HARVEST HEALTH & RECREATION INC....HARVEST HEALTH & RECREATION INC. MANAGEMENT’S DISCUSSION &...

HARVEST HEALTH & RECREATION INC.

MANAGEMENT’S DISCUSSION & ANALYSIS

For the three and nine months ended September 30, 2019 and 2018

(Expressed in thousands of United States dollars)

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MD&A of Harvest Health & Recreation Inc.

This management discussion and analysis (“MD&A”) of the financial condition and results of operations of Harvest Health & Recreation Inc. (the “Company” or “Harvest”) is for the three and nine months ended September 30, 2019 and 2018. It is supplemental to, and should be read in conjunction with, the Company’s condensed consolidated financial statements and the accompanying notes for the three and nine months ended September 30, 2019 and 2018. The Company's interim condensed consolidated financial information for the three and nine months ended September 30, 2019 and 2018 is unaudited. The Company’s financial statements are prepared in accordance with International Financial Reporting Standards (“IFRS”). Financial information presented in this MD&A is presented in thousands of United States dollars (“$”) unless otherwise indicated. The MD&A is presented as of November 29, 2019 unless otherwise noted.

This MD&A contains certain “forward-looking statements” and certain “forward-looking information” as defined under applicable United States securities laws and Canadian securities laws. Forward-looking information is often identified by the words "may," "would," "could," "should," "will," "intend," "plan," "anticipate," "believe," "estimate," "expect" or similar expressions.

Forward-looking statements may relate to future financial conditions, results of operations, plans, objectives, performance or business developments. These statements speak only as at the date they are made and are based on information currently available and on the then current expectations of the party making the statement and assumptions concerning future events, which are subject to a number of known and unknown risks, uncertainties and other factors that may cause actual results, performance or achievements to be materially different from that which was expressed or implied by such forward-looking statements, including, but not limited to, risks and uncertainties related to:

• the ability to raise sufficient capital to meet its debt obligations and advance the business of the Company and to fund planned operating and capital expenditures and planned acquisitions;

• the quality, efficacy and safety of the Company’s products; • the ability of the Company to develop its brand and meet its growth objectives; • the ability of the Company to complete planned acquisitions that are accretive to its revenue; • the ability of the Company to obtain and/or maintain licenses to operate in the jurisdictions in which it operates or in which it

expects or plans to operate; • adverse changes in applicable laws or adverse changes in the application or enforcement of current laws, including those related

to taxation; • the ability to locate and acquire suitable companies, properties and assets necessary to execute on the Company's business

plans; • the increasing costs of compliance with extensive government regulation; • the availability of financing opportunities, risks associated with economic conditions, dependence on management and conflicts

of interest; and • other risks described in this MD&A and described from time to time in documents filed by the Company.

The forward-looking statements contained herein are based on certain key expectations and assumptions, including, but not limited to, with respect to expectations and assumptions concerning: (i) receipt of required shareholder and regulatory approvals in a timely manner or at all; (ii) receipt and/or maintenance of required licenses and third party consents in a timely manner or at all; and (iii) the success of the operations of the Company.

Although we believe that the expectations and assumptions on which such forward-looking statements are based are reasonable, undue reliance should not be placed on the forward-looking statements, because no assurance can be given that they will prove to be correct. Since forward-looking statements address future events and conditions, by their very nature, they involve inherent risks and uncertainties. Actual results could differ materially from those currently anticipated due to a number of factors and risks. These include but are not limited to: the availability of sources of income to generate cash flow and revenue; the dependence on management and directors; risks relating to the receipt of the required licenses, risks relating to additional funding requirements; due diligence risks; exchange rate risks; potential transaction and legal risks; risks relating to laws and regulations applicable to the processing and sale of cannabis, and the right to cultivate, produce, distribute and dispense cannabis and cannabis related products; and other factors beyond the Company’s control, as more particularly described under the heading “Risk Factors” in this MD&A.

Consequently, all forward-looking statements made in this MD&A and other documents of the Company, as applicable, are qualified by such cautionary statements, and there can be no assurance that the anticipated results or developments will actually be realized or, even if realized, that they will have the expected consequences to or effects on the Company. The cautionary statements contained or referred to in this section should be considered in connection with any subsequent written or oral forward-looking statements that the Company and/or persons acting on its behalf may issue. The Company does not undertake any obligation to update or revise any forward-looking statements, whether as a result of new information, future events or otherwise, other than as required under securities legislation.

OVERVIEW OF THE COMPANY

Harvest is one of the largest multi-state vertically integrated operators in the cannabis industry in the United States.

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Founded in Arizona and receiving its first license there in 2012, Harvest has one of the largest market shares in the state, one of the largest medical cannabis market in the country and one of the oldest regulated cannabis markets in the world. Building on its success in Arizona, Harvest has consistently grown its revenues and industry footprint every year since its founding, currently operates in six states, and is actively exploring expansion into additional states, with planned expansion into at least one more by 2020. Since 2013, Harvest has won a variety of operating awards, including seven Best Dispensary awards issued by four independent organizations, four Best Medical Cannabis Strain awards, and one Best Medical Cannabis Product award.

The Harvest team brings broad operational expertise in real estate, legislation, permitting, zoning and retail sales. The Company has been extremely successful in winning licensure in non-competitive and competitive application processes throughout the country, winning many licenses across the states in which it operates or is expanding. Harvest’s ability to navigate complex regulatory pathways that are different in each state, as well as extensive research into each market it enters, are key tenets to its success.

Harvest is a vertically integrated cannabis company that operates from “seed to sale.” Harvest currently holds licenses, has operations, or has licensing relationships in Arizona, Arkansas, California, Colorado, Florida, Maryland, Massachusetts, Michigan, Nevada, North Dakota, Pennsylvania and Utah with pending applications in, and is exploring expansion into additional states. In addition, Harvest owns CO2 extraction, distillation, purification and manufacturing technology used to produce a line of therapeutic cannabis topicals, vapes and gems, featuring cannabinoids and a hemp-derived product line sold in Colorado with plans for nationwide distribution.

The Company operates in one segment, the processing and sale of cannabis, with three main business areas contributing to that segment:

• Cultivation – Harvest grows cannabis in outdoor, indoor and greenhouse facilities. Its expertise in growing enables the Company to produce award-winning and proprietary strains in a highly cost-effective manner. The Company sells its products in Harvest dispensaries and also to third parties.

• Processing – Harvest converts cannabis biomass into formulated oil using a variety of extraction techniques. The Company uses some of this oil to produce consumer products such as vaporizer cartridges and edibles, and it sells the remaining oil to third parties.

• Retail dispensaries – Harvest operates award-winning retail dispensaries that sell proprietary and third-party cannabis products to patients and customers.

Harvest conducts business through wholly-owned operating subsidiaries and operating agreements established to conduct the different segments of each business (each an “Operating Subsidiary” and together, “Operating Subsidiaries”). Harvest’s principal operating locations and type of operation are listed below: State Nature of Operations Opened Arizona – 11 locations Retail Dispensary September 2013 – September 2019 Maryland – 2 locations Retail Dispensary September 2018 – September 2019 Pennsylvania – 2 locations Retail Dispensary September 2018 – September 2019 California – 3 locations Retail Dispensary December 2018 – September 2019 Florida – 6 locations Retail Dispensary February 2019 – May 2019 North Dakota – 2 locations Retail Dispensary July 2019 – August 2019 Arizona Greenhouse/Outdoor Grow/Processing Lab July 2015 – July 2019 Maryland Indoor Grow/Processing September 2017 – July 2019 Florida Cultivation/Processing February 2019

In certain states, cannabis licenses are divided into three categories: dispensary, cultivation, and processing. Dispensary licenses comprise the retail operations and allow a company to dispense cannabis to patients. Cultivation licenses allow a company to grow cannabis plants. Processing licenses allow for the processing of cannabis into other products (e.g., edibles, oil, etc.). Cultivation and processing licenses comprise the wholesale operations.

In other states, for example Arizona, where the Company’s largest concentration of business activity is located, cannabis licenses are defined as vertically integrated, which allows the license holder the right to engage in dispensary, cultivation, and processing activities.

On November 14, 2018, the Company completed a reverse take-over transaction (the “Business Combination” or "RTO"), with RockBridge Resources Inc., a British Columbia corporation (“Rockbridge”). The Business Combination was structured as a series of transactions, including a Canadian three-cornered amalgamation and a series of other reorganization steps as explained further in Note 3 to the Company’s interim unaudited condensed consolidated financial statements for the period ended September 30, 2019.

The Company’s corporate headquarters is located at 1155 W Rio Salado Parkway, Suite 201, Tempe, Arizona, 85281.

Proposed Transactions

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(a) Agreement to Acquire Verano Holdings On April 23, 2019, we announced the signing of definitive agreements to acquire Verano Holdings (the “Transaction” or “Business Combination Agreement”). Pursuant to the terms of the Business Combination Agreement, security holders of Harvest and Verano will become security holders in the combined company, which will carry on the business of the Company and Verano (the “Resulting Issuer”). The Transaction will be carried out by way of a plan of arrangement under the Business Corporations Act (British Columbia) whereby, among other things: (i) Harvest shareholders will exchange their shares in the Company for equivalent securities in the Resulting Issuer on a 1:1 basis, and (ii) Verano security holders will be issued a combination of Subordinate Voting Shares and Multiple Voting Shares in the capital of the Resulting Issuer in connection with the indirect exchange of their securities in Verano. The all-stock Transaction will result in the issuance of approximately 129,550,579 Subordinate Voting Shares, on an as converted basis. In addition, the Transaction will include the completion of various Verano pipeline acquisitions, with a combined value of approximately $36 million, and additional pipeline acquisitions that are in negotiations and may include certain entities that are not ancillary to the Company’s business, payable in shares of the Resulting Issuer.

