ANNUAL INFORMATION FORM. For the year ended December 31, 2015

Transcription

1 ANNUAL INFORMATION FORM For the year ended December 31, 2015 Date: November 21, 2016

2 TABLE OF CONTENTS PRELIMINARY NOTES... 4 Date of Information...4 Financial Information...4 FORWARD-LOOKING INFORMATION... 4 Currency and Exchange Rate Information...5 CORPORATE STRUCTURE... 5 Name, Address and Incorporation...5 Intercorporate Relationships...6 GENERAL DEVELOPMENT OF THE BUSINESS... 6 Three Year History...6 Recent Developments...9 DESCRIPTION OF BUSINESS General Description of the Business...11 Current Licence under the ACMPR...11 Products of the Company...12 Operations...13 Distribution...13 Storage and Security...13 Specialized Skill and Knowledge...14 Reporting Requirements...14 Medical Marihuana Market...16 Competitive Environment...16 Business Strategy...17 Protection of Intellectual Property...17 Employees...18 Risk Factors...18 DIVIDENDS CAPITAL STRUCTURE MARKET FOR SECURITIES Trading Price and Volume...28 PRIOR SALES Stock Options...29 Warrants...29 ESCROWED SECURITIES AND SECURITIES SUBJECT TO CONTRACTUAL RESTRICTION ON TRANSFER... 30

3 - 3 - DIRECTORS AND OFFICERS Name, Occupation and Security Holding...30 Director Biographies...32 Cease Trade Orders, Bankruptcies, Penalties or Sanctions...34 Conflicts of Interest...34 AUDIT COMMITTEE INFORMATION Audit Committee Mandate...35 Composition of the Audit Committee...35 Relevant Education and Experience...35 Reliance on Certain Exemptions...35 Audit Committee Oversight...36 Pre-Approval Policy and Procedures...36 External Auditor Service Fees...36 LEGAL PROCEEDINGS AND REGULATORY ACTIONS Legal Proceedings...37 Regulatory Actions...37 INTEREST OF MANAGEMENT AND OTHERS IN MATERIAL TRANSACTIONS TRANSFER AGENT AND REGISTRAR MATERIAL CONTRACTS INTERESTS OF EXPERTS ADDITIONAL INFORMATION... 38

4 PRELIMINARY NOTES Date of Information Unless otherwise indicated, all information contained in this Annual Information Form ( AIF ) of Emerald Health Therapeutics, Inc. (the Company ) is as of December 31, Financial Information The Company s financial results are prepared and reported in accordance with International Financial Reporting Standards as issued by the International Accounting Standards Board ( IFRS ) and is presented in Canadian dollars. FORWARD-LOOKING INFORMATION Certain statements contained in this AIF 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 the Company. 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: whether the number of the Company s registered patients will increase; whether the Company s sales will increase and whether the business of the Company will eventually be profitable; how and if the Company will benefit from its recent transactions with Emerald Health Sciences Inc. ( Sciences ), a control person of the Company, and what opportunities that transaction will provide; the terms of the loan from Sciences to the Company and whether Sciences will continue to provide loans to the Company and the terms of such loans; whether the Company s subsidiary, Emerald Health Botanicals Inc. ( Botanicals ) will be able to maintain the Current Licence (as defined in the AIF) to produce and sell medical marihuana and cannabis oils issued to it under the Access to Cannabis for Medical Purposes Regulations ( ACMPR ); whether the Company will continue to purchase additional strains of dried medical marihuana from another producer who is licensed (a Licensed Producer ) under the ACMPR; the expectation of the impact of the ACMPR; whether Botanicals will launch a high CBD oil product and introduce new oils produced by way of supercritical CO2 extraction in the first half of 2017; Botanicals longer term strategy to become a leading provider of quality products for the broader marihuana market; Botanicals intention to continue to communicate with and provide education and services to medical doctors and other healthcare professionals; the introduction of new cannabis oils produced by supercritical fluid extraction in the first half of 2017; the continued increase of client base and revenue as a result of the introduction of cannabis oils; the Company s continued research and development of strains and products; clinical trials to be undertaken by the Company; whether the Company will acquire pre-approval applications from other applicants; the anticipated completion of the October Private Placement (as defined in the AIF); whether the expansion at the current facility will allow the Company to increase its production capacity of dried product and oils; how the Company s research and development project related to strains of medical cannabis will be used and how it will be funded; whether common shares of the Company will be issued upon the conversion of debt owed to Sciences and the number of common shares of the Company that will be issued; and the effect that each risk factor will have on the Company.

