LIQUOR STORES N.A. LTD.

LIQUOR STORES N.A. LTD. MANAGEMENT S DISCUSSION AND ANALYSIS For the Three and Nine Months Ended September 30, 2017 Dated as at November 9, 2017

Table of Contents 1. Basis of Presentation... 3 2. Strategic Direction and Outlook... 4 3. Performance Overview... 7 4. Liquidity and Capital Resources... 15 5. Analysis of Consolidated Financial Position... 20 6. Shareholders Equity... 21 7. Dividends... 21 8. Related Party Transactions... 22 9. Financial Instruments... 22 10. Business Overview... 22 11. Critical Accounting Estimates and Accounting Policies... 24 12. Non-IFRS Financial Measures... 25 13. Risk Factors... 27 14. Internal Controls over Financial Reporting, Disclosure Controls and Procedures... 27 15. Condensed Quarterly Information... 28 16. Forward Looking Statements... 28 2

1. Basis of Presentation This Management s Discussion and Analysis ( MD&A ) provides a comparison of Liquor Stores N.A. Ltd. s performance for the three and nine months ended September 30, 2017 with the three and nine months ended September 30, 2016. This discussion should be read in conjunction with the Company s unaudited condensed interim consolidated financial statements and notes thereto (the interim financial statements ) for the three and nine months ended September 30, 2017 and 2016, the audited consolidated financial statements for the years ended December 31, 2016 and 2015, the annual MD&A for the year ended December 31, 2016, and the Annual Information Form dated March 29, 2017, each of which is available on SEDAR at www.sedar.com. The information in this MD&A is current to November 9, 2017, unless otherwise noted. In this MD&A, unless the context otherwise requires, all references to we, us, our, Liquor Stores, and the Company refer to Liquor Stores N.A. Ltd. and its subsidiaries, and all references to Management refer to the directors and senior officers of the Company. Unless otherwise stated, financial information is expressed in Canadian dollars and has been prepared in accordance with International Financial Reporting Standards ( IFRS ), as set out in the Handbook of the Chartered Professional Accountants Part I ( CPA Handbook ), for financial statements. Certain dollar amounts have been rounded to the nearest hundred thousand dollars or thousand dollars. Throughout this MD&A references are made to non-ifrs financial measures, including same-store sales, operating profit before amortization, operating profit before amortization as a percentage of sales, adjusted operating profit before amortization, adjusting items, adjusted net earnings, and adjusted basic and diluted earnings per share. A description of these measures and their limitations are discussed under Non-IFRS Financial Measures, along with a reconciliation to the nearest IFRS financial measure. Additional information relating to Liquor Stores can be found at www.liquorstoresna.ca. The Company s continuous disclosure materials, including its annual and quarterly MD&A, audited annual and unaudited interim financial statements, its Annual Information Form, Information Circulars, and various news releases issued by the Company are also available on its website or directly through the SEDAR system at www.sedar.com. 3

2. Strategic Direction and Outlook The past six years have seen intense competition in Liquor Stores core market of Alberta, where there are now more than 1,400 retail liquor stores and 600 off premise liquor stores. Competitors are concentrated in the low-price, low-margin segment of retail alcohol sales. As these competitors entered Liquor Stores markets and trade areas, the Company did not adequately respond. Liquor Stores Alberta store network is outdated, with some stores not in optimal locations, and the Company suffers from negative brand image among Albertans. The core Alberta assets of the business were allowed to atrophy, as financial resources and management focus was allocated by the former board of directors on expansion in the United States. As a result, the Company has seen its market share in Alberta decline over the past several years. The Company also expects further competitive pressure in the Edmonton market, the Company s largest with 79 stores, due to relaxation or elimination of certain radius restrictions that provide for a minimum distance between liquor stores. At the June 2017 Annual Meeting of shareholders, shareholders voted for a new direction for the Company and new board leadership. The new board has directed the management team to implement the plan voted for overwhelmingly by shareholders. The focus will be on Alberta as directed, which is the core of Liquor Stores business. The Company intends to deliver much stronger and standardized operational performance in all the foundational elements of retail to restore its place as the market leader in Alberta. With that foundation in place, Liquor Stores intends to offer a distinctive experience in the marketplace to regain the Company s market share in Alberta and attack the discount competitors head on. Framework of the Strategic Plan The Company has undertaken a complete examination of its core competitive strengths and opportunities for growth in what has essentially become a commoditized retail market. This review has revealed many additional areas where management believes the Company can position or reposition itself. The opportunities for transforming the Company to achieve this objective are rooted in several specific initiatives described below that support one or more of the following integrated outcomes (1) achieve exceptional retail operational performance, (2) sharpen market focus, and (3) consistently deliver a superior and distinctive customer experience. Achieving exceptional operational performance means that Liquor Stores will develop a comprehensive and standardized set of operational metrics to be delivered consistently in every store, by every employee, in every customer interaction. This requires a retail footprint that is consistent in design and structure and is well maintained throughout the entire fleet. Liquor Stores is now committed to continuous improvement, to achieving the highest operating standards, and to eliminating unnecessary costs, duplication, and waste so that resources can be redeployed towards initiatives that drive sales and results. Sharpening our market focus means that Liquor Stores will concentrate its resources on market segments the Company can dominate and leverage its competitive strengths to increase market share and drive profitability. Growing market share where there is the greatest potential to maximize operating profit is key to the long-term success of the business. Delivering a superior customer experience means that Liquor Stores will invest the resources required to build a customer service culture and create a unique customer experience that consistently exceeds expectations and is distinctive in the market. The adult beverage retail experience in the Company s core markets have become commoditized which presents a great opportunity to distinguish our business and increase the Company s market share. 4