In connection with the Transaction, an application will be made to list the Resulting Issuer’s Subordinate Voting Shares for trading on the Canadian Securities Exchange (the “CSE”).

The Transaction was approved by 100% of each class of Harvest shareholders at a special meeting in June 2019 (the “Harvest Meeting”). The Board of Directors of Harvest unanimously approved the Transaction and recommended that Harvest shareholders vote in favor of the Transaction at the Harvest Meeting. The Transaction is subject to, among other conditions, court approval, CSE approval, certain additional regulatory approvals customary for a transaction of this nature, and the satisfaction or waiver of all closing conditions. The Business Combination Agreement includes covenants typical of transactions of this nature including, with respect to non-solicitation, a right granted to each party to match superior proposals and provisions entitling each party to a fiduciary-out. In addition, we and Verano have each agreed to pay a termination fee to the other party upon the occurrence of certain events. Full details of the Transaction are included in the management information circular of the Company describing the matters considered at the Harvest Meeting, which is available on SEDAR under the issuer profile of Harvest at www.sedar.com.

On November 4, 2019, Harvest and Verano certified substantial compliance with the Request for Additional Information and Documentary Materials (“Second Request”) issued by the Department of Justice (“DOJ”) on July 11, 2019 regarding the Verano Transaction. The waiting period is expected to expire on or around December 4, 2019, after which Harvest and Verano will be free to close, subject to state and local regulatory approval, unless the DOJ takes legal action to block the transaction.

(b) Agreement to Acquire Falcon International Corp.

On February 14, 2019, we entered into a definitive agreement (the “Agreement”) to acquire Falcon International Corp. (“Falcon”), a California cannabis company. The merger consideration is contemplated to be $155 million plus an earnout payment of $85 million if certain revenue thresholds are met, payable in Multiple Voting Shares at the time of closing. The number of Subordinate Voting Shares to be paid is determined by dividing the merger consideration, converted to Canadian currency using the Bank of Canada daily average exchange rate published on the day prior to closing, by 100 times the lower of (a) CAD $10.98; or (b) a price equal to the greater of (i) the closing price of the Company’s Subordinate Voting Shares on the CSE on the business day prior to the closing date; or (ii) CAD $9.333. The agreement also provides that we will provide liquidity to Falcon to support certain working capital needs and capital expenditure needs prior to the close of the transaction. The loans provided to Falcon are included in Notes Receivable on the condensed consolidated balance sheets as of December 31, 2018 and September 30, 2019. We also disbursed loan amounts to Falcon subsequent to the balance sheet date. The acquisition will include Falcon’s experienced leadership team, 16 cannabis licenses, distribution network that gives us the ability to distribute our own brands to dispensaries across California, manufacturing capabilities, cultivation facilities, and a portfolio of top-selling brands including: Cru Cannabis™, Littles™ and High Garden™. The Agreement is subject to customary conditions of closing and is expected to close upon completion of due diligence, contractual agreements, and other regulatory approvals. On September 23, 2019, Harvest and Falcon certified substantial compliance with the Second Request issued by the DOJ on April 17, 2019 regarding the Falcon Transaction. The waiting period expired on October 23, 2019, after which Harvest and Falcon are free to close, subject to state and local regulatory approval, unless the DOJ takes legal action to block the transaction.

(c) Agreement to Acquire CannaPharmacy, Inc.

On November 18, 2019 a wholly owned subsidiary of the Company entered into an agreement with CannaPharmacy, Inc. (“CannaPharmacy”) to acquire its subsidiary, Franklin Labs, LLC for $8 million cash payment plus certain other cannabis assets upon completion of due diligence and subject to closing conditions. Alternatively, if such conditions are not met Harvest can acquire Franklin Labs, LLC for $15 million in cash and an $11 million promissory note. Franklin Labs owns and operates a 46,800 sq. ft. cultivation and

http://www.sedar.com/

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manufacturing/processing facility in Reading, Pennsylvania. As part of this agreement, Harvest and CannaPharmacy have agreed to terminate their previously announced agreement whereby Harvest would have acquired CannaPharmacy’s right to own or operate cannabis licenses in Pennsylvania, Delaware, New Jersey and Maryland.

The revised agreement is due, in part, to accommodate our plans to more strategically align with our operational needs, which have evolved since the previously announced acquisition of CannaPharmacy. The acquisition of Franklin Labs is expected to allow us to more efficiently scale operations in Pennsylvania and provide dispensaries and patients in that state with access to our intellectual property, high-quality products, and trusted retail experiences. The acquisition is subject to, among other things, the execution of definitive agreements, the receipt of regulatory approvals and the satisfaction or waiver of closing conditions customary for a transaction of this nature.

Non-IFRS Financial and Performance Measures

The following non-IFRS presentations of earnings before interest, taxes, depreciation and amortization (“EBITDA”) and Working Capital, as defined below, are made to assist our investors and Management in evaluating our operating performance. Management uses non-IFRS financial measures, in addition to IFRS financial measures, to understand and compare operating results across accounting periods, for financial and operational decision making, for planning and forecasting purposes and to evaluate the Company’s financial performance. These non-IFRS financial measures are Adjusted EBITDA, as defined below, and Working Capital.

Management believes that these non-IFRS financial measures reflect the Company’s ongoing business in a manner that allows for meaningful comparisons and analysis of trends in the business, as they facilitate comparing financial results across accounting periods and to those of peer companies. Management also believes that these non-IFRS financial measures enable investors to evaluate the Company’s operating results and future prospects in the same manner as management. These non-IFRS financial measures may also exclude expenses and gains that may be unusual in nature, infrequent or not reflective of the Company’s ongoing operating results.

As there are no standardized methods of calculating these non-IFRS measures, the Company’s methods may differ from those used by others, and, accordingly, the use of these measures may not be directly comparable to similarly titled measures used by others. Accordingly, these non-IFRS measures are intended to provide additional information and should not be considered in isolation or as a substitute for measures of performance prepared in accordance with IFRS.

Adjusted EBITDA

Adjusted EBITDA is a financial measure that is not defined under IFRS. We use non-IFRS financial measures, and believe they enhance an investor’s understanding of our financial and operating performance from period to period, because they exclude certain material non-cash items and certain other adjustments we believe are not reflective of our ongoing operations and performance. In particular, we have and continue to make significant acquisitions and investments in cannabis properties and management resources to better position our organization to achieve our strategic growth objectives, which have resulted in outflows of economic resources. Accordingly, we use these metrics to measure our core financial and operating performance for business planning purposes. In addition, we believe investors use both IFRS and non-IFRS measures to assess management’s past and future decisions associated with our priorities and allocation of capital, as well as to analyze how our business operates in or responds to, swings in economic cycles or other events that impact the cannabis industry. These measures, however, do not have any standardized meaning prescribed by IFRS and may not be comparable to similar measures presented by other companies in our industry. These financial measures are not intended to represent and should not be considered as alternatives to net income, operating income or any other performance measures derived in accordance with IFRS as measures of operating performance or operating cash flows or as measures of liquidity.

Adjusted EBITDA has important limitations as an analytical tool and should not be considered in isolation or as a substitute for any standardized measure under IFRS (a) including net income or loss as an indication or our financial performance or (b) IFRS cash flows from operating activities as a measure of our liquidity. For example, these financial measures:

• exclude certain tax payments that may reduce cash available to us;

• do not reflect any cash capital expenditure requirements for the assets being depreciated and amortized that may have to be replaced in the future;

• do not reflect changes in, or cash requirements for, our working capital needs; and

• do not reflect the interest expense or the cash requirements necessary to service interest or principal payments on our debt.

Other companies in our industry may calculate these measures differently than we do, limiting their usefulness as comparative measures.

Working Capital

The calculation of Working Capital provides additional information and is not defined under IFRS. We define Working Capital as current assets less current liabilities. This measure should not be considered in isolation or as a substitute for any standardized measure under IFRS. This information is intended to provide investors with information about the Company’s liquidity.

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Other companies in our industry may calculate this measure differently than we do, limiting its usefulness as a comparative measure.

Reconciliations of Non-IFRS Financial and Performance Measures

The table below reconciles Net (Loss) Income to Adjusted EBITDA for the periods indicated. Three months ended September 30, Nine months ended September 30,

2019 2018 2019 2018 Net (loss) income (IFRS) before non-controlling interest $ (39,510 ) $ 261 $ (86,020 ) $ 3,459 Add (deduct) impact of: Net interest and other financing costs (1) 5,512 487 9,248 792 Income tax (464 ) 1,034 3,571 2,454 Amortization and depreciation (2) 4,894 342 9,099 1,078 Gain on assets (116 ) (35 ) (206 ) (1,561 ) Other expense 629 — 878 — Foreign currency loss (277 ) — 501 — Share-based compensation expense 7,718 — 19,115 — Realized fair value amounts included in inventory sold 17,644 2,133 31,119 3,559 Unrealized fair value gain on growth of biological assets (17,901 ) (5,691 ) (36,748 ) (5,691 ) Other expansion expenses (pre-open) 4,616 — 7,111 — Transaction & other special charges 6,346 1,085 14,304 1,414 Adjusted EBITDA (non-IFRS) $ (10,909 ) $ (384 ) $ (28,028 ) $ 5,504 (1) Includes $-, $-, $522, and $- of interest reported in cost of sales. (2) Includes $403, $-, $1,515, and $- of depreciation reported in cost of sales.