5 - 5 - 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. Investors are cautioned that any such statements are not guarantees of future performance and those 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, continued availability of capital financing and general economic, market or business conditions, the Company s reliance on the Current Licence, regulatory risks relating to the Company s compliance with the ACMPR, changes in laws, regulations and guidelines relating to medical marihuana and the possible legalization of marihuana by the Federal government, changes in government, changes in government policy, increased competition in the marihuana market, the limited operating history of the Company, the Company s reliance on a single production facility, its reliance on management, difficulties in securing additional financing, unfavourable publicity or consumer perception of the medical marihuana industry, the impact of any negative scientific studies on the effects of cannabis, changes in the Company s over-all business strategy and restrictions of the TSX Venture Exchange on the Company s business. Additional factors that could cause actual results to differ materially include, but are not limited to, the risk factors described herein and as discussed in the Company s required financial statements and filings. See Risks 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 AIF should not be unduly relied upon. These statements speak only as of the date of this AIF. 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. Currency and Exchange Rate Information All dollar amounts (i.e. $ ), unless otherwise indicated, are expressed in Canadian dollars and United States dollars are referred to as US$. Name, Address and Incorporation CORPORATE STRUCTURE Emerald Health Therapeutics, Inc. (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 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. At that time, 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. The Company s head office address is PO Box West Saanich Road, Victoria, British Columbia, V8Z 7E7 and its registered office is located at # West Hastings Street, Vancouver, British Columbia, V6E 3X1. The Company is a reporting issuer in British Columbia and Alberta and not in any other jurisdiction.

6 - 6 - Intercorporate Relationships The Company operates its business through its wholly-owned subsidiary, Botanicals. Botanicals is a private, Victoria, British Columbia based company and was incorporated pursuant to the Business Corporations Act (British Columbia) on January 28, The following chart (as of the date hereof) illustrates the Company s corporate structure. Emerald Health Therapeutics, Inc. (Business Corporations Act (BC)) Emerald Health Botanicals Inc. (Business Corporations Act (BC)) GENERAL DEVELOPMENT OF THE BUSINESS The Company is a publicly-traded company with headquarters in Victoria, British Columbia Canada. The Company s common shares (the Common Shares ) are listed on the TSX Venture Exchange ( TSXV ) under the trading symbol EMH. The Company is classified as a Tier 2 Venture Issuer on the TSXV. The Company is the parent of its wholly-owned subsidiary Botanicals. The principal business of Botanicals is the production and sale of medical marihuana and cannabis oils pursuant to a licence issued to Botanicals under the Access to Cannabis for Medical Purposes Regulations (the ACMPR ). Three Year History On October 16, 2008, the Company was listed on the TSXV as a capital pool company (as such term is defined in the policies of the TSXV) at that time. On January 20, 2011, the Company completed its Qualifying Transaction (as such term is defined in the policies of the TSXV) comprising of the acquisition of certain oil and gas interest located in the Hays area of southeast Alberta. From January 2011 until the RTO, the Company continued to be engaged in the exploration, development and production of oil and natural gas and held petroleum resource properties in Western Canada. Botanicals commenced business in January 2013 with the goal of becoming a Licensed Producer under the Marihuana for Medicinal Purposes Regulations (the MMPR ). Botanicals applied to Health Canada under the MMPR for approval to become a licensed producer in March 2013 and obtained the necessary licence (the Producer Licence ) in February The Producer Licence permitted Botanicals to undertake the production, sale, possession, transport and destruction of medical marihuana. Botanicals principal business was the production and storage of marihuana from its Victoria, British Columbia production facility, as regulated by the MMPR at that time. In June 2014, Botanicals secured a 5-year lease agreement for its current facility, with an option to renew for two successive 5-year terms.