Strategic Pillars of Transformation The Company has begun implementing initiatives in the following areas to drive sales, improve profitability and deliver long-term shareholder value: Reduce operating costs as a percentage of sales by simplifying and streamlining the business structure, performing a store network optimization analysis that will review stores for closure or repositioning that are not strategic or contributing enough to the Company s operating profits, and optimizing the operating hours of our locations. This will allow us to more efficiently leverage our existing cost base to make the needed investments necessary to deliver the superior customer experience described above. Since August, this has included streamlining the management structure and reducing our overall administrative overhead by eliminating the duplicate U.S. management team members and placing those responsibilities under executives based in the Edmonton head office. In addition to a change in CEO, who is now based in Edmonton, the Company has: o o o o o reduced from two Chief Operating Officers to one based in Canada; eliminated the role of SVP, Shared Services with the Company s Information Technology department now reporting directly to the CEO and commenced the search for a Canadianbased VP, Human Resources to also report to the CEO; eliminated the US-based buying team for the private label program and consolidated this program under Canadian leadership; announced the pending closure of the US regional office in Kentucky; commenced the process of restructuring the marketing department to an internal marketing team rather than outsourcing the marketing function to an external agency, which will refocus marketing spend on initiatives to improve our sales rather than agency fees. These initiatives are expected to reduce selling, distribution, and administrative costs by more than $5 million on an annualized basis. Optimize the Company s inventory levels and increase inventory turnover ratios to free up trapped capital and fund more accretive initiatives. Management has set a target to improve store inventory turns to at least 8.0 times annually generated by a combination of assortment rationalization, renovation of the Company s store fleet to increase store sales volumes, and installation of new fixtures that will require a smaller inventory investment and improve product visibility to customers. The inventory reduction efforts are well underway and have already produced an inventory reduction of more than $20 million. Further reductions are expected before year-end in preparation for a major store renovation plan to be carried out in 2018. The inventory reduction and cash flow improvements from this initial renovation effort will be used to fund the next wave of renovations, however this process could negatively impact the Company s gross margin percentage in the short-term as unproductive products could require discounted pricing to clear out of the store network in a timely and efficient manner. 5

Improve the brand image of the Company through accelerating the pace of renovating Alberta and selected British Columbia store locations. This effort is expected to drive same-store sales increases in Canada and better position the Company against intensifying competition. Liquor Stores has nearly completed its renovation of four locations in Alberta which implement its beta concept of a new store design, layout, assortment, customer experience and brand. The first three locations will open November 16, 2017 with the remaining location opening in early December 2017. The Company will adjust elements of the design once market response is gauged and incorporate refinements for subsequent store renovations. The Company expects to begin renovating at least 50 stores in the next year, and will increase the number of stores renovated as further improvements in cash flow and reduction in inventory levels are achieved. The renovation of the store network could negatively impact the Company s sales performance for the periods where the stores are under renovation, however the Company anticipates an increase in the level of sales for the period subsequent to the renovation. Re-evaluating the Company s U.S. operations to maximize shareholder value. The Company previously announced that it has entered into a preliminary non-binding term sheet with a third party in connection with the proposed sale of the Company s fifteen Liquor Barn locations in the state of Kentucky. This is part of the Company s broader evaluation of strategic objectives to determine the best use of capital to maximize shareholder returns that will be performed for the Company s U.S. operations, which is still in the early phases for the remaining U.S regions. Accelerating implementation of a new enterprise resource planning ( ERP ) system that will improve business operations, enhance inventory management and procurement to further reduce capital invested in inventory, enhance internal data management, create significant insight into customer shopping behavior, and provide a scalable growth platform. The implementation cost is estimated to be between $12-15 million and the Company is targeting implementation between end of 2018 and early 2019. The project has already commenced and is currently on schedule and on budget. The Company has begun a process to rationalize the private label product assortment and improve our inventory turns from these products. This program remains key to the future of Liquor Stores and will be important as both a volume sales and margin enhancing program going forward. The Company believes that this integrated strategic approach reflects the best use of the Company s capital to maximize shareholder value. The capital investments of the Company will be funded through cash flow from existing operations, its current available credit and access to capital, and through ongoing inventory reduction efforts, which Management believes will be sufficient to finance the execution of the Company s objectives as outlined above without the need of raising any new debt or equity financing. 6