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SELECTED FINANCIAL INFORMATION

The following is selected financial data derived from the interim unaudited condensed consolidated financial statements of the Company for the three and nine months ended September 30, 2019 and 2018, in thousands of United States dollars, except per share data. The selected consolidated financial information set out below may not be indicative of the Company’s future performance:

For the three months ended

September 30, For the nine months ended

September 30, 2019 2018 2019 2018

Revenue $ 33,151 $ 11,153 $ 78,987 $ 30,012 Cost of goods sold (21,532 ) (5,565 ) (52,782 ) (12,642 ) Gross profit, before biological asset adjustments 11,619 5,588 26,205 17,370 Realized fair value amounts included in inventory sold (17,644 ) (2,133 ) (31,119 ) (3,559 ) Unrealized fair value gain on growth of biological assets 17,901 5,691 36,748 5,691 Gross profit 11,876 9,146 31,834 19,502 Expenses

General and administrative 30,998 6,571 71,148 12,357 Sales and marketing 2,895 486 6,537 923 Share-based compensation expense 7,718 — 19,115 — Depreciation and amortization 4,491 342 7,584 1,078

Total expenses 46,102 7,399 104,384 14,358 Operating (loss) income (34,226 ) 1,747 (72,550 ) 5,144 Other (expense) income

Gain on sale of assets and impairment, net 116 35 206 1,561 Other expense (629 ) — (878 ) — Foreign currency loss 277 — (501 ) — Interest expense (5,512 ) (487 ) (8,726 ) (792 )

(Loss) income before taxes and non-controlling interest (39,974 ) 1,295 (82,449 ) 5,913 Income taxes 464 (1,034 ) (3,571 ) (2,454 ) (Loss) income before non-controlling interest (39,510 ) 261 (86,020 ) 3,459 Loss attributed to non-controlling interest 415 (714 ) 1,383 164 Net (loss) income attributed to Harvest Health & Recreation Inc. $ (39,095 ) $ (453 ) $ (84,637 ) $ 3,623 (Loss) income per share - basic and diluted $ (0.14 ) $ (0.30 )

Attributable to Harvest Health and Recreation Inc. Stockholders $ (0.14 ) $ (0.30 ) Attributable to non-controlling interest $ 0 $ 0

Weighted-average shares outstanding - basic and diluted 288,137,942 285,853,929

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Comparison of the three months ended September 30, 2019 and September 30, 2018

For the three months ended

September 30, 2019 2018 $ Change % Change

Revenue $ 33,151 $ 11,153 $ 21,998 197 % Cost of goods sold (21,532 ) (5,565 ) (15,967 ) 287 % Gross profit before biological asset adjustments 11,619 5,588 6,031 108 % Realized fair value amounts included in inventory sold (17,644 ) (2,133 ) (15,511 ) 727 % Unrealized fair value gain on growth of biological assets 17,901 5,691 12,210 215 % Gross profit 11,876 9,146 2,730 30 % Expenses

General and administrative 30,998 6,571 24,427 372 % Sales and marketing 2,895 486 2,409 496 % Share-based compensation expense 7,718 — 7,718 nm Depreciation and amortization 4,491 342 4,149 nm

Total expenses 46,102 7,399 38,703 523 % Operating (loss) / income (34,226 ) 1,747 (35,973 ) nm Other Income / (Expenses)

Gain on sale of assets and impairment, net 116 35 81 231 % Other expense (629 ) — (629 ) nm Foreign currency loss 277 — 277 nm Interest expense (5,512 ) (487 ) (5,025 ) nm

(Loss) / income before taxes and non-controlling Interest (39,974 ) 1,295 (41,269 ) nm Income taxes 464 (1,034 ) 1,498 (145 %) (Loss) income before non-controlling interest (39,510 ) 261 (39,771 ) nm Loss attributed to non-controlling interest 415 (714 ) 1,129 (158 %) Net (loss) income attributed to Harvest Health & Recreation Inc. $ (39,095 ) $ (453 ) $ (38,642 ) nm Adjusted EBITDA (non-IFRS) $ (10,909 ) $ (384 ) $ (10,525 ) nm Revenue Revenue for the three months ended September 30, 2019 and 2018 was $33.2 million and $11.2 million, respectively, an increase of $22.0 million or 197%. Revenue growth was driven by the addition of new and acquired dispensaries in Arizona, California, Florida, Maryland, North Dakota and Pennsylvania as well as growth in our existing cultivation, processing, and retail operations.

Cost of Goods Sold & Biological Assets

Cost of goods sold are derived from costs related to the internal cultivation and processing of cannabis and from retail purchases made from other licensed producers operating within our state markets.

For the three months ended September 30, 2019, cost of goods sold, excluding any adjustments to the fair value of biological assets, of $21.5 million was up $16.0 million, or 287%, compared to three months ended September 30, 2018. The increase is driven by continued market growth and higher sales volume.

Inventory of plants under production is considered a biological asset. Under IFRS, biological assets are to be recorded at fair value at the time of harvest, less costs to sell. The biological assets are transferred to inventory, and the transfer becomes the deemed cost on a go-forward basis. When the product is sold, the fair value is relieved from inventory, and the transfer is recorded to cost of sales. Cost of goods sold also includes products and costs acquired from other producers and sold by the Company.

Gross Profit

Gross profit before biological asset adjustments for the three months ended September 30, 2019 was $11.6 million, or 35%, gross margin, representing a gross profit margin on the sale of branded cannabis flower and processed and packaged products including concentrates, edibles, topicals and other cannabis. This is compared to gross profit before biological asset adjustments for the three months ended September 30, 2018 of $5.6 million, or 50%, gross margin. Cannabis costs are affected by various state regulations that limit the sourcing and procurement of cannabis product, which may create fluctuations in gross profit over comparative periods as the regulatory environment changes.

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Gross profit after net gains on biological asset transformation for three months ended September 30, 2019 was $11.9 million, representing a gross margin of 36%, compared with gross profit after biological asset transformation of $9.1 million, or 82%, gross margin, for the three months ended September 30, 2018.

Total Expenses

Total expenses for the three months ended September 30, 2019 and 2018 were $46.1 million and $7.4 million, respectively. The increase in total expenses of $38.7 million for the three-month period is primarily attributable to an increase in general and administrative expenses of $24.4 million. We expect additional investment in this area with expansion and to support the increasing complexity of the cannabis business. Furthermore, we expect to incur acquisition and transaction costs related to our expansion plans.

The increase in total expenses is further attributable to a $4.1 million increase in depreciation and amortization, due to property, plant and equipment (“PP&E”) coming in-service and intangible assets purchased during the period, and $7.7 million of share-based compensation expense.

Total Other (Expense)

Total other expense for three months ended September 30, 2019 was $5.7 million, an increase of $5.3 million compared to the three months ended September 30, 2018 and was primarily due to increased interest expense on a higher debt balance and on lease liabilities recognized due to IFRS 16 adopted on January 1, 2019.

Provision for Income Taxes

Income tax expense is recognized based on the expected tax payable on the taxable income for the year, using tax rates enacted or substantively enacted at year-end. For three months ended September 30, 2019 and 2018, federal and state income tax (benefit)/expense totaled ($0.5) million and $1.0 million, respectively.

Net (Loss) Income

Net (loss) income before non-controlling interest for three months ended September 30, 2019 and 2018 was a loss of $39.5 million and income of $0.3 million.

Comparison of the three months ended September 30, 2019 and June 30, 2019 For the three months ended

September 30,

2019 June 30, 2019 (as restated) $ Change % Change

Revenue $ 33,151 $ 26,596 $ 6,555 25 % Cost of goods sold (21,532 ) (19,915 ) (1,617 ) 8 % Gross profit before biological asset adjustments 11,619 6,681 4,938 74 % Realized fair value amounts included in inventory sold (17,644 ) (7,740 ) (9,904 ) 128 % Unrealized fair value gain on growth of biological assets 17,901 13,075 4,826 37 % Gross profit 11,876 12,016 (140 ) (1 %) Expenses

General and administrative 30,998 21,764 9,234 42 % Sales and marketing 2,895 2,053 842 41 % Share-based compensation expense 7,718 8,094 (376 ) (5 %) Depreciation and amortization 4,491 1,600 2,891 181 %

Total expenses 46,102 33,511 12,591 38 % Operating loss (34,226 ) (21,495 ) (12,731 ) 59 % Other Income / (Expenses)

Gain on sale of assets and impairment, net 116 90 26 29 % Other expense (629 ) (200 ) (429 ) 215 % Foreign currency loss 277 (403 ) 680 (169 %) Interest expense (5,512 ) (2,439 ) (3,073 ) 126 %

Loss before taxes and non-controlling Interest (39,974 ) (24,447 ) (15,527 ) 64 % Income taxes 464 (1,637 ) 2,101 (128 %) Loss before non-controlling interest (39,510 ) (26,084 ) (13,426 ) 51 % Loss attributed to non-controlling interest 415 590 (175 ) (30 %) Net loss attributed to Harvest Health & Recreation Inc. $ (39,095 ) $ (25,494 ) $ (13,601 ) 53 % Adjusted EBITDA (non-IFRS) $ (10,909 ) $ (12,382 ) $ 1,473 (12 %)

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Revenue

Revenue for the three months ended September 30, 2019 was $33.2 million, an increase of $6.6 million, or 25%, compared to revenue of $26.6 million for the three months ended June 30, 2019. Revenue growth was driven by the addition of new and acquired dispensaries in Arizona, California, Florida, Maryland, North Dakota and Pennsylvania as well as growth in our existing cultivation, manufacturing, and retail operations.