7 - 7 - In July 2014, Botanicals received notice from Health Canada that the original licence issued in February 2014, and expiring on August 5, 2014, would be extended, however it would not include the activity of selling medical marihuana, only the activities of cultivation and production. Health Canada had added requirements that would require further inspection in order to receive a sales licence. On September 4, 2014, the Company and Botanicals completed the RTO and the Company acquired all of the issued and outstanding securities of Botanicals by exchanging three Common Shares for each Botanicals common share outstanding, and Botanicals became a wholly-owned subsidiary of the Company. On closing of the RTO, the Company completed the disposition of its oil and natural gas assets for nominal proceeds, changed its name to T-Bird Pharma Inc. and began to operate exclusively as a medical marihuana producer. Upon completion of the RTO, former shareholders of Botanicals received 35,329,014 Common Shares from treasury in exchange for their shares in Botanicals. In addition, 1,236,515 Common Shares were issued as a finder s fee in connection with the closing of the RTO and 7,500,000 Common Shares were issued in connection with a concurrent private placement of 7,500,000 units of the Company at a price of $0.40 per unit. Each unit consisted of one Common Share and one half of one warrant (each, a Warrant ) to purchase a Common Share at a price of $0.80 per share for a period of 12 months, subject to acceleration. Following the RTO and related transactions, the former shareholders of Botanicals held approximately 76.7% of the outstanding Common Shares of the Company. In addition, upon closing of the RTO, 8,817,771 Common Shares were placed in escrow pursuant to the terms of a value security escrow agreement (the Value Security Escrow Agreement ) and 27,129,498 Common Shares were placed in escrow pursuant to the terms of a surplus security escrow agreement (the Surplus Security Escrow Agreement ), both dated September 4, As of October 18, 2016, 1,502,256 Common Shares remain in escrow pursuant to the terms of the Value Security Escrow Agreement and 14,921,220 Common Shares remain in escrow pursuant to the terms of the Surplus Security Escrow Agreement. See Escrowed Securities and Securities Subject to Contractual Restrictions on Transfer in this AIF. In January 2015, the Chief Executive Officer, Robert Gagnon, stepped down and was replaced by Dr. Bin Huang, who had previously been appointed as the Company s President and Chief Operating Officer. In February 2015, Chris Taylor the Chief Financial Officer, stepped down and was replaced Sandra Pratt. In February 2015, Botanicals applied for a sales licence (the Sales Licence ) permitting Botanicals to sell medical marihuana as permitted under the MMPR. In April 2015, the Company, together with certain of its shareholders, completed a transaction with Sciences whereby Sciences acquired (the Escrow Transfer ) a total of 20,156,790 Common Shares (equal to 44% of the Company s then issued and outstanding Common Shares) from five of its founding shareholders, including its former Chief Executive Officer and Chief Financial Officer, at a price of $0.21 per Common Share. Concurrent with the completion of the Escrow Transfer in April 2015, three new board members were appointed to the Company s Board of Directors (the Board ) and three existing Board members resigned. Dr. Avtar Dhillon was appointed as Executive Chairman of the Company and director and Mr. David Raffa, previous Executive Chairman, continued as a member of the Board. In May 2015 Botanicals received the Sales Licence from Health Canada.

8 - 8 - Upon obtaining the Sales Licence, the Company s client service representative team started registering patients during the third quarter of 2015 and product sales commenced at that time. As it takes time to register patients under the MMPR, the Company did not have significant revenue in 2015 but expects to see an increase in the number of registered patients ordering product in In August 2015, the Company entered into a loan agreement with Sciences (the Loan Agreement ), a control person of the Company, pursuant to which Sciences agreed to loan monies to the Company on a revolving basis, in amounts and at times agreed to by the parties, at an interest rate of 5% and repayable on demand. The Company and Sciences increased the interest rate to 12% per annum, effective February 26, In August 2015, Botanicals applied for a supplemental licence (the Supplemental Licence ) from Health Canada authorizing Botanicals to produce cannabis oils. The Company began construction of lab space within its current facility and purchased lab equipment in September 2015 in anticipation of receiving the Supplemental Licence. As Botanicals reviewed its growth strategy, effective October 31, 2015, it terminated the lease agreement on a facility in Victoria, British Columbia that it was considering as a second cultivation facility. In November 2015, Botanicals received the Supplemental Licence from Health Canada authorizing the production of cannabis oils. The Company started production of cannabis oils shortly after receiving the Supplemental Licence. In November 2015, Health Canada approved two additional production rooms at Botanical s facility and renewed its Producer Licence under the MMPR for a period of one year. The two additional production rooms increased Botanicals growing capacity. In addition, a new expanded vault was installed and approved by Health Canada in December Production by the Company up to December 31, 2015 was moderate as the Company had limited space to grow its products and was not able to build up large quantities of inventory prior to sales commencing. The Company purchased additional strains of dried medical marihuana from another Licensed Producer to supplement its inventory levels as per approval received from Health Canada. The expansion of the current facility, including the extract lab, which was completed in December 2015, allowed the Company to increase its production capacity of dried product and oils. The Company continued to grow its production capacity to gain economies of scale and assess growth strategies based on market demand. During 2015, Botanicals started a research and development project related to the strains of medical cannabis held by Botanicals. The project was used to characterize strains and utilize the data generated by the study to assist in identifying strains with specific compositions of cannabinoids, developing new strains using the Company s range of genetic material and ultimately matching these strains with patients needs. The project was partially funded through National Research Council of Canada-IRAP ( NRC- IRAP ).The Company concluded the project in August 2016 and Botanicals characterized several new strains from its diverse pool of cannabis seeds. Strains with exceptionally high CBD levels may allow Botanicals to produce CBD oils in the future with unique compositions of cannabinoids through blending. The results indicate that Botanical s genetic material holds significant ranges of cannabinoids that can be used in a variety of products. Botanicals is in discussion with NRC-IRAP on a potential phase two of the project, which may commence in early 2017.

