CONSOLIDATED FINANCIAL STATEMENTS - Form 6-K

CONSOLIDATED FINANCIAL STATEMENTS

Years Ended December 31, 2021 and 2020

(Expressed in thousands of Canadian dollars)

Management's Responsibility for Financial Reporting

The preparation and presentation of the accompanying consolidated financial statements of Alcanna Inc. ("the Company"), which have been prepared in accordance with International Financial Reporting Standards, are the responsibility of management and have been approved by the Board of Directors.

The consolidated financial statements include certain amounts that are based on the best estimates and judgments of management and in their opinion present fairly, in all material respects, Alcanna Inc.'s financial position, financial performance and cash flows. The Company's accounting procedures and related systems of internal controls are designed to provide reasonable assurance that its assets are safeguarded and its financial information is reliable.

The consolidated financial statements have been audited by PricewaterhouseCoopers LLP, the Company's external auditor. The external auditor is responsible for examining the consolidated financial statements and expressing its opinion on the fairness of the financial statements in accordance with International Financial Reporting Standards. The auditor's report outlines the scope of its audit examination and states its opinion.

The Board of Directors, through the Audit Committee, is responsible for overseeing management's responsibility for financial reporting and is ultimately responsible for reviewing and approving the consolidated financial statements. The Audit Committee meets regularly with management and the external auditor to satisfy itself that each group is discharging its responsibilities with respect to internal controls and financial reporting. The Audit Committee reports its findings to the Board of Directors for their consideration when approving the consolidated financial statements for issuance to the shareholders. The external auditor has full and open access to the Audit Committee, with and without the presence of management. The Audit Committee also considers, for review by the Board of Directors and approval by the shareholders, the engagement or re-appointment of the external auditor.

Report of Independent Auditors

To the Shareholder of Alcanna Inc.

Opinion

We have audited the accompanying consolidated financial statements of Alcanna Inc. and its subsidiaries (the "Company"), which comprise the consolidated statements of financial position as of December 31, 2021 and 2020, and the related consolidated statements of changes in equity, profit and loss, comprehensive income and loss, and cash flows for the years then ended, including the related notes (collectively referred to as the "consolidated financial statements").

In our opinion, the accompanying consolidated financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2021 and 2020, and the financial performance and its cash flows for the years then ended in accordance with International Financial Reporting Standards as issued by the International Accounting Standards Board.

Basis for Opinion

We conducted our audit in accordance with auditing standards generally accepted in the United States of America ("US GAAS"). Our responsibilities under those standards are further described in the Auditors' Responsibilities for the Audit of the Consolidated Financial Statements section of our report. We are required to be independent of the Company and to meet our other ethical responsibilities, in accordance with the relevant ethical requirements relating to our audit. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinion.

Responsibilities of Management for the Consolidated Financial Statements

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

In preparing the financial statements, management is responsible for assessing the Company's ability to continue as a going concern for at least, but not limited to, 12-months from the end of the reporting period, disclosing, as applicable, matters related to going concern and using the going concern basis of accounting unless management either intends to liquidate the Company or to cease operations, or has no realistic alternative but to do so.

PricewaterhouseCoopers LLP

Stantec Tower, 10220 103 Avenue NW, Suite 2200, Edmonton, Alberta, Canada T5J 0K4

T: +1 780 441 6700, F: +1 780 441 6776

"PwC" refers to PricewaterhouseCoopers LLP, an Ontario limited liability partnership.

Auditors' Responsibilities for the Audit of the Consolidated Financial Statements

Our objectives are to obtain reasonable assurance about whether the financial statements as a whole are free from material misstatement, whether due to fraud or error, and to issue an auditors' report that includes our opinion. Reasonable assurance is a high level of assurance but is not absolute assurance and therefore is not a guarantee that an audit conducted in accordance with US GAAS will always detect a material misstatement when it exists. The risk of not detecting a material misstatement resulting from fraud is higher than for one resulting from error, as fraud may involve collusion, forgery, intentional omissions, misrepresentations, or the override of internal control. Misstatements are considered material if there is a substantial likelihood that, individually or in the aggregate, they would influence the judgment made by a reasonable user based on the financial statements.

In performing an audit in accordance with US GAAS, we:

We are required to communicate with those charged with governance regarding, among other matters, the planned scope and timing of the audit, significant audit findings, and certain internal control-related matters that we identified during the audit.

Alcanna Inc.

Consolidated Statements of Financial Position

(in thousands of Canadian dollars)

The accompanying notes are an integral part of the consolidated financial statements.

Approved on behalf of the Board of Directors:

Alcanna Inc.

Consolidated Statements of Changes in Equity

(in thousands of Canadian dollars)

The accompanying notes are an integral part of these consolidated financial statements.

Alcanna Inc.

Consolidated Statements of Profit and Loss

Years Ended December 31, 2021 and 2020

(in thousands of Canadian dollars, except for per share amounts)

The accompanying notes are an integral part of the consolidated financial statements.

Alcanna Inc.

Consolidated Statements of Comprehensive Income and Loss

Years Ended December 31, 2021 and 2020

(in thousands of Canadian dollars)

The accompanying notes are an integral part of the consolidated financial statements.

Alcanna Inc.

Consolidated Statements of Cash Flows

Years Ended December 30, 2021 and 2020

(in thousands of Canadian dollars)

The accompanying notes are an integral part of the consolidated financial statements.

Alcanna Inc.

