase price	 	 	2,500,000	 
	 	 	 	 	 
	The net assets acquired included the following:	 	 	 	 
	 	 	 	 	 
	Cash	 	 	2,500,068	 
	Amounts receivable	 	 	25,684	 
	Prepaid expenses	 	 	1,883	 
	Property and equipment	 	 	267,571	 
	Intangible assets	 	 	2,922,096	 
	Deferred income tax assets	 	 	471,469	 
	Total assets	 	 	6,188,771	 
	 	 	 	 	 
	Accounts payable and accrued liabilities	 	 	(1,002,302	)
	Deferred income tax liabilities	 	 	(788,966	)
	Total liabilities	 	 	(1,791,268	)
	 	 	 	 	 
	Net assets acquired	 	 	4,397,503	 

 

    	16

     

    

 

	EMERALD HEALTH THERAPEUTICS, INC.
	NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 
	For the years ended December 31, 2017 and 2016 
	(Expressed in Canadian dollars)

 

Acquisition costs of $64,197 were expensed during
the year ended December 31, 2017.

 

The non-controlling interest
upon acquisition was measured by proportionate share in the recognized amounts of the identifiable net assets. The fair value of
the amounts receivable acquired is equal to the carrying value.

 

Included in the Company’s
revenue for the year ended December 31, 2017 is $8,190 earned by Northern Vine in the period from the acquisition date, November
17, 2017, to December 31, 2017. Included in the Company’s net loss for the year ended December 31, 2017 is Northern Vine’s
net loss of $146,579 from November 17, 2017 to December 31, 2017.

 

If the Company had acquired its
interest in Northern Vine on January 1, 2017, revenue would have increased by $58,000 and net loss would have increased by $1,018,000
for the year ended December 31, 2017.

 

		6.	ACCOUNTS RECEIVABLE

 

The Company’s accounts receivable is comprised
of:

 

	 	 	December 31
 2017	 	 	December 31
 2016	 
	 	 	$	 	 	$	 
	Goods and Services Tax refund receivable	 	 	186,410	 	 	 	26,350	 
	Interest receivable	 	 	24,438	 	 	 	-	 
	Other	 	 	67,384	 	 	 	2,351	 
	 	 	 	278,232	 	 	 	28,701	 

 

Accounts receivable are neither impaired nor past
due.

 

		7.	BIOLOGICAL ASSETS

 

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

 

	 	 	December 31
 2017	 	 	December 31
 2016	 
	 	 	 	$	 	 	 	$	 
	Carrying amount, beginning of year	 	 	162,986	 	 	 	140,422	 
	Use of seeds	 	 	-	 	 	 	(2,640	)
	Costs incurred until harvest	 	 	218,874	 	 	 	158,310	 
	Effect of unrealized changes in fair value of biological assets	 	 	(1,977	)	 	 	64,852	 
	Transferred to inventory upon harvest	 	 	(265,324	)	 	 	(197,958	)
	Carrying amount, end of year	 	 	114,559	 	 	 	162,986	 

 

    	17

     

    

 

	EMERALD HEALTH THERAPEUTICS, INC.
	NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 
	For the years ended December 31, 2017 and 2016 
	(Expressed in Canadian dollars)

 

As at December 31, 2017, included
in the carrying amount of biological assets is $25,113 (December 31, 2016 - $25,113) in seeds and $89,446 (December 31, 2016 -
$137,873) in live plants.

 

The significant assumptions used
in determining the fair value of medical 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.

 

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 medical cannabis per plant
would result in an increase or decrease in the fair value of biological assets of $4,472 at December 31, 2017 (December 31, 2016
- $6,894).

 

The Company has expanded the
comparative disclosure to include additional disclosure of costs incurred until harvest and the effect of unrealized changes in
fair value of biological assets. The revised disclosure provides more relevant information to the users of the financial statements.

 

		8.	INVENTORY

 

The Company’s inventory is comprised of:

 

	 	 	December 31
 2017	 	 	December 31
 2016	 
	 	 	$	 	 	$	 
	Dried cannabis	 	 	524,651	 	 	 	105,699	 
	Cannabis oils	 	 	190,116	 	 	 	40,357	 
	Goods for resale	 	 	3,727	 	 	 	1,214	 
	Supplies and consumables	 	 	9,141	 	 	 	12,778	 
	 	 	 	727,635	 	 	 	160,048	 

 

Inventory expensed and included
in cost of sales during the year ended December 31, 2017 was $637,751 (December 31, 2016 - $193,793).

 

		9.	COST OF SALES

 

Cost of sales include harvested
biological assets, purchased dried cannabis, goods purchased for resale and the cost of manufactured oil products sold during the
period. These costs consist of direct costs and include direct labor, supplies, lab testing, packaging costs, rent and utilities.

 

    	18

     

    

 

	EMERALD HEALTH THERAPEUTICS, INC.
	NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 
	For the years ended December 31, 2017 and 2016 
	(Expressed in Canadian dollars)

 

 

		10.	PLANT AND EQUIPMENT

 

	 	 	Leasehold
 improvements	 	 	Growing, lab
 and extract
 equipment	 	 	Other
 equipment	 	 	Total	 
	 	 	$	 	 	$	 	 	$	 	 	$	 
	Cost	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 
	Balance, December 31, 2015	 	 	184,327	 	 	 	258,913	 	 	 	28,631	 	 	 	471,871	 
	Additions	 	 	602	 	 	 	199,470	 	 	 	24,927	 	 	 	224,999	 
	Disposals	 	 	-	 	 	 	(2,604	)	 	 	(1,305	)	 	 	(3,909	)
	Balance, December 31, 2016	 	 	184,929	 	 	 	455,779	 	 	 	52,253	 	 	 	692,961	 
	Additions Acquired through	 	 	59,242	 	 	 	299,675	 	 	 	42,931	 	 	 	401,848	 
	Northern Vine (Note 5)	 	 	30,300	 	 	 	237,271	 	 	 	-	 	 	 	267,571	 
	Disposals	 	 	-	 	 	 	-	 	 	 	(911	)	 	 	(911	)
	Balance, December 31, 2017	 	 	274,471	 	 	 	992,725	 	 	 	94,273	 	 	 	1,361,469	 
	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 
	Accumulated depreciation	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 
	Balance, December 31, 2015	 	 	27,229	 	 	 	29,495	 	 	 	9,337	 	 	 	66,061	 
	Additions	 	 	18,775	 	 	 	68,281	 	 	 	12,387	 	 	 	99,443	 
	Disposals	 	 	-	 	 	 	(825	)	 	 	(906	)	 	 	(1,731	)
	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	 
	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 
	Net book value	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 
	At December 31, 2016	 	 	138,925	 	 	 	358,828	 	 	 	31,435	 	 	 	529,188	 
	At December 31, 2017	 	 	194,862	 	 	 	782,072	 	 	 	54,401	 	 	 	1,031,335	 

 

Plant under construction

 

During 2017, site preparation
began on the Company’s new self-constructed plant located in Metro Vancouver, British Columbia. As at 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 deprecation will commence.

 

    	19

     

    

 

	EMERALD HEALTH THERAPEUTICS, INC.
	NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 
	For the years ended December 31, 2017 and 2016 
	(Expressed in Canadian dollars)

 

		11.	INTANGIBLE ASSETS AND GOODWILL

 

The Company’s intangible assets continuity is
as follows:

 

	 	 	Health Canada
 License	 	 	Computer 
 Software	 	 	Total	 
	 	 	$	 	 	$	 	 	$	 
	Cost	 	 	 	 	 	 	 	 	 	 	 	 
	Balance, December 31, 2015	 	 	-	 	 	 	2,549	 	 	 	2,549	 
	Additions	 	 	-	 	 	 	61,771	 	 	 	61,771	 
	Disposals	 	 	-	 	 	 	(2,185	)	 	 	(2,185	)
	Balance, December 31, 2016	 	 	-	 	 	 	62,135	 	 	 	62,135	 
	Additions	 	 	-	 	 	 	-	 	 	 	-	 
	Acquired through Northern Vine (Note 5)	 	 	2,922,096	 	 	 	-	 	 	 	2,922,096	 
	Disposals	 	 	-	 	 	 	-	 	 	 	-	 
	Balance, December 31, 2017	 	 	2,922,096	 	 	 	62,135	 	 	 	2,984,231	 
	 	 	 	 	 	 	 	 	 	 	 	 	 
	Accumulated depreciation	 	 	 	 	 	 	 	 	 	 	 	 
	Balance, December 31, 2015	 	 	-	 	 	 	1,232	 	 	 	1,232	 
	Additions	 	 	-	 	 	 	16,906	 	 	 	16,906	 
	Disposals	 	 	-	 	 	 	(1,421	)	 	 	(1,421	)
	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	 
	 	 	 	 	 	 	 	 	 	 	 	 	 
	Net book value	 	 	 	 	 	 	 	 	 	 	 	 
	At December 31, 2016	 	 	-	 	 	 	45,418	 	 	 	45,418	 
	At December 31, 2017	 	 	2,834,650	 	 	 	17,205	 	 	 	2,851,855	 

 

The Company’s goodwill continuity is as follows:

 

	 	 	Goodwill	 
	 	 	$	 
	Balance, December 31, 2015 and 2016	 	 	-	 
	Acquired from Northern Vine (Note 5)	 	 	169,323	 
	Balance, December 31, 2017	 	 	169,323	 

 

    	20

     

    

 

	EMERALD HEALTH THERAPEUTICS, INC.
	NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 
	For the years ended December 31, 2017 and 2016 
	(Expressed in Canadian dollars)

 

		12.	LONG-TERM INVESTMENTS

 

	 	 	Fair value
 December 31
 2016	 	 	Investment	 	 	Cummulative
 change in
 fair value	 	 	Fair value
 December 31
 2017	 
	 	 	$	 	 	$	 	 	$	 	 	$	 
	Level 1 on fair value hierarchy	 	 	       	 	 	 	 	 	 	 	 	 	 	 	 	 
	VANC Pharmaceuticals Inc. - shares	 	 	-	 	 	 	250,000	 	 	 	250,000	 	 	 	500,000	 
	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 
	Level 2 on fair value hierarchy	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 
	VANC Pharmaceuticals Inc. - warrants	 	 	-	 	 	 	-	 	 	 	166,667	 	 	 	166,667	 
	 	 	 	-	 	 	 	250,000	 	 	 	416,667	 	 	 	666,667	 

 

On November 27, 2017 the Company
purchased 1,666,667 units of VANC Pharmaceuticals Inc., (“VANC”), a related party, pursuant to a subscription agreement
dated November 7, 2017. Each unit entitled the holder to 1,666,667 shares and 1,666,667 warrants.

 

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 VANC,
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. The common shares of VANC have been trading above $0.25 per share
since December 6, 2017. No notice has been issued as at the filing date of these financial statements.

 

		13.	INVESTMENT IN JOINT VENTURE

 

In 2017, the Company and Village
Farms International, Inc. (“Village Farms”) formed Pure Sunfarms Corp. (“Pure Sunfarms”), a privately held
company incorporated pursuant to the Business Corporations Act (British Columbia). The purpose of Pure Sunfarms is to pursue large-scale
cannabis production in Canada. Village Farms and the Company each have a 50% ownership interest in Pure Sunfarms in the form of
common shares. The Company has concluded that the agreement constitutes a joint arrangement where joint control is shared with
Village Farms and therefore has accounted for Pure Sunfarms using the equity method.

 

The Company has contributed $16
million in cash to the joint venture as at December 31, 2017. A further $4 million in cash is required to be forwarded to the joint
venture; this amount is currently included as “payable to joint venture” on the statement of financial position. As
part of the transaction, the Company incurred related transaction costs of $229,639, which have been added to the amount of the
investment in Pure Sunfarms in accordance with IAS 28.

 

    	21

     

    

 

	EMERALD HEALTH THERAPEUTICS, INC.
	NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 
	For the years ended December 31, 2017 and 2016 
	(Expressed in Canadian dollars)

 

Summarized financial information for Pure Sunfarms
is set out below:

 

	 	 	December 31	 	 	December 31	 
	 	 	2017	 	 	2016	 
	 	 	$	 	 	$	 
	Non-current assets	 	 	23,144,466	 	 	 	-	 
	Current assets (a)	 	 	17,381,496	 	 	 	-	 
	Total assets	 	 	40,525,962	 	 	 	-	 
	 	 	 	 	 	 	 	 	 
	Non-current liabilities	 	 	-	 	 	 	-	 
	Current liabilities	 	 	1,171,118	 	 	 	-	 
	Total liabilities	 	 	1,171,118	 	 	 	-	 
	 	 	 	 	 	 	 	 	 
	(a) includes cash and cash equivalents	 	 	2,906,910	 	 	 	-	 
	 	 	 	 	 	 	 	 	 
	Loss and comprehensive loss (b)	 	 	645,156	 	 	 	-	 
	 	 	 	 	 	 	 	           	 
	(b) includes income tax recovery	 	 	238,620	 	 	 	-	 

 

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

 

	 	 	December 31
 2017	 	 	December 31
 2016	 
	 	 	$	 	 	$	 
	Total net assets of Pure Sunfarms	 	 	39,354,844	 	 	 	      -	 
	 	 	 	 	 	 	 	 	 
	50% ownership interest held by the Company	 	 	19,677,422	 	 	 	-	 
	Transaction costs	 	 	229,639	 	 	 	-	 
	Carrying amount of the investment	 	 	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.

 

		14.	RELATED PARTY TRANSACTIONS

 

With
Emerald Health Sciences Inc.

 

Emerald Health Sciences Inc.
(“Sciences”) charged the Company $1,871,521 during the year ended December 31, 2017 (December 31, 2016 - $146,970)
for services related to financing, business development, investor relations and acquisition activities. The Company entered into
a management agreement with Sciences in May 2015, which has subsequently been amended in 2018 to provide increased services at
a cost of $350,000 per month. Sciences charged the Company $303,099 during the year ended December 31, 2017 (December 31, 2016
- $1,587) for invoices paid on behalf of the Company. The Company paid $Nil (2016 - $39,561) to Sciences in interest on outstanding
debt that was repaid in full by way of debt conversion (discussed below) in 2016. As of December 31, 2017, the Company owed $125,486
(December 31, 2016 - $97,696) to Sciences, this amount is included in the due to related parties caption on the Consolidated Statements
of Financial Position and is non-interest bearing.

 

    	22

     

    

 

	EMERALD HEALTH THERAPEUTICS, INC.
	NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 
	For the years ended December 31, 2017 and 2016 
	(Expressed in Canadian dollars)

 

In March 2016, Sciences agreed
to convert debt of $1,392,796 outstanding as of February 26, 2016, the date Sciences agreed to the conversion of the debt, into
8,097,651 Common Shares at a deemed price of $0.172 per share. The TSXV approved the conversion of the debt and shares were issued
in May 2016.

 

In August 2016, Sciences and
the Company announced a private placement of 4,077,687 units of the Company at a price of $0.205 per unit, for gross proceeds of
$835,926. Each unit was comprised 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 for a period of 24 months at an exercise price of $0.27. The TSXV approved the
transaction and the shares were issued in September 2016.

 

Also in August 2016, Sciences
agreed to convert additional debt outstanding in the amount of $921,465 owed by the Company to Sciences as of August 5, 2016, the
date Sciences agreed to the conversion of the debt, into 4,494,955 Common Shares at a deemed price of $0.205 per share. The TSXV
approved the conversion of the debt and shares were issued in September 2016.