9 - 9 - Recent Developments Development of Business During the first four months of 2016, Botanicals primarily focussed on developing the operating procedures required to manufacture cannabis oils in order to apply to Health Canada for a supplemental sales licence (the Supplemental Sales Licence ) allowing for the sale of cannabis oils. The application for the Supplemental Sales Licence was submitted in April 2016 and in July 2016 Botanicals received approval to sell cannabis oils. Once Botanicals received the Supplemental Sales Licence, production began on three initial products that were available for sale starting in September The three cannabis oil products currently in production include: Tetrahydrocannabinol acid ( THCA ) oil, Tetrahydrocannabinol ( THC ) oil, as well as two different strengths of oils containing both THC and cannabidiol ( CBD ). The cannabis oils are whole plant extracts that deliver the benefits of cannabinoids orally. Botanicals expects to launch a fourth product, a high CBD oil, and introduce new cannabis oils produced by supercritical fluid extraction in the first half of In March 2016, the Company granted 300,000 stock options ( Options ) to an employee of the Company. Each such Option is exercisable into one common share of the Company (each, a Common Share ) at a price of $0.175 per Common Share for a period of five years and vests over 36 months. In addition to developing the new cannabis oil products, the Company also launched a new website and a new logo in June 2016 and has re-branded its products by way of new packaging and increased social media presence and community engagement on Instagram and Facebook. The Company s e-commerce ordering system was also updated improving the efficiency of client ordering and inventory management. In August 2016, the Company granted a total of 400,000 stock options ( Options ) to a director and certain employees of the Company. Each Option is exercisable into one common share of the Company (each, a Common Share ) at a price of $0.335 per Common Share for a period of five years and vested immediately. In August 2016, Health Canada announced the ACMPR, which replaced the MMPR as the regulations governing Canada s medical cannabis program. The ACMPR came into force on August 24, 2016 and provides individuals who received a medical document signed by a health care practitioner prescribing the use of medical marihuana with three options to access medical marihuana: (a) (b) (c) through a Licensed Producer; produce a limited amount of cannabis for their own medical purposes; or designate someone to produce it for them. Under the MMPR, the only option for individuals to access medical marihuana was to purchase it from a Licensed Producer. The Company does not expect that the adoption of the ACMPR will significantly impact the operations of the Company. In September 2016, the Company issued an aggregate of 1,950,000 Options to various directors, officers and employees of the Company at an exercise price of $0.72 per Common Share exercisable for a period of five years. The Options granted to the directors vested immediately, while the Options granted to the officers and the employees will vest over 36 months.

10 During 2016, Botanicals produced several dried medical marihuana products that sold out very quickly. However, due to limited growth space, Botanicals is limited on the volume of product it is able to grow and continues to purchase additional strains of dried medical marihuana from other Licensed Producers to supplement inventory levels for both dried medical marihuana sales and cannabis oil production. The Company is actively pursuing expansion options that would allow for increased production. Through its research program supported by a contribution from the NRC-IRAP, the Botanicals team has characterized several new strains from its diverse pool of cannabis seeds. Strains with exceptionally high CBD levels are anticipated to allow Botanicals to produce CBD oils in the future with unique compositions of cannabinoids through blending. These products are expected to be available in the first half of On November 7, 2016, the Company received a new licence from Health Canada under the ACMPR which is valid (the Current Licence ) until May 7, 2018 (the Licence Period ). The Current Licence supersedes and replaces the Producers Licence, the Sales Licence, the Supplemental Licence and the Supplemental Sales Licence. Under the Current Licence, the Company may produce dried marihuana and cannabis oils and sell or provide dried marihuana, cannabis oils, marihuana plants and marihuana seeds in accordance with the ACMPR and the terms set out therein. See Description of Business - Current Licence for additional information on the terms of the Current Licence. As of the date of this AIF, Botanicals has continued to register new clients and continues to offer an expanding product line of dried medical cannabis and cannabis oils. Transactions with Sciences In March 2016, the Company and Sciences agreed to convert outstanding debt in the aggregate amount of $1,392,796 owed by the Company to Sciences 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 May Shares for Debt Transaction ). Such debt consisted of $1,374,808 in loans from Sciences to the Company and $17,988 outstanding for services provided by Sciences to the Company. The May Shares for Debt Transaction closed on May 12, In August 2016, the Company and Sciences announced a private placement (the August Private Placement ) of an aggregate of up to 4,077,687 units of the Company, in one or more tranches, 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 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 August Private Placement was completed on September 21, Also in August 2016, the Company and Sciences agreed to convert additional outstanding debt in the aggregate 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 September Shares for Debt Transaction ). Such debt consisted of $900,669 for loans from Sciences and for services provided by Sciences to the Company, plus accrued interest of $20,796. The September Shares for Debt Transaction was completed on September 21, On August 7, 2016, Mr. David Raffa resigned as a director of the Company and a new director, Mr. Bob Rai was appointed. Sciences concurrently reached an agreement to purchase 4,407,708 Common Shares from Mr. Raffa (the Share Purchase Agreement ). Pursuant to the Share Purchase Agreement, Sciences acquired ownership of 2,203,854 Common Shares on September 15, 2016 at a price of $0.29 per share and 2,203,854 Common Shares on October 26, 2016 at a price of $0.31 per Common Share. An