Notes to the Consolidated Financial Statements

December 31, 2021 and 2020

(in thousands of Canadian dollars except share data or unless otherwise specified)

Alcanna Inc. (the "Company" or "Alcanna") was incorporated under the Canada Business Corporations Act. The address of the Company's registered office is 101, 17220 Stony Plain Road, Edmonton, Alberta. The Company's Common Shares trade on the Toronto Stock Exchange (the "TSX") under the symbol "CLIQ".

The Company's principal activities are the retailing of wines, beers and spirits ("Liquor Operations"). As at December 31, 2021, the Company operated 170 (December 31, 2020 - 205) retail liquor stores, of which 169 (December 31, 2020 - 181) were in Alberta and one (December 31, 2020 - 24) in British Columbia. The Company also owns approximately 63% of Nova Cannabis Inc. ("Nova")(TSX: NOVC), whose principal activities are the retailing of cannabis ("Cannabis Operations"). As at December 31, 2021, Nova operated 74 (December 31, 2020 - 34) retail cannabis stores, of which 57 (December 31, 2020 - 33) were in Alberta, 16 (December 31, 2020 - one) in Ontario, and one (December 31, 2020 - nil) in Saskatchewan.

On October 7, 2021, Alcanna entered into an arrangement agreement, which was subsequently amended on January 6, 2022 with Sundial Growers Inc. to complete a court-approved plan of arrangement under the Canada Business Corporations Act. Refer to note 29 for additional details.

On March 22, 2021, the Company closed the business combination agreement with YSS Corp. ("YSS") that was executed on January 18, 2021, and the following events took place:

For accounting purposes, the Nova Transaction constituted a reverse acquisition that involved a change of control of Nova Cannabis Inc. (formerly YSS Corp.). Based on the guidance in IFRS 3, Business Combinations, it was determined that Nova Cannabis Inc. (formerly YSS Corp.) was the accounting acquiree and Alcanna was the accounting acquirer, as Alcanna, the sole partner of ACS LP, controlled Nova upon completion of the Nova Transaction. Refer to note 4 for further information.

The common shares of Nova began trading on the TSX Venture Exchange in substitution of the common shares of YSS Corp. on March 24, 2021 under the trading symbol "NOVC". On July 15, 2021, Nova Shares began trading on the TSX under the same trading symbol and were concurrently delisted from the TSX Venture Exchange.

During the year ended December 31, 2021, the Company completed a series of asset purchase agreements for the sale of the Company's remaining convenience-format retail liquor stores in British Columbia. As a result of these events and the decision to sell, the Company has exited the convenience-format retail liquor store business in British Columbia and has classified the results of the British Columbia Operations, defined in note 5, as discontinued operations.

Alcanna Inc.

Notes to the Consolidated Financial Statements

December 31, 2021 and 2020

(in thousands of Canadian dollars except share data or unless otherwise specified)

The consolidated financial statements (the "financial statements") were approved and authorized for issuance by the Board of Directors on September 19, 2022.

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

The financial statements have been prepared under the historical cost convention, except for the derivative warranty liabilities, redemption obligation, and the Directors' deferred share units and cash-settled awards under the incentive award plan, which are measured at fair value. Assets and liabilities held for sale are measured at the lower of their carrying amount and fair value less costs to sell.

These financial statements include the accounts of the Company and its subsidiaries. Subsidiaries are entities controlled by the Company. The Company controls an entity when it is exposed to, or has rights to, variable returns from its involvement with the entity and has the ability to affect those returns through its power over the entity. Subsidiaries are fully consolidated from the date of acquisition, which is the date on which the Company obtains control, and continue to be consolidated until the date that such control ceases to exist.

All subsidiaries, with the exception of holding companies, are retailers of wine, beer, spirits and cannabis. The financial statements of the subsidiaries are prepared under the same reporting period as the Company, using consistent accounting policies. All intercompany balances, income and expenses and unrealized gains and losses resulting from intercompany transactions are eliminated on consolidation. The Company applies the direct method of consolidation.

Non-controlling interests ("NCI") represent equity interest in subsidiaries owned by outside parties. The Company recognizes NCI in an acquired entity at fair value or at the NCI proportionate share of the acquired entity's net identifiable assets. This decision is made on an acquisition-by-acquisition basis. The fair value or share of net identifiable assets of subsidiaries attributable to NCI are presented as a component of equity. Their share of the subsidiary's net earnings (loss) is recognized directly in equity. Changes in the Company's ownership interest in its subsidiaries that do not result in a loss of control are accounted for as equity transactions.

The preparation of these consolidated financial statements in accordance with IFRS requires management to make judgments, estimates and assumptions that affect the application of accounting policies and the reported amounts of assets and liabilities, income and expense. Actual results may differ from those estimates.

Estimates and assumptions are continually evaluated and are based on management's experience and other factors, including expectation of future events that are believed to be reasonable under the circumstances. Management has considered the impacts of the COVID-19 pandemic in making the judgements, estimates, and assumptions used in these financial statements, and gave specific consideration to the fact that the severity and

Alcanna Inc.

Notes to the Consolidated Financial Statements

December 31, 2021 and 2020

(in thousands of Canadian dollars except share data or unless otherwise specified)

duration of the COVID-19 pandemic are unknown. Management will continue to monitor and assess the impact of the pandemic on its judgements, estimates, assumptions, accounting policies and amounts recognized in these financial statements, including, but not limited to, impairment of property and equipment, intangible assets, right-of-use assets, and goodwill.