3. Performance Overview The following table summarizes highlights of the Company s financial performance for the three months ended September 30, 2017 and 2016: (Cdn $000 s unless otherwise noted) Sales Three months ended September 30, 2017 2016 Variance $ % $ % $ % (unaudited) (unaudited) Canadian same-stores (5) 126,264 61.8% 128,299 61.4% (2,035) -1.6% Other Canadian stores (1) 3,482 1.7% 3,544 1.7% (62) -1.7% Canadian wholesale 8,518 4.2% 8,331 4.0% 187 2.2% Total Canadian store sales 138,264 67.7% 140,174 67.1% (1,910) -1.4% U.S. same-stores (US$) (5) 51,043 25.0% 52,569 25.2% (1,526) -2.9% Other U.S. stores (US$) (2) 1,733 0.8% - 0.0% 1,733 100.0% Foreign exchange on U.S. store sales 13,331 6.5% 16,017 7.7% (2,686) -16.8% Total U.S. store sales 66,107 32.3% 68,586 32.9% (2,479) -3.6% Total sales 204,371 100.0% 208,760 100.0% (4,389) -2.1% Gross margin 51,919 25.4% 52,967 25.4% (1,048) -2.0% Selling and distribution expenses 36,586 17.9% 34,838 16.7% 1,748 5.0% Administrative expenses 10,175 5.0% 5,518 2.6% 4,657 84.4% Operating profit before amortization Adjusted operating profit before amortization (5) 5,158 2.5% 12,611 6.1% (7,453) -59.1% 9,905 4.8% 12,611 6.1% (2,706) -21.5% Net earnings (loss) (2,836) -1.4% 4,615 2.2% (7,451) -161.5% Adjusted net earnings (5) 4,392 2.1% 4,615 2.2% (223) -4.8% Cash provided by operating activities 18,015 8.8% 23,013 11.0% (4,998) -21.7% Dividends paid in cash 2,290 1.1% 2,227 1.1% 63 2.8% Total assets 437,078 470,877 (33,799) -7.2% Total equity 210,916 239,893 (28,977) -12.1% Basic and diluted earnings (loss) per share (0.12) 0.16 (0.28) -175.0% Basic and diluted adjusted earnings per share (5) 0.14 0.16 (0.02) -12.5% 7

The following table summarizes highlights of the Company s financial performance for the nine months ended September 30, 2017 and 2016: (Cdn $000 s, unless otherwise noted) Sales Nine months ended September 30, 2017 2016 Variance $ % $ % $ % (unaudited) (unaudited) Canadian same-stores (5) 332,490 57.8% 342,516 58.0% (10,026) -2.9% Other Canadian stores (3) 22,520 3.9% 23,060 3.9% (540) -2.3% Canadian wholesale 24,385 4.2% 23,531 4.0% 854 3.6% Total Canadian store sales 379,395 65.9% 389,107 65.9% (9,712) -2.5% U.S. same-stores (US$) (5) 118,157 20.6% 123,517 20.9% (5,360) -4.3% Other U.S. stores (US$) (4) 31,517 5.5% 28,821 4.9% 2,696 9.4% Foreign exchange on U.S. store sales 45,799 8.0% 48,622 8.3% (2,823) -5.8% Total U.S. store sales 195,473 34.1% 200,960 34.1% (5,487) -2.7% Total sales 574,868 100.0% 590,067 100.0% (15,199) -2.6% Gross margin 147,904 25.7% 149,071 25.3% (1,167) -0.8% Selling and distribution expenses 114,621 19.9% 103,912 17.6% 10,709 10.3% Administrative expenses 22,066 3.8% 18,058 3.1% 4,008 22.2% Operating profit before amortization (5) Adjusted operating profit before amortization (5) 11,217 2.0% 27,101 4.6% (15,884) -58.6% 21,590 3.8% 28,346 4.8% (6,756) -23.8% Net earnings (loss) (9,003) -1.6% 7,809 1.3% (16,812) -215.3% Adjusted net earnings (5) 3,478 0.6% 8,708 1.5% (5,230) -60.1% Cash used in operating activities 12,245 2.1% 15,775 2.7% (3,530) -22.4% Dividends paid in cash 6,852 1.2% 11,066 1.9% (4,214) -38.1% Total assets 437,078 470,877 (33,799) -7.2% Total equity 210,916 239,893 (28,977) -12.1% Basic and diluted earnings (loss) per share (0.37) 0.24 (0.61) -254.2% Basic and diluted adjusted earnings (loss) per share (5) 0.08 0.28 (0.20) -71.4% Notes: (1) Sales for Other Canadian stores for the three months ended September 30, 2017 and 2016 include those of two new stores opened, five stores closed, and one store sold subsequent to June 30, 2016, and two stores in British Columbia that were closed and relocated to superior locations. (2) Sales for Other U.S. stores for the three months ended September 30, 2017 and 2016 include one new store opened in Connecticut subsequent to June 30, 2016. 8

(3) Sales for Other Canadian stores for the nine months ended September 30, 2017 and 2016 include those of two new stores opened, six stores closed, and one store sold subsequent to December 31, 2015, two stores in British Columbia that were closed and relocated to superior locations, and seven stores that were closed for approximately one month in Q2 2016 resulting from the evacuation of the Fort McMurray area due to a fire. (4) Sales for Other U.S. stores for the nine months ended September 30, 2017 and 2016 include the following changes subsequent to December 31, 2015: (i) New Jersey: two new stores acquired, and (ii) Connecticut: one new store opened. (5) Same-store sales, operating profit before amortization, adjusting items, adjusted operating profit before amortization, adjusted net earnings (loss), and adjusted earnings (loss) per share are non-ifrs measures that do not have standardized meaning prescribed by IFRS. For more information and a reconciliation of non-ifrs measures to the closest IFRS measure see the Non-IFRS Financial Measures section of this MD&A. Third Quarter 2017 Operating Results Compared to Third Quarter 2016 Operating Results Sales Total sales decreased by $4.4 million or 2.1% to $204.4 million in the third quarter of 2017 (Q3 2016 - $208.8 million), attributable to the following: Same-Store Sales 1 Canadian same-store sales decreased by $2.0 million, or 1.6%. o o Approximately 70% of the decline in Canadian same-store sales compared to prior year was attributable to the seven stores in Fort McMurray, AB. In the third quarter of 2016, sales in Fort McMurray increased due to a temporary population increase related to the clean-up and restoration efforts from the April 2016 forest fires. The three large format Wine and Beyond stores in Edmonton continued to perform well, with increases in sales at all locations compared to the same period last year. The British Columbia region overall also had sales increase compared to the same quarter last year. U.S. same-store sales decreased by $1.5 million or 2.9%. o o Same-store sales in Alaska continue to be negatively impacted by the Alaska economy. Same-store sales in Kentucky and New Jersey declined compared to the same quarter in the prior year due to intensified competition in these markets. Other Sales Canadian wholesale sales, which include sales to licensee customers in Alberta (restaurants, lounges, hotels, etc.), were $8.5 million for the three months ended September 30, 2017, which increased by $0.2 million or 2.2% compared to Q3 2016 (Q3 2016 - $8.3 million). Sales for Other U.S. stores have increased by $1.7 million compared to Q3 2016, due to a new large format store opened in Norwalk, Connecticut in October 2016. Foreign Exchange The impact of foreign exchange on the Company s U.S. store sales resulted in a $2.7 million negative adjustment in $USD sales being converted to $CAD compared to the same period last year as a result of the strengthening in the Canadian dollar compared to the U.S. Dollar. 1 See the Non-IFRS Financial Measures section of this MD&A 9