 

In November 2016, Sciences and
the Company completed a private placement of 4,411,764 units of the Company at a price of $0.68 per unit, for gross proceeds of
$3,000,000. Each unit was comprised 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 $0.85 per share for a period of five years from
the closing date. The TSXV approved the transaction and the shares were issued in November 2016.

 

As of December 31, 2017, Sciences
held an aggregate of 45,156,555 shares, representing 42% of the issued and outstanding common shares of the Company (“Common
Shares”) and it held 8,489,451 common share purchase warrants of the Company.

 

With the Company’s joint venture

 

As of December 31, 2017, Pure
Sunfarms owes the Company $324,674 (December 31, 2016 - $Nil) for expenditures made on behalf of the joint venture. This amount
is included in the due from related parties caption on the Consolidated Statements of Financial Position and is non-interest bearing.

 

    	23

     

    

 

	EMERALD HEALTH THERAPEUTICS, INC.
	NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 
	For the years ended December 31, 2017 and 2016 
	(Expressed in Canadian dollars)

 

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 year ended December 31, 2017, the Company paid to the Landlord $169,704 (2016
- $Nil) in rent, a $15,000 damage deposit, and a further $196,391 utility deposit, refundable if usage minimum is met as expected
by 2022. The Landlord also charged the Company $238,603 during the year ended December 31, 2017 (2016 - $Nil) for services related
to construction of the Company’s new facility. As of December 31, 2017, the Company owed $77,244 (December 31, 2016 - $Nil)
to the Landlord, this amount is included in the due to related parties caption on the Consolidated Statements of Financial Position
and is non-interest bearing.

 

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

 

On November 27, 2017 for investment
purposes, the Company paid $250,000 to purchase 1,666,667 units of VANC, as described in Note 12. The CEO of VANC 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:

 

	 	 	For the year ended
 December 31
 2017	 	 	For the year ended
 December 31
 2016	 
	 	 	$	 	 	$	 
	Wage and short-term benefits	 	 	670,667	 	 	 	369,528	 
	Share-based payments (Note 15)	 	 	1,318,058	 	 	 	536,999	 
	 	 	 	1,988,725	 	 	 	906,527	 

 

Included in the due to related
parties caption on the Consolidated Statements of Financial Position at December 31, 2017 is $44,775 (December 31, 2016 - $Nil)
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 and at market rates, which is the amount of consideration
established and agreed to by the related parties.

 

    	24

     

    

 

	EMERALD HEALTH THERAPEUTICS, INC.
	NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 
	For the years ended December 31, 2017 and 2016 
	(Expressed in Canadian dollars)

 

		15.	SHARE CAPITAL

 

		Authorized	

 

		·	Unlimited number of common shares without par value

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

 

Issued

 

		·	106,787,226 common shares (December 31, 2016 – 67,794,698)

		·	Nil preferred shares (December 31, 2016 - Nil)

 

During the year ended December
31, 2017 the outstanding share capital increased by 38,992,528 Common Shares due to the following transactions:

 

		·	A prospectus offering (the “February
Offering”), completed on February 10, 2017, for 10,235,000 units of the Company at a price of $1.35 per unit, for gross proceeds
of $13,817,250. Each unit consisted of one Common Share and one-half of 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 $2.00 for a period of 24 months
from the closing date;

		·	A prospectus offering (the “April
Offering”), completed on April 20, 2017, for 13,170,000 units of the Company at a price of $1.85 per unit, for gross proceeds
of $24,364,500. Each unit consisted of one Common Share and one-half of 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 $2.60 for a period of 24 months
from the closing date;

		·	The issuance on April 21, 2017 of an additional
1,465,100 shares of the Company at a price of $1.755 per share and 987,750 common share purchase warrants (on the same terms as
the warrants issued under the April Offering) at a price of $0.19 per warrant, for gross proceeds of $2,758,924 pursuant to the
exercise of an over-allotment option granted to the underwriter in connection with the April Offering;

		·	The exercise of compensation units that
were issued under the February Offering for 307,050 units of the Company at a price of $1.35 per unit, for gross proceeds of $414,518.
Each unit consisted of one Common Share and one-half of 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 $2.00 for a period of 24 months from the closing date;

		·	The exercise of compensation units that
were issued under the April Offering for 439,053 units of the Company at a price of $1.85 per unit, for gross proceeds of $812,248.
Each unit consisted of one Common Share and one-half of 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 $2.60 for a period of 24 months from the closing date;

		·	A total of 4,797,375 warrants were exercised
at an exercise price of $2.00 for gross proceeds of $9,594,750;

 

    	25

     

    

 

	EMERALD HEALTH THERAPEUTICS, INC.
	NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 
	For the years ended December 31, 2017 and 2016 
	(Expressed in Canadian dollars)

 

		·	A total of 7,047,700 warrants were exercised
at an exercise price of $2.60 for gross proceeds of $18,324,020; and

		·	A total of 1,531,250 stock options were
exercised ranging in exercise price from $0.175 to $1.42 for gross proceeds of $1,120,060.

 

During the year ended December
31, 2016, the outstanding share capital increased by 21,723,857 Common Shares due to the following transactions:

 

		·	The debt conversion with Sciences in May
2016 for 8,097,651 Common Shares at a deemed price of $0.172 per share;

		·	The private placement with Sciences in
September 2016 for 4,077,687 units of the Company at a price of $0.205 per unit, for gross proceeds of $835,926. Each unit was
comprised 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 for a period of 24 months at an exercise price of $0.27;

		·	The debt conversion with Sciences in September
2016 for 4,494,955 Common Shares at a deemed price of $0.205 per share;

		·	The private placement with Sciences in
November 2016 for 4,411,764 units of the Company at a price of $0.68 per unit, for gross proceeds of $3,000,000. Each unit was
comprised 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 $0.85 for a period of five years from the closing date; and

		·	A total of 641,800 stock options were
exercised ranging in exercise price from $0.175 to $0.72 for gross proceeds of $273,176.

 

Surplus and Value Escrow Agreements

 

As at December 31, 2017, there are no shares held
in escrow.

 

In September 2014, the Company
entered into a Surplus Security Escrow Agreement and a Value Security Escrow Agreement in connection with the RTO pursuant to TSXV
Policy 5.4 Escrow, Vendor Consideration and Resale Restrictions. Approximately 59% of the initial outstanding Common Shares
issued in September 2014 were subject to the Surplus Security Escrow Agreement and as at December 31, 2017, none (December 31,
2016 – 14,921,220) of the Common Shares held under the Surplus Security Escrow Agreement remain in escrow. Approximately
11% of the initial Common Shares were subject to the Value Security Escrow Agreement and as of December 31, 2017, none (December
31, 2016 – 1,520,256) of the Common Shares held under the Value Security Escrow Agreement remain in escrow.

 

    	26

     

    

 

	EMERALD HEALTH THERAPEUTICS, INC.
	NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 
	For the years ended December 31, 2017 and 2016 
	(Expressed in Canadian dollars)

 

Share based payments

 

In May 2017, the board of directors
approved the adoption of a New Omnibus Incentive Plan (the “New Plan”), which was approved by the shareholders in June
2017. The New Plan replaces the stock option plan that was previously approved by the shareholders (the “Previous Plan”).
Options granted under the Previous Plan will remain outstanding and governed by the terms of the Previous Plan.

 

Under the New Plan, the maximum
number of common shares issuable upon the exercise or redemption and settlement of all awards granted under the New Plan shall
not exceed 10% of the issued and outstanding Shares at the time of granting of such award less the number of Shares reserved for
issuance under all other security based compensation arrangements of the Company. Under the New Plan, the following types of awards
can be issued: stock options, share appreciation rights, restricted share units and other performance awards.

 

The New Plan, as was the Previous
Plan, is administered by the Board of Directors of the Company who establish exercise prices, at not less than market price at
the date of grant, and expiry dates, which have been set at five years from issuance.

 

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.

 

	 	 	Number of Options	 	 	Weigthed Average
 Exercise Price	 
	 	 	 	 	 	$	 
	Balance at December 31, 2015	 	 	3,950,000	 	 	 	0.44	 
	Granted	 	 	2,725,000	 	 	 	0.62	 
	Forfeited	 	 	(25,000	)	 	 	0.72	 
	Exercised	 	 	(641,800	)	 	 	0.43	 
	Expired	 	 	(250,000	)	 	 	0.40	 
	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	 

 

During the year ended December
31, 2017, the Company granted 5,905,000 stock options to employees and consultants. The stock options granted had exercise prices
between $1.16 and $4.25, expiry dates of up to five years and vest over periods of up to three years. The fair values of the stock
options were determined to be between $0.41 and $2.23.

 

    	27

     

    

 

	EMERALD HEALTH THERAPEUTICS, INC.
	NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 
	For the years ended December 31, 2017 and 2016 
	(Expressed in Canadian dollars)

 

The fair values of the options
granted during the year ended December 31, 2017 and 2016 were determined on the date of the grant using the Black-Scholes option
pricing model with the following assumptions:

 

	 	 	December 31
 2017	 	 	December 31
 2016	 
	Risk free interest rate	 	 	0.74% - 1.70	%	 	 	0.59% - 1.04	%
	Expected life of options (years)	 	 	1-3	 	 	 	4-5	 
	Expected annualized volatility	 	 	80	%	 	 	80	%
	Expected dividend yield	 	 	Nil	 	 	 	Nil	 
	Weighted average Black-Scholes value of each option	 	$	1.37	 	 	$	0.39	 

 

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.

 

    	28

     

    

 

	EMERALD HEALTH THERAPEUTICS, INC.
	NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 
	For the years ended December 31, 2017 and 2016 
	(Expressed in Canadian dollars)

 

 

Incentive stock options outstanding and exercisable
at December 31, 2017 are summarized as follows:

 

	 	 	 	 	 	 	 	 	 	Outstanding	 	 	 	 	 	Exercisable	 
	Exercise
 price	 	 	Quantity	 	 	Remaining
 contractual
 life (years)	 	 	Weighted
 average
 exercise
 price	 	 	Quantity	 	 	Weighted
 average
 exercise
 price	 
	$	 	 	 	 	 	 	 	 	$	 	 	 	 	 	$	 
	 	0.175	 	 	 	141,673	 	 	 	3.19	 	 	 	0.175	 	 	 	4,376	 	 	 	0.175	 
	 	0.335	 	 	 	210,000	 	 	 	3.65	 	 	 	0.335	 	 	 	70,350	 	 	 	0.335	 
	 	0.400	 	 	 	750,000	 	 	 	1.68	 	 	 	0.400	 	 	 	300,000	 	 	 	0.400	 
	 	0.410	 	 	 	70,000	 	 	 	2.07	 	 	 	0.410	 	 	 	22,514	 	 	 	0.410	 
	 	0.450	 	 	 	1,500,000	 	 	 	2.32	 	 	 	0.450	 	 	 	675,000	 	 	 	0.450	 
	 	0.550	 	 	 	160,000	 	 	 	1.92	 	 	 	0.550	 	 	 	88,000	 	 	 	0.550	 
	 	0.720	 	 	 	1,794,718	 	 	 	3.75	 	 	 	0.720	 	 	 	819,697	 	 	 	0.720	 
	 	1.160	 	 	 	35,000	 	 	 	4.42	 	 	 	1.160	 	 	 	7,894	 	 	 	1.160	 
	 	1.180	 	 	 	200,000	 	 	 	4.50	 	 	 	1.180	 	 	 	118,000	 	 	 	1.180	 
	 	1.190	 	 	 	87,500	 	 	 	4.67	 	 	 	1.190	 	 	 	4,958	 	 	 	1.190	 
	 	1.210	 	 	 	50,000	 	 	 	4.59	 	 	 	1.210	 	 	 	8,403	 	 	 	1.210	 
	 	1.220	 	 	 	787,223	 	 	 	4.35	 	 	 	1.220	 	 	 	206,045	 	 	 	1.220	 
	 	1.380	 	 	 	150,000	 	 	 	3.45	 	 	 	1.380	 	 	 	84,813	 	 	 	1.380	 
	 	1.420	 	 	 	150,000	 	 	 	4.32	 	 	 	1.420	 	 	 	47,333	 	 	 	1.420	 
	 	1.510	 	 	 	100,000	 	 	 	1.04	 	 	 	1.510	 	 	 	151,000	 	 	 	1.510	 
	 	1.290	 	 	 	500,000	 	 	 	4.76	 	 	 	1.290	 	 	 	161,250	 	 	 	1.290	 
	 	1.270	 	 	 	100,000	 	 	 	4.72	 	 	 	1.270	 	 	 	31,750	 	 	 	1.270	 
	 	1.470	 	 	 	175,000	 	 	 	4.78	 	 	 	1.470	 	 	 	64,313	 	 	 	1.470	 
	 	2.330	 	 	 	250,000	 	 	 	4.88	 	 	 	2.330	 	 	 	145,625	 	 	 	2.330	 
	 	4.250	 	 	 	2,650,000	 	 	 	4.98	 	 	 	4.250	 	 	 	2,815,625	 	 	 	4.250	 
	 	 	 	 	 	9,861,114	 	 	 	3.81	 	 	 	1.757	 	 	 	5,826,946	 	 	 	1.112	 

 

The Company recorded share-based
compensation expense related to the incentive stock options of $2,716,400 for the year ended December 31, 2017 (December 31, 2016
- $680,788). The expense has been charged to the consolidated statements of loss and comprehensive loss.

 

Restricted share units

 

During
the year ended December 31, 2017, the Company issued 825,000 restricted share units (“RSUs”), as permitted under the
New Plan described above. The RSUs vest as follows: 200,000 on May 8, 2020; 275,000 on December 15, 2020; and 350,000 on January
15, 2019 and will be settled in Common Shares. At the time of issuance, the fair value of the RSUs were determined to be: $1.22
per unit for RSU’s vesting on May 8, 2020; $4.92 per unit for RSUs vesting on December 15, 2020 and $4.25 per unit for RSUs
vesting on January 15, 2019. The Company recorded share-based compensation expense related to the RSUs of $106,095 for the
year ended December 31, 2017 (December 31, 2016 - $Nil) to the consolidated statement of loss and comprehensive loss.

 

    	29

     

    

 

	EMERALD HEALTH THERAPEUTICS, INC.
	NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 
	For the years ended December 31, 2017 and 2016 
	(Expressed in Canadian dollars)

 

Compensation options

 

As part of the prospectus offerings
completed in February 2017 and April 2017, the Company issued compensation options to the underwriters, exercisable into units
with the same terms as the units issued in the applicable offerings for a period of twenty-four months. The fair value of the compensation
options reduced the share capital amount. Compensation options outstanding and exercisable at December 31, 2017 are summarized
as follows:

 

	 	 	Number of
 compensation 
 options	 	 	Remaining
 contractual
 life (years)	 	 	Weighted
 Average
 Exercise
 Price	 	 	Fair
 Value
 per unit	 	 	Fair
 Value
 at issue	 
	 	 	 	 	 	$	 	 	 	 	 	$	 	 	$	 
	Balance at December 31, 2016	 	 	-	 	 	 	-	 	 	 	-	 	 	 	-	 	 	 	-	 
	Granted, February offering	 	 	307,050	 	 	 	1.35	 	 	 	1.11	 	 	 	0.40	 	 	 	121,941	 
	Granted, April offering	 	 	395,100	 	 	 	1.85	 	 	 	1.30	 	 	 	0.52	 	 	 	205,830	 
	Granted, April offering, over allotment	 	 	43,953	 	 	 	1.85	 	 	 	1.30	 	 	 	0.51	 	 	 	22,327	 
	Exercised	 	 	(746,103	)	 	 	1.64	 	 	 	1.22	 	 	 	0.47	 	 	 	(350,098	)
	Balance at December 31, 2017	 	 	-	 	 	 	-	 	 	 	-	 	 	 	-	 	 	 	-	 

 

The fair values of the compensation
options granted during the year ended December 31, 2017 were determined on the date of the grant using the Black-Scholes option
pricing model with the following assumptions:

 

	 	 	Grant
 February 10,
 2017	 	 	Grant
 April 20,
 2017	 	 	Grant
 April 21,
 2017	 
	Number of compensation options granted	 	 	307,050	 	 	 	395,100	 	 	 	43,953	 
	Exercise price	 	$	1.35	 	 	$	1.85	 	 	$	1.85	 
	Market value on grant date	 	$	1.31	 	 	$	1.44	 	 	$	1.42	 
	Risk free interest rate	 	 	0.77	%	 	 	0.74	%	 	 	0.71	%
	Expected life	 	 	2 years	 	 	 	2 years	 	 	 	2 years	 
	Annualized volatility	 	 	80	%	 	 	80	%	 	 	80	%
	Expected dividends	 	 	Nil	 	 	 	Nil	 	 	 	Nil	 

 

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.