The estimates and assumptions that have a significant risk of causing a material adjustment to the carrying value of assets and liabilities within the next financial year are discussed below.

Estimates:

The Company reviews goodwill and intangible assets with indefinite lives at least annually, and other non-financial assets when there is any indication that the asset may be impaired. The recoverable amounts of cash-generating units ("CGU") have been determined, where applicable, using discounted cash flow models that require assumptions about future cash flows and discount rates.

Refer to notes 10 and 21 for further details regarding estimation of recoverable amounts.

Determining deferred taxes involves a number of assumptions and variables that could reasonably change, including: the useful lives of recorded property and equipment and definite life intangible assets that determine the amount of amortization recorded thereon, the amount of discretionary tax deductions the Company will claim from its existing tax depreciation pools, the rates of tax applicable to various jurisdictions in which the Company is taxable, the allocation of taxable income to those jurisdictions, and the acceptance of the Company's tax filing positions by taxation authorities. Changes in these assumptions and variables, which are re-evaluated at each Consolidated Statement of Financial Position date, could result in changes in the recorded amount of deferred taxes and these changes could be material.

Deferred tax assets are assessed to determine the likelihood that they will be realized from future taxable income. Details of tax losses expected to be utilized on the basis of future taxable income are provided in note 15.

Inventories are carried at the lower of cost and net realizable value, which requires the Company to utilize estimates related to fluctuations in future retail prices, seasonality and costs necessary to sell the inventory.

The Company applies judgment on the recognition and measurement of assets acquired and liabilities assumed, and estimates are used to calculate and measure such adjustments. In measuring the fair value of the acquiree's assets and liabilities, management uses estimates about future cash flows and discount rates. Any measurement changes after initial recognition would affect the measurement of goodwill.

Alcanna Inc.

Notes to the Consolidated Financial Statements

December 31, 2021 and 2020

(in thousands of Canadian dollars except share data or unless otherwise specified)

The Company evaluates all provisions at each reporting date. These provisions can be significant and are prepared using estimates of the costs of future activities. In certain instances, management may determine that these provisions are no longer required or that certain provisions are insufficient as new events occur or as additional information is obtained. Provisions are separately identified and disclosed in the Company's financial statements. Changes to these estimates may affect the value of provisions, net loss, and comprehensive loss in future periods.

The Company estimates the incremental borrowing rate used to measure the lease liability for each lease contract. This includes estimation in determining the asset-specific security impact. There is also estimation uncertainty arising from certain leases containing variable lease terms that are linked to operational results.

Assumptions:

The Company uses judgment in determining the entities that it controls and therefore consolidates. The Company controls an entity when the Company has the existing rights that give it the ability to direct the activities that significantly affect the entitiy's returns. The Company consolidates all of its wholly owned subsidiaries. The Company also consolidates Nova as the Company's interest in Nova was determined to provide control. Judgment is applied in determining whether the Company controls the entities in which it does not have full ownership rights. Most often, judgment involves reviewing contractual rights to determine if rights are participating (giving power over one entity) or protective rights (protecting the Company's interest without giving it power).

Management is required to use judgment in determining the grouping of assets to identify cash generating units ("CGU") for the purposes of testing non-financial assets for impairment. As the grouping of CGUs determines the level at which non-financial assets are tested for impairment, the grouping of CGUs can impact the outcome of impairment testing. For the purpose of goodwill and indefinite life intangible assets impairment testing, CGUs are grouped at the lowest level at which goodwill and indefinite life intangible assets are monitored for internal management purposes. In addition, judgment is used to determine whether a triggering event has occurred requiring an impairment test to be completed.

The Company applies judgment in determining whether non-current assets and disposal groups meet the criteria to be classified as held for sale. Operations associated with a disposal group that meet the criteria as held for sale, are required to classify its assets and liabilities as held for sale.

The Company estimates the lease term by considering the facts and circumstances that can create an economic incentive to exercise an extension option, or not exercise a termination option by assessing relevant factors such as store profitability. 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). Potential future cash outflows have not been included in the lease liability because it is not reasonably certain that the lease will be extended. The assessment of the lease term 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 lessee.

Alcanna Inc.

Notes to the Consolidated Financial Statements

December 31, 2021 and 2020

(in thousands of Canadian dollars except share data or unless otherwise specified)

Revenue is generated from sales to customers, through retail stores for liquor and cannabis products. Revenue from retail sales is recognized at the point of sale.

Cash consists of cash on hand, credit card deposits in transit and demand deposits held with banks.

Restricted cash represents cash held by an unincorporated silo entity controlled by the Company, that was not available for general use by other entities within the Company.

Inventory consists primarily of liquor, cannabis and related merchandise for resale and is valued at the lower of cost, determined using the weighted average method, and net realizable value. Net realizable value is the estimated selling price less applicable selling costs. All inventories are finished goods. Write-downs to net realizable value may be reversed in a subsequent period if circumstances that previously caused a write-down no longer exist.

Property and equipment are recorded at cost less accumulated depreciation and accumulated impairment charges. Depreciation is calculated using the straight-line method over the estimated useful lives of assets. Property and equipment under construction, and not yet available for use, are not depreciated until they are available for use. Depreciation methods and useful lives are reviewed at each financial year-end and are adjusted for, as required, prospectively. Estimated useful lives are as follows:

The Company tests its property and equipment for impairment when events and circumstances warrant such a review, as described in note 3h.

Intangible assets, consisting of retail liquor and cannabis licenses, trade names, and software, are recorded at cost.