11 aggregate of 2,424,237 Common Shares purchased by Sciences pursuant to the Share Purchase Agreement from Mr. Raffa are subject to the Surplus Security Escrow Agreement. On November 16, 2016, the Company completed a private placement (the November Private Placement ) of 4,411,764 units of the Company at a price of $0.68 per unit to Sciences. Each unit was comprised of one Common Share and one Common Share purchase warrant. Each warrant entitles the holder thereof to acquire an additional Common Share at a price of $0.85 per Common Share for a period of five years from the closing date. Upon completion of the November Private Placement, Sciences held approximately 67.5% of the Common Shares (on an undiluted basis) and 71.2% of the Common Shares (on a partially-diluted basis giving effect only to the exercise of Common Share purchase warrants held by Sciences). General Description of the Business DESCRIPTION OF BUSINESS The Company operates its business through its wholly-owned subsidiary, Botanicals. Botanicals is a Licensed Producer of medical marihuana under the ACMPR, and was a Licensed Producer under its predecessor, the MMPR. The Current Licence allows Botanicals to produce and sell medical marihuana and cannabis oils to clients and other Licensed Producers. Individuals may become clients of Botanicals ( Clients ) by registering with Botanicals through its secure online portal or via telephone after the individual has received a medical document signed by a health care practitioner setting out the daily quantity of dried marihuana, in grams, that the practitioner authorizes for the person. Current Licence under the ACMPR Under the terms of the Current Licence, Botanicals may: (a) produce during the Licence Period: (i) (ii) up to 150kg of dried marihuana; and up to 648kg of cannabis oils. (b) sell during the Licence Period: (i) smaller quantities of dried marihuana, cannabis oil and/or units of marihuana plants to: (A) (B) (C) (D) other Licensed Producers, licensed dealers, the Minister; or persons to whom an exemption relating to the substance has been granted under section 56 of the ACMPR; (ii) larger quantities of dried marihuana, cannabis oils and/or units of marihuana plants to:

12 (A) (B) (C) (D) (E) in respect of dried marihuana or units of marihuana plants, Clients or individuals who are responsible for a Client; in respect of cannabis oils, Clients or individuals who are responsible for a Client, if the cannabis oil is the final packaged product and is produced using cannabis cold water extraction and cannabis infusion into carrier oil, as inspected by Health Canada; hospital employees, if the possession of the dried marihuana or cannabis oil is for the purposes of and in connection with their employment; persons to whom an exemption relating to the substance has been granted under section 56 of the CDSA; and health care practitioners who have provided a medical document, if the practitioner has given their consent under the ACMPR to receive the shipment on behalf of a Client. Botanicals may apply to Health Canada to increase its allowable maximum production quantity and maximum allowable quantities to be sold or provided to the parties listed above. Furthermore, Botanicals may also: (i) ship dried cannabis to a health care practitioner in the case referred to in subparagraph 130(1)(f)(iii) of the ACMPR; (ii) import cannabis if conducted in accordance with an import permit issued under section 95 of the ACMPR; or (iii) possess cannabis for the purpose of export and cannabis in accordance with an export permit issued under section 103 of the ACMPR. In addition, the Current Licence permits the Company to transfer or receive bulk shipments of dried marihuana or cannabis oils to or from other Licensed Producers provided that (a) the bulk product has not already been packaged into immediate containers for sale under the ACMPR, (b) the Licensed Producer has completed the Licensed Producer Bulk Transfer Transaction Form as required by Health Canada and (c) has provided notice to Health Canada at least 10 days prior to each planned shipment. Due to limited growth space, Botanicals purchases additional strains of dried medical marihuana from other Licensed Producers to supplement inventory levels for both dried medical marihuana sales and cannabis oil production, as permitted under the Current License and the ACMPR. Products of the Company Botanicals currently offers a variety of dried marihuana strains and cannabis oils each with varying levels of THC and CBD. There is no limit on THC or CBD imposed by the ACMPR on the dried strains that can be produced nor does the ACMPR set out specific requirements for pricing. Currently, pursuant to the ACMPR, cannabis oils are limited to 30 mg per ml, or 3%, THC for oil and 10mg per capsule. There is no limit on CBD in cannabis oil. Botanicals currently sells dried marihuana between $7.00 and $10.00 per gram and cannabis oils between $75.00 and $ per 30 ml bottle. However, future products may sell above or below these price ranges. Botanicals also offers compassion pricing to clients who have annual incomes of $30,000 or less or who are classified by their physician as palliative. Compassion pricing provides discounts of 30% on dried marihuana and 20% on cannabis oils.