Gross Margin Gross margin as a percentage of sales for the period was flat at 25.4% (Q3 2016 25.4%) compared to the same period in the prior year. Gross margin percentage was reduced by a higher proportion of beer sales versus wine and spirits compared to the same period last year, with beer sales attracting a lower gross margin percentage. This reduction was offset by the Company s continued focus on increasing sales of private label products which attract a higher gross margin percentage than comparable national brands. Gross margin for the period was $51.9 million, a decrease of $1.1 million or 2.0% from $53.0 million for the same period last year which was due primarily to the decrease in sales over the same period compared to last year due to the factors discussed above. Selling and distribution expenses Selling and distribution expenses for the three months ended September 30, 2017 were $36.6 million, up $1.8 million from $34.8 million a year earlier. The Company s selling and distribution expenses increased as a result of the impact of an increase in the minimum wage in Alberta and British Columbia, and additional marketing and pre-opening costs for the opening of a new large format Wine and Beyond in Calgary, AB. Administrative expenses Administrative expenses for the three months ended September 30, 2017 were $10.2 million, an increase of $4.7 million from $5.5 million a year earlier. The increase related to an aggregate expense of $4.7 million of severance costs related to the departure of the Company s former President and Chief Executive Officer, Executive Vice President and Chief Operating Officer, US, and Senior Vice President, Human Resources. With the impact of this severance cost removed, administrative expenses for the three months ended September 30, 2017 were $5.5 million, which was roughly flat compared to a year earlier. Operating profit before amortization Operating profit before amortization for the three months ended September 30, 2017 decreased by $7.5 million to $5.2 million or 2.5% as a percentage of sales (Q3 2016 6.1%). The decrease in operating profit was primarily due to the $4.7 million of severance costs coupled with the decrease in gross margin as discussed above. Adjusted operating profit before amortization for the three months ended September 30, 2017 decreased by $2.7 million, or 21.5%, to $9.9 million after the impact of the severance for the departed U.S.-based executives discussed above was removed. 10

Amortization of property, equipment, and intangible assets Amortization expense on property, equipment, and intangible assets of $3.7 million for the third quarter of 2017 increased by $0.7 million compared to the same period in the prior year (Q3 2016 - $3.0 million). Additional amortization in the current year related to the new stores opened subsequent to June 30, 2016 along with accelerated amortization for stores renovated in the current period. Gain on disposal of assets The Company completed a transaction with a third party whereby the Company sold store fixtures, a wine-only liquor license and net working capital for a store location in British Columbia for gross proceeds of $2.3 million. The Company has recorded a gain on sale of $1.4 million from this transaction. Finance Costs Finance costs for the third quarter of 2017 have decreased by $0.5 million to $2.2 million (Q3 2016 - $2.7 million) primarily related to lower average long-term debt balances compared to the same period in the prior year resulting in lower interest paid on the Company s operating line of credit. Impairment The Company recorded an impairment charge of $3.3 million to the goodwill allocated to the Birchfield Ventures cash generating unit grouping ( CGU ). The estimated recoverable amount of the CGU declined in the current period primarily related to a change in Management s forecasted sales and profitability as a result of, among other factors, increased competition in the areas that these stores operate and continued decline of their operating results. The Company also recorded an impairment charge of $2.5 million related to a decline in the forecasted sales and profitability of a store location within the Kentucky region. Fair value adjustments Fair value adjustments are comprised of unrealized gains recorded on the non-controlling interest put option liability of $1.1 million (Q3 2016 $0.1 million loss) as a result of a decline in the Company s forecast of future earnings for Birchfield Ventures and the resulting valuation of the put value for the remaining 49% of Birchfield Ventures not currently owned by an indirect subsidiary of the Company. In addition, the Company s call option on the unowned 49% of Birchfield Ventures was also re-measured resulting in an unrealised loss of $0.2 million (Q3 2016 - $0.3 million). An unrealized gain was recorded for an interest rate swap of $0.6 million (Q3 2016 $0.1 million). Income taxes An income tax recovery of $0.9 million for an effective rate of 23% was recorded for the third quarter of 2017. The Company s estimated effective rate of tax will fluctuate based on the estimated proportion of income/loss attributable to each jurisdiction in which the Company operates. 11