Alcanna Inc.

Notes to the Consolidated Financial Statements

December 31, 2021 and 2020

(in thousands of Canadian dollars except share data or unless otherwise specified)

The Company assesses the carrying value of finite life intangible assets for impairment when events or circumstances warrant such a review as described in the "Impairment of non-financial assets" policy. Useful lives, residual values and amortization methods for intangible assets with finite useful lives are reviewed at least annually.

The Company assesses the carrying value of indefinite life intangible assets for impairment annually, or more frequently, if events or changes in circumstances indicate that their carrying value may not be recoverable as described in the "Impairment of non-financial assets" policy.

At the inception of a contract, the Company assesses whether a contract is, or contains, a lease. A contract is, or contains, a lease if the contract conveys the right to control the use of an identified asset for a period of time in exchange for consideration. To assess whether a contract conveys the right to control the use of an identified asset, the Company assesses whether:

Lessee accounting

Leases are recognized as a right-of-use asset and a corresponding lease liability at the date at which the leased asset is available for use. Each lease payment is allocated between the lease liability and finance cost. The finance cost is charged to net earnings (loss) over the lease period so as to produce a constant periodic rate of interest on the remaining balance of the lease liability for each period. The right-of-use asset is depreciated over the shorter of the asset's useful life and the lease term on a straight-line basis.

Lease payments included in the measurement of the lease liability include the net present value of the following:

The lease payments are discounted using the interest rate implicit in the lease. If that rate cannot be determined, the lessee's incremental borrowing rate is used. The incremental borrowing rate is the rate that the lessee would have to pay to borrow at prevailing interest rates, market precedents and the Company's specific credit spread on similar terms and security.

Alcanna Inc.

Notes to the Consolidated Financial Statements

December 31, 2021 and 2020

(in thousands of Canadian dollars except share data or unless otherwise specified)

Right-of-use assets are initially measured at cost, comprising the following:

The right-of-use assets are typically depreciated on a straight-line basis over the lease term unless the Company expects to obtain ownership of the leased asset at the end of the lease. The lease term consists of:

If the Company expects to obtain ownership of the leased asset at the end of the lease, the Company depreciates the right-of-use asset over the underlying asset's estimated useful life. The right-of-use asset is periodically reduced by impairment losses, if any, and adjusted for certain remeasurements of the lease liability.

After the commencement date of a lease contract, remeasurements of a lease liability result from either a lease modification or reassessment. A change in the scope of a lease contract, or the consideration for a lease, that was not part of its original terms and conditions is considered a lease modification. A lease modification is assessed to determine whether it meets the criteria of a separate lease that would require a separate right-of-use asset and a corresponding lease liability at the effective date of the modification. If the lease modification is not a separate lease, the Company remeasures the lease liability to reflect changes to the lease payments and adjusts the carrying amount of the right-of-use asset. If the carrying amount of the right-of-use asset has already been reduced to zero, the Company recognizes the remaining amount of the remeasurement in the determination of net earning (loss). A lease reassessment takes place when there are changes in the lease payments based on contractual clauses included in the original contract. For lease reassessments, the lease liability is remeasured to reflect changes to the lease payments and adjusts the carrying amount of the right-of-use asset. If the carrying amount of the right-of-use asset has already been reduced to zero, the Company recognizes the remaining amount of the remeasurement in the determination of profit or loss.

Acquisitions

Acquisitions of businesses and subsidiaries that meet the definition of a business are accounted for using the acquisition method. The consideration of an acquisition is measured as the fair value of the identifiable assets given, equity instruments issued, and liabilities incurred or assumed at the date of acquisition in exchange for control of the acquired business. Acquisition-related costs are recognized into net earnings (loss) as incurred, other than those associated with the issue of debt or equity securities.

Goodwill

Goodwill reflects the excess of the consideration transferred, amount of non-controlling interest in the acquired entity, and the acquisition-date fair value of any prior equity interest in the acquired entity over the fair value of the net identifiable assets acquired.

Alcanna Inc.

Notes to the Consolidated Financial Statements

December 31, 2021 and 2020

(in thousands of Canadian dollars except share data or unless otherwise specified)

Goodwill is not amortized but is assessed for impairment at least annually or when events and circumstances indicate that the carrying value may not be recoverable as described in the "Impairment of non-financial assets" policy.

At each Consolidated Statement of Financial Position date, the Company reviews the carrying value of its non-financial assets, other than inventories and deferred tax assets, to determine whether there is any indication of impairment. If any such indication exists, the asset is tested for impairment by comparing its estimated recoverable amount to its carrying value. Goodwill and indefinite life intangible assets are tested for impairment at least annually.

For the purpose of impairment testing, assets are grouped together in the smallest group of assets that generate cash inflows from continuing use that are largely independent of cash inflows of other assets or groups of assets. This grouping is referred to as a CGU. The Company has determined the following CGUs for purposes of impairment testing:

Corporate assets, which include head office facilities and warehouses, do not generate separate cash inflows. Corporate assets are tested for impairment at the minimum grouping of CGUs to which the corporate assets can be reasonably and consistently allocated. Goodwill arising from a business combination is tested for impairment at the minimum grouping of CGUs that are expected to benefit from the synergies of the combination.