13 Botanicals generally provides eight to ten options of dried medical marihuana products for clients and currently produces approximately eight strains from its own genetics, which are available at different times, subject to growing cycles. However, due to limited growth space, Botanicals is currently limited on the volume of product it is able to produce internally and purchases additional strains of dried medical marihuana from other Licensed Producers to supplement inventory levels for both dried medical marihuana sales and cannabis oil production. Botanicals currently has three cannabis oil products in production, including: THCA oil, THC oil, as well as two different strengths of oils containing both THC and CBD. The cannabis oils are whole plant extracts that deliver the benefits of cannabinoids orally. Botanicals expects to launch a high CBD low TCH oil, and introduce new cannabis oils produced by supercritical fluid extraction in the first half of Operations Botanicals primary operations consist of: (a) (b) (c) (d) (e) (f) (g) limited production of cannabis for the purpose of sale, production of cannabis oils and research and development; sale of Botanical s products through its online secure customer portal; registration, sales and customer service by way of its online secure customer portal and telephone; reporting and regulatory compliance as required by the ACMPR; research and development related to the characterization of cannabis strains; production of cannabis oils by way of ethanol extraction and supercritical CO2 extraction; and sourcing, quality control verification and purchase of wholesale dried cannabis and cannabis oils from other Licensed Producers. Distribution Under the Current Licence, the Company is licensed to sell or provide dried marihuana and cannabis oils to Clients. Clients order from Botanicals primarily through Botanicals secure online customer portal and through telephone ordering with Botanicals customer service team. Botanicals ships all products discretely to Clients through Purolator and Canada Post in accordance with the ACMPR. Storage and Security The ACMPR requires commercial production sites to be located indoors, and not in a private dwelling. Subdivision C of the ACMPR sets out physical security requirements that are necessary to secure sites where Licensed Producers conduct activities with medical cannabis other than storage. As per Health Canada regulations, Botanicals facilities contain two safes and one vault that have been designated as security level 6, 6 and 7, respectively. Combined, Botanicals is licensed to store up to 175 kg or $1,750,000 worth of dried cannabis and cannabis extracts on site at any given time.

14 The vault is equipped with security cameras, motion sensors, finger print scanners, code locked doors and seismic sensors that set alarms off when vibrations are detected. These security measures ensure Botanicals is compliant with all of Health Canada s necessary security requirements. The vault can only be accessed by a Responsible Person in Charge (as defined under the ACMPR) and at least one Responsible Person in Charge must be present in the vault at all times if the doors are opened. Health Canada conducts ad hoc, unscheduled site inspections of Licensed Producers. Botanicals has experienced these inspections numerous times, previously on a monthly basis but now on a roughly bimonthly basis. Botanicals has responded to and complied with all requests from Health Canada within the time frames indicated in such requests. As of the date hereof, there are no outstanding inspection issues with Health Canada beyond day to day adjustments that may occur in order to ensure ongoing compliance. Botanicals has not been required to recall any distributed product or otherwise been formally reprimanded. Specialized Skill and Knowledge Knowledge with respect to cultivating and growing medical marihuana is important to the medical marihuana industry. The nature of growing marihuana is not substantially different from the nature of growing other agricultural products. Variables such as temperature, humidity, lighting, air flow, watering and feeding cycles are defined and controlled to produce consistent product and to avoid contamination. The product is cut, sorted and dried under defined conditions that are establish to protect the activity and purity of the product. Once processing is complete, each processing batch is subjected to testing against quality specifications set for activity and purity. Botanicals has recruited a cultivation team with specialized skill sets unique to indoor agricultural cultivation and growing marihuana. Botanical s management team has a collective 60 years of indoor cannabis production experience since the implementation of the Medical Marihuana Access Regulations, the predecessor to the MMPR and ACMPR, by Health Canada. Botanical s senior management and management include molecular biologists, geneticists and plant biologists who collectively have extensive expertise in large-scale agriculture with crops other than cannabis. Reporting Requirements In addition to general reporting requirements prescribed by the ACMPR, the Current Licence requires that Botanicals makes a report of information including, but not limited to, the following to the Office of Controlled Substances of Health Canada on a monthly basis: (a) (b) the total amount of dried marihuana and cannabis oil (in kgs) produced in the reporting period; the total amount of dried marihuana and cannabis oil (in kgs) sold or transferred to the following during the reporting period: (i) (ii) (iii) Clients; other Licensed Producers; and licensed dealers; (c) the total number of persons that were registered clients of Botanicals at the end of the reporting period, including only those persons whose registrations were valid on the last