 

    	30

     

    

 

EMERALD HEALTH THERAPEUTICS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

For the years ended December 31, 2017 and 2016

(Expressed in Canadian dollars)

 

 

		16.	WARRANTS

 

	 	 	Expiry date	 	Number of 
 Warrants	 	 	Weighted
 Average
 Exercise Price	 
	 	 	 	 	 	 	 	$	 
	Balance at December 31, 2015	 	 	 	 	-	 	 	 	-	 
	Issued in September, 2016	 	September 20, 2018	 	 	4,077,687	 	 	 	0.27	 
	Issued in November, 2016	 	November 15, 2021	 	 	4,411,764	 	 	 	0.85	 
	Balance at December 31, 2016	 	 	 	 	8,489,451	 	 	 	0.57	 
	Issued in February, 2017	 	January 19, 2018	 	 	5,117,500	 	 	 	2.00	 
	Issued in April, 2017	 	February 5, 2018	 	 	7,572,750	 	 	 	2.60	 
	Issued upon exercise of compensation units	 	January 19, 2018	 	 	153,525	 	 	 	2.00	 
	Issued upon exercise of compensation units	 	February 5, 2018	 	 	219,526	 	 	 	2.60	 
	Exercised	 	 	 	 	(11,845,075	)	 	 	2.36	 
	Balance at December 31, 2017	 	 	 	 	9,707,677	 	 	 	0.80	 

 

The Company exercised its right
to accelerate the exercise period for the warrants issued in February 2017. Notice of the accelerated expiry was provided to warrant
holders effective December 20, 2017. The new expiry date of these warrant was January 19, 2018. On January 19, 2018 the remaining
30,300 unexercised warrants issued under the February 2017 prospectus offering expired and were cancelled.

 

Subsequent to the year ended
December 31, 2017, the Company exercised its right to accelerate the exercise period for the warrants issued in April 2017. Notice
of the accelerated expiry was provided to warrant holders effective January 5, 2018. The new expiry date of these warrants was
February 5, 2018. On February 5, 2018 the remaining 25,750 unexercised warrants issued under the April 2017 prospectus offering
expired and were cancelled.

 

		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:

 

    	31

     

    

 

	EMERALD HEALTH THERAPEUTICS, INC.
	NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 
	For the years ended December 31, 2017 and 2016 
	(Expressed in Canadian dollars)

 

	 	 	2018	 	 	2019	 	 	2020	 	 	2021	 	 	2022	 	 	Thereafter	 
	 	 	$	 	 	$	 	 	$	 	 	$	 	 	$	 	 	$	 
	Production facilities	 	 	154,575	 	 	 	120,739	 	 	 	41,988	 	 	 	31,113	 	 	 	2,593	 	 	 	-	 
	Office space	 	 	71,820	 	 	 	95,760	 	 	 	39,900	 	 	 	-	 	 	 	-	 	 	 	-	 
	Temporary housing	 	 	29,970	 	 	 	2,700	 	 	 	-	 	 	 	-	 	 	 	-	 	 	 	-	 
	Land (Note 14)	 	 	320,000	 	 	 	320,000	 	 	 	320,000	 	 	 	320,000	 	 	 	320,000	 	 	 	7,760,000	 
	Total	 	 	576,365	 	 	 	539,199	 	 	 	401,888	 	 	 	351,113	 	 	 	322,593	 	 	 	7,760,000	 

 

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 $3,580,000
in the year ended December 31, 2018.

 

		18.	FINANCIAL INSTRUMENTS

 

Financial assets and financial liabilities are measured
on an ongoing basis at fair value or amortized cost. As at December 31, 2017 and December 31, 2016, the classification of the financial
instruments, as well as their carrying values and fair values, are shown in the table below:

 

	 	 	December 31, 2017	 	 	December 31, 2016	 
	 	 	Fair Value	 	 	Carrying Value	 	 	Fair Value	 	 	Carrying Value	 
	 	 	$	 	 	$	 	 	$	 	 	$	 
	Financial Assets	 	  	 	 	 	 	 	 	 	 	 	 	 	 	 	 
	FVTPL	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 
	Cash	 	 	9,523,145	 	 	 	9,523,145	 	 	 	3,217,205	 	 	 	3,217,205	 
	Biological assets	 	 	114,559	 	 	 	114,559	 	 	 	162,986	 	 	 	162,986	 
	Long-term investment	 	 	666,667	 	 	 	666,667	 	 	 	-	 	 	 	-	 
	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 
	Loans and accounts, recorded at amortized cost	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 
	Cash equivalents	 	 	35,000,000	 	 	 	35,000,000	 	 	 	-	 	 	 	-	 
	Accounts receivable	 	 	91,822	 	 	 	91,822	 	 	 	2,351	 	 	 	2,351	 
	Due from related parties	 	 	324,674	 	 	 	324,674	 	 	 	-	 	 	 	-	 
	Refundable deposits	 	 	196,391	 	 	 	196,391	 	 	 	-	 	 	 	-	 
	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 
	Financial Liabilities	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 
	Other financial liabilities, recorded at amortized cost	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 
	Accounts payable and accrued liabilities	 	 	1,378,645	 	 	 	1,378,645	 	 	 	376,339	 	 	 	376,339	 
	Payable to joint venture	 	 	4,000,000	 	 	 	4,000,000	 	 	 	-	 	 	 	-	 
	Due to related parties	 	 	247,505	 	 	 	247,505	 	 	 	97,696	 	 	 	97,696	 

 

    	32

     

    

 

	EMERALD HEALTH THERAPEUTICS, INC.
	NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 
	For the years ended December 31, 2017 and 2016 
	(Expressed in Canadian dollars)

 

The carrying value of the cash
and cash equivalents, accounts receivables (excluding statutory receivable balances), due from related parties, accounts payable
and accrued liabilities and amounts due to related parties, approximates 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	 
	 	 	Carrying Value	 	 	Level 1	 	 	Level 2	 	 	Level 3	 
	 	 	$	 	 	$	 	 	$	 	 	$	 
	As at December 31, 2017	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 
	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 
	Financial Assets	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 
	Cash	 	 	9,523,145	 	 	 	9,523,145	 	 	 	-	 	 	 	-	 
	Biological assets	 	 	114,559	 	 	 	-	 	 	 	-	 	 	 	114,559	 
	Long-term investments	 	 	666,667	 	 	 	500,000	 	 	 	166,667	 	 	 	-	 
	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 
	As at December 31, 2016	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 
	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 
	Financial Assets	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 
	Cash	 	 	3,217,205	 	 	 	3,217,205	 	 	 	-	 	 	 	-	 
	Biological assets	 	 	162,986	 	 	 	-	 	 	 	-	 	 	 	162,986	 

 

The Company is exposed to varying degrees to a variety
of financial instrument related risks:

 

Currency risk

 

The Company’s functional
and presentation currency is the Canadian dollar and major purchases are transacted in Canadian dollars. As a result, the Company’s
exposure to foreign currency risk is minimal.

 

    	33

     

    

 

	EMERALD HEALTH THERAPEUTICS, INC.
	NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 
	For the years ended December 31, 2017 and 2016 
	(Expressed in Canadian dollars)

 

Credit risk

 

The Company’s cash and
redeemable short-term investment certificates are largely held in large Canadian financial institutions. The Company does not have
any asset backed commercial paper. The Company maintains cash deposits with Schedule A financial institutions, which from time
to time may exceed federally insured limits. The Company’s maximum exposure to credit risk as at December 31, 2017 is the
carrying value of its financial assets.

 

Interest rate risk

 

Interest rate risk is the risk
the fair value or future cash flows of a financial instrument will fluctuate because of changes in market interest rates. Financial
assets and liabilities with variable interest rates expose the Company to cash flow interest rate risk. The Company does not hold
any financial liabilities with variable interest rates. The Company does maintain bank accounts and redeemable short-term investment
certificates which earn interest at variable rates, but it does not believe it is currently subject to any significant interest
rate risk.

 

Liquidity risk

 

Liquidity risk is the risk that
the Company will not be able to meet its obligations associated with financial liabilities. As at December 31, 2017, the Company
had positive working capital of $40,510,006 (December 31, 2016 – positive working capital of $3,127,688). The Company’s
ability to continue as a going concern is dependent on management’s ability to raise required funding through future equity
issuances and through short term borrowing. The Company manages its liquidity risk by forecasting cash flows from operations and
anticipating any investing and financing activities. Management and the Board of Directors are actively involved in the review,
planning and approval of significant expenditures and commitments.

 

		19.	CAPITAL MANAGEMENT

 

The Company’s objective
when managing its capital is to ensure sufficient equity financing to fund its planned operations in a way that maximizes the shareholder
return given the assumed risks of its operations. The Company considers shareholders’ equity as capital. Through the ongoing
management of its capital, the Company will modify the structure of its capital based on changing economic conditions. In doing
so, the Company may issue new shares. Annual budgeting is the primary tool used to manage the Company’s capital. Updates
are made as necessary to both capital expenditure and operational budgets in order to adapt to changes in risk factors, proposed
expenditure programs and market conditions.

 

		20.	INCOME TAXES

 

As the Company has recorded
a net loss for accounting and income tax purposes in both 2017 and 2016, no current income tax expense has been recorded in these
financial statements.

 

    	34

     

    

 

	EMERALD HEALTH THERAPEUTICS, INC.
	NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 
	For the years ended December 31, 2017 and 2016 
	(Expressed in Canadian dollars)

 

The income taxes shown in the
Statements of Loss and Comprehensive Loss differ from the amounts obtained by applying statutory rates to the loss before income
taxes due to the following:

 

	 	 	December 31,
 2017	 	 	December 31,
 2016	 
	Statutory tax rate	 	 	26	%	 	 	26	%
	 	 	 	 	 	 	 	 	 
	 	 	$	 	 	$	 
	Loss for the year before income taxes	 	 	(8,841,824	)	 	 	(2,940,501	)
	Expected income tax recovery	 	 	(2,298,874	)	 	 	(764,530	)
	Non-deductible items	 	 	772,027	 	 	 	127,047	 
	Tax impact of rate change	 	 	(58,725	)	 	 	-	 
	Unrecognized deductible temporary difference	 	 	1,585,572	 	 	 	637,483	 
	Income tax expense	 	 	-	 	 	 	-	 

 

The statutory rate increased from 26% to 27% effective
January 1, 2018.

 

Deferred taxes reflect the tax
effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes. Deferred
tax assets (liabilities) at December 31, 2017 and 2016 are comprised of the following:

 

	 	 	December 31,
 2017	 	 	December 31,
 2016	 
	 	 	$	 	 	$	 
	Deferred tax assets from:	 	 	 	 	 	 	 	 
	Non-capital loss carry-forward and tax pool balances	 	 	4,029,820	 	 	 	1,696,687	 
	Share issue costs	 	 	770,948	 	 	 	129,824	 
	Cumulative eligible capital	 	 	14,364	 	 	 	14,873	 
	Plant and equipment	 	 	6,952	 	 	 	208	 
	 	 	 	4,822,084	 	 	 	1,841,592	 
	Deferred tax liabilities from:	 	 	 	 	 	 	 	 
	Long term investment	 	 	(56,250	)	 	 	-	 
	Intangible assets	 	 	(788,966	)	 	 	-	 
	 	 	 	(845,216	)	 	 	-	 
	Unrecognized deferred tax assets	 	 	(4,294,365	)	 	 	(1,841,592	)
	Net deferred tax liability	 	 	(317,497	)	 	 	-	 

 

    	35

     

    

 

	EMERALD HEALTH THERAPEUTICS, INC.
	NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 
	For the years ended December 31, 2017 and 2016 
	(Expressed in Canadian dollars)

 

	 	 	December 31,	 	 	December 31,	 
	 	 	2017	 	 	2016	 
	 	 	$	 	 	$	 
	 	 	 	 	 	 	 
	Deferred tax assets (liabilities) through acquisition (Note 5):	 	 	 	 	 	 	          	 
	Non-capital loss carry-forward	 	 	471,469	 	 	 	-	 
	Intangible assets	 	 	(788,966	)	 	 	-	 
	Net deferred tax liability	 	 	(317,497	)	 	 	-	 

 

Tax pool balances consist of
Scientific Research and Experimental Development qualified expenditures of $329,749 which may be carried forward indefinitely and
deducted against any Canadian business income.

 

The Company has non-capital
losses carry forward of approximately $12.8 million at December 31, 2017 (December 31, 2016 $6.5 million) for which a deferred
tax asset has not been recognized. These losses may be carried forward to apply against future year income tax for Canadian income
tax purposes, subject to the final determination by taxation authorities, expire as follows:

 

	Expires:	     	$	 
	2033	 	 	13,424	 
	2034	 	 	1,227,229	 
	2035	 	 	2,537,489	 
	2036	 	 	2,122,188	 
	2037	 	 	6,948,997	 
	 	 	 	12,849,327	 

 

		21.	SEGMENTED INFORMATION

 

The Company operates in one
operating segment, being the production of medical cannabis pursuant to the Access to Cannabis for Medical Purposes Regulations.
As at December 31, 2017 and 2016, all of the Company’s operations and assets are located in Canada.

 

		22.	GENERAL AND ADMINISTRATIVE EXPENSES

 

	 	 	December 31,
 2017	 	 	December 31,
 2016	 
	 	 	$	 	 	$	 
	Professional, director and consulting fees	 	 	2,301,067	 	 	 	418,093	 
	Investor relations and media	 	 	1,026,299	 	 	 	5,511	 
	Wages and benefits	 	 	854,430	 	 	 	504,422	 
	Office and general	 	 	522,485	 	 	 	196,320	 
	Travel and accomodations	 	 	366,166	 	 	 	56,751	 
	Interest on promissory note	 	 	-	 	 	 	39,678	 
	Total general and administrative expenses	 	 	5,070,447	 	 	 	1,220,775	 

 

    	36

     

    

 

	EMERALD HEALTH THERAPEUTICS, INC.
	NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 
	For the years ended December 31, 2017 and 2016 
	(Expressed in Canadian dollars)

 

		23.	EVENTS AFTER THE REPORTING PERIOD

 

On January 9, 2018 the Company
closed a private placement offering to a single Canadian institutional accredited investor (the “Investor”) of 3,000,000
units at a price per unit of $5.00 for gross proceeds of $15,000,000. Each unit consists of one common share of the Company and
one common share purchase warrant. Each warrant is exercisable into one common share of the Company for a period of 3 years at
a price of $6.00 per warrant with an expiry date of January 9, 2021. In the event that the closing price of the Company’s
common shares on the TSX Venture Exchange is greater than $8.00 per common share for a period of 10 consecutive trading days at
any time after the closing of the prospectus sale, the Company may accelerate the expiry date of the warrants by giving notice
to the Investor and in such case the warrants will expire on the 30th day after the date on which such notice is given by the Company.