The recoverable amount of a CGU or CGU grouping is the higher of its estimated value in use ("VIU") and its estimated fair value less costs of disposal ("FVLCD"). The VIU is based on the estimated future cash flows from the CGU or CGU grouping, discounted to their present value using a pre-tax discount rate that reflects current market assessments of the time value of money and the risks specific to the CGU or CGU group. The FVLCD is based on the best information available to reflect the amount that could be obtained from the disposal of the CGU in an arm's length transaction between knowledgeable and willing parties, net of estimates of the costs of disposal.

An impairment loss is recognized if the carrying value of a CGU or CGU group exceeds its estimated recoverable amount. For asset impairments other than goodwill, the impairment loss reduces the carrying value of the non-financial assets in the CGU on a pro-rata basis. Any loss identified from goodwill impairment testing is first applied to reduce the carrying value of goodwill allocated to the CGU or CGU grouping, and then to reduce the carrying value of the other non-financial assets in the CGU or CGU grouping on a pro-rata basis. Impairment losses are recognized through net earnings (loss).

Alcanna Inc.

Notes to the Consolidated Financial Statements

December 31, 2021 and 2020

(in thousands of Canadian dollars except share data or unless otherwise specified)

Goodwill is carried at cost less accumulated impairment charges adjusted for foreign exchange where applicable. An impairment loss with respect to goodwill is not reversed. For assets other than goodwill, an impairment loss is reversed only to the extent that the asset's carrying value does not exceed the carrying value that would have been determined, net of amortization, if no impairment loss had been recognized.

Current income tax is the expected tax payable on taxable income for the year, using tax rates enacted or substantively enacted at the end of the Consolidated Statement of Financial Position date, and any adjustment to tax payable in respect of prior years.

Deferred tax is provided in full, using the liability method, on temporary differences arising between the tax bases of assets and liabilities and their carrying values in the financial statements. The deferred tax is not accounted for if it arises from initial recognition of an asset or liability in a transaction, other than a business combination, that at the time of the transaction affects neither accounting nor taxable profit nor loss. Deferred tax is determined using tax rates that have been enacted or substantively enacted by the Consolidated Statement of Financial Position date and are expected to apply when the related deferred tax asset is realized or the deferred tax liability is settled.

Deferred tax assets are recognized to the extent that it is probable that future taxable earnings will be available against which any temporary differences and tax loss carryforwards can be utilized.

The Company's share-based payments consist of a deferred share plan for the benefit of the Company's Directors, and an incentive award plan comprised of restricted awards and performance awards for employees of the Company. These plans are further described in note 22.

The Company's equity-settled share-based payment plans include restricted awards and performance awards.

The fair value of the Company's equity-settled restricted awards, as determined at the grant date, are expensed on a graded-vesting basis with a corresponding increase in equity. The fair value of the Company's performance awards, as determined at the grant date, is expensed on a cliff-vesting basis with a corresponding increase in equity. The number of awards expected to vest is reviewed at least annually with any adjustments being recognized in the period they are determined.

Upon settlement of awards issued under equity-settled share-based payment plans, amounts previously recorded in equity reserves are recorded as an increase in share capital.

The Company's cash-settled share-based payment plans include a deferred share plan for issuances by the Company and Nova.

The fair value of awards granted under these plans is recognized as an expense with a corresponding increase in the liability as employees become entitled to the payments. The liability is recorded in accounts payable and accrued liabilities. The fair value of the liability is re-measured at the end of each Consolidated Statement of Financial Position date and at the date of the settlement. Changes in fair value are recognized in net earnings (loss).

Alcanna Inc.

Notes to the Consolidated Financial Statements

December 31, 2021 and 2020

(in thousands of Canadian dollars except share data or unless otherwise specified)

Provisions are liabilities of the Company for which the amount and timing of settlement is uncertain. A provision is recognized in the financial statements when the Company has a present legal or constructive obligation because of a past event, and it is probable that an outflow of economic benefits will be required to settle the obligation. If the effect is material, provisions are determined by discounting the expected future cash flows at a pre-tax rate that reflects current market assessments of the time value of money and, when appropriate, the risks specific to the liability.

Financial assets measured at amortized cost are non-derivative financial assets with fixed or determinable payments and include cash and receivables. They are recognized initially at their face value, except when fair value is materially different, and are subsequently measured at amortized cost using the effective interest rate method, less a provision for impairment.

At each Consolidated Statement of Financial Position date, the Company assesses whether a financial asset or group of financial assets is impaired under the expected credit loss model. The Company applies the IFRS 9 simplified approach to measuring the expected credit losses, which uses a lifetime expected loss allowance for all trade receivables, if applicable. To measure the expected credit losses, trade receivables are grouped based on shared credit risk characteristics and the days past due. The loss provision is based on the timing of the groups along with individual assessments for balances owing. The amortized cost of the financial asset is reduced by impairment losses at an amount equal to the lifetime expected credit losses.

Accounts payable and accrued liabilities and redemption obligations are non-interest bearing and are recognized initially at their face amount, except when fair value is materially different, and are subsequently measured at amortized cost using the effective interest method. Long-term debt is recognized initially at fair value, net of any directly attributable transaction costs, and are subsequently measured at amortized cost using the effective interest method.

Derivative instruments are recognized at fair value in net earnings (loss) on the date the Company became party to the contract and were subsequently marked to market at each Consolidated Statement of Financial Position date with changes in fair value reported in net earnings (loss).

The Company's convertible debentures were classified as a financial liability with a portion of the proceeds representing the value of the conversion option bifurcated to equity. Transaction costs related to the convertible debenture issuance were initially recognized in the carrying value of the associated liability and were recognized in net earnings (loss) using the effective interest method. Upon conversion, portions of debt and the conversion option are transferred into common shares.