Cost of goods sold, excluding any adjustments to the fair value of biological assets, for the three months ended September 30, 2019, was $21.5 million, an increase of $1.6 million, or 8%, compared to cost of goods sold for the three months ended June 30, 2019. The increase was driven by continued market growth and higher sales volume.


Gross Profit

Gross profit before biological asset adjustments for the three months ended September 30, 2019 was $11.6 million, or 35%, gross margin, representing a gross profit margin on the sale of branded cannabis flower and processed and packaged products including concentrates, edibles, topicals and other cannabis. This is compared to gross profit before biological asset adjustments for the three months ended June 30, 2019 of $6.7 million, or 25%, gross margin. Cannabis costs are affected by various state regulations that limit the sourcing and procurement of cannabis product, which may create fluctuations in gross profit over comparative periods as the regulatory environment changes. Gross profit after net gains on biological asset transformation for the three months ended September 30, 2019 was $11.9 million compared to $12.0 million for the three months ended June 30, 2019. Gross margin for the three months ended September 30, 2019 was 36% compared to 45% for the three months ended June 30, 2019.

Total Expenses Total operating expenses for the three months ended September 30, 2019 were $46.1 million, an increase of $12.6 million, or 38%, compared to $33.5 million for the three months ended June 30, 2019. The increase in total operating expenses is primarily attributable to an increase in general and administrative expenses of $9.2 million. We expect additional investment in this area with expansion and to support increasing complexity of the cannabis business. Furthermore, we expect to incur acquisition and transaction costs related to our expansion plans. The increase in total expenses is further attributable to a $2.9 million increase in depreciation and amortization due to PP&E coming in-service and intangible assets purchased during prior quarters and continuing into the current quarter.


Total other expense for three months ended September 30, 2019 was $5.7 million, an increase of $2.8 million compared to the three months ended June 30, 2019. The increase was primarily due to increased interest expense on a higher debt balance and on higher lease liabilities due to additional leases obtained during the quarter.


Income tax expense is recognized based on the expected tax payable on the taxable income for the year, using tax rates enacted or substantively enacted at year-end. For the three months ended September 30, 2019, federal and state income tax benefit totaled ($0.5) million. For the three months ended June 30, 2019, federal and state income tax expense totaled $1.6 million.

Net (Loss) Income

Net (loss) income before non-controlling interest for three months ended September 30, 2019 was a loss of $39.5 million and a loss of $26.1 million for the three months ended June 30, 2019.

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Comparison of the nine months ended September 30, 2019 and September 30, 2018.

For the nine months ended

September 30, 2019 2018 $ Change % Change

Revenue $ 78,987 $ 30,012 $ 48,975 163 % Cost of goods sold (52,782 ) (12,642 ) (40,140 ) 318 % Gross profit before biological asset adjustments 26,205 17,370 8,835 51 % Realized fair value amounts included in inventory sold (31,119 ) (3,559 ) (27,560 ) 774 % Unrealized fair value gain on growth of biological assets 36,748 5,691 31,057 546 % Gross profit 31,834 19,502 12,332 63 % Expenses

General and administrative 71,148 12,357 58,791 476 % Sales and marketing 6,537 923 5,614 608 % Share-based compensation expense 19,115 — 19,115 nm Depreciation and amortization 7,584 1,078 6,506 604 %

Total expenses 104,384 14,358 90,026 627 % Operating (loss) / income (72,550 ) 5,144 (77,694 ) nm Other Income / (Expenses)

Gain on sale of assets and impairment, net 206 1,561 (1,355 ) (87 %) Other expense (878 ) — (878 ) nm Foreign currency loss (501 ) — (501 ) nm Interest expense (8,726 ) (792 ) (7,934 ) nm

(Loss) / income before taxes and non-controlling Interest (82,449 ) 5,913 (88,362 ) nm Income taxes (3,571 ) (2,454 ) (1,117 ) 46 % (Loss) income before non-controlling interest (86,020 ) 3,459 (89,479 ) nm Loss attributed to non-controlling interest 1,383 164 1,219 743 % Net (loss) income attributed to Harvest Health & Recreation Inc. $ (84,637 ) $ 3,623 $ (88,260 ) nm Adjusted EBITDA (non-IFRS) $ (28,028 ) $ 5,504 $ (33,532 ) (609 %) Revenue

Revenue for the nine months ended September 30, 2019 and 2018 was $79.0 million and $30.0 million, respectively, an increase of $49.0 million, or 163%. Revenue growth was driven by the addition of new and acquired dispensaries in Arizona, California, Florida, Maryland, North Dakota and Pennsylvania as well as growth in our existing cultivation, manufacturing, and retail operations.



For the nine months ended September 30, 2019, cost of goods sold, excluding any adjustments to the fair value of biological assets, of $52.8 million, was up $40.1 million, or 318%, compared to nine months ended September 30, 2018. The increase is driven by continued market growth and higher sales volume.


Gross Profit

Gross profit before biological asset adjustments for the nine months ended September 30, 2019 was $26.2 million, or 33%, gross margin, representing a gross profit margin on the sale of branded cannabis flower and processed and packaged products including concentrates, edibles, topicals and other cannabis. This is compared to gross profit before biological asset adjustments for the nine months ended September 30, 2018 of $17.4 million, or 58%, gross margin. Cannabis costs are affected by various state regulations that limit the sourcing and procurement of cannabis product, which may create fluctuations in gross profit over comparative periods as the regulatory environment changes.

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Gross profit after net gains on biological asset transformation for nine months ended September 30, 2019 was $31.8 million, representing a gross margin of 40%, compared with gross profit after biological asset transformation of $19.5 million, or 65%, gross margin, for the nine months ended September 30, 2018.

Total Expenses

Total expenses for the nine months ended September 30, 2019 and 2018 were $104.4 million and $14.4 million, respectively. The increase in total expenses of $90.0 million for the nine-month period is primarily attributable to an increase in general and administrative expenses of $58.8 million. We expect additional investment in this area with expansion and to support the increasing complexity of the cannabis business. Furthermore, we expect to incur acquisition and transaction costs related to our expansion plans.

The increase in total expenses is further attributable to a $6.5 million increase in depreciation and amortization, due to PP&E coming in-service and intangible assets purchased during the year, and $19.1 million of share-based compensation expense


Total other expense for nine months ended September 30, 2019 was $9.9 million, an increase of $10.7 million compared to the nine months ended September 30, 2018, and was primarily due to increased interest expense on a higher debt balance and on lease liabilities recognized due to IFRS 16 adopted on January 1, 2019, and a gain on sale of asset in the prior year.


Income tax expense is recognized based on the expected tax payable on the taxable income for the year, using tax rates enacted or substantively enacted at year-end. For the nine months ended September 30, 2019 and 2018, federal and state income tax expense totaled $3.6 million and $2.5 million, respectively. The increase is due to higher gross profit discussed above.

Net (Loss) Income

Net (loss) income before non-controlling interest for nine months ended September 30, 2019 and 2018 was a loss of $86.0 million and income of $3.5 million.

SUMMARY OF QUARTERLY RESULTS

The following table presents selected financial information, for the most recently prepared quarters in thousands of United States dollars.

Quarter Ended Total Revenue Net (Loss)

Income September 30, 2019 $ 33,151 $ (39,095 ) June 30, 2019 (as restated) 26,596 (25,494 ) March 31, 2019 19,240 (20,048 ) December 31, 2018 16,943 (71,088 ) September 30, 2018 11,154 (453 ) June 30, 2018 10,524 2,830 March 31, 2018 8,335 1,246 December 31, 2017 7,210 1,268 Drivers of Results of Operations

Revenue

The Company derives its revenue from both its wholesale and retail businesses from cannabis products it manufactures, sells and distributes to third-party retail customers and from direct sales to end consumers in its retail stores. For the three and nine months ended September 30, 2019, revenue was contributed from wholesale, retail and licensing business units.

Gross Profit

Gross profit is revenue less cost of goods sold. Cost of goods sold includes the costs directly attributable to product sales and includes amounts paid for finished goods, such as flower, edibles, and concentrates, as well as packaging and other supplies, fees for services and processing, and allocated overhead, which includes allocations of rent, administrative salaries, utilities, and related costs. Cannabis costs are affected by various state regulations that limit the sourcing and procurement of cannabis product, which may create fluctuations in gross profit over comparative periods as the regulatory environment changes. Gross margin measures our gross profit as a percentage of revenue.