 

On February 9, 2018 the Company
closed a private placement offering of 3,000,000 units at a price per unit of $6.00 for gross proceeds of $18,000,000. Each unit
consists of one common share of the Company and one common share purchase warrant. Each warrant is exercisable into one common
share of the Company for a period of 6 months at a price of $7.00 per warrant with an expiry date of August 9, 2018. In the event
that the closing price of the Company’s common shares on the TSXV or other recognized exchange is greater than $8.50 per
common share for a period of 5 consecutive trading days at any time after the closing of the prospectus sale, the Company may accelerate
the expiry date of the warrants by giving notice to the Investor and in such case the warrants will expire on the 15th day after
the date on which such notice is given by the Company.

 

On February 15, the 3,000,000
warrants issued under the January 2018 private placement offering were exercised at an exercise price of $6.00 per share for gross
proceeds of $18,000,000.

 

On March 3, the 4,077,687 warrants
issued in September 2016 were exercised at an exercise price of $0.27 per share for gross proceeds of $1,100,975.

 

Subsequent to the year end,
the Company granted an aggregate of 545,000 options to purchase Common Shares, to various employees and consultants, at an average
exercise price of $5.75 per share. These options vest over three years and expire after five years. The Company also granted 5,000
RSUs, which will vest in full on January 12, 2019 if the vesting condition is met.

 

    	37Exhibit 4.3

 

 

EMERALD HEALTH THERAPEUTICS,
INC.

 

MANAGEMENT DISCUSSION AND ANALYSIS

For the year ended December 31, 2017

 

Dated:
March 29, 2018

 

    	- 1 -

     

    

 

TABLE OF CONTENTS

 

	Forward-Looking Statements	3
	 	 
	Disclosure Controls and Procedures	5
	 	 
	Overview	5
	 	 
	Recent Developments and Events after the Reporting Period	6
	 	 
	Disclosure of Outstanding Share Data	11
	 	 
	Selected Annual Information	12
	 	 
	Summary of Quarterly Results	12
	 	 
	Results of Operations	13
	 	 
	Additional Disclosure for Venture Issuers Without Significant Revenue	16
	 	 
	Liquidity and Capital Resources	16
	 	 
	Operating, Investing and Financing Activities	17
	 	 
	Financial Risk Management	17
	 	 
	Measurement uncertainty and impairment assessments	18
	 	 
	Transactions with Related Parties	18
	 	 
	Proposed Transactions	19
	 	 
	Critical Accounting Policies and Estimates	19
	 	 
	Changes in Accounting Standards not yet Effective	19
	 	 
	Off-Balance Sheet Arrangements	19
	 	 
	Risks and Uncertainties	19

 

    	- 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. (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”.

 

Forward-looking statements include, but
are not limited to, statements in respect of: potential increases in the number of registered patients of Emerald Health Therapeutics
Canada Inc. (“EHTC”), the Company’s wholly-owned subsidiary, and increases in the Company’s sales as a
result; the anticipated positive gross margins of the Company’s sales upon realizing expanded production capacity; the eventual
profitability of the business of the Company; 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 will provide; the
expectation that the Pure Sunfarms Corp. (“Pure Sunfarms”) joint venture will result in large-scale, high-quality,
low-cost cannabis production; the estimate that Pure Sunfarms’ initial greenhouse will yield more than 75,000 kg of dried
cannabis annually upon completion of full licencing and conversion; timing of such licensing and conversion and the costs thereof;
anticipated expansion of a second site in Metro Vancouver, British Columbia (“Metro Vancouver”); anticipated construction
costs, licensing and production capacity for the second site in Metro Vancouver; timing of production and sale of cannabis from
Pure Sunfarms’ facilities; the potential joint venture opportunity with DMG Blockchain Solutions Inc. (“DMG Blockchain”)
and the ability for such joint venture to develop a supply chain management system and e-commerce marketplace for cannabis sales;
the potential joint venture opportunity with Namaste Technologies Inc. (“Namaste”) and the ability of such joint venture
to develop a fully integrated e-commerce platform to serve as a retail channel for the Company’s patients; the expected growth
of the cannabis analytical testing market; the expected growth of demand in the therapeutic and non-therapeutic adult-use cannabis
market; use of proceeds of the Company’s prospectus financings; the potential proceeds from the exercise of the Company’s
outstanding common share purchase warrants; the purchasing by EHTC of additional strains of dried cannabis from another producer
who is licensed as a producer (a “Licensed Producer”) under the Access to Cannabis for Medical Purposes Regulations
(“ACMPR”); the introduction by the Company of new strains of cannabis oils; EHTC’s intention to continue to communicate
with and provide education and services to medical doctors and other healthcare professionals; the continued increase of the Company’s
client base and revenue as a result of the introduction of cannabis oils; the Company’s and EHTC’s continued research
and development of cannabis strains and products; clinical trials to be undertaken by EHTC; the acquisition by EHTC of pre-approval
applications from other ACMPR applicants; the timing, cost and implementation of the development of new production facilities and
the potential resulting increase to the Company’s production capacity of dried product and oils; the use and funding of EHTC
research and development project related to strains of medical cannabis; the implementation of the Cannabis Act (as defined herein)
by the federal government of Canada and its potential impact; the Company’s anticipated compliance with regulatory requirements
for non-medical cannabis sales; 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; continued
availability of capital financing and general economic, market or business conditions; EHTC’s reliance on the Current Licence
(as defined herein) to produce and sell medical cannabis and cannabis oils issued to it under the ACMPR and its ability to maintain
the Current Licence; EHTC’s ability to increase registered patients and sales and to make the Company profitable; regulatory
risks relating to EHTC’s compliance with the ACMPR; regulatory approvals for expansion of EHTC’s current production
facility, development of new production facilities and greenhouse retrofits by EHTC and Pure Sunfarms; Pure Sunfarms’ reliance
on the PSF Licence (as defined herein) to cultivate cannabis issued to it under the ACMPR and its ability to maintain the PSF Licence;
NV’s reliance on the NV Licence (as defined herein) to provide analytical testing of cannabis and production of Cannabidiol
(“CBD”) oil issued to it under the ACMPR and its ability to maintain the NV Licence; the Company’s ability to
execute its multi-phase expansion plan and its plans with Pure Sunfarms; the Company’s ability to execute a definitive agreement
with DMG Blockchain and establish a joint venture; the Company’s ability to execute a definitive agreement with Namaste and
establish a joint venture; changes in laws, regulations and guidelines relating to medical cannabis including the adoption of the
Cannabis Act, the implementation of provincial and territorial legislation related to the Cannabis Act and changes to the Excise
Tax Act by the federal government of Canada; 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; 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; 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;
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; and restrictions of the TSX Venture Exchange on the Company’s
business. See “Risks and Uncertainties” in this MD&A and other factors described the Company’s Annual Information
Form under the heading “Risk Factors”.

 

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.

 

    	- 4 -

     

    

 

Management’s Discussion and Analysis

 

The following MD&A is prepared as of
March 29, 2018 and is intended to assist the understanding of the results of operations and financial condition of Emerald Health
Therapeutics, Inc.

 

This MD&A should be read in conjunction
with the audited consolidated financial statements and accompanying notes of the Company for the years ended December 31, 2017
and 2016 which have been prepared in accordance with International Financial Reporting Standards (“IFRS”). 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.

 

Additional information related to the Company
is available on its website at www.emeraldhealth.ca. Other information related to the
Company, including the Company’s most recent Annual Information Form and financial statements referred to herein are available
on the Canadian Securities Administrator’s website at www.sedar.com.

 

Disclosure Controls and Procedures

 

During the year ended December 31, 2017
there has been no significant change in the Company’s internal control over financial reporting since the last reporting
period.

 

The management of the Company is responsible
for establishing and maintaining appropriate information systems, procedures and controls to ensure that information used internally
and disclosed externally is complete, reliable and timely. The Company’s certifying officers are responsible for ensuring
that processes are in place to provide them with sufficient knowledge to support the representations they make.

 

The management of the Company has filed
the Venture Issuer Basic Certificate with the Annual Filings on SEDAR at www.sedar.com. In contrast to the certificate under
National Instrument (“NI 52-109”) (Certification of Disclosure in Issuer’s Annual and Interim Filings), the Venture
Issuer Basic Certification does not include representations relating to the establishment and maintenance of disclosure controls
and procedures and internal control over financing reporting, as defined in NI 52-109. Investors should be aware that inherent
limitations on the ability of the Company’s certifying officers to design and implement on a cost-effective basis disclosure
controls and procedures and internal controls over financial reporting as defined in NI 52-109 may result in additional risks to
the quality, reliability, transparency and timeliness of interim and annual filings and other reports provided under securities
legislation.

 

Overview

 

Emerald was incorporated pursuant to the
Business Corporations Act (British Columbia) on July 31, 2007 as Firebird Capital Partners Inc. and changed its name to
Firebird Energy Inc. in December 2012. On September 4, 2014, the Company completed the acquisition of all the issued and outstanding
common shares of Thunderbird Biomedical Inc. (“Thunderbird”), by way of a reverse takeover (the “Transaction”)
under the rules of the TSX Venture Exchange (the “TSXV”) and concurrently changed its name to T-Bird Pharma, Inc. At
that time, Thunderbird became a wholly-owned subsidiary of T-Bird. In June 2015, the Company changed its name to Emerald Health
Therapeutics, Inc. and Thunderbird changed its name to Emerald Health Botanicals Inc. (“Botanicals”). In February 2018
Botanicals changed its name to Emerald Health Therapeutics Canada Inc. (“EHTC”).

 

    	- 5 -

     

    

 

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 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”.
The Company is the parent of its wholly-owned subsidiary EHTC.

 

EHTC is a private, Victoria, British Columbia
based company incorporated pursuant to the Business Corporations Act (British Columbia) on January 28, 2013. The principal
business of EHTC is the production and sale of medical cannabis pursuant to a licence (the “Current Licence”) issued
to EHTC under the Access to Cannabis for Medical Purposes Regulations (“ACMPR”), formerly the Marihuana for Medical
Purposes Regulations (“MMPR”). The Current Licence is valid until November 2019.

 

On June 6, 2017, the Company and EHTC entered
into a joint venture to secure a 50% equity interest in Pure Sunfarms Corp., for the purpose of producing, cultivating and distributing
wholesale cannabis and cannabis extracts for therapeutic and non-therapeutic use purposes, if permitted by law. On March 2, 2018,
Health Canada issued a cultivation licence for the Pure Sunfarms site under the ACMPR and is expected to issue a sales licence
for the Pure Sunfarms site under the ACMPR in July, 2018 (collectively the “PSF Licence”). EHTC also owns 100% of the
shares of Emerald Health Farms Inc. (“Farms”), a holding company incorporated pursuant to the Business Corporations
Act (British Columbia) on September 7, 2017 to hold the PSF Licence. On March 15, 2018 Farms changed its name to Pure Sunfarms
Canada Inc. (“PSC”).

 

On November 17, 2017 EHTC acquired control
of Northern Vine Canada Inc. (“Northern Vine”) and holds 53% of Northern Vine’s issued and outstanding shares.
Northern Vine is a Licensed Dealer under the provisions of the Controlled Drugs and Substances Act (Canada) and is licensed to
provide analytical testing services, to import/export cannabis oils and to manufacture CBD oil (the “NV Licence”).
The NV Licence is valid through December 2019.

 

Emerald is focused on four priorities to
meet the current needs of the Canadian legal cannabis market and future demand in the therapeutic and non-therapeutic adult-use
market: 1) Significant production expansion; 2) Research and development and clinical work; 3) Extraction expertise and value-added
product development supported by protected intellectual property; and 4) Expanding nationwide distribution channels.

 

Emerald is also focused on international business development
opportunities.

 

Recent Developments and Events after the Reporting Period

 

New CEO

 

On October 2, 2017, the Company announced
the appointment of Chris Wagner as Chief Executive Officer and as a director of Emerald. Mr. Wagner has spent more than 25 years
in marketing pharmaceutical products and building biotechnology companies. Bin Huang, PhD, continues to focus on the management
of the Company’s operations and expansion as President of EHTC.

 

New CFO

 

On November 20, 2017, the Company
announced the appointment of Robert C. Hill, CPA, CA as the Chief Financial Officer of Emerald. Mr. Hill brings over 20 years
of accounting, finance, and senior leadership experience as a seasoned manager of private and publicly traded technology and
financial services businesses in Canada, USA and Asia.

 

    	- 6 -

     

    

 

Second Site License Granted by Health Canada

 

In early October 2017, Health Canada granted
a sales license for EHTC’s second site. The second site is primarily being used to house the Company’s customer service
representatives and administration. The Company expects to expand the second site license to allow for additional cannabis related
activities. The Current Licence is valid until October 2020.

 

DMG Blockchain Solutions Inc.

 

On January 28, 2018 the Company and DMG
Blockchain signed a non-binding letter of intent to form a joint venture, to be named CannaChain Technologies, for the purpose
of developing a foundational blockchain-based supply chain management system and e-commerce marketplace for the legal cannabis
industry.

 

Namaste Technologies Inc.

 

On January 30, 2018 the Company and Namaste
signed a non-binding letter of intent whereby the Company and Namaste propose to enter into a definitive agreement to collaborate
on strategic business opportunities worldwide and develop a fully integrated e-commerce platform to serve as a retail channel for
the Company’s patients.

 

Expansion projects

 

Emerald is undergoing two major expansion
projects that are expected to significantly increase the Company’s production capacity. Both projects need to be licenced
by Health Canada to produce and sell cannabis. The applications for licences at both project sites have been filed with Health
Canada, and the Pure Sunfarms site received its cultivation licence on March 2, 2018.

 

In June 2017, the Company announced a transaction
with Village Farms International, Inc. (“Village Farms”) to form the joint venture Pure Sunfarms, for large-scale,
high-quality, low-cost cannabis production. EHTC and Village Farms each own a 50% equity interest in Pure Sunfarms. Under the terms
of the agreement, Village Farms has contributed a 1.1 million-square foot (25-acre) greenhouse facility located on a 50-acre parcel
of land in Delta, British Columbia (“Delta 3”). The Company was required to initially contribute an aggregate of $20
million in cash, $2 million advanced at closing, $10 million deposited into an escrow account, and the remaining $8 million advanced
in tranches upon satisfaction of certain milestones to fund conversion of the initial greenhouse. The combination of EHTC’s
cannabis experience with 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. It is estimated that the initial greenhouse
could yield more than 75,000 kg of dried cannabis annually upon completion of full licencing and conversion. The $10 million in
escrow was released to Pure Sunfarms upon issuance of the cultivation license by Health Canada in March 2018.

 

Conversion of the remainder of 1.1 million
ft2 Delta 3 site is currently underway and the entire facility is expected to be in production in 2019.

 

    	- 7 -

     

    

 

Pure Sunfarms also holds options to lease
or purchase from Village Farms a second 1.1 million ft2 (25 acre) greenhouse (“Delta 2”) and a 2.6 million
ft2 (60 acre) greenhouse (“Delta 1”). Both Delta 2 and Delta 1 are located adjacent to Delta 3. Combined,
these three greenhouse assets provide the joint venture with a total potential aggregate production capacity of up to 4.8 million
ft2 (110 acres).