Net earnings (loss) For the three months ended September 30, 2017, a net loss of $2.8 million was recorded, which is a $7.4 million decrease from Q3 2016 (Q3 2016 $4.6 million net earnings). The decrease in earnings is due to the decrease in operating profit before amortization and impairment charges discussed further above. On a per share basis, loss per share was $0.12 for Q3 2017 (Q3 2016 $0.16 earnings per share). Normalized for other adjusting items (see Non-IFRS Measures of this MD&A for a summary of adjusting items) and the impairment charges discussed above, adjusted net earnings in the current quarter were $4.4 million, a decrease of $0.2 million compared to the same period in the prior year, and adjusted earnings per share was $0.14 (Q3 2016 - $0.16 per share). Nine months ended September 30, 2017 Operating Results Compared to Nine months ended September 30, 2016 Operating Results Sales Total sales decreased by $15.2 million or 2.6% to $574.9 million for the nine months ended September 30, 2017 (2016 - $590.1 million), related primarily to the following: Same-Store Sales 2 Canadian same-store sales decreased by $10.0 million, or 2.9%. o o Stores located in Alberta continued to face pressure from an increasing level of competition faced from discounters that have continued to enter Alberta with locations in close proximity to many of the Company s existing stores. Same-store sales increased in British Columbia compared to the same period in the prior year. The large format Wine and Beyond stores also continued to perform well, with increases in sales at all three locations compared to the same period last year. U.S. same-store sales decreased by $5.4 million or 4.3%. o o Same-store sales in Alaska continue to be negatively impacted by the Alaska economy. Same-store sales in Kentucky declined compared to the same period in the prior year caused by the entrance of a new national competitor in Q4 2016, and in both Louisville and Lexington from the continued expansion of stand-alone liquor stores operated by a national grocer. 2 See the Non-IFRS Financial Measures section of this MD&A 12

Other Sales Canadian wholesale sales, which include sales to licensee customers in Alberta (restaurants, lounges, hotels, etc.), were $24.4 million for the nine months ended September 30, 2017, representing an increase of $0.9 million or 3.6% from the prior year (2016 - $23.5 million). Sales for the Other Canadian stores have decreased $0.5 million compared to the same period in the prior year, primarily as a result of the overall decrease in sales from the seven Fort McMurray stores that benefitted from a temporary increase in population due to the clean-up and restoration efforts as a result of the forest fires that occurred in Q3 2016. Sales for Other U.S. stores have increased by $2.7 million compared to the same period in 2016, primarily as a result of the sales contribution of the new large format store in Norwalk, Connecticut opened in October 2016. Foreign Exchange The impact of foreign exchange on the Company s U.S. store sales resulted in a $2.8 million negative adjustment in $USD sales being converted to $CAD compared to the same period last year as a result of the strengthening in the Canadian dollar compared to the U.S. Dollar. Gross Margin Gross margin for the period was $147.9 million, a decrease of $1.2 million or 0.8% from $149.1 million for the same period last year. The change in gross margin is attributable to the higher gross margin as a percentage of sales being more than offset by the gross margin impact of the decline in same store sales in the current quarter. Gross margin as a percentage of sales for the period increased to 25.7% (2016 25.3%). Selling and distribution expenses Selling and distribution expenses for the nine months ended September 30, 2017 were $114.6 million, an increase of $10.7 million or 10.3% from $103.9 million a year earlier. The increase in selling and distribution expenses related primarily to a provision of $4.1 million recorded in the second quarter of 2017 for the unfavorable lease for the unopened store in Berlin, Massachusetts, along with an increase in marketing and promotion costs for the rebranding of a large format store in Norwalk, Connecticut (now branded as Wine and Beyond due to poor operating performance under the previous brand of LQR MKT ) and the launch of a new Wine and Beyond location in Calgary, AB in the third quarter of 2017. The Company also experienced inflationary increases to in-store labor costs as a result of minimum wage increases in Alberta and British Columbia. 13

Administrative expenses Administrative expenses for the nine months ended September 30, 2017 were $22.1 million, an increase of $4.0 million from $18.1 million a year earlier. As discussed in the summary of results for the three months ended September 30, 2017 earlier in this MD&A, ongoing cost containment measures were offset by severance costs incurred for the departure of former members of executive management of the Company. The Company also incurred additional costs of $1.4 million in the second quarter of 2017 in preparation for the contested annual meeting of the shareholders. The dissident proxy was ultimately successful, resulting in the election of six new Directors and a new strategy being implemented for the Company, as discussed earlier in this MD&A. Operating profit before amortization Operating profit before amortization for the nine months ended September 30, 2017 decreased by $15.9 million to $11.2 million or 2.0% as a percentage of sales (2016 4.6%). The decrease in operating profit was primarily due to the decline in gross margin combined with the increase in operating and administrative costs as discussed above. Adjusted operating profit before amortization for the nine months ended September 30, 2017 decreased by $6.8 million, or 23.8%, to $21.6 million with the impact of the provision recorded for the unfavorable lease for the Berlin, Massachusetts location, executive severance and the incremental costs for the contested annual shareholders meeting removed. Amortization of property, equipment, and intangible assets Amortization expense on property, equipment, and intangible assets of $9.5 million for the first nine months of 2017 increased by $0.3 million from the same period in the prior year (2016 - $9.2 million). Additional amortization in the current year related to the new stores opened subsequent to December 31, 2015 along with accelerated amortization for stores renovated in the current period. Amortization expense was partially offset by the reduced amortization related to stores that were closed over this same period. Gain on disposal of assets The Company completed a transaction with a third party whereby the Company sold store fixtures, a wine-only liquor license and net working capital for a store location in British Columbia for gross proceeds of $2.3 million. The Company has recorded a gain on sale of $1.4 million from this transaction. Finance Costs Finance costs have increased by $1.0 million to $8.9 million for the nine months ended September 30, 2017 (2016 - $7.9 million) related to the $1.2 million of non-cash finance costs recorded upon the early redemption of the 5.85% debentures, along with additional interest costs incurred from the issuance of the 4.70% convertible subordinated debentures issued prior to the redemption of the 5.85% debentures which was partially offset by lower interest paid on the Company s operating line of credit over that same period. Fair value adjustments Fair value adjustments are comprised of unrealized gains recorded on the non-controlling interest put option liability for an indirect subsidiary of the Company of $0.9 million (2016 $0.3 million loss) as a result of a decline in the Company s forecast of future earnings for Birchfield Ventures and the resulting valuation of the put value for the remaining 49% of Birchfield Ventures not currently owned by an indirect subsidiary of the Company. The Company also recorded an unrealized loss on the purchase option of $1.1 million (2016 $0.8 14