Over the past two years, execution on the Company’s national expansion strategy and revenue growth have taken priority. We expect to continue our growth strategy for the foreseeable future to the extent we are able to raise additional capital, as we continue our efforts to expand our footprint within the Company’s current markets with acquisitions and partnerships and scales resources into new markets. In the markets in which the Company is already operational, we expect to realize gradual price compression as these state markets

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mature, which will put downward pressure on both the Company’s retail and wholesale gross margins. The Company’s current production capacity, however, has not been fully realized, and it is expected that price compression at the wholesale level will be offset by the scalability of the Company’s production facilities and continued realization of significant distribution market share. As a result, we expect overall consolidated gross margins (before the adjustment for the unrealized gain or loss in the fair value of biological assets) will be influenced by these market factors quarter-to-quarter but will remain steady over the foreseeable future.

Total Expenses

Total expenses other than the cost of goods sold consist of selling costs to support customer relationships and marketing and branding activities. It also includes a significant investment in the corporate infrastructure required to support ongoing business.

General and administrative expenses also include costs incurred at our retail sites and corporate offices, primarily related to personnel costs and operating costs, and other professional service costs. We expect to continue to invest to support expansion plans and to support the increasing complexity of the cannabis business. Furthermore, we expects to continue to incur acquisition and transaction costs related to these expansion plans.

Selling and marketing costs generally correlate to revenue. As a percentage of sales, we expect selling costs to remain relatively flat in the more established operational markets and increase in the markets in which we seek expansion. In addition, we may choose to spend more on marketing and branding activities as we continue to expand our footprint in certain markets.

In light of delays in closing acquisition transactions attributable to unanticipated regulatory hurdles at the U.S. Department of Justice and in a handful of states, and more recently, an interim reversal in sentiment and tightening of capital availability, we have taken measures to reduce costs. These measures include a workforce restructuring intended to both rationalize and optimize expenses given the delays in completing acquisitions and in anticipation of completion of pending acquisitions that are expected to add additional employees.

Provision for Income Tax

The Company is subject to income taxes in the jurisdictions in which it operates, and, consequently, income tax expense is a function of the allocation of taxable income by jurisdiction and the various activities that impact the timing of taxable events. As the Company operates in the legal cannabis industry, it is subject to the limitations of Internal Revenue Code (IRC) Section 280E under which taxpayers are only allowed to deduct expenses directly related to sales of product. This results in permanent differences between ordinary and necessary business expenses deemed non-allowable under IRC Section 280E and a higher effective tax rate than most industries. Therefore, the effective tax rate can be highly variable and may not necessarily correlate to pretax income or loss.

Liquidity, Financing Activities During the Period, and Capital Resources

As of September 30, 2019 and December 31, 2018, the Company had cash equivalents of $18.3 million and $191.9 million, respectively, to meet its current obligations and total current liabilities of $65.3 million and $38.9 million, respectively. The Company also had working capital of $72.3 million and $209.4 million, respectively, a decrease of $137 million driven mainly by cash used in operations, capital expenditures and investing activities. As of September 30, 2019, cash generated from ongoing operations was not sufficient to fund operations and, in particular, to fund our growth strategy in the short-term or long-term. The Company is required to raise additional funds from debt and/or equity financing. The primary need for liquidity is to fund working capital requirements of the business, including operational expenses, operationalizing existing licenses, capital expenditures, debt service and acquisitions. The primary source of liquidity has primarily been private and/or public financing and to a lesser extent by cash generated from sales. The ability to fund operations, to make planned capital expenditures, to execute on the growth/acquisition strategy, to make scheduled debt and rent payments and to repay or refinance indebtedness depends on our ability to raise funds from debt and/or equity financing and future operating performance and cash flows, which are subject to prevailing economic conditions and financial, business and other factors, some of which are beyond our control. There can be no assurance that additional financing will be available to the Company when needed or, if available, that it can be obtained on commercially reasonable terms. Current and Future Financings

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On November 20, 2019, the Company announced that it expanded the previously in place non-revolving term loan with an additional draw of $20.7 million (CAD $27.5 million) through a second amendment to the Company’s existing amended and restated credit agreement originally executed on July 26, 2019 (as amended by a joinder and amending agreement dated August 26, 2019 and first amending agreement dated October 21, 2019). This was in addition to the draw on October 2019 where the Company executed an amendment to the amended and restated Letter Credit Agreement originally executed on July 26, 2019 to add another non-revolving term loan of $26.6 million (CAD $35 million) (“Bridge Facility”), in addition to the existing, non-revolving term loan of CAD $50 million (“Primary Facility”). On November 29, 2019, the Company executed a revised agreement that replaces and supersedes all terms and conditions contained in the original agreement dated November 6, 2019 extending the Bridge Facility maturity to March 31, 2020. These two draws in October and November bring the total principal of the Bridge Facility to $47.3 million, which matures on March 31, 2020.

The Company previously borrowed CAD $24 million on July 26, 2019, when the amended and restated Letter Credit Agreement was executed and, in conjunction with the Business Combination, originally borrowed CAD $26 million for a period of three years at an interest rate that is equal to Bank of Montreal Prime plus 10.3% per annum. Principal payments under the loan will be amortized monthly on a straight-line basis over a five-year period beginning six months after the date of the loan. The loan will be secured by a first lien on the assets of the Company and its subsidiaries and a pledge of its ownership in its subsidiaries. The Company paid the agent of the lender CAD $1.05 million upon executing the amendment and had paid a CAD $0.5 million work fee upon executing the amended and restated Letter Credit Agreement and a CAD $0.6 million work fee and issued to such agent USD $0.9 million in Subordinate Voting Shares upon executing the original Letter Credit Agreement.

In May 2019, the Company entered into an investment agreement with an institutional investor and an Agency Agreement with Eight Capital, pursuant to which Eight Capital agreed to offer for sale, and the institutional investor agreed, subject to certain terms and conditions customary for a transaction of this nature, including the Company maintaining a market capitalization in excess of $2 billion, to purchase five tranches of $100 million 7% unsecured convertible debentures (the “Convertible Debentures”), at a price of $1,000 per Convertible Debenture (the “Issue Price”) for gross proceeds of up to $500 million. The Company intends to use the net proceeds of to fund working capital and general corporate purposes.

In May 2019, the Company sold to the institutional investor $100 million of the Convertible Debentures. The initial $100 million tranche of Convertible Debentures, the Warrants and the Subordinate Voting Shares underlying both, were subject to a statutory hold period which expired on September 11, 2019, being four months and one day following the date of issue of the Convertible Debentures.

The Convertible Debentures have a maturity date (the “Maturity Date”) of May 9, 2022 and will bear interest from the date of issue at 7.0% per annum, payable semi-annually on June 30 and December 30 of each year. The Convertible Debentures are convertible, at the option of the holder, into Subordinate Voting Shares at any time prior to the close of business on the last business day immediately preceding the Maturity Date. The Convertible Debentures have a conversion price of $11.42 (the USD equivalent of CAD $15.38, based on the Bank of Canada CAD/USD exchange rate as of May 8, 2019) per Subordinate Voting Share (the “Conversion Price”). The purchaser of the Convertible Debentures also received, for no additional consideration, 3,502,666 warrants (the “Warrants”). Each Warrant is exercisable to purchase one Subordinate Voting Share at an exercise price of CAD $18.17 per share, for a period of 36 months from the date of issue.

The Company may, subject to certain conditions, force the conversion of all of the principal amount of the then outstanding Convertible Debentures at the applicable Conversion Price if, at any time after the date that is four months and one day following the date of issue of the Convertible Debentures, the VWAP of the Subordinate Voting Shares is greater than CAD $21.53 for any 10 consecutive trading days, by providing 30 days’ notice of such conversion.

There can be no assurances that all or any portion of the remaining $400 million of Debentures will be issued as proposed or at all.

In August and September of 2018, Harvest FINCO, Inc. (“Harvest FINCO USA”), an affiliate of Harvest, closed a private placement offering to sell approximately $50 million of convertible promissory notes to accredited investors. Upon completion of the Business Combination, the convertible promissory notes were exchanged for shares of the resulting company.

Through August and October 2018, Harvest issued 9% Convertible Promissory Notes to accredited investors in a private placement in exchange for $49.3 million of proceeds (“Convertible Promissory Notes”). The Convertible Promissory Notes bore simple interest at the rate of 9% per annum payable by Harvest on a semi-annual basis on the last business day of June and December with principal due on July 31, 2021 and convertible (i) voluntarily by noteholders into common equity of Harvest based on a deemed enterprise value of Harvest of $840 million or (ii) automatically into common equity of Harvest at the time of a Resulting Issuance prior to January 1, 2019 at the lesser of the value of each issued and outstanding share as of the time of the conversion based on a deemed enterprise value of Harvest of $840 million or a 30% discount to the initial share price of the Resulting Issuance. Due to the conversion feature on these notes being non-fixed, in accordance with IAS 32 Financial Instruments: Presentation, the contract to issue a variable number of equity shares fails to meet the definition of equity. Accordingly, the whole contract is considered a liability and accounted for at fair value with changes in fair value recognized in the consolidated statements of operations at each period-end.

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On November 13, 2018, an affiliate of Harvest, HVST Finco (Canada) Inc. (“Harvest Finco Canada”) completed an offering pursuant to which Harvest Finco Canada issued 33,305,294 subscription receipts (the “Subscription Receipts”) at a price of $6.55 per Subscription Receipt (the equivalent of CAD $8.67, based on the Bank of Canada exchange rate of CAD $1.3241 per $1.00 on November 13, 2018) for gross proceeds of $218.2 million. In connection with the closing of the Business Combination, 33,305,294 Subscription Receipts issued pursuant to the Offering were automatically converted into 33,305,294 common shares in the capital of Harvest Finco Canada and then exchanged into subordinate voting shares of the Company on a one-for-one basis.