 

The second expansion project is the building
of a 500,000 ft2 greenhouse, with expansion potential to 1 million ft2 on 32 acres in Metro Vancouver. In
May 2017, the Company entered into a thirty-year agreement to lease the Metro Vancouver site at a market rate of $320,000 per year.
The land was leased for the purpose of building a Health Canada licensed production facility to expand growing capability. The
landlord is a corporation controlled by Dr. Avtar Dhillon, the Executive Chairman of the Company.

 

Site prep and construction at the Metro
Vancouver site began in April 2017 and $2.8 million in costs were incurred from April 1 to December 31, 2017. The Company has completed
a significant amount of construction and in October 2017 submitted an application to Health Canada to produce cannabis at this
facility. The retro-fit of the Pure Sunfarms Delta 3 site caused the original Metro Vancouver site construction schedule to be
extended and construction costs of up to $20 million for the first two modular greenhouses that were anticipated in 2017 are expected
to be incurred into 2018.

 

Acquisitions

 

On October 26, 2017, the Company announced
it had signed a definitive agreement with Northern Vine and Abattis Bioceuticals Corp (“Abattis”) to invest $2.5 million
into Northern Vine to acquire 53% of the company and appoint three of its four directors. On November 17, 2017 the Company completed
the transaction and acquired control of Northern Vine. Abattis continues to hold the remaining 47% of the shares of Northern Vine.

 

Northern Vine is a Licensed Dealer under
the provisions of the Controlled Drugs and Substances Act (Canada), which permits Northern Vine to carry out a broader range of
cannabis research and development and pursue international business opportunities. The Licensed Dealer status allows Northern Vine
to export and import not only cannabis, but also to export and import cannabis oils. Currently Licensed Producers such as EHTC,
are not permitted to export or import cannabis oils under the ACMPR.

 

The acquisition of Northern Vine significantly
expanded Emerald’s ability to carry out research and development, as Northern Vine is authorized under ACMPR to prepare any
manipulation, formulation, dosage from, strength or package size of cannabis which can be mixed with additives and other controlled
drugs.

 

Northern Vine also provides Emerald with
preferred customer access to complete microbiology and chemical analysis, with testing of product potency as well as testing for
the presence of pesticides, microbes, and environmental toxins in dried plant products and extracts.

 

Financings

 

In February 2018, January 2018, April 2017,
and February 2017 the Company completed financings that resulted in total gross proceeds from unit issuances and warrant exercises
of $123.8 million (net proceeds – $120.5 million) and has the potential to a raise an additional $21 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.

 

    	- 8 -

     

    

 

On February 9, 2018 the Company closed
a prospectus sale to a single Canadian institutional accredited investor (the “Investor”) of 3,000,000 units pursuant
to a supplement to the Company’s base shelf prospectus at a price per unit of $6.00 for gross proceeds of $18,000,000. 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 six months at a price of $7.00 per Common Share with an expiry date of August 9, 2018. In the event that
the closing price of the Common Shares on the TSX Venture Exchange or other recognized exchange is greater than $8.50 per Common
Share for a period of five 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 15th
day after the date on which notice is given by the Company.

 

On January 9, 2018 the Company closed a
prospectus sale to the Investor of 3,000,000 units pursuant to a supplement to the Company’s base shelf prospectus at a price
per unit of $5.00 for gross proceeds of $15,000,000. 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.

 

In April 2017, the Company completed a
prospectus offering of 13,170,000 units of the Company on a bought deal basis pursuant to a supplement to the Company’s base
shelf prospectus at a price of $1.85 per unit, for total gross proceeds of $23,364,500. Each such unit consisted of one Common
Share and one-half of one common share purchase warrant of the Company. In addition, the underwriter exercised its over-allotment
option to acquire a further 1,465,100 Common Shares and 987,750 common share purchase warrants for proceeds of $2,758,923 (the
“April Prospectus Offering”). Total gross proceeds received from the April Prospectus Offering was $26,123,423.

 

Each full warrant issued under the April
Prospectus Offering, entitled the holder to acquire one Common Share at a price of $2.60 for a period of 24 months following the
Closing Date, subject to acceleration. The Company exercised its right to accelerate the expiry date of these warrants on January
5, 2018. A total of 7,766,526 warrants issued under the April Prospectus Offering were exercised for gross proceeds of $20,192,968.
The remaining 25,750 warrants were not exercised and expired on February 5, 2018.

 

In February 2017, the Company completed
a prospectus offering of 10,235,000 units of the Company on a bought deal basis pursuant to a supplement to the Company’s
base shelf prospectus at a price of $1.35 per unit, for total gross proceeds of $13,817,250 (including the exercise in full of
an over-allotment option) (the “February Prospectus Offering”). Each such unit consisted of one Common Share and one-half
of one common share purchase warrant of the Company.

 

Each full warrant issued under the February
Prospectus Offering entitled the holder to acquire one Common Share at a price of $2.00 for a period of 24 months following the
Closing Date, subject to acceleration. The Company exercised its right to accelerate the expiry date of these warrants on December
20, 2017. A total of 5,240,725 warrants issued under the February Prospectus Offering were exercised for gross proceeds of $10,481,450.
The remaining 30,300 warrants were not exercised and expired on January 19, 2018.

 

    	- 9 -

     

    

 

In connection with the April Prospectus
Offering, the Company also issued to the underwriter a total of 439,053 compensation options and in connection with the February
Prospectus Offering the Company issued to the underwriter 307,050 compensation options. Each compensation option entitles the holder
to acquire a unit at a price of $1.85 per unit (April Prospectus Offering) or $1.35 per unit (February Prospectus Offering) for
a period of 24 months following the closing of the Offering. All the compensation options were exercised in December 2017 for gross
proceeds of $1,226,766.

 

Research and development

 

As the Company has been planning for expansion,
much of its research and development focus has involved increasing plant diversity and product offerings, as well as improving
on its cultivation, manufacturing, and standardization processes in anticipation of a significant scale up.

 

The Company’s collection of genetic
materials and established team of experts will continue to play a major role as EHTC continues to build its propriety strains,
products and reputation. Through its research program the EHTC team has characterized the cannabinoid and terpene profiles of several
of its cannabis strains and has identified a number of strains with exceptionally high CBD levels which allowed EHTC to produce
and sell a high concentration CBD oil starting in April 2017.

 

In June 2017, EHTC established an advisory
board (the “Advisory Board”) to provide strategic guidance to the Company on its continuing product and market development,
the development of pharmaceutical formulations and observational and clinical studies. The Advisory Board includes researchers
and physicians specializing in pain management, addiction research, immunology, natural medicines, and pharmaceutical product development,
as well experts in cannabinoids and the endocannabinoid system.

 

Sales and distribution

 

Client acquisition and client service is
an ongoing focus for EHTC. After the introduction of cannabis oils, the client base began to increase quickly resulting in a corresponding
increase in revenue in 2017. EHTC also recognizes that the medical profession plays an important role in the introduction of medical
cannabis to clients and continuing education of medical professionals on the product is required. In partnership with other professional
organizations, EHTC intends to continue to communicate with medical doctors and other healthcare professionals, and to provide
education and services to these professionals.

 

With legalization of non-medical cannabis
in Canada expected in 2018, EHTC’s strategy includes becoming a leading provider of high quality, low cost products for the
broader cannabis market. Being one of the limited number of Licensed Producers with scalable systems and processes, management
of the Company is of the opinion that EHTC is well positioned to benefit from the legalization of non-medical cannabis.

 

The addition of Northern Vine in November
2017 provides the Company new revenue streams from the provision of cannabis analytical testing services, import/export activities,
and increases the Company’s access to oil extraction production. The cannabis analytical testing market is expected to grow
commensurately with the growth of cannabis production for medical, and when legalized, adult-use markets.

 

    	- 10 -

     

    

 

Regulatory

 

On April 13, 2017, the federal government
of Canada introduced before parliament Bill C-45 An Act respecting cannabis and to amend the Controlled Drugs and Substances
Act, the Criminal Code and Other Acts (the “Cannabis Act”), the draft legislation setting out the federal
regulatory framework for legalization of cannabis for non-medical purposes. On March 22, 2018, Bill C-45 passed second reading
in the Senate, giving the bill approval in principle. The bill now proceeds to the Standing Senate Committee for closer scrutiny,
witness testimony and proposed amendments before returning to the Senate for a final debate and vote expected by June 7, 2018.

 

Once Bill C-45 is passed by the Senate,
it will receive royal assent and become law, however the provinces will need an additional eight to twelve weeks from such date
to prepare for retail sales. It is anticipated that legal adult use cannabis sales in Canada will commence August or September
2018.

 

In addition, many other aspects regarding
the distribution, sale and taxation of non-medical cannabis will be subject to provincial and municipal jurisdiction. The Company
is currently preparing for the various governing regulations including packaging, product specifications, and distribution requirements
and anticipates being regulatory compliant when legal adult use sales commence in Canada.

 

Until the Cannabis Act is in force, existing
laws remain in place and the terms of the Cannabis Act are subject to change.

 

Omnibus Incentive Plan

 

In May 2017, the board of directors approved
the adoption of an omnibus incentive plan (the “New Plan”), which was approved by shareholders in June 2017. The New
Plan replaces the stock option plan that was previously approved by the shareholders (the “Previous Plan”), however
any options granted under the Previous Plan will remain outstanding and governed by the terms of the Previous Plan. Under the New
Plan, the maximum number of Common Shares issuable upon the exercise or redemption and settlement of all awards granted under the
New Plan shall not exceed 10% of the issued and outstanding Common Shares at the time of granting of such award less the number
of Common Shares reserved for issuance under all other security-based compensation arrangements of the Company. Under the New Plan,
the following types of awards can be issued: stock options, share appreciation rights, restricted share units and other performance
awards.

 

Disclosure of Outstanding Share Data

 

The Company’s authorized share capital
consists of an unlimited number of Common Shares of which 106,787,226 were issued and outstanding as of December 31, 2017 and 121,485,612
were issued and outstanding as of March 29, 2018.

 

During the year ended December 31, 2017,
the Company granted an aggregate of 5,905,000 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 $1.16 and $4.25
per share. Subsequent to the year end, the Company granted an additional 545,000 stock options, with an average exercise price
of $5.75 per share, exercisable for up to five years

 

There were 9,861,144 stock options and
825,000 restricted share units outstanding as of December 31, 2017. As of March 29, 2018, there were 9,947,591 stock options and
830,000 restricted share units outstanding.

 

There were 9,707,677 warrants outstanding
as of December 31, 2017. As of March 29, 2018, there were 7,411,764 warrants outstanding.

 

    	- 11 -

     

    

 

Selected Annual Information

 

The financial information presented for
the years below was derived from financial statements prepared in accordance with IFRS and is expressed in Canadian dollars.

 

	 	 	For the years ended December 31,
	 	 	2017
 ($)	 	2016
 ($)	 	2015

($)
	Total revenue	 	 	937,654	 	 	 	253,321	 	 	 	31,291	 
	Net loss attributable to the Company	 	 	(8,731,832	)	 	 	(2,940,501	)	 	 	(3,497,271	)
	Net loss per share (basic and diluted)	 	 	(0.10	)	 	 	(0.05	)	 	 	(0.08	)
	Total assets	 	 	73,730,839	 	 	 	4,176,329	 	 	 	771,679	 

 

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:

 

	 	 	2017
	 	 	December 31
 ($)	 	September 30
 ($)	 	June 30
 ($)	 	March 31
 ($)
	Revenue	 	 	279,362	 	 	 	211,316	 	 	 	245,708	 	 	 	201,268	 
	Expenses	 	 	2,742,507	 	 	 	1,661,700	 	 	 	1,602,443	 	 	 	1,205,940	 
	Share-based payments	 	 	1,979,553	 	 	 	271,968	 	 	 	369,788	 	 	 	201,186	 
	Interest income	 	 	43,024	 	 	 	60,997	 	 	 	57,497	 	 	 	-	 
	Share of loss from joint venture	 	 	(44,562	)	 	 	(278,016	)	 	 	-	 	 	 	-	 
	Net Loss	 	 	(4,027,569	)	 	 	(1,939,371	)	 	 	(1,669,026	)	 	 	(1,205,858	)
	Net Loss per share (basic and diluted)	 	 	(0.04	)	 	 	(0.02	)	 	 	(0.02	)	 	 	(0.02	)

 

	 	 	2016
	 	 	December 31
 ($)	 	September 30
 ($)	 	June 30
 ($)	 	March 31
 ($)
	Revenue	 	 	124,251	 	 	 	48,933	 	 	 	38,729	 	 	 	41,408	 
	Expenses	 	 	867,562	 	 	 	590,896	 	 	 	547,447	 	 	 	507,129	 
	Share-based payments	 	 	137,113	 	 	 	467,878	 	 	 	37,618	 	 	 	38,179	 
	Net Loss	 	 	(880,424	)	 	 	(1,009,841	)	 	 	(546,336	)	 	 	(503,900	)
	Net Loss per share (basic and diluted)	 	 	(0.01	)	 	 	(0.02	)	 	 	(0.01	)	 	 	(0.01	)

 

    	- 12 -

     

    

 

Results of Operations

 

Quarter ended December 31, 2017

 

The net loss for the quarter ended December
31, 2017 was $4.0 million (loss of $0.04 per share), compared to the net loss of $0.9 million (loss of $0.01 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 December 31, 2017 include the following:

 

Revenue

 

Revenue for the quarter ended December
31, 2017 was $279,362 compared to $124,251 for the same period in the prior year. The Company’s client base increased during
the current year, resulting in an increase in revenue compared to the prior year. For the quarter ended December 31, 2017, revenue
was comprised of approximately 50% dried product and 50% oils, compared to substantially 100% dried product in the quarter ended
December 31, 2016.

 

Cost of goods sold

 

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.

 

		(i)	Cost of goods sold expensed to inventory is the cost (or net realizable value) attributable to
the goods sold. The costs include growing, cultivation and harvesting costs and extraction as well as packaging and labelling.
Also included in cost of goods sold is the direct cost incurred in purchasing product from other Licenced Producers. Cost of goods
sold expensed to inventory for the quarters ended December 31, 2017 and 2016 was $120,057 and $86,545 respectively. The increases
in cost of goods sold in the current year is directly related to the increase in the amount of product sold by the Company.

 

		(ii)	Production costs include all 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 December 31, 2017, the Company incurred production costs of $310,794
versus $211,345 in the quarter ended December 31, 2016. The increase in the 2017 quarter is due to more products sold.

 

		(iii)	Changes in the fair value of biological assets is part of the Company’s cost of goods sold
due to IFRS standards relating to agriculture and biological assets (i.e. living plants or animals). This line item currently represents
the change in fair value in biological assets (medical cannabis) during the period. The change in biological assets for the quarter
ended December 31, 2017 was a loss of $44,883 compared to a gain of $95,372 in the same quarter in the prior year.

 

    	- 13 -

     

    

 

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 for the quarters ended December 31, 2017 and 2016 was negative $196,372 and negative $78,267 respectively.
As the production volumes in 2017 have increased, the Company has been able to improve the gross margin. However, as the production
volumes to date have been small due to limitations on space available and with high fixed costs required to meet the regulatory
requirements, the costs of goods sold have been greater than revenue. Once the Company is able to produce larger volumes of product,
the gross margins are expected to become positive.