million) for the remaining 49% of Birchfield Ventures not owned by the Company, and a gain recorded on the interest rate swap of $0.9 million (2016 - $0.1 million loss). Impairment The Company recorded an impairment charge of $3.3 million to the goodwill allocated to the Birchfield Ventures cash generating unit grouping ( CGU ). The estimated recoverable amount of the CGU declined in the current period primarily related to a change in Management s forecasted sales and profitability as a result of, among other factors, increased competition in the areas that these stores operate and continued decline of their operating results. The Company also recorded an impairment charge of $2.5 million related to a decline in the forecasted sales and profitability of a store location within the Kentucky region. Income taxes In the first nine months of 2017, the Company recorded an income tax recovery of $2.6 million for an effective rate of 23% (2016 - $2.3 million expense). The Company s estimated effective rate of tax will fluctuate based on the estimated proportion of income/loss attributable to each jurisdiction that the Company operates in for 2017 compared to 2016. Net earnings (loss) For the nine months ended September 30, 2017, a net loss of $9.0 million was recorded, representing a decrease of $16.8 million compared to the same period in the prior year (2016 $7.8 million net earnings). The decrease in earnings is due to the decrease in operating profit coupled with the impairment charges discussed further above. On a per share basis, loss per share was $0.37 for the nine months ended September 30, 2017 (2016 $0.24 earnings per share). Normalized for the adjusting items and impairments discussed above (see Non-IFRS Measures of this MD&A for a summary of adjusting items), adjusted net earnings were $3.5 million, a decline of $5.2 million compared to same period in the prior year. 4. Liquidity and Capital Resources Summary of Consolidated Cash Flows Three months ended September 30, Nine months ended September 30, (expressed in thousands) 2017 2016 2017 2016 Cash provided by operating activities Cash used in investing activities Cash provided by (used in) financing activities Effect of exchange rate on changes in cash 18,015 $23,013 $12,245 $15,775 (8,585) (2,423) (15,091) (31,102) (11,490) (22,844) (2,967) 15,961 (56) 44 (117) (428) Net increase (decrease) in cash $(2,116) $(2,210) $(5,930) $206 15

Operating activities For the three months ended September 30, 2017, cash provided by operating activities was $18.0million, a $5.0million decrease from $23.0 million provided by the same period in the prior year. For the nine months ended September 30, 2017, cash provided by operating activities was $12.2million, a $3.6million decrease from $15.8 million provided in the same period in the prior year. The decrease in cash flows from operating activities in both periods related to a decline in operating profit before amortization 3 partially offset by the Company s continued efforts to reduce inventory levels compared to the prior year. Investing activities For the three months ended September 30, 2017, cash used in investing activities was $8.6 million, a $6.2 million increase from $2.4 million used for the same period in the prior year primarily related to the construction of new stores, where the spend has increased compared to the same period in the prior year. For the nine months ended September 30, 2017, cash used in investing activities was $15.1million, a $16.0million decrease from $31.1 million used for the same period in the prior year. Cash used for investing activities primarily related to the construction of new stores and relocations of existing stores, which increased in activity and spend compared to the same period in the prior year, which was more than offset by the Company s loan to a subsidiary to permit an indirect subsidiary s acquisition of 51% of Birchfield Ventures LLC for $20.9 million in the prior year. Financing activities For the three months ended September 30, 2017, cash used in financing activities was $11.5 million, compared to $22.8 million used in financing activities from the same period in 2016. This change primarily relates to lower operating cash flows generated in 2017 compared to the same period in 2016 being used to repay longterm debt along with increased cash flow used in investing activities as discussed above. For the nine months ended September 30, 2017, cash used in financing activities was $3.0 million, compared to $16.0 million provided by the same period in 2016. This change primarily relates to higher total proceeds from total long term debt (net of debentures repaid) in the prior year, which was due to the loan for the acquisition of Birchfield for cash consideration of $20.9 million in Q1 2016. Foreign currency translation gain on cash The accounts of the Company s subsidiaries with a U.S. dollar functional currency are translated into Canadian dollars as follows: Assets and liabilities are translated at the rate of exchange in effect at the balance sheet date; and Revenue and expense items (including amortization) are translated at the average rate of exchange for the period. The resulting unrealized exchange gains and losses from these translation adjustments are included as a separate component of shareholders equity in accumulated other comprehensive income. The effect of exchange rate changes on cash balances held in foreign currencies is separately reported as part of the reconciliation of the change in cash balances for the period. The U.S. dollar experienced increases and decreases against the Canadian dollar at times during the nine months ended September 30, 2017, and based on the timing and level of cash held in U.S. dollars, the Company has recorded a $0.1 million loss on cash held in foreign 3 See the Non-IFRS Financial Measures section of this MD&A 16