On November 14, 2018, the Company completed a reverse take-over transaction (the “Business Combination”), with RockBridge Resources Inc. (“Rockbridge”). In connection with the closing of the Business Combination, the outstanding principal balance under the Convertible Promissory Notes and all accrued interest thereon was automatically converted into 15,414,623 shares of common stock. The Company recognized a fair value adjustment of $50.7 million.

The Business Combination was completed by way of, among other things, (i) several share exchanges between existing holders of common shares of various acquired companies and the Company, pursuant to which such holders were issued a combination of Super Voting Shares, Multiple Voting Shares and Subordinate Voting Shares of the Company; (ii) a share exchange between existing holders of common shares of Harvest FINCO USA, an affiliate of Harvest, pursuant to which holders of common shares of Harvest FINCO USA were issued a combination of subordinate voting shares and multiple voting shares in exchange for Harvest FINCO US common shares; and (iii) a three-cornered amalgamation among Rockbridge, Harvest Finco Canada and 1185928 B.C. Ltd. (“BC Subco”), pursuant to which Harvest Finco Canada shareholders (including former holders of Subscription Receipts) received subordinate voting shares of the Company, and pursuant to which BC Subco amalgamated with Harvest Finco to form a new company, which was subsequently wound up into the Company.

As part of the Business Combination, the Company implemented a three class voting structure on November 14, 2018, including the creation of a new class of subordinate voting shares (the “Subordinate Voting Shares”), a new class of multiple voting shares (the “Multiple Voting Shares”) and a new class of super voting shares (the “Super Voting Shares”) and changed its name to “Harvest Health & Recreation Inc.” Each Subordinate Voting Share carries the right to one vote per share on all matters to be voted on by shareholders of the resulting Company, each Multiple Voting Share carries the right to 100 votes per share on all matters to be voted on by shareholders of the resulting Company, and each Super Voting Share carries the right to 200 votes per share on all matters to be voted on by shareholders of the resulting Company.

Cash Flows

Cash Flow from Operating Activities

Net cash provided by (used in) operating activities for the nine months ended September 30, 2019 and 2018 was ($65.0) million and $0.3 million, respectively, with the increase of ($65.3) million attributed to increased overall expenses and increased cash used to support expanding working capital.

Cash Flow from Investing Activities

Net cash used in investing activities was ($214.2) million and ($17.2) million for the nine months ended September 30, 2019 and 2018, respectively, an increase of ($197.0) million. The change for the period is primarily attributed to purchases of ($102.2) million of PP&E, ($73.7) million issuances of notes receivable, and ($31.2) million of cash consideration paid for acquisitions, net of cash acquired.

Cash Flow from Financing Activities

Net cash provided by financing activities for the nine months ended September 30, 2019 and 2018 was $105.6 million and $44.0 million, respectively. The change for the 2019 period is primarily attributed to proceeds from issuance of convertible notes payable of $100.0 million, notes payable proceeds of $19.8 million, partially offset by repayment of notes payable of $10.7 million, fees paid for debt financing of $4.8 million and other items aggregating to $3.9 million.

Contractual Obligations

As of September 30, 2019, the Company has the following obligations to make future payments, representing contracts and other commitments that are known and committed.

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Payments Due by Period

Total Less than 1

year 1 - 3 years 3 - 5 years More than 5

years Lease obligations $ 87,225 $ 9,633 $ 17,338 $ 15,843 $ 44,411 Debt obligations 148,050 9,636 132,784 5,574 56 Contingent consideration 30,629 11,629 19,000 — — $ 265,904 $ 30,898 $ 169,122 $ 21,417 $ 44,467 Off-Balance Sheet Arrangements

As of the date of this filing, the Company does not have any off-balance-sheet arrangements that have, or are reasonably likely to have, a current or future effect on the results of operations or financial condition of the Company, including, and without limitation, such considerations as liquidity and capital resources.

Transactions with Related Parties

The Company’s key management personnel have the authority and responsibility for planning, directing and controlling the activities of the Company and consists of the Company's executive management team and management directors.

September 30,

2019 September 30,

2018 Management compensation $ 623 $ 291 Directors' fees 33 — Share-based payments 3,519 — $ 4,175 $ 291 a. Notes receivable: Included in notes receivable are the following amounts due from related parties:

September 30,

2019 December 31,

2018 Promissory note dated December 17, 2018, in the principal amount of $1,300 with maturity date of February 28, 2020; principal is due at maturity. Interest rate of 8.25% per annum with interest payments due monthly, beginning February 4, 2019. $ 1,786 $ 1,300 Promissory note dated January 25, 2019 in the principal amount of $1,565 with maturity date of December 13, 2019; principal is due at maturity. Interest rate of 8.5% per annum, due at maturity. 1,565 — Total due from related party (current portion notes receivable) $ 3,351 $ 1,300 b. Rental Payments: During the three months ended September 30, 2019 and 2018, rental payments included amounts due to related

parties of $142 and $54, respectively. During the nine months ended September 30, 2019 and 2018, rental payments included amounts due to related parties of $252 and $161, respectively.

c. Interest Income: During the three and nine months ended September 30, 2019, interest income included amounts due from related parties of $78 and $192, respectively. During the three and nine months ended September 30, 2018, interest income did not include amounts due to related parties.

Critical Accounting Judgments and Key Sources of Estimation Uncertainty

The preparation of the Company’s interim unaudited condensed consolidated financial statements requires management to make judgments, estimates, and assumptions about the carrying amounts of assets and liabilities that are not readily apparent from other sources. The estimates and associated assumptions are based on historical experience and other factors that are considered relevant. Actual results may differ from these estimates.

The estimates and underlying assumptions are reviewed on an ongoing basis. Revisions to accounting estimates are recognized in the period in which the estimate is revised, if the revision affects only that period, or in the period of the revision and future periods, if the revision affects both current and future periods.

Significant judgments, estimates, and assumptions that have the most significant effect on the amounts recognized in the financial statements are described below.

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Biological Assets

Biological assets, consisting of cannabis plants and agricultural produce consisting of cannabis, are measured at fair value less costs to sell up to the point of harvest.

Determination of the fair values of the biological assets and the agricultural product requires the Company to make assumptions about how market participants assign fair values to these assets. These assumptions primarily relate to the level of costs required to bring the cannabis up to the point of harvest, costs to convert the harvested cannabis to finished goods, sales price, risk of loss, expected future yields from the cannabis plants and estimating values during the growth cycle.

The valuation of biological assets at the point of harvest is the cost basis for all cannabis-based inventory, and thus any critical estimates, and judgments related to the valuation of biological assets are also applicable for inventory. The valuation of work in progress and finished goods also requires the estimate of conversion costs incurred, which become part of the carrying amount for the inventory. The Company must also determine if the cost of any inventory exceeds its net realizable value, such as cases where prices have decreased, or inventory has spoiled or has otherwise been damaged.

Estimated Useful Lives of Property Plant and Equipment

Depreciation of property, plant and equipment is dependent upon estimates of useful lives which are determined through the exercise of judgment. The assessment of any impairment of these assets is dependent upon estimates of recoverable amounts that take into account factors such as economic and market conditions and the useful lives of assets.

Estimated Useful Lives of and Amortization of Intangible Assets

Amortization of intangible assets is recorded on a straight-line basis over their estimated useful lives which do not exceed any contractual periods, if any. Intangible assets that have indefinite useful lives are not subject to amortization and are tested annually for impairment or more frequently if events or changes in circumstances indicate that they might be impaired.

Business Combinations

In a business combination, all identifiable assets, liabilities and contingent liabilities acquired are recorded at their fair values. One of the most significant estimates relates to the determination of the fair value of these assets and liabilities. For any intangible asset identified, depending on the type of intangible asset and the complexity of determining its fair value, an independent valuation expert or management may develop the fair value, using appropriate valuation techniques, which are generally based on a forecast of the total expected future net cash flows. The evaluations are linked closely to the assumptions made by management regarding the future performance of the assets concerned and any changes in the discount rate applied.

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

Goodwill Impairment

The Company performs an annual test for goodwill impairment in the fourth quarter for each of the cash generating units (CGUs) with goodwill allocated and whenever events or circumstances make it more likely than not that an impairment may have occurred. Determining whether an impairment has occurred requires valuation of the respective CGU using a discounted cash flow method. When available and as appropriate, the Company uses comparative market multiples to corroborate discounted cash flow results and relies on several factors, including actual operating results, future business plans, economic projections and market data.

Recent Accounting Pronouncements

New Standards Adopted

IFRS 16 Leases

In January 2016, the IASB issued IFRS 16, Leases (“IFRS 16”), which supersedes IAS 17 Leases (“IAS 17”), IFRIC 4 Determining whether an Arrangement contains a Lease (“IFRIC 4”), SIC-15 Operating Leases – Incentives, and SIC-27 Evaluating the Substance of Transactions Involving the Legal Form of a Lease. The standard sets out the principles for the recognition, measurement, presentation and disclosure of leases and requires lessees to account for all leases under a single on-balance sheet model. Lessor accounting under IFRS 16 is substantially unchanged under IAS 17. Lessors will continue to classify leases as either operating or finance leases using similar principles as in IAS 17.