15 day of the reporting period, and the total number of persons that were registered as new Clients of Botanicals during the reporting period; (d) (e) (f) (g) (h) (i) (j) persons registered under the ACMPR to obtain interim supply; persons registered under the ACMPR to obtain starting materials; the number of individuals who tried to register with Botanicals, but could not be registered, regardless of the reason, and the number of Clients who placed orders or tried to place orders that could not be filled, regardless of the reason; the total amount of dried marihuana and cannabis oil (in kgs) held by Botanicals as of the final day of the reporting period; the total amount of dried marihuana and cannabis oil (in kgs) that Botanicals imported and exported during the reporting period; the total amount of dried marihuana and cannabis oil (in grams) lost, stolen and/or destroyed during the reporting period; the total number of shipments of dried marihuana and cannabis oils sent to the following during the reporting period in each province and territory. (i) (ii) (iii) Clients; other Licensed Producers; and licensed dealers; (k) (l) (m) (n) (o) the average and median daily amount of dried marihuana and cannabis oil (in grams) supported by health care practitioners to be used by Clients; the average and median shipment size (in grams) sent to Clients during the reporting period; the ten highest and ten lowest amounts of dried marihuana shipped to Clients in the reporting period (the name or other information of the Client must not be identified.); the total number of shipments of dried marihuana and cannabis oils to Clients in various defined ranges (in grams); and a list of all physicians and all nurse practitioners who provided a medical document for a Client in the reporting period, including the location and the number of medical documents the physician or nurse practitioner signed during the reporting period. The Current Licence also requires that the Company makes a report of the following additional information to the Office of Controlled Substances of Health Canada on a yearly basis: (a) the quantities of starting materials actually used in the production of finished products;

16 (b) (c) (d) (e) the quantity in inventory of cannabis on the premises as at December 31, including harvested cannabis prior to drying and after drying as well as the bulk and packaged dried cannabis held in stock; the quantity of cannabis produced on the premises during the calendar year; annual estimates of the production of cannabis for the following calendar year; and an annual summary of any adverse reactions reported. Medical Marihuana Market On its website, Health Canada indicates that in August 2016 there were 91,178 individuals registered, under the MMPR, to possess and consume dried cannabis or cannabis oil for medicinal purposes in Canada. Those individuals consumed 4,632 kgs of dried marihuana and 2,051 kg of cannabis oil during the period of June 1, 2016 to August 31, In the Cost-Benefit Analysis of Regulatory Changes for Access to Marihuana for Medical Purposes that Health Canada commissioned in connection with the development of the MMPR, the analysis used an upper bound (or ceiling) of 450,000 Canadians who might become participants in Canada s Marihuana Medical Access Program by 2024 as the reference case. According to the Health Canada website the average size of dosage per prescription for licences granted to individual users by Health Canada is 2.7 grams of cannabis per day and the average shipment per customer per day is 0.96 grams. The market for medical cannabis in Canada is tightly controlled by and subject to regulation, including the ACMPR, the Narcotic Control Regulations and the CDSA. The commercial medical cannabis industry is a new industry and the Company anticipates that such regulations will be subject to change as the Federal Government monitors Licensed Producers in action. Competitive Environment As of December 31, 2015, Health Canada had licensed a total of 27 Licensed Producers. As of October 31, 2016, Health Canada has now licensed a total of 36 Licensed Producers. Of the 36 Licensed Producers, 25 are fully authorized to sell finished product to registered customers, nine have a licence restricted to the cultivation of medical cannabis and two have a licence just to sell medical cannabis. In addition, there are 22 licensed producers of cannabis extracts. Five of these companies are only licensed to produce cannabis extracts. Sixteen of the companies are licensed to produce and sell cannabis extracts and one company is licensed only to sell cannabis extracts. The Company believes that the stringent application and compliance requirements of the ACMPR together with the requirements and process to obtain the requisite licences will service to restrict the number of new entrants to the medical marihuana market. However, the Company does believe that a number of new competitors will emerge and who will launch in the near future, all vying for market share. As cannabis is largely perceived as a commodity product, there is initially little to differentiate Botanicals products in terms of unique features or benefits. Botanicals believes that competition in the future will be based on issues such as product quality, variety, price and client services.