currency in the three months ended September 30, 2017 (2016 insignificant gain) and a $0.1 million loss in the nine months ended September 30, 2017 (2016 - $0.4 million loss). Credit Facilities and Subordinated Debentures The Company, through a syndicate group of lenders, has a credit facility that matures on September 30, 2019, with a total size of $165 million plus $15 million USD. At November 8, 2017, there was approximately $72.9 million drawn on the credit facility. Pursuant to the terms of the credit facility, the Company has the ability to request an additional $50 million of loan availability (to be provided by the lenders on a best-effort basis). The Company s credit facility is subject to a number of financial covenants. Under the terms of the Company s credit facility, the following ratios are monitored: funded debt to EBITDA, adjusted debt to EBITDAR, and fixed coverage ratio. There are no financial covenants attributable to the Company s convertible unsecured subordinated debentures. Funded debt to EBITDA ratio Funded debt is defined as all of the Company s obligations, liabilities and indebtedness which would, in accordance with IFRS, be classified on a consolidated statement of financial position of the Company as indebtedness for borrowed money of the Company, but excludes subordinated debt, deferred taxes and accounts payable incurred in the ordinary course of the Company s business. EBITDA is defined under the amended and restated credit facility as the net income of the Company plus the following: interest expense, provision for income taxes, any portion of expense in respect of non-cash items including any long-term incentive plan amounts not to be settled in cash, depreciation, amortization, deferred taxes, and non-recurring losses to a maximum of $4.5 million in any fiscal year, write downs of goodwill and intangible assets, restructuring charges for stores, and amortization of inventory fair value adjustments. EBITDA is also less any non-recurring extraordinary or one-time gains from any capital asset sales or certain foreign currency transactions. The Company is also permitted to include a trailing twelve months of estimated EBITDA for any new acquisitions. Adjusted debt to EBITDAR Adjusted debt is defined as the Company s debt plus seven times aggregate rent expense. EBITDAR is defined as EBITDA plus aggregate rent expense. Fixed charge coverage ratio Fixed charge coverage ratio is the ratio of EBITDAR less the aggregate amount of unfunded capital expenditures and cash taxes divided by the sum of all interest expense and scheduled repayment of debt for the relevant period, cash dividends and rent. As at September 30, 2017, the Company was in compliance with all financial covenants, as set forth below: Ratio Covenant As at September 30, 2017 Funded debt to EBITDA < 3.50:1.00 1.96 Adjusted debt to EBITDAR < 5.00:1.00 4.42 Fixed charge coverage > or = 1.05:1.00 1.25 17

The funded debt to EBITDA, adjusted debt to EBITDAR and fixed charge coverage ratios are calculated quarterly based on the latest rolling four quarter period completed, including acquired stores. 5.85% Debentures On May 3, 2017, the Company redeemed all of its outstanding 5.85% convertible unsecured subordinated debentures (the 5.85% Debentures ). The 5.85% Debentures were redeemed prior to their maturity date of April 30, 2018 in accordance with the terms of the trust indenture governing the 5.85% Debentures. The aggregate principal amount of the 5.85% Debentures redeemed was $67.5 million, reflecting a redemption price equal to $1,000 for each $1,000 principal amount of 5.85% Debentures held. The Company had previously raised the 4.70% Debentures, as described below, to fund the repayment of the 5.85% Debentures, which effectively refinanced these Debentures at a lower interest rate and extended the maturity to January 31, 2022. 4.70% Debentures On September 29, 2016 the Company issued $67.5 million principal amount of convertible unsecured subordinated debentures and on October 4, 2016 the Company issued an additional $10.1 million upon exercise of the over-allotment option of the underwriters (collectively, the 4.70% Debentures ) for a total aggregate principal amount of $77.6 million. The 4.70% Debentures are due January 31, 2022 and bear interest at a rate of 4.70% per annum, payable semi-annually in arrears on January 31 and July 31 of each year, commencing July 31, 2017. The 4.70% Debentures are convertible at any time at the option of the holders into common shares of the Company at a conversion price of $14.60 per share. The primary use of proceeds of the 4.70% Debentures was to repay the 5.85% Debentures prior to their maturity, as described above, to lower the ongoing interest costs of the Company. The 4.70% Debentures will not be redeemable prior to January 31, 2020. On or after January 31, 2020 and prior to January 31, 2021, the 4.70% Debentures may be redeemed by the Company, in whole or in part from time to time, on not more than 60 days and not less than 30 days prior notice at a redemption price equal to their principal amount plus accrued and unpaid interest, if any, up to but excluding the date set for redemption, provided that the volume-weighted average trading price of the Common Shares on the TSX for the 20 consecutive trading days ending five trading days prior to the date on which notice of redemption is provided is at least 125% of the Conversion Price. On or after January 31, 2021 and prior to the maturity date, the Company may, at its option, redeem the 4.70% Debentures by way of cash payment or through the issuance of common shares, in whole or in part, from time to time at par plus accrued and unpaid interest. Liquidity Risk Liquidity ensures the Company has sufficient financial resources available at all times to meet its obligations. The Company manages liquidity risk by ensuring it has a variety of alternatives available to fund acquisitions, new store development and ongoing operations, which include cash provided by operations, bank indebtedness, issuance of new equity or debt instruments or a combination thereof. The decision to utilize a specific alternative is dependent upon capital market conditions and interest rate levels. The degree to which the Company is leveraged may impact its ability to obtain additional financing for working capital or to finance acquisitions. Management believes the Company is managing liquidity risk appropriately and anticipates the Company will be able to fund operating and liquidity needs in the near term. As at November 8, 2017, the Company has undrawn credit of approximately $42.0 million under its credit facility available to finance operating requirements, growth opportunities and for general corporate purposes. 18