Effective January 1, 2019, the Company adopted IFRS 16 retrospectively but has not restated comparative financials for the 2018 reporting period as permitted under the specific transitional provisions in the standard. The reclassifications and the adjustments

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arising from the new leasing rules are therefore recognized in the opening balance sheet on January 1, 2019. In the context of initial application, the Company has exercised the option not to apply the new recognition requirements to short-term leases and to leases of low-value assets. The Company also made the election to not separate non-lease components from lease components, and instead account for each lease component and any associated non-lease components as a single lease component.

(i) Adjustments recognized on adoption of IFRS 16

Upon adopting, the Company recognized lease liabilities in relation to leases that had previously been classified as ‘operating leases’ under the principles of IAS 17. These liabilities were measured at the present value of the remaining lease payments, discounted using the lessee’s incremental borrowing rate as of January 1, 2019. The weighted-average incremental borrowing rate for lease liabilities initially recognized as of January 1, 2019 was 10%. The Company did not have any leases that had been previously classified as 'finance leases' under the principles of IAS 17 at the time of adoption.

The associated right-of-use assets for the Company's leases were measured on a retrospective basis as if the new rules had always been applied. There were no onerous lease contracts that would have required an adjustment to the right-of-use assets at the date of initial application.

In applying IFRS 16 for the first time, the Company applied the following practical expedients permitted by the standard:

• use of a single discount rate to a portfolio of leases with reasonably similar characteristics,

• reliance on previous assessments of whether leases are onerous immediately before the date of initial application,

• application of the short-term leases exemption to leases with a remaining lease term of less than 12 months as at the date of initial application, and

• exclusion of initial direct costs from the measurement of the right-of-use asset at the date of initial application.

The Company has also elected not to reassess whether a contract is or contains a lease at the date of initial application. Instead, for contracts entered into before the transition date, the previous determinations pursuant to IAS 17 and IFRIC 4 of whether a contract is a lease have been maintained.

Based on the foregoing, the impact of the change in accounting policy on January 1, 2019, is summarized below:

• right-of-use assets of $24,618 were recognized,

• lease liabilities of $25,865 were recognized,

• deferred rent of $151 related to previous operating leases was derecognized,

• deferred tax liability decreased by $505 due to the deferred tax impact of the changes in assets and liabilities, and

• the net impact on retained earnings was a decrease of $591.

The following represents the reconciliation of lease liabilities as of January 1, 2019 to the operating lease commitments as of December 31, 2018: Operating lease commitments as of December 31, 2018 $ 39,959 Relief option for short-term leases (52 ) Less executed lease not yet commenced as of December 31, 2018 (367 ) Other 1,425 Gross lease liabilities as of January 1, 2019 40,965 Discounting (15,100 ) Lease liabilities due to initial application of IFRS 16 as of January 1, 2019 $ 25,865

During the three months ended September 30, 2019, the Company recorded depreciation on right-of-use assets of $1,548, $1,366 included in depreciation and amortization and $182 included in cost of goods sold in the interim unaudited condensed consolidated statement of operations. During the three months ended September 30, 2019, the Company also recorded interest on lease liabilities of $1,336, $1,336 included in interest expense and nil included in cost of goods sold in the interim unaudited condensed consolidated statement of operations. During the nine months ended September 30, 2019, the Company recorded depreciation on right-of-use assets of $3,347, $2,520 included in depreciation and amortization and $827 included in cost of goods sold in the interim unaudited condensed consolidated statement of operations. During the nine months ended September 30, 2019, the Company also recorded interest on lease liabilities of $2,959, $2,437 included in interest expense and $522 included in cost of goods sold in the interim unaudited condensed consolidated statement of operations.

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(ii) Summary of new accounting policies for leases

The Company leases certain business facilities from third parties under operating agreements that specify minimum rentals. Lease terms are negotiated on an individual basis and contain a wide range of different terms and conditions; the Company assesses whether a contract is, or contains, a lease at the inception of the contract. The lease agreements do not impose any covenants, but leased assets may not be used as security for borrowing purposes.

Until the end of the 2018 financial year, leases of property, plant and equipment were classified as either finance or operating leases. A lease was classified as a finance lease if it transferred substantially all of the risks and rewards incidental to ownership of the leased asset to the Company; otherwise, it was classified as an operating lease. Finance leases were capitalized at the commencement of the lease at the inception date fair value of the leased property or, if lower, at the present value of the minimum lease payments. In an operating lease, lease payments were recognized as an expense on a straight-line basis over the lease term, except where another systematic basis is more representative of the time pattern in which the economic benefits are consumed. Any prepaid rent and accrued rent were recognized under other current assets and other current liabilities, respectively.

From January 1, 2019, right-of-use assets and corresponding lease liabilities are recognized for all leases at the commencement date, except for short-term leases (defined as leases with a lease term of 12 months or less) and leases of low value assets. The lease payments for these contracts are generally recognized on a straight-line basis over the term of the lease unless another systematic basis is more representative of the time pattern in which the economic benefits from the leased asset are consumed. The Company has lease agreements with lease and non-lease components and accounts for such components as a single lease component.

Lease liabilities are initially measured at the present value of the lease payments, that are not paid at the commencement date, over the lease term. Lease payments used in lease liability calculations include:

• fixed payments (including in-substance fixed payments), less any lease incentives receivable,

• variable lease payment that are based on an index or a rate,

• amounts expected to be payable by the lessee under residual value guarantees,

• the exercise price of a purchase option if the lessee is reasonably certain to exercise that option, and

• payments of penalties for terminating the lease, if the lease term reflects the lessee exercising that option.

The lease payments are discounted using the interest rate implicit in the lease. As most of the Company's leases do not provide an implicit rate, the Company's estimated incremental borrowing rate, based on the information available at commencement date, is used to determine the present value of lease payments. The implicit rate is used when readily determinable. Lease payments are split into principal and interest portions using the effective interest method. Subsequently, the amount of lease liabilities is increased to reflect the accretion of interest and reduced for the lease payments made. In addition, the carrying amount of lease liabilities is remeasured if there is a modification, change in the lease term, change in the in-substance fixed lease payments, or change in the assessment to purchase the underlying asset.

The right-of-use assets comprise the initial measurement of the corresponding lease liability, lease payments made at or before the commencement day, any initial direct costs, and any restoration costs. They are subsequently measured at cost less accumulated depreciation and impairment losses. Right-of-use assets are depreciated over the shorter of the lease term and the useful life of the underlying asset.

In determining the lease term, management considers all facts and circumstances that create an economic incentive to exercise an extension option, or not exercise a termination option. Extension options (or periods after termination options) are only included in the lease term if the lease is reasonably certain to be extended (or not terminated). The lease term assessment is reviewed if a significant event or a significant change in circumstances occurs which affects this assessment and that is within the control of the Company.

RISK FACTORS

Many factors could cause the Company’s actual results, performance and achievements to differ materially from those expressed or implied by the forward-looking statements and forward-looking information, including without limitation, the following factors, which are discussed in greater detail under the heading “Risk Factors” in the Company’s Notice of Meeting and Management Information Circular dated May 24, 2019 filed with securities regulators and available on www.harvestinc.com.

• The Company’s planned acquisitions are subject to varying degrees of approval which include in some, but not all cases, among other things (a) approval of the CSE for the listing of the new shares; (b) approval of the transfer of the cannabis-related licenses by local and state authorities in many of the markets where the target company’s assets and licenses are held; and (c) other regulatory approvals, including required authorizations under the U.S. Hart-Scott-Rodino Antitrust

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Improvements Act of 1976, as amended. The Company is unable to predict when all required approvals or authorizations will be obtained, if at all.

• The Company plans to issue additional securities in the future in connection with its planned acquisitions, offerings and financing transactions (including through the sale of securities convertible into or exchangeable or exercisable for Subordinate Voting Shares) and possible future offerings of its securities, which will dilute a shareholder’s holdings in the Company. The Company’s articles permit the issuance of an unlimited number of Subordinate Voting Shares and Multiple Voting Shares, and shareholders will have no pre-emptive rights in connection with such further issuance. The Board of Directors of the Company has discretion to determine the price and the terms of further issuances. The Company cannot predict the effect that future issuances and sales of its securities will have on the market price of the Subordinate Voting Shares. Issuances of a substantial number of additional securities of the Company, or the perception that such issuances could occur, may adversely affect prevailing market prices for the Subordinate Voting Shares. With any additional issuance of the Company’s securities, investors will suffer dilution to their voting power and the Company may experience dilution in its revenue per share.

• The market price of the Subordinate Voting Shares cannot be predicted and has been and may be volatile and subject to wide fluctuations in response to numerous factors, many of which are beyond the Company’s control. This volatility may affect the ability of holders of Subordinate Voting Shares to sell their securities at an advantageous price. Market price fluctuations in the Subordinate Voting Shares may be due to the Company’s operating results failing to meet expectations of securities analysts or investors in any period, downward revision in securities analysts’ estimates, adverse changes in general market conditions or competitive, regulatory or economic trends, adverse changes in the economic performance or market valuations of companies in the industry in which the Company operates, acquisitions, dispositions, strategic partnerships, joint ventures, capital commitments or other material public announcements by the Company or its competitors or government and regulatory authorities, operating and share price performance of the companies that investors deem comparable to the Company, addition or departure of the Company’s executive officers and other key personnel, dual class or multiple voting share structure of the Company, the concentration of voting control that is held by the Founders, along with a variety of additional factors.