 

Other expenses

 

General and Administrative –
During the quarter ended December 31, 2017, the Company incurred general and administration expenses of $1.9 million
versus $0.5 million for the quarter ended December 31, 2016. The current quarter included expenses related to a significant increase
in activities including corporate branding, business development, media, and project management. Additional staff have been hired
and office space has been expanded. In the quarter ended December 31, 2017, general and administrative costs included; salaries
and benefits of $297,748 (2016 - $104,297), consulting and professional services fees of $851,469 (2016 - $72,554), corporate branding
and media $481,161 (2016 - $883), office and insurance of $163,565 (2016 - $47,991) and travel and accommodation of $135,297 (2016
- $12,255). Included in consulting and professional service fees, for the quarter ended December 31, 2017, are $600,000 in management
fees to Sciences as per the agreement effective August 2017, see discussion of the management agreement with Sciences under “Transactions
with Related Parties.”

 

Sales and marketing – In the
quarter ended December 31, 2017, the Company incurred sales and marketing expenses of $146,383 versus $77,720 in the comparable
2016 prior period. The current year increase reflects the increase in sales and marketing activity related to an expanded client
base and sales volumes.

 

Research and development –
In the quarter ended December 31, 2017, the Company incurred research and development expenses of $40,226 versus $57,295 in the
comparable 2016 prior period. Research and development projects in the current quarter include development and testing of processes
to manufacture a variety of cannabis oils and capsules and planning for upcoming clinical trials. The prior year included development
and testing of cannabis oils as well as testing a variety of growing and production methodologies and continuation of the National
Research Council’s Industrial Research Assistance Program (IRAP) project to characterize medical cannabis strains.

 

Share-based compensation –
In the quarter ended December 31, 2017, the Company incurred share-based compensation expenses of $1,979,553 versus $137,112 in
the comparable 2016 prior period. The amounts are compensation expenses related to employee, director and consultant incentive
stock options which are measured at fair value at the date of grant and expensed over the options’ vesting period. During
the current quarter, the Company granted 3,675,000 stock options and 625,000 restricted share units to employees and consultants.
The increase in the share-based compensation expense is due to a large volume of options that were issued in the quarter ended
December 31, 2017 of which 25% vested immediately and therefore were recognized immediately as share-based compensation expense.

 

Share of loss from joint venture –
In the quarter ended December 31, 2017, the Company recognized $44,562 as its 50% share of the loss from the Pure Sunfarms joint
venture, which commenced operations during the quarter ended September 30, 2017. Pure Sunfarms is expected to begin producing cannabis
available for sale in 2018.

 

    	- 14 -

     

    

 

Year ended December 31, 2017

 

For the year ended December 31, 2017 the
net loss was $8.8 million (loss of $0.10 per share), compared to a net loss of $2.9 million (loss of $0.05 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 year ended December
31, 2017 include the following: Revenue

 

Revenue for the year ended December 31,
2017 was $937,654 compared to $253,321 in the prior year as the Company’s client based increased during the current year.
In addition, oil product sales, which command higher selling prices, increased at a faster rate than dried cannabis sales.

 

Cost of goods sold

 

Cost of goods sold increased in the current
year compared to the prior year due to higher sales volumes and an increase in volumes produced in the current year. Total gross
margin for the year ended December 31, 2017 and 2016 was negative $285,517 and negative $349,946 respectively. The improvement
in gross margin is due to larger production and sales volumes.

 

Other expenses

 

General and Administrative –
During the year ended December 31, 2017, the Company incurred general and administration expenses of $5.1 million versus
$1.2 million for the same period ended December 31, 2016. The increase in these expenses related to a significant increase in activities
including corporate branding, business development, media, annual general meeting and project management. Additional staff have
been hired and office space has been expanded. For the year ended December 31, 2017, general and administrative costs included:
salaries and benefits of $854,430 (2016 - $504,422), professional, director and consulting fees of $2,301,067 (2016 - $418,093),
corporate branding and media $1,026,299 (2016 - $5,511), office and insurance of $522,485 (2016 - $196,320) and travel and accommodation
of $366,166 (2016 - $56,751). Included in the professional, director and consulting fees, is $1,000,000 in management fees paid
to Sciences as per the agreement effective August 2017, see discussion of the management agreement with Sciences under “Transactions
with Related Parties.”

 

Sales and marketing – For
the year ended December 31, 2017, the Company incurred sales and marketing expenses of $428,541 versus $271,118 in the comparable
2016 prior period. The current year increase reflects the increase in sales and marketing activity related to an expanded client
base and sales volumes.

 

Research and development –
For the year ended December 31, 2017, the Company incurred research and development expenses of $207,500 versus $301,526 in the
comparable 2016 prior period. Research and development projects in the current year include development and testing of processes
to manufacture a variety of cannabis oils and capsules and planning for upcoming clinical trials.

 

Share-based compensation –
Share-based compensation expense for the year ended December 31, 2017 was $2,822,495 compared to $680,788 in the comparable 2016
prior period. The amounts are compensation expenses related to employee, director and consultant incentive stock options which
are measured at fair value at the date of grant and expensed over the options’ vesting period. During the current year, the
Company granted 5,905,000 stock options and 825,000 restricted share units to employees and consultants. The increase in the share-based
compensation expense reflects the increase in the number of stock options granted in late 2017 that vested during the current period.

 

    	- 15 -

     

    

 

Share of loss from joint venture –
The Company recognized $322,578 as its 50% share of the loss from the Pure Sunfarms joint venture, which commenced operations during
the quarter ended September 30, 2017. Pure Sunfarms is expected to begin producing cannabis available for sale in 2018. The costs
incurred in 2017 consist of non-capitalized pre-production costs.

 

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 
 December 31, 
 2017
 ($)	 	For the three 
 months ended
 December 31,
 2016
 ($)	 	For the year 
 ended 
 December 31, 
 2017 
 ($)	 	For the year 
 ended 
 December 31, 
 2016 
 ($)
	Expensed research and development costs	 	 	40,226	 	 	 	57,295	 	 	 	207,500	 	 	 	301,526	 
	General and administrative expenses	 	 	1,929,240	 	 	 	496,332	 	 	 	5,070,447	 	 	 	1,220,775	 
	Purchase of plant and equipment	 	 	1,096,154	 	 	 	46,788	 	 	 	2,257,022	 	 	 	183,225	 

 

Liquidity and Capital Resources

 

The Company continually monitors and manages
its cash flow to assess the liquidity necessary to fund operations. As at December 31, 2017, the Company had positive working capital
of $40.5 million. Subsequent to the year end, the Company raised additional gross proceeds of $54.9 million from private placement
offerings and warrant exercises.

 

While the Company has incurred losses to
date, management anticipates 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; and EHTC’s new
production facility in Metro Vancouver. During the year ended December 31, 2017, the Company committed to payments of $3,580,000
in the year 2018 for the supply of material and labour to build greenhouses at the Metro Vancouver site.

 

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:

 

    	- 16 -

     

    

 

	 	 	Due by year ending
	 	 	2018	 	2019	 	2020	 	2021	 	2022	 	Thereafter
	Production facilities	 	$	154,575	 	 	$	120,739	 	 	$	41,988	 	 	$	31,113	 	 	$	2,593	 	 	$	-	 
	Office space	 	$	71,820	 	 	$	95,760	 	 	$	39,900	 	 	$	-	 	 	$	-	 	 	$	-	 
	Temporary housing	 	$	29,970	 	 	$	2,700	 	 	$	-	 	 	$	-	 	 	$	-	 	 	$	-	 
	Land	 	$	320,000	 	 	$	320,000	 	 	$	320,000	 	 	$	320,000	 	 	$	320,000	 	 	$	7,760,000	 
	Total	 	$	576,365	 	 	$	539,199	 	 	$	401,888	 	 	$	351,113	 	 	$	322,593	 	 	$	7,760,000	 

 

Operating, Investing and Financing Activities

 

The chart below highlights the Company’s cash flows for
the year ended December 31, 2017:

 

	 	 	For
the year ended
 December 31, 2017

                                                                                      ($)
	 	For
the year ended
 December 31, 2016

($)

	Net cash provided by (used in):	 	 	 	 	 	 	 	 
	Operating activities	 	 	(7,815,986	)	 	 	(2,047,658	)
	Investing activities	 	 	(18,932,984	)	 	 	(243,997	)
	Financing activities	 	 	68,054,910	 	 	 	5,427,024	 
	Increase in cash	 	 	41,305,940	 	 	 	3,135,369	 

 

Cash used in operating activities for the
year ended December 31, 2017 was $7.8 million, compared to cash used of $2.0 million in the prior year. The current year amount
reflects the increase in general and administrative expenditures, and cash outflows from payments of current liabilities and increase
in current assets from the prior year ended December 31, 2016 and acquired balances during the year.

 

Cash used in investing activities for the
year ended December 31, 2017 was $18.9 million, compared to cash used of $243,997 in the prior year. In the current year, $16.2
million was used to invest in the Pure Sunfarms joint venture transaction; $2.3 million was used in construction of the new production
facility at the Metro Vancouver site; and $250,000 was used to purchase a long-term investment.

 

Cash provided by financing activities for
the year ended December 31, 2017 was $68.1 million, compared to cash provided of $5.4 million in the prior year. Cash generated
in the current year included $37.8 million from net proceeds received on the prospectus offerings completed in February and April
2017, $27.9 million received from warrant exercises, $1.1 million from stock option exercises and $1.2 million from compensation
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.

 

    	- 17 -

     

    

 

Measurement uncertainty and impairment assessments

 

As of December 31, 2017, 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 transactions with a control
person of the Company, a company controlled by the Company’s Executive Chairman, a company whose CEO is also a director of
the Company, and with its joint venture.

 

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.
Currently, for consideration of $350,000 per month, Sciences provides services and support in the following areas: corporate administration
and strategy development, facility management and construction, corporate finance and advisory, including providing access to capital,
business development, human resources, scientific and technical advice, and intellectual property development. With access to these
services, the Company has been able to identify potential opportunities, select endeavours to pursue, successfully negotiate and
develop key strategic partnerships. During 2017 and the first quarter of 2018, access to services provided by Sciences was instrumental
in the success of the February 2018, January 2018, April 2017, and February 2017 financings, the Pure Sunfarms joint venture with
Village Farms, and the acquisition of Northern Vine.

 

As of 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. As of March 29, 2018, Sciences held an aggregate of 45,234,242 Common
Shares, representing approximately 37% of the issued and outstanding Common Shares and it held 4,411,764 common share purchase
warrants of the Company.

 

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. The lease amount of $320,000 per annum was determined by an independent valuation. The Landlord also
charged the Company $238,603 during the year ended December 31, 2017 (2016 - $Nil) for services related to construction of the
Company’s new facility.

 

On November 27, 2017 for investment purposes,
the Company purchased 1,666,667 units of VANC Pharmaceuticals Inc. (“VANC”). The CEO of VANC is also a director
of the Company. Each unit provided the Company with one common share of VANC and one common share purchase warrant of VANC. As
at December 31, and at March 29, 2018, the Company holds 1,666,667 common shares of VANC representing 5.9% of the issued and outstanding
common shares of VANC. Upon exercise of the common share purchase warrants of VANC, the Company will hold 3,333,334 common shares
of VANC, representing 11.7% of the issued and outstanding common shares of VANC, assuming no share issuances to other parties.

 

    	- 18 -

     

    

 

The Company also has related party transactions
with Pure Sunfarms. As at December 31, 2017, Pure Sunfarms owes the Company $324,674 (December 31, 2016 - $Nil) for expenditures
made on behalf of the joint venture. These expenditures were made to facilitate the administration the retro-fit of the Delta 3
property and Health Canada licence application. It is expected that once Pure Sunfarms is fully operational this type of transaction
will cease. It is anticipated that future related party transactions with Pure Sunfarms will comprise of the sales of cannabis
plants to Pure Sunfarms and the purchase of cannabis from Pure Sunfarms.

 

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.

 

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.

 

Changes in Accounting Standards not yet Effective

 

Refer to Note 4 of the Company’s
audited consolidated financial statements for the years ended December 31, 2017 and 2016 for additional information on several
new standards, amendments to standards and interpretations, which are not effective yet, and have not been applied in preparing
these consolidated financial statements but may affect the Company when applied in the future.

 

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

 

Investment in the Common Shares must be
regarded as highly speculative due to the proposed nature of the Company’s business and its present stage of development.
The following is a non-exhaustive list of certain risk factors associated with the Company:

 

Reliance on Licences

 

EHTC’s ability to grow, store and
sell medical cannabis in Canada is dependent on the Current Licence. Failure to comply with the requirements of the Current Licence,
or any failure to maintain the Current Licence would have a material adverse impact on the business, financial condition and financial
performance of EHTC and the Company. The Company believes it will meet the requirements of the ACMPR for further extensions or
renewals of the Current Licence, the PSF Licence and the NV Licence. However, should Health Canada not extend or renew one or more
of these licences, or should it renew one or more of these licences on different terms, the business, financial condition and results
of the operation of the Company would be materially adversely affected.

 

    	- 19 -

     

    

 

Expansion Risks

 

There is no guarantee that 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 will be successful. Any such activities will require, among other things, various regulatory approvals,
licences and permits (such as additional site licences from Health Canada under the ACMPR, as applicable) and there is no guarantee
that all required approvals, licences and permits will be obtained in a timely fashion or at all. There is also no guarantee that
the Company will be able to complete any of the foregoing activities as anticipated or at all. The failure of the Company to successfully
execute its expansion strategy (including receiving required regulatory approvals and permits) could adversely affect the Company’s
business, financial condition and financial performance and may result in the Company failing to meet anticipated or future demand
for its cannabis-based pharmaceutical products, when and if it arises.

 

Change in Laws, Regulations and Guidelines

 

EHTC’s operations are subject to
a variety of laws, regulations and guidelines relating to the manufacture, management, transportation, storage and disposal of
cannabis but also including laws and regulations relating to health and safety, privacy, the conduct of operations and the protection
of the environment. While to the knowledge of the Company’s management, EHTC is currently in material compliance with all
such laws, changes to such laws, regulations and guidelines due to matters beyond the control of EHTC may cause adverse effects
to EHTC operations and the financial condition of EHTC and the Company.

 

The Government of Canada has provided guidance
that, subject to Parliamentary approval and Royal Assent, it intends to provide regulated and restricted access to cannabis pursuant
to the Cannabis Act in 2018. The Cannabis Act has passed third reading in the House of Commons. However there remains no assurance
that the legalization of non-medical cannabis by the Government of Canada will occur as anticipated or at all.

 

Health Canada’s proposed approach
to the regulation of cannabis includes proposals relating to cannabis for medical purposes and health products containing cannabis.
Such proposals, if implemented, could result in changes to the current regulatory regime under the ACMPR, which may impact the
operations of Licensed Producers or affect the Canadian medical cannabis industry generally. Any such regulatory changes could
adversely affect the Company’s business, financial condition and financial performance.

 

In addition, if the Cannabis Act comes
into effect, there is no guarantee that provincial legislation regulating the distribution and sale of cannabis for non-medical
purposes will be enacted according to the terms announced by such provinces, or at all, or that any such legislation, if enacted,
will create the opportunities for growth anticipated by the Company or other commentators. For example, the Provinces of Ontario
(Canada’s most populous province), Québec and New Brunswick have announced sales and distribution models that would
create government-controlled monopolies over the legal retail and distribution of cannabis for non-medical purposes in such provinces,
which could limit the Company’s opportunities for the sale of cannabis in those provinces.