17 Business Strategy Botanicals current strategy is to remain a reputable and trusted provider of medical marihuana, and to accelerate the growth of its client base and sales revenue after the launch of its cannabis oil products. To reach these goals, Botanicals must provide a consistent supply of high quality products and maintain its excellence in client services. Through a combination of in house production and wholesale purchase from other Licensed Producers, Botanicals expects to continue to provide a wide range of strains of dried marihuana, THCA, THC and THC:CBD oils. Additionally, Botanicals expects to launch a high CBD low THC oil, and introduce new cannabis oils produced by supercritical fluid extraction in the first half of Client acquisition and client service is an ongoing focus for Botanicals. After the introduction of cannabis oils, the client base began to increase quickly and the Company expects the trend to continue and revenue to increase in the last quarter of The introduction of a new, on-line ordering system in June 2016 provided a simple and efficient method for clients to order products. Botanicals also recognizes that the medical profession plays a significant role in the introduction of medical marihuana to clients and continuing education of medical professionals on the product is required. In partnership with other professional organizations, Botanicals intends to continue to communicate with medical doctors and other healthcare professionals, and to provide the best education and services to these professionals. The Company s collection of genetic materials and established team of experts will continue to play a major role as Botanicals continues to build its propriety strains, products and reputation. Through its research program supported by a contribution from the NRC-IRAP grants, the Botanicals team has characterized the cannabinoids and terpenes profiles of its plant materials, and has identified several new strains from its diverse pool of cannabis seeds. Strains with exceptionally high CBD levels will allow Botanicals to produce CBD oils in the future with unique compositions of cannabinoids through blending. In addition to continued research and development of strains and products, the Company also plans to undertake clinical research to study the effects of our products on client health. With legalization of marihuana a potential opportunity, Botanicals longer term strategy includes becoming a leading provider of quality products for the broader marihuana market. Being one of the limited number of Licensed Producers with scalable systems and processes, management of the Company is of the opinion that Botanicals is well positioned to take advantage of the legalization of marihuana when and if it occurs. As such, Botanicals is actively looking at options to expand its production capabilities including acquiring a pre-approval application from another applicant and moving such application forward through the Health Canada approval process, or leasing or purchasing a facility that provides for scalable production options. Protection of Intellectual Property Through its affiliates, Botanicals has applied for Canadian trademark protection for the word Emerald for use in connection with Botanicals business, which includes medical cannabis and cannabis. Botanicals is also determining what additional unregistered intellectual property there may be opportunities for protection. Botanicals is reviewing its options on an ongoing basis.

18 Employees As of December 31, 2015, the Company employed 2 full-time employees, no part-time or temporary employees and two consultants. Botanicals employed seven full-time employees, three part-time or temporary employees and three consultants. As of the date of this AIF, the Company employed two fulltime employees, no part-time or temporary employees and two consultants. Botanicals employed seven full-time employees, four part-time or temporary employees and three consultants. The Company believes its relationship with its employees is good. None of the Company s employees are represented by a labour union or subject to a collective bargaining agreement nor are any of Botanicals employees. Risk Factors The Company, and thus the securities of the Company, should be considered a speculative investment due to the high-risk nature of the Company s business, and investors should carefully consider all of the information disclosed in this AIF prior to making an investment in the Company. In addition to the other information presented in this AIF, the following risk factors should be given special consideration when evaluating an investment in the Company s securities: Reliance on Current Licence Botanicals ability to grow, store and sell medical marihuana in Canada will be dependent on the Current Licence from Health Canada. 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 operating results of Botanicals and the Company. The Current Licence was renewed on November 8, 2016 for an eighteen-month period ending May 7, Botanicals believes it will meet the requirements of the ACMPR for further extensions or renewals of the Current Licence. However, should Health Canada not extend or renew the Current Licence, or should it renew them on different terms, the business, financial condition and results of the operation of Botanicals and the Company would be materially adversely affected. Regulatory Risks The activities of Botanicals 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 cannot predict the time required to secure all appropriate regulatory approvals for its products, or the extent of testing and documentation that may be required by governmental authorities. Any delays in obtaining, or failure to obtain regulatory approvals would significantly delay the development of markets and products and could have a material adverse effect on the business, results of operations and financial condition of Botanicals and the Company. Change in Laws, Regulations and Guidelines Botanicals operations are subject to a variety of laws, regulations and guidelines relating to the manufacture, management, transportation, storage and disposal of medical marihuana but also including laws and regulations relating to health and safety, the conduct of operations and the protection of the environment. While, to the knowledge of the Company s management, Botanicals is currently in compliance with all such laws, changes to such laws, regulations and guidelines due to matters beyond the control of Botanicals may cause adverse effects to Botanicals operations and financial condition.