• The Company’s operations are subject to various laws, regulations and guidelines relating to the manufacture, management, transportation, storage and disposal of cannabis but also including laws and regulations relating to health and safety, the conduct of operations and the protection of the environment.

• The continued operation of the Company, debt service and capital requirements associated with its planned acquisitions and future growth strategy will require additional financing, and there can be no assurance that additional capital or other types of financing will be available if needed or that, if available, the terms of such financing will be favorable to the Company.

• If the Company defaults on secured indebtedness, the lender may foreclose, and the Company could lose the security in respect of such loan in its entirety. If the Company defaults on unsecured indebtedness, the terms of the loan may require the Company to repay the principal amount of the loan and any interest and other charges and costs associated with a default.

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

• The Company’s limited operating history may make it difficult for investors to predict future performance based on current operations.

• The Company may lose its status as a Foreign Private Issuer if, as of the last business day of the Company's second fiscal quarter for any year, more than 50% of the Company's outstanding voting securities (as determined under Rule 405 of the U.S. Securities Act) are directly or indirectly held of record by residents of the United States. Loss of Foreign Private Issuer status may have adverse consequences on the Company's ability to issue its securities to acquire companies and its ability to raise capital in private placements or Canadian prospectus offerings. In addition, loss of the Company's Foreign Private Issuer status would likely result in increased reporting requirements and increased audit, legal and administration costs. Further, should the Company seek to list on a securities exchange in the United States, loss of Foreign Private Issuer status may increase the cost and time required for such a listing. These increased costs may have a material adverse effect on the business, financial condition or results of operations of the Company.

• The Company could lose its status as a Foreign Private Issuer if all or a portion of the Multiple Voting Shares directly or indirectly held of record by U.S. residents are converted into Subordinate Voting Shares. The conversion rights attached to the Multiple Voting Shares contain restrictions on conversion that are intended to avoid such a result; however, there can be no guarantee that such restrictions on conversion will be effective to prevent the Company from potentially losing Foreign Private Issuer status if a sufficient number of Multiple Voting Shares are converted into Subordinate Voting Shares and such Subordinate Voting Shares are acquired, either upon conversion or pursuant to a subsequent transaction, by U.S. residents. In addition, the Company could potentially lose its Foreign Private Issuer status as a result of future issuances of its shares from treasury to the extent such shares are acquired by U.S. residents.

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• The success of the business strategy of the Company, depends on the legality of the cannabis industry in the United States. The political environment surrounding the cannabis industry in the United States in general can be volatile, and the regulatory framework in the United States remains in flux. As of the date of this report, 33 states, Washington, D.C. and certain other U.S. territories have implemented laws and regulations to legalize and regulate the cultivation, sale, possession and use of cannabis, and additional states have pending legislation regarding the same; however, the risk remains that a shift in the regulatory or political realm could occur and have a drastic impact on the industry as a whole, adversely impacting the Company's ability to successfully invest and/or participate in the selected business opportunities. Further, there is no guarantee that at some future date, voters and/or the applicable legislative bodies will not repeal, overturn or limit any such legislation legalizing the sale, disbursement and consumption of medical or adult-use cannabis. It is also important to note that local and city ordinances may strictly limit and/or restrict disbursement of cannabis in a manner that will make it extremely difficult or impossible to transact business that is necessary for the continued operation of the cannabis industry. Cannabis remains illegal under federal law, and the federal government could bring criminal and civil charges against the Company or its subsidiaries or its investments at any time. Federal actions against any individual or entity engaged in the cannabis industry or a substantial repeal of cannabis-related legislation could have a material adverse effect on the business, financial condition or results of operations of the Company.

• As of September 30, 2019, Steve White, the Chief Executive Officer and a director of the Company, and Jason Vedadi, the Executive Chairman and a director of the Company, exercise approximately 68% of the voting power in respect of the Company’s outstanding shares as a result of their ownership of Multiple Voting Shares and Super Voting Shares. As a result, Mr. White and Mr. Vedadi (the “Founders”), and potentially either one of them alone, have the ability to control the outcome of matters submitted to the Company’s shareholders for approval, including the election and removal of directors and any arrangement, sale of all or substantially all of the assets, fundamental change or change of business of the Company.

• The Company’s business could be adversely affected if it fails to protect its intellectual property.

• The Company may be exposed to infringement or misappropriation claims by third parties, which, if determined adversely to the Company, could subject to significant liabilities and other Costs.

• The operation of the Company can be impacted by adverse changes or developments affecting the facilities of the Company’s wholly-owned subsidiaries.

• The Company’s ability to recruit and retain management, skilled labor and suppliers is crucial to the Company’s success.

• There is potential that the Company will face intense competition from other companies, some of which have longer operating histories and more financial resources and manufacturing and marketing experience than the Company.

• The Company both directly and indirectly engages in the medical and adult-use cannabis industry in the United States where local state law permits such activities. Investors are cautioned that in the United States, cannabis is largely regulated at the state level. To the Company’s knowledge, there are to date a total of 33 states, and the District of Columbia, that have now legalized cannabis in some form. The District of Columbia and 11 states -- Alaska, California, Colorado, Illinois, Maine, Massachusetts, Michigan, Nevada, Oregon, Vermont and Washington -- have adopted the most expansive laws legalizing marijuana for recreational use. Notwithstanding the permissive regulatory environment of cannabis at the state level, cannabis continues to be categorized as a controlled substance under the Controlled Substances Act (CSA) and as such, cultivation, distribution, sale and possession of cannabis violates federal law in the United States. The inconsistency between federal and state laws and regulations is a major risk factor, and there can be no assurance that the federal government will not seek to prosecute cases involving cannabis businesses that are otherwise compliant with state law. Violations of any federal laws and regulations could result in significant fines, penalties, administrative sanctions, convictions or settlements arising from civil proceedings conducted by either the federal government or private citizens, or criminal charges, including, but not limited to, disgorgement of profits, cessation of business activities or divestiture. This could have a material adverse effect on the Company, including its reputation and ability to conduct business, its holding (directly or indirectly) of medical and adult-use cannabis licenses in the United States, the listing of its securities on the CSE or other applicable exchanges, its financial position, operating results, profitability or liquidity or the market price of Subordinate Voting Shares.

• The Company believes the cannabis industry is highly dependent upon consumer perception regarding the safety, efficacy and quality of the cannabis produced. Consumer perception of the Company’s products can be significantly influenced by scientific research or findings, regulatory investigations, litigation, media attention and other publicity regarding the consumption of cannabis products. There can be no assurance that future scientific research, findings, regulatory proceedings, litigation, media attention or other research findings or publicity will be favorable to the cannabis market or any product or consistent with earlier publicity.

• The Company and its subsidiaries face an inherent risk of exposure to product liability claims, regulatory action and litigation if its products are alleged to have caused significant loss or injury.

• Greater access to cannabis, through home and designated growing and illegal dispensaries, may decrease the number of patients registering with the Company and may cause registered patients to leave the Company and grow for themselves.

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• Any significant interruption or negative change in the availability or economics of the supply chain for key inputs could materially impact the business, financial condition and operating results of the Company.

• If the Company is unable to continually innovate and increase efficiencies, its ability to attract new customers may be adversely affected.

• The Company may engage in acquisitions or other strategic transactions or make investments that could result in significant changes or management disruption.

• The Company could fail to integrate acquired companies into the business of the Company.

• Completed acquisitions, strategic transaction or investments could fail to increase shareholder value.

• The Company has, and will have, certain business arrangements with third parties, the breakdown/loss of which could impact its operations.

• The Company’s operations are subject to environmental and safety laws and regulations concerning, among other things, emissions and discharges to water, air and land, the handling and disposal of hazardous and non-hazardous materials and wastes, and employee health and safety.

• Although most growing is expected to be completed indoors under climate-controlled conditions, some of the Company’s growing also occurs outdoors, and, as such, there can be no assurance that natural elements and weather will not have a material adverse effect on any such future production.

• The Company may become party to litigation, mediation and/or arbitration from time to time in the ordinary course of business which could adversely affect its business.

• The Company relies on water, and the inability to access water could significantly affect our cultivation.

• Interest rate fluctuations.

• Availability of credit or other financing.

• Our ability to meet present and future debt service obligations.

• Our ability to refinance or extend the maturity of indebtedness, at, prior to, or after the time it matures.

• Insufficient resources to pursue our current strategy.

• Real estate market conditions.

• Our ability to remain listed on the CSE or the OTC Markets.

• Increase in the cost of labor, including mandatory minimum wages by state or local governments.

• Increases in costs of energy, healthcare, insurance and other operating expenses as a result of increased regulation or otherwise.

• Terrorist attacks or other acts of war.

• Natural disasters, including adverse climate changes in the areas where we are located.

• Adequacy of insurance coverage and increases in cost for health care coverage for our employees and potential government regulation with respect to health care coverage.

• Data breaches or cybersecurity attacks, including breaches impacting the integrity and security of our data.

We do not undertake any obligation to update publicly or revise any forward-looking statements whether as a result of new information, future events or otherwise except as required by law.

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