Alcanna Inc.

Notes to the Consolidated Financial Statements

December 31, 2021 and 2020

(in thousands of Canadian dollars except share data or unless otherwise specified)

The Company classifies non-current assets and disposal groups as held for sale if their carrying amounts will be recovered principally through a sale transaction rather than through continuing use. The criteria for held for sale classification is regarded as met when a sale is highly probable, the asset or disposal group is available for immediate sale in its present condition, and management is committed to the sale, which is expected to be completed within one year from the date of classification. Non-current assets and disposal groups classified as held for sale are measured at the lower of their carrying amount and fair value less costs to sell. Non-current assets are not depreciated once classified as held for sale.

A discontinued operation is a component of the Company's business that has either been disposed of or is classified as held for sale and represents a separate major line of business or geographical area of operations and can be clearly distinguished from the rest of the Company, both operationally and for financial reporting purposes. Classification as a discontinued operation occurs at the earlier of disposal or when the operation meets the criteria to be classified as held for sale. When an operation is classified as a discontinued operation, the comparative Consolidated Statements of Profit and Loss and Comprehensive Income and Loss are restated as if the operation had been discontinued from the start of the comparative year. Discontinued operations are excluded from the results of continuing operations and are presented as a single amount net of tax as net earnings (loss) from discontinued operations in the Consolidated Statements of Profit and Loss.

Items included in the financial statements of each of the Company's subsidiaries are measured using the currency of the primary economic environment in which the subsidiary operates (the "functional currency"). The financial statements are presented in Canadian dollars, which is the Company's functional currency.

Transactions in foreign currencies are translated at the actual rates of exchange. Monetary assets and liabilities denominated in foreign currencies at the Consolidated Statement of Financial Position date are translated into the Canadian dollar at the exchange rate for that date. Foreign exchange differences arising on translation are recognized in net earnings (loss). Non-monetary assets and liabilities that are measured at historical cost are translated using the exchange rate at the date of the transaction.

The financial statements of foreign subsidiaries whose unit of measure is not the Canadian dollar are translated into Canadian dollars using the exchange rate in effect at the Consolidated Statement of Financial Position date for assets and liabilities, and the average exchange rates for the period for revenue, expenses and cash flows. Foreign exchange differences arising on translation are recognized in accumulated other comprehensive income (loss) in equity.

When a foreign operation is disposed of in its entirety or partially such that control, significant influence or joint control is lost, the cumulative amount in the translation reserve related to that foreign operation is reclassified to net earnings (loss) as part of the gain or loss on disposal.

Foreign exchange gains and losses arising from a receivable or payable to a foreign operation, the settlement of which is neither planned nor likely to occur in the foreseeable future and which in substance is considered to form part of the net investment in foreign operations, are recognized in other comprehensive income (loss) in the cumulate foreign currency translation differences.

Operating segments are reported in a manner consistent with the internal reporting provided to the chief operating decision maker ("CODM"). The CODM is responsible for allocating resources and assessing performance of the operating segments and has been identified as the Chief Executive Officer of the Company.

Alcanna Inc.

Notes to the Consolidated Financial Statements

December 31, 2021 and 2020

(in thousands of Canadian dollars except share data or unless otherwise specified)

Basic earnings (loss) per share ("EPS") is calculated by dividing net earnings (loss) for the period attributable to equity owners of the Company by the weighted average number of common shares outstanding for the period.

Diluted EPS is calculated by adjusting basic EPS for the effect of dilutive instruments, which may include equity-settled share-based payment plans and convertible debentures.

A number of new standards, amendments to standards and interpretations of standards have been issued by the International Accounting Standards Board and the International Financial Reporting Interpretations Committee and are effective for annual reporting periods beginning on or after January 1, 2021, which the Company adopted and determined did not have a significant impact on these financial statements.

The Company has not early adopted the new standards, amendments to standards and interpretations of standards that become effective for annual reporting periods beginning on or after January 1, 2022 in preparing these financial statements, and does not expect the implementation of which to have a significant impact on its accounting policies unless noted otherwise below.

IAS 12 Amendments

In 2021 the IASB issued amendments to IAS 12 Income Taxes which revises the accounting treatment for deferred tax on transactions such as leases, whereby the initial recognition exemption does not apply to transactions in which equal amounts of deductible and taxable temporary differences arise on initial recognition. The amendments are effective for annual reporting periods beginning on or after January 1, 2023, and is applied to the earliest comparative period presented. While early adoption is permitted, the Company does not intend to early adopt the amendments to IAS 12. The Company is currently assessing the impact of the amendments on its financial statements.

On March 22, 2021, the Company closed the business combination agreement (the "Agreement") with YSS Corp., who underwent a name change to Nova Cannabis Inc. upon closing of the Nova Transaction. Pursuant to the Agreement, the Company sold all the equity securities of the ACS Entities and in exchange, was issued 35,750,000 Nova Shares. Nova operates out of the Company's registered office.

Management performed an analysis under IFRS 3, Business Combinations, and has determined that Alcanna is the accounting acquirer of Nova. As such, the Nova Transaction constitutes a reverse acquisition for accounting purposes. Therefore, Nova (formerly YSS Corp.), being the acquired enterprise for accounting purposes, has its assets and liabilities included in these financial statements at their fair value on the date of the Nova Transaction in accordance with IFRS 3.