 

The Cannabis Act is currently under consideration
by the federal government of Canada and no drafts of the necessary federal regulations or provincial legislation have been circulated
publicly. There is no guarantee that changes to the existing regime would be favourable to current Licensed Producers and may include
provisions that have a materially adverse impact on EHTC including, but not limited to:

 

    	- 20 -

     

    

 

		(i)	restrictions on EHTC’s ability to run its business as it currently operates or the imposition
of new restrictions on Licensed Producers, including restrictions on the products that may be produced or made available by Licensed
Producers, restrictions on strains (including restrictions on potency) and types of products (oil, resin, concentrates, edible
products containing cannabis extracts), and additional restrictions on advertising of the EHTC’s products;

 

		(ii)	changes to the legislation with the effect of reducing barriers to entry for new entrants to the
industry, some of whom may have more financial resources and marketing expertise than EHTC and the Company;

 

		(iii)	changes to the current distribution channels, including the introduction of retail distribution
or other new types of licensed distributors, or the imposition of a government monopoly on distribution which would impact EHTC’s
ability to sell its products;

 

		(iv)	changes to limit the types of customers EHTC can sell to (for example, age restrictions), changes
in the manner in which customers are licensed to purchase EHTC’s products, or which limit the amount of product that purchasers
may buy, any of which may reduce the number of EHTC’s possible customers or the average amount of purchased product;

 

		(v)	the implementation of additional taxes on EHTC’s products, which may reduce the demand of
EHTC’s products and reduce the quantity of products sold by EHTC; and

 

		(vi)	changes to the legislation to impose new requirements on Licensed Producers, including changes
to the labeling requirements for EHTC’s products or the manner in which the products are required to be tested or approved
for sale, which could increase the cost of producing EHTC’s products and could reduce EHTC’s earnings and margins.

 

While the impact of any of such changes
are uncertain and are highly dependent on which specific laws, regulations or guidelines are changed, it is not expected that any
such changes would have an effect on EHTC’s operations that are materially different than the effect on similar-sized companies
in the same business as EHTC and the Company.

 

Supply Risks

 

EHTC is limited in its ability to grow,
store and sell cannabis under the terms of the Current Licence and as a result of its reliance on a single growing facility. As
a result, EHTC purchases additional dried cannabis from other Licensed Producers to supplement its own production. If EHTC is unable
to acquire additional cannabis sufficient to meet demand on terms and conditions favourable to EHTC, it could have a material adverse
effect on the business, results of operations and financial condition of EHTC and the Company.

 

Reliance on a Single Facility

 

Although the Company is in the process
of constructing additional growing facilities, to date, the Company’s production has come solely from its initial facility
in British Columbia and EHTC does not expect to achieve production at any other facility in the near term. Adverse changes or developments
affecting EHTC’s current facility could have a material and adverse effect on the Company’s business, financial condition
and prospects.

 

    	- 21 -

     

    

 

EHTC’s facility requires regular
maintenance on both the heating and cooling systems and regular power component maintenance on the generator and delivery systems.
Any failure of the heating and cooling systems or electrical delivery systems could have a material and adverse effect on EHTC’s
and the Company's business, financial condition and financial prospects.

 

EHTC is currently constructing a second
production facility in Metro Vancouver, British Columbia which will require licencing by Health Canada and significant investment
of capital. Neither the Health Canada licencing nor the investment of capital are assured.

 

Regulatory Risks

 

The activities of EHTC are subject to regulation
by governmental authorities, particularly Health Canada. Achievement of the Company’s business objectives are contingent,
in part, upon compliance with regulatory requirements enacted by these governmental authorities and obtaining all regulatory approvals,
where necessary, for the sale of its products. The Company will also require Health Canada and other regulatory approval in order
to proceed with construction of its proposed new growing facilities as part its expansion plans and will be required to apply for
and obtain an additional licence under the ACMPR before it begins growing medical cannabis at such facilities. EHTC and the Company
cannot predict the time required to secure all appropriate regulatory approvals for its proposed facilities or products, or the
extent of testing and documentation that may be required by Health Canada or other governmental authorities. Any delays in obtaining,
or failure to obtain regulatory approvals would significantly delay the development of facilities, markets and/or products and
could have a material adverse effect on the business, financial performance and financial condition of EHTC and the Company.

 

Limited Operating History

 

EHTC was incorporated in 2013 and has yet
to generate significant revenue. EHTC and the Company are therefore subject to many of the risks common to early-stage enterprises,
including under-capitalization, cash shortages, limitations with respect to personnel, financial, and other resources and lack
of revenues. There is no assurance that the Company will be successful in achieving a return on shareholders' investment and the
likelihood of success must be considered in light of the early stage of operations.

 

Joint Venture

 

The Company owns a 50% equity interest
in Pure Sunfarms, which is accounted for as a joint venture. Although the Company has certain rights pursuant to the shareholders’
agreement governing Pure Sunfarms, the Company does not directly control the management of Pure Sunfarms and it is intended that
Pure Sunfarms will have its own management. Success of Pure Sunfarms will depend, in part, on the expertise of such management.
The business of Pure Sunfarms is itself subject to the operational and business risks inherent in the large-scale production of
cannabis and to that extent, the business of Pure Sunfarms will be subject to many of the same business risks applicable to the
Company and which are set out elsewhere in this MD&A. In particular, the production and sale of cannabis at Pure Sunfarms’
facilities in Delta, British Columbia is subject to obtaining all necessary permits and licenses, including a production license
under the ACMPR. There can be no assurance that the Company and Pure Sunfarms will be successful in obtaining all such permits
and licenses. In the event that all such licenses and permits are not obtained then Pure Sunfarms will not be permitted to produce
or sell cannabis which would have a material adverse effect on the Company’s business, financial performance and financial
performance.

 

    	- 22 -

     

    

 

Pure Sunfarms may require additional capital
subsequent to the initial $20 million cash contributed by the Company pursuant to the shareholders’ agreement governing the
joint venture. To the extent Pure Sunfarms is unable to internally fund its operating requirements or expansion plans it may make
additional capital calls on its shareholders. Failure by the Company to meet such a capital call would not constitute a default
under the shareholders’ agreement but in the event that its joint venture partner, Village Farms, elects to make its capital
contributions the Company’s interest in Pure Sunfarms may, in certain circumstances, be diluted. If the Company elects to
fund a capital call but Village Farms fails to do so, then the Company may need to advance additional capital in order to meet
Pure Sunfarms’ needs. There can be no assurance that the Company or Village Farms will have the necessary capital resources
to meet a capital call when and if made by Pure Sunfarms. In the event that Pure Sunfarms cannot raise the necessary funds from
its shareholders it may need to raise additional funds through debt or equity financings that may be dilutive to the Company’s
interest in Pure Sunfarms. If Pure Sunfarms cannot obtain adequate capital to the extent required on favorable terms or at all,
it may be required to scale back or halt entirely its operating or expansion plans and its business, financial condition and results
of operations could be adversely affected. Disputes may arise between the Company and its joint venture partner, Village Farms,
that may adversely affect the success of Pure Sunfarms and which would have a material adverse effect on the Company’s business,
financial performance and financial performance. Failure by the Company to otherwise comply with its obligations under the shareholders’
agreement may result in the Company being in default under the shareholders’ agreement and could result in the Company losing
some or all of its interest in Pure Sunfarms.

 

Reliance on Management

 

The success of EHTC and the Company is
primarily dependent upon the ability, expertise, judgment, discretion and good faith of its senior management. While employment
agreements are customarily used as a primary method of retaining the services of key employees, these agreements cannot assure
the continued services of such employees indefinitely. Any loss of the services of any such individuals could have a material adverse
effect on the Company’s business, financial performance or financial condition. In addition, the Company has entered into
a services agreement with Sciences pursuant to which Sciences provides certain management services to the Company and if such agreement
were terminated, it may have a material adverse impact on the Company’s business, financial performance or financial condition.

 

Shelf Life of Inventory

 

EHTC holds finished goods in inventory
and its inventory has a shelf life. Finished goods in EHTC’s inventory include dried cannabis and cannabis oil products.
EHTC follows Health Canada’s testing requirements for product release and re-tests its inventory for information purposes.
Based on such testing results and management’s experience, EHTC believes that there is no significant change in product composition
during a twelve-month storage under its current vault conditions. EHTC’s typical turnover rate for inventory varies between
two weeks and six months from final production, however this turnover rate may change, and its inventory may reach its expiration
and may not be sold. Even though management of EHTC on a regular basis reviews the amount of inventory on hand, reviews the remaining
shelf life and estimates the time required to manufacture and sell such inventory, write-down of inventory may still be required. Any such write-down of inventory
could have a material adverse effect on EHTC’s and the Company’s business, financial performance or financial condition.

 

    	- 23 -

     

    

 

Information Systems Security Threats

 

The Company has entered into agreements
with third parties for hardware, software, telecommunications and other information technology (“IT”) services in connection
with its operations. The Company’s operations depend, in part, on how well it and its suppliers protect networks, equipment,
IT systems and software against damage from a number of threats, including, but not limited to, cable cuts, damage to physical
plants, natural disasters, terrorism, fire, power loss, hacking, computer viruses, vandalism and theft. The Company’s operations
also depend on the timely maintenance, upgrade and replacement of networks, equipment, IT systems and software, as well as pre-emptive
expenses to mitigate the risks of failures. Any of these and other events could result in information system failures, delays and/or
increase in capital expenses. The failure of information systems or a component of information systems could, depending on the
nature of any such failure, adversely impact the Company’s reputation and financial performance.

 

The Company has not experienced any material
losses to date relating to cyber-attacks or other information security breaches, but there can be no assurance that the Company
will not incur such losses in the future. The Company’s risk and exposure to these matters cannot be fully mitigated because
of, among other things, the evolving nature of these threats. As a result, cyber security and the continued development and enhancement
of controls, processes and practices designed to protect systems, computers, software, data and networks from attack, damage or
unauthorized access is a priority. As cyber threats continue to evolve, the Company may be required to expend additional resources
to continue to modify or enhance protective measures or to investigate and remediate any security vulnerabilities.

 

Damage to the Company’s Reputation

 

Damage to the Company’s reputation
could be the result of the actual or perceived occurrence of any number of events, and could include any negative publicity, whether
true or not. The increased usage of social media and other web-based tools used to generate, publish and discuss user-generated
content and to connect with other users has made it increasingly easier for individuals and groups to communicate and share opinions
and views in regard to the Company and its activities, whether true or not. Although the Company believes that it operates in a
manner that is respectful to all stakeholders and that it takes care in protecting its image and reputation, the Company does not
ultimately have direct control over how it is perceived by others. Reputational loss may result in decreased investor confidence,
increased challenges in developing and maintaining community relations and an impediment to the Company’s overall ability
to advance its projects, thereby having a material adverse impact on financial performance, financial condition, cash flows and
growth prospects.

 

Third Party Reputational Risk

 

The parties with which the Company does
business may perceive that they are exposed to reputational risk as a result of the Company’s cannabis business activities.
This may impact the Company’s ability to retain current partners, such as its banking relationship, or source future partners
as required for growth or future expansion in Canada or the United States. Failure to establish or maintain such business relationships
could have a material adverse effect on EHTC and the Company.

 

    	- 24 -

     

    

 

Factors which may Prevent Realization of Growth Targets

 

EHTC is currently in the early development
stage and its growth strategy contemplates outfitting its production facility with additional production resources and constructing
new growing facilities. There is a risk that such construction and expansion will not be achieved on time, on budget, or at all,
as they can be adversely affected by a variety of factors, including some that are discussed elsewhere in these risk factors and
the following:

 

		(i)	delays in obtaining, or conditions imposed by, regulatory approvals and licences including approvals
from Health Canada;

 

		(ii)	plant design errors;

 

		(iii)	environmental pollution;

 

		(iv)	non-performance by third party contractors;

 

		(v)	increases in materials or labour costs;

 

		(vi)	production falling below expected levels of output or efficiency;

 

		(vii)	breakdown, aging or failure of equipment or processes;

 

		(viii)	contractor or operator errors;

 

		(ix)	labour disputes, disruptions or declines in productivity;

 

		(x)	inability to attract sufficient numbers of qualified workers;

 

		(xi)	disruption in the supply of energy and utilities; and

 

		(xii)	major incidents and/or catastrophic events such as fires, explosions, earthquakes or storms.

 

As a result, there is a risk that EHTC
may not have product or sufficient product available for shipment to meet future demand when it arises. Failure to satisfy such
future demand may have a material adverse effect on EHTC’s revenue and financial performance and may result in the loss of
future customers and market share.

 

Financial Losses

 

The Company has incurred losses in recent
periods. The Company may not be able to achieve or maintain profitability and may continue to incur significant losses in the future.
In addition, the Company expects to continue to increase operating expenses as it implements initiatives to continue to grow its
business. If the Company’s revenues do not increase to offset these expected increases in costs and operating expenses, the
Company will not be profitable.

 

    	- 25 -

     

    

 

Additional Financing

 

The building and operation of EHTC’s
facilities and business are capital intensive. In order to execute its anticipated growth strategy, the Company will require additional
equity and/or debt financing to support on-going operations, to undertake capital expenditures or to undertake acquisitions or
other business combination transactions. There can be no assurance that additional financing will be available to the Company when
needed or on terms which are acceptable. The Company’s inability to raise financing to support on-going operations or to
fund capital expenditures or acquisitions could limit the Company’s growth and may have a material adverse effect upon future
profitability. The Company may require additional financing to fund its operations to the point where it is generating positive
cash flows.

 

If additional funds are raised through
further issuances of equity or convertible debt securities, existing shareholders could suffer significant dilution. The Company
may, subject to securities regulatory requirements and limitations, offer Common Shares, preferred shares, warrants, subscription
receipts and units, or any combination thereof, from time to time in one or more offerings, when, and if, market conditions are
favorable to the Company. The specific terms of such future offerings, if any, would be subject to the approval of the board of
directors of the Company.

 

Any debt financing secured in the future
could involve restrictive covenants relating to capital raising activities and other financial and operational matters, which may
make it more difficult for the Company to obtain additional capital and to pursue business opportunities, including potential acquisitions.

 

In addition, the Company has in the past
received a substantial amount of its debt financing from its majority shareholder, Sciences, pursuant to the terms of a loan agreement,
as amended (the “Loan Agreement”) entered into between the Company and Sciences. There is no guarantee that Sciences
will continue to provide funds when needed by the Company or that the terms of the Loan Agreement will remain the same or acceptable
to the Company.

 

Competition

 

The Company expects to face intense competition
from other companies, some of which can be expected to have longer operating histories and greater financial resources and manufacturing
and marketing experience than the Company. Increased competition by larger and better financed competitors could materially and
adversely affect the business, financial performance or financial condition of the Company.

 

Because of the early stage of the industry
in which EHTC operates, the Company expects to face additional competition from new entrants. If the number of users of legal cannabis
in Canada increases, the demand for products is expected to increase and the Company expects that competition will become more
intense, as current and future competitors begin to offer an increasing number of diversified products. To remain competitive,
the Company will require a continued high level of investment in research and development, marketing, sales and client support.
The Company may not have sufficient resources to maintain research and development, marketing, sales and client support efforts
on a competitive basis which could materially and adversely affect the business, financial performance or financial condition of
the Company.

 

Risks Inherent in an Agricultural Business

 

EHTC’s business involves the growing
of cannabis, an agricultural product. As such, the business is subject to the risks inherent in the agricultural business, such
as insects, plant diseases and similar agricultural risks. Although EHTC grows its products indoors under climate-controlled conditions
and carefully monitors the growing conditions with trained personnel, there can be no assurance that natural elements will not
have a material adverse effect on the production of its products.

 

    	- 26 -

     

    

 

Vulnerability to Rising Energy Costs

 

EHTC’s cannabis growing operations
consume considerable energy, making EHTC and the Company vulnerable to rising energy costs. Rising or volatile energy costs may
adversely impact the business of the Company and its ability to operate profitably.