Interest Rate Risk and Sensitivity The Company s indebtedness in respect of its credit facility bears interest at floating rates. The Company manages its interest rate risk through credit facility negotiations and by identifying upcoming credit requirements based on strategic plans. The Company is party to an interest rate swap with a Canadian Schedule I bank that expires December 14, 2019 with a notional $60 million of principal debt with a rate equivalent to 1.23% plus the applicable credit spread determined with reference to the credit facility. At November 8, 2017, the fixed rate paid by the Company on the notional amount of the interest rate swap is 2.98% per annum after taking into account the applicable credit spread determined with reference to the credit facility. The Company is not using hedge accounting for this swap, and accordingly, its fair value is recorded on the statement of financial position, with changes in fair value recorded in earnings. Assuming an outstanding amount drawn on the credit facility of $72.9 million, of which $60.0 million is subject to the interest rate swap, the following table presents a sensitivity analysis to changes in market interest rates on floating rate indebtedness and their potential annual impact on the Company as at November 8, 2017: (expressed in thousands) + 1.00% - 1.00% Increase (decrease) in interest expense 129 (129) Increase (decrease) in net earnings (100) 100 An increase/decrease of 1.00% in market interest rates would result in a nominal decrease/increase in the Company s net earnings per share. Credit Risk The Company s financial assets that are exposed to credit risk consist primarily of cash and cash equivalents and accounts receivable. The Company maintains its cash and cash equivalents with a major Canadian chartered bank. The Company, in its normal course of operations, is exposed to credit risk from its wholesale customers in Alberta; however, wholesale customer purchases represent less than 5% of the Company s sales. Risk associated with accounts receivable is mitigated by credit management policies. Historically, bad debts from these accounts have been insignificant. The Company is not subject to significant concentration of credit risk with respect to its customers; primarily all receivables are due from businesses in the Alberta hospitality industry. Bad debts are insignificant in relation to total sales. Foreign Exchange Risk The Company is subject to fluctuations in the value of the Canadian dollar relative to the U.S. dollar in the normal course of business. A portion of cash flows are realized in U.S. dollars and as such, fluctuations in the exchange rate between the Canadian dollar and U.S. dollar may have an effect on financial results. Transactions denominated in foreign currencies are recorded at the rate of exchange on the transaction date. Monetary assets and liabilities are translated into Canadian dollars at the rate of exchange prevailing at the balance sheet date, with any resulting gain or loss being included in earnings. This exposure primarily relates to U.S. intercompany management fees, interest payments, and dividends which totalled $4.3 million USD for the twelve month period ended September 30, 2017. 19

5. Analysis of Consolidated Financial Position Selected accounts (Cdn $000 s) As at September 30, 2017 As at December 31, 2016 Cash 1,090 7,020 Accounts receivable 7,125 3,184 Inventory 133,942 155,425 Total current assets 153,915 176,009 Property and equipment 64,401 63,674 Intangible assets 45,345 46,690 Goodwill 153,955 158,318 Total assets 437,078 463,047 Accounts payable and accrued liabilities 58,230 67,402 Dividends payable 1,017 830 Total current liabilities 62,071 69,006 Long-term debt 143,281 135,838 Provisions 3,836 455 Non-controlling interest put option 12,355 14,316 Total liabilities 226,162 227,652 The Company has a significant investment in working capital that is primarily due to the Company being required by law to pay for inventory prior to receiving it in Alberta and British Columbia. At September 30, 2017, net working capital (current assets, excluding cash, less current liabilities) was $90.8 million, a $9.2 million decrease from the previous year end (2016 - $100.0 million) primarily due to the reduction in the Company s inventory levels and timing of settlement of accounts payable and accrued liability balances. Accounts receivable increased $3.9 million to $7.1 million as at September 30, 2017 primarily due to the sale proceeds of $2.4 million for a wine-only location in British Columbia which were physically received after September 30, 2017, and an increase in tenant allowance receivables for new stores that completed construction and opened during the third quarter of 2017. Inventory was reduced by $21.5 million compared to December 31, 2016. The Company has implemented several measures to manage our inventory levels more efficiently including stronger controls on purchasing. The carrying value of property and equipment was $64.4million, a $0.7million increase from the prior year end (December 31, 2016 - $63.7 million). Additions during the period were related to the construction costs for new stores under development in the period for the relocation of the two stores in British Columbia, a new Wine and Beyond location in Calgary, AB, store renovations and maintenance capital expenditures. These additions were nearly offset by amortization, impairment charges and disposals during the period discussed elsewhere within this MD&A. Goodwill decreased primarily as a result of the impairment charges discussed earlier in this MD&A. Accounts payable and accrued liabilities decreased by $9.2 million to $58.2 million as at September 30, 2017, primarily as a result of the timing of a large amount of accounts payable and accruals recorded as at December 31, 2016 being paid in Q1 2017. This included accounts payable and accruals for inventory buys in the U.S. to replenish stock subsequent to the holiday selling season. 20