Following closing of the Nova Transaction but prior to giving effect to the Concurrent Financing, discussed below, the former YSS Corp. shareholders held approximately 17.5% and Alcanna held approximately 82.5%, respectively, of the Nova Shares, calculated on a basic non-diluted basis.

Alcanna Inc.

Notes to the Consolidated Financial Statements

December 31, 2021 and 2020

(in thousands of Canadian dollars except share data or unless otherwise specified)

The Nova Transaction has been accounted for using the acquisition method and reverse takeover accounting, whereby the assets and liabilities of the acquiree are recorded at their fair values, and the financial results from the former YSS Corp. operations subsequent to the Nova Transaction closing date, are included in these financial statements.

The following table summarizes the purchase consideration and purchase price allocation for the Nova Transaction, of the acquired assets and assumed liabilities at the date of acquisition:

The fair value consideration for the Nova Transaction used in the purchase price allocation has been determined based on the fair value of the former YSS Corp. immediately after closing of the Nova Transaction. This was assessed as the 17.5% interest held by former YSS Corp. shareholders in the market capitalization of Nova, after completion of the business combination but prior to giving effect to the Concurrent Financing, of $130,000.

Goodwill is primarily attributable to the synergies expected to be achieved by integrating YSS Corp.'s retail cannabis business with the NCS LP operations after the Nova Transaction as well as the positive results expected to be achieved from rebranding the majority of the retail cannabis stores acquired by Nova to the new "Value Buds" banner. The entire amount of goodwill is not deductible for tax purposes.

Alcanna Inc.

Notes to the Consolidated Financial Statements

December 31, 2021 and 2020

(in thousands of Canadian dollars except share data or unless otherwise specified)

From the Nova Transaction closing date to December 31, 2021, the former YSS Corp. operations contributed $24,439 of sales and $2,612 of net loss from continuing operations to Nova, of which approximately 63% is attributable to equity shareholders of the Company. If the Nova Transaction had been completed on January 1, 2021, the Company would have recognized consolidated pro-forma sales and net loss for the year ended December 31, 2021, adjusted for lower depreciation expense from the assets being recorded at fair value and to exclude duplicate transaction costs incurred by YSS Corp., of $731,946 and $29,254, respectively, which includes $674 in transaction costs incurred by Nova.

Transaction costs associated with the Nova Transaction incurred by Nova and Alcanna were $3,106, of which $910 was incurred during the year ended December 31, 2020 and $2,196 incurred during the year ended December 31, 2021. Transaction costs have been recognized within the "public company and advisory services" category of administrative expenses (note 25).

Effective February 11, 2021, Alcanna Cannabis Stores Finance Ltd. ("ACS FinCo"), a wholly owned subsidiary of NCS LP, completed the sale of an aggregate of 13,334,000 subscription receipts at a price of $3.00 per subscription receipt for aggregate proceeds of $40,002 in connection with the Nova Transaction. Immediately upon closing of the Nova Transaction, each subscription receipt converted into one common share of ACS FinCo and was subsequently exchanged for one Nova Share pursuant to an amalgamation of ACS FinCo and 2316416 Alberta Ltd., a wholly owned subsidiary of Nova (the "Amalgamation").

Following completion of the Nova Transaction, including the Amalgamation and the Concurrent Financing, Alcanna held approximately 63% of the Nova Shares, and the former YSS Corp. shareholders and former holders of ACS FinCo subscription receipts held approximately 13% and 24%, respectively, of the Nova Shares, calculated on a basic non-diluted basis.

Transaction costs incurred by Nova to facilitate the Concurrent Financing include legal, accounting and agent fees. Transactions costs were $3,594 and comprise a cash payment to agents who facilitated the Concurrent Financing of $2,400, agent expenses of $129, compensation warrants of $653 granted to the agents ("Agent Warrants") (note 17), and l egal and accounting fees of $412. Transaction costs associated with the Concurrent Financing are considered share-issuance costs and have been recognized in equity.

As at December 31, 2021, the Company held approximately 63% (2020 - nil) ownership in Nova through ownership of 35,750,000 Class A common shares. The publicly held interest in Nova is presented as a non-controlling interest through equity in the Company's Consolidated Statements of Financial Position. Upon completion of the business combination, the Company elected to recognize the non-controlling interest in Nova at the fair value of the non-controlling interest's ownership in Nova, which at the time was 17.5%, prior to giving effect to the Concurrent Financing. The fair value of the non-controlling interest in Nova, as a publicly traded company, was measured by applying a market approach and with reference to Nova's share price on the day of the Nova Transaction of $3.00.

Subsequent transactions with non-controlling interests, including the issuance of additional Nova Shares through the Concurrent Financing, have been recognized as an adjustment to the non-controlling interest equal to the proportionate share of net assets given up to new shareholders. The difference between the value ascribed to the non-controlling interest and the fair value of consideration received has been recorded in contributed surplus attributable to shareholders of Alcanna.

Alcanna Inc.

Notes to the Consolidated Financial Statements

December 31, 2021 and 2020

(in thousands of Canadian dollars except share data or unless otherwise specified)

On January 1, 2019, Liquor Stores Limited Partnership ("LSLP"), a wholly owned subsidiary of Alcanna, transferred the underlying net assets of 50 liquor stores into the Canadian Liquor Retailers Alliance (the "Alliance"), another wholly owned subsidiary of Alcanna, at cost. On January 14, 2019, the Alliance acquired, through a business combination, the underlying net assets of 12 operational liquor stores and 3 liquor stores under construction from Ace Liquor Corporation ("Ace"). The Alliance paid consideration in the form of $9,000 cash and 15,759,451 partnership units of the Alliance. As a result of the transaction, LSLP held 71% of the Alliance partnership units and Ace held 29% of the Alliance partnership units at the transaction date. Alcanna owns 100% of the common shares of the Alliance's general partner.

On January 24, 2020, Alcanna acquired the remaining 29% of the partnership units issued by the Alliance from Ace in exchange for 2,927,928 common shares in the capital of Alcanna (the "Shares"). The transaction was valued at $13,000 with the Company issuing the Shares at a price of $4.44 per share. This transaction resulted in the Company owning 100% of the partnership units issued by the Alliance. Subsequent to the transaction, Ace owns approximately 7.3% of the Shares of Alcanna.

Immediately prior to the exchange, the carrying amount of the existing 29% non-controlling interest in the Alliance was $346. The Company recognized a decrease in non-controlling interests of $346 and a decrease in equity attributable to shareholders of $12,654. The effect on the equity attributable to the shareholders of the Company during the period is summarized as follows:

Alaska Operations

On June 1, 2020, the Company sold its Alaska operations, which formed a portion of its Liquor Operations operating segment and consisted of 21 retail liquor stores and one distribution centre (the "Alaska Operations"). Net proceeds of $26,509 (US$19,449) were recorded on the sale, comprised of $29,714 (US$21,800) total proceeds under the terms of the agreement, net of cash disposed of $2,467 (US$1,810) and transaction costs of $738 (US$541). Net proceeds of $25,315 were received during the year ended December 31, 2020, and $1,194 received during the year ended December 31, 2021.

Alcanna Inc.

Notes to the Consolidated Financial Statements

December 31, 2021 and 2020

(in thousands of Canadian dollars except share data or unless otherwise specified)

The Company recognized a gain on the sale of the Alaska Operations within net earnings from discontinued operations as follows:

The assets and liabilities disposed were as follows:

The results of the Alaska Operations have been classified as discontinued operations in Consolidated Statements of Profit and Loss and related note disclosures based on management's determination that these operations constituted a major component of the Company's operations. The comparative Consolidated Statements of Profit and Loss and related note disclosures have been restated to remove the results of the discontinued operations from continuing operations.

British Columbia Operations

On October 30, 2020, the Company sold 8 convenience-format retail liquor stores on Vancouver Island, British Columbia (the "Vancouver Island Disposal Group"), which formed a portion of its Liquor Operations operating segment. Net proceeds of $21,078 were recorded on the sale, comprised of $21,299 total proceeds under the terms of the agreement, net of cash disposed of $21 and transaction costs of $200.

In late 2020, the Company was approached by several parties interested in purchasing the remaining British Columbia retail stores. The strategic decision was made to enter into a series of asset purchase agreements, which were executed during the year ended December 31, 2021, with three parties for the sale of 23 convenience-format retail liquor stores across British Columbia (the "British Columbia Operations"). The stores previously formed a portion of the Company's Liquor Operations operating segment.

Alcanna Inc.

Notes to the Consolidated Financial Statements

December 31, 2021 and 2020

(in thousands of Canadian dollars except share data or unless otherwise specified)

On March 31, 2021, the Company completed the first of the three transactions whereby 19 convenience-format retail liquor stores in British Columbia were sold to Otter Home and Farm Co-operative and one store was closed. Net proceeds of $80,918 were recorded on the sale, comprised of $81,302 total proceeds under the terms of the agreement, net of cash disposed of $68 and transaction costs of $316.

On April 1, 2021, the company completed the second sale of one convenience-format retail liquor store in British Columbia. Total and net proceeds of $1,376 were recorded on the sale.

On April 12, 2021, the company completed the third and final sale of two convenience-format retail liquor stores in British Columbia. Net proceeds of $3,734 were recorded on the sale, comprised of $3,741 total proceeds under the terms of the agreement, net of cash disposed of $5 and transaction costs of $2.

The Company recognized a gain on the sale of the British Columbia Operations within net earnings from discontinued operations as follows:

The assets and liabilities disposed were as follows:

The results of the British Columbia Operations have been classified as discontinued operations in Consolidated Statements of Profit and Loss and related note disclosures based on management's determination that these operations constituted a major component of the Company's operations. The comparative Consolidated Statements of Profit and Loss and related note disclosures have been restated to remove the results of the discontinued operations from continuing operations.

Alcanna Inc.

Notes to the Consolidated Financial Statements

December 31, 2021 and 2020

(in thousands of Canadian dollars except share data or unless otherwise specified)

In accordance with IAS 21, on disposal of the US Operations in 2020, the Company reclassified accumulated translation differences directly attributable to the US Operations of $9,927 from accumulated other comprehensive income to the gain recognized on the sale. Further, as part of the Company's co-ordinated plan to exit all foreign operations, the Company dissolved its remaining US subsidiaries effective December 31, 2020, and reclassified the remaining accumulated translation differences attributable to those subsidiaries of $4,383 from accumulated other comprehensive income to net earnings from discontinued operations.

A reconciliation of the major classes of line items constituting net earnings and comprehensive income (loss) from discontinued operations, inclusive of the Alaska Operations and British Columbia Operations, net of tax, as presented in the Consolidated Statements of Profit and Loss and Comprehensive Income and Loss is as follows:

Alcanna Inc.

Notes to the Consolidated Financial Statements

December 31, 2021 