 

Transportation Disruptions

 

Due to the perishable and premium nature
of EHTC’s products, EHTC will depend on fast and efficient delivery services by courier to distribute its product. Any prolonged
disruption of this courier service could have an adverse effect on the financial performance or financial condition of the Company.
Rising costs associated with the courier services used by EHTC to ship its products may also adversely impact the business of EHTC
its ability to operate profitably.

 

Unfavourable Publicity or Consumer Perception

 

The Company believes the medical cannabis
industry is highly dependent upon consumer perception regarding the safety, efficacy and quality of the medical cannabis produced.
Consumer perception of EHTC’s products can be significantly influenced by scientific research or findings, regulatory investigations,
litigation, media attention and other publicity regarding the consumption of cannabis products. There can be no assurance that
future scientific research, findings, regulatory proceedings, litigation, media attention or other research findings or publicity
will be favourable to the medical cannabis market or any particular product, or consistent with earlier publicity. Future research
reports, findings, regulatory proceedings, litigation, media attention or other publicity that are perceived as less favourable
than, or that question, earlier research reports, findings or publicity could have a material adverse effect on the demand for
EHTC’s products and the business, financial performance, financial condition and cash flows of EHTC and the Company. EHTC’s
dependence upon consumer perceptions means that adverse scientific research reports, findings, regulatory proceedings, litigation,
media attention or other publicity, whether or not accurate or with merit, could have a material adverse effect on EHTC and the
Company, the demand for EHTC’s products, and the business, financial performance, financial condition and cash flows of EHTC
and the Company. Further, adverse publicity reports or other media attention regarding the safety, efficacy and quality of cannabis
in general, or EHTC’s products specifically, or associating the consumption of cannabis with illness or other negative effects
or events, could have such a material adverse effect. Such adverse publicity reports or other media attention could arise even
if the adverse effects associated with such products resulted from consumers' failure to consume such products appropriately or
as directed.

 

Product Liability

 

As a manufacturer and distributor of products
designed to be ingested by humans, EHTC faces an inherent risk of exposure to product liability claims, regulatory action and litigation
if any of its products are alleged to have caused significant loss or injury. In addition, the manufacture and sale of EHTC’s
products involve the risk of injury to consumers due to tampering by unauthorized third parties or product contamination. Previously
unknown adverse reactions resulting from human consumption of EHTC’s products alone or in combination with other medications
or substances could occur. EHTC and the Company may be subject to various product liability claims, including, among others, that
EHTC’s products caused injury or illness, include inadequate instructions for use or include inadequate warnings concerning
possible side effects or interactions with other substances. A product liability claim or regulatory action against EHTC could
result in increased costs, could adversely affect EHTC’s reputation with its clients and consumers generally, and could have
a material adverse effect on the financial performance and the financial condition of EHTC and the Company. There can be no assurances
that EHTC will be able to obtain or maintain product liability insurance on acceptable terms or with adequate coverage against
potential liabilities. Such insurance is expensive and may not be available in the future on acceptable terms, or at all. The inability
to obtain sufficient insurance coverage on reasonable terms or to otherwise protect against potential product liability claims
could result in the Company incurring significant losses in the event of a successful claim and could prevent or inhibit the commercialization
of EHTC’s potential products.

 

    	- 27 -

     

    

 

Product Recalls

 

Manufacturers and distributors of products
are sometimes subject to orders for the recall or return of their products for a variety of reasons, including product defects,
such as contamination, unintended harmful side effects or interactions with other substances, packaging safety and inadequate or
inaccurate labeling disclosure. If any of EHTC’s products are recalled due to an alleged product defect or for any other
reason, EHTC could be required to incur the unexpected expense of the recall and any legal proceedings that might arise in connection
with the recall. EHTC may lose a significant amount of sales and may not be able to replace those sales at an acceptable margin
or at all. In addition, a product recall may require significant management attention. Although EHTC has detailed procedures in
place for testing finished products, there can be no assurance that any quality, potency or contamination problems will be detected
in time to avoid unforeseen product recalls, regulatory action or lawsuits. A recall for any of the foregoing reasons could lead
to decreased demand for EHTC’s products and could have a material adverse effect on financial performance and financial condition
of EHTC and the Company. Additionally, product recalls may lead to increased scrutiny of EHTC’s operations by Health Canada
or other regulatory agencies, requiring further management attention and potential legal fees and other expenses.

 

Reliance on Key Inputs

 

EHTC’s business is dependent on a
number of key inputs and their related costs including raw materials and supplies related to its growing operations, as well as
electricity, water and other local utilities. Any significant interruption or negative change in the availability or economics
of the supply chain for key inputs could materially impact the business, financial performance or financial condition of the Company.
Some of these inputs may only be available from a single supplier or a limited group of suppliers. If a sole source supplier was
to go out of business, EHTC might be unable to find a replacement for such source in a timely manner or at all. If a sole source
supplier were to be acquired by a competitor, that competitor may elect not to sell to EHTC in the future. Any inability to secure
required supplies and services or to do so on appropriate terms could have a materially adverse impact on the business, financial
performance or financial condition of the Company.

 

Dependence on Suppliers and Skilled Labour

 

The ability of EHTC and the Company to
compete and grow will be dependent on it having access, at a reasonable cost and in a timely manner, to skilled labour, equipment,
parts and components. No assurances can be given that EHTC will be successful in maintaining its required supply of skilled labour,
equipment, parts and components. It is also possible that the final costs of the major equipment contemplated by EHTC’s capital
expenditure program may be significantly greater than anticipated by the Company’s management and may be greater than funds
available to the Company, in which circumstance EHTC may curtail, or extend the time frames for completing its capital expenditure
plans. This could have an adverse effect on the financial results of the Company.

 

    	- 28 -

     

    

 

Difficulty to Forecast

 

The Company must rely largely on its own
market research to forecast sales as detailed forecasts are not generally obtainable from other sources at this early stage of
the legal cannabis industry in Canada. A failure in the demand for its products to materialize as a result of competition, technological
change or other factors could have a material adverse effect on the business, financial performance or financial condition of the
Company.

 

Operating Risk and Insurance Coverage

 

The Company has insurance to protect its
assets, operations and employees. While the Company believes its insurance coverage addresses all material risks to which it is
exposed and is adequate and customary in its current state of operations, such insurance is subject to coverage limits and exclusions
and may not be available for all of the risks and hazards to which the Company is exposed. In addition, no assurance can be given
that such insurance will be adequate to cover the Company’s liabilities or will be generally available in the future or,
if available, that premiums will be commercially justifiable. If the Company were to incur substantial liability and such damages
were not covered by insurance or were in excess of policy limits, or if the Company were to incur such liability at a time when
it is not able to obtain liability insurance, the business, financial performance and financial condition of the Company could
be materially adversely affected.

 

TSXV Restrictions on Business

 

The Company has delivered an undertaking
to the TSXV confirming that, while listed on the TSXV, the Company will only conduct the business of the direct and indirect production,
sale, extraction and distribution of medicinal cannabis and its extracts and derivatives in Canada pursuant to one or more licenses
issued by Health Canada in accordance with applicable Canadian law, unless prior approval is obtained from the TSXV. This undertaking
could have an adverse effect on the Company’s ability to export cannabis from Canada and on the Company’s ability to
expand its business into other areas including the provision of non-medical cannabis in the event that the laws were to change
to permit such sales and the Company is still listed on the TSXV and still subject to such undertaking at the time. This undertaking
may prevent the Company from expanding into new areas of business when the Company’s competitors have no such restrictions.
All such restrictions could materially and adversely affect the growth, business, financial performance or financial condition
of the Company.

 

Management of Growth

 

The Company may be subject to growth-related
risks including capacity constraints and pressure on its internal systems and controls. The ability of the Company to manage growth
effectively will require it to continue to implement and improve its operational and financial systems and to expand, train and
manage its employee base. The inability of the Company to deal with this growth may have a material adverse effect on the Company’s
business, financial performance, financial condition, and prospects.

 

    	- 29 -

     

    

 

Integration of Acquired Business

 

The Company has acquired, directly or indirectly,
interests in businesses complementary to the business of the Company. The success of such acquisitions will depend in part on successfully
consolidating functions and integrating operations, procedures and personnel in a timely and efficient manner. This integration
may require the dedication of substantial management effort, time and resources which may divert management’s focus and resources
from other strategic opportunities of the Company and from operational matters during this process.

 

Litigation

 

The Company may become party to litigation
from time to time in the ordinary course of business which could adversely affect its business. Should any litigation in which
the Company becomes involved be determined against the Company such a decision could adversely affect the Company’s resources
and its ability to continue operating and the market price for the Common Shares and could use significant resources. Even if the
Company is involved in litigation and is successful, litigation can redirect significant company resources and attention away from
the business of the Company and may have a material adverse effect on the Company’s business, financial performance, financial
condition and prospects.

 

The Market Price of the Common Shares May be Subject to Wide
Price Fluctuations

 

The market price of the Common Shares may
be subject to wide fluctuations in response to many factors, including variations in the financial performance of the Company,
divergence in financial results from analysts' expectations, changes in earnings estimates by stock market analysts, changes in
the business prospects for the Company, general economic conditions, legislative changes, and other events and factors outside
of the Company’s control. In addition, stock markets have from time to time experienced extreme price and volume fluctuations,
which, as well as general economic and political conditions, could adversely affect the market price for the Common Shares.

 

The market price of the Common Shares and
the common shares of other companies that investors may consider to be comparable to the Company have experienced significant price
and volume fluctuations recently. In particular, the market price of such shares are impacted by news reports relating to competitive
developments, regulatory changes and other related issues in the legal cannabis industry, including the Cannabis Act.

 

Dividends

 

The Company has no earnings or dividend
record and does not anticipate paying any dividends on the Common Shares in the foreseeable future. Any dividends paid by the Company
would be subject to tax and, potentially, withholdings.

 

Limited Market for Securities

 

The Company is listed on the TSXV, however,
there can be no assurance that an active and liquid market for the Common Shares will develop or be maintained and an investor
may find it difficult to resell any securities of the Company.

 

    	- 30 -

     

    

 

Environmental and Employee Health and Safety Regulations

 

EHTC’s operations are subject to
environmental and safety laws and regulations concerning, among other things, emissions and discharges to water, air and land,
the handling and disposal of hazardous and non-hazardous materials and wastes, and employee health and safety. EHTC will incur ongoing
costs and obligations related to compliance with environmental and employee health and safety matters. Governmental approvals and
permits are currently, and may in the future be, required in connection with EHTC’s operations. Failure to comply with environmental
and safety laws and regulations may result in additional costs for corrective measures, penalties or in restrictions on EHTC’s
manufacturing operations. In addition, changes in environmental, employee health and safety or other laws, more vigorous enforcement
thereof or other unanticipated events could require extensive changes to EHTC’s operations or give rise to material liabilities,
which could have a material adverse effect on the business, financial performance and financial condition of the Company.

 

A Substantial Number of Common Shares are Owned by a Single
Shareholder

 

A significant percentage of the Company’s
outstanding Common Shares are owned by a single shareholder, Sciences. As such, Sciences is in a position to exercise influence
over matters requiring shareholder approval, including the determination of significant corporate actions that could otherwise
be beneficial to the Company’s other shareholders, including the election and removal of directors, amendments to the Company’s
corporate governing documents and business combinations. The Company’s interests and those of Sciences may at times conflict,
and this conflict might be resolved against the Company’s interests. The concentration of control by a single shareholder
may practically preclude an unsolicited take-over bid for the Common Shares, and this may adversely impact the value and trading
price of the Common Shares.

 

Restrictions on Sales Activities

 

The legal cannabis industry in Canada is
in its early development state and restrictions on sales and marketing activities imposed by Health Canada, various medical associations,
other governmental or quasi-governmental bodies or voluntary industry associations may adversely affect the Company’s ability
to conduct sales and marketing activities and could have a material adverse effect on the Company’s business, financial performance
or financial condition.

 

Conflicts of Interest

 

The Company may be subject to various potential
conflicts of interest because of the fact that some of its officers and directors may be engaged in a range of business activities.
Dr. Avtar Dhillon, Mr. Jim Heppell and Mr. Punit Dhillon, each of whom is a director of the Company, are also directors and/or
officers of Sciences. In addition, the Company’s executive officers and directors may devote time to their outside business
interests, so long as such activities do not materially or adversely interfere with their duties to the Company. In some cases,
the Company’s executive officers and directors may have fiduciary obligations associated with these business interests that
interfere with their ability to devote time to the Company’s business and affairs and that could adversely affect the Company’s
operations. These business interests could require significant time and attention of the Company’s executive officers and
directors.

 

In addition, the Company may also
become involved in other transactions which conflict with the interests of its directors and the officers who may from time
to time deal with persons, firms, institutions or corporations with which the Company may be dealing, or which may be seeking
investments similar to those desired by it. The interests of these persons could conflict with those of the Company. In
addition, from time to time, these persons may be competing with the Company for available investment opportunities.
Conflicts of interest, if any, will be subject to the procedures and remedies provided under applicable laws. In particular,
in the event that such a conflict of interest arises at a meeting of the Company’s directors, a director who has such a
conflict will abstain from voting for or against the approval of such participation or such terms. In accordance with
applicable laws, the directors of the Company are required to act honestly, in good faith and in the best interests of the
Company.

 

    	- 31 -

     

    

 

Actions against the Company and its Directors and Officers

 

The Company and its subsidiaries are corporations
organized under the laws of the Province of British Columbia. Certain of the Company’s directors and officers, reside principally
in Canada. Because all or a substantial portion of the Company’s assets and the assets of these persons are located in Canada,
it may not be possible for foreign investors to effect service of process from outside of Canada upon the Company or those persons.
Furthermore, it may not be possible to enforce against the Company foreign judgments obtained in courts outside of Canada based
upon the civil liability provisions of the securities laws or other laws in those jurisdictions.

 

General Business Risk and Liability

 

Given the nature of Company’s business,
it may from time to time be subject to claims or complaints from investors or others in the normal course of business. The legal
risks facing the Company, its directors, officers, employees or agents in this respect include potential liability for violations
of securities laws, breach of fiduciary duty and misuse of investors’ funds. Violations of securities laws and breaches of
fiduciary duty could result in civil liability, fines, sanctions, or the suspension or revocation of the Company’s right
to carry on its existing business. The Company may incur significant costs in connection with such potential liabilities.

 

Client Acquisition

 

EHTC’s success depends in part on
its ability to attract and retain clients. There are many factors which could impact EHTC’s ability to attract and retain
clients, including but not limited to EHTC’s ability to continually produce desirable and effective product, the successful
implementation of the EHTC’s client-acquisition plan and the continued growth in the aggregate number of patients selecting
medical cannabis as a treatment option. EHTC’s failure to acquire and retain patients as clients would have a material adverse
effect on its business, financial performance and financial condition.

 

Holding Company

 

The Company is a holding company and essentially
all of its assets are shares of its subsidiaries. As a result, investors in the Company are subject to the risks attributable to
its subsidiaries. As a holding company, the Company conducts substantially all of its active business through its subsidiaries,
which generates substantially all of its revenues. Consequently, the Company’s cash flows and ability to complete current
or desirable future enhancement opportunities are dependent on the earnings of its subsidiaries and the distribution of those earnings
to the Company. The ability of the subsidiaries to pay dividends and other distributions will depend on their financial performance
and will be subject to applicable laws and regulations which require that solvency and capital standards be maintained and contractual
restrictions contained in the instruments governing its debt. In the event of a bankruptcy, liquidation or reorganization of a
subsidiary, holders of indebtedness and trade creditors may be entitled to payment of their claims from the assets of the subsidiary
before the Company.

 

    	- 32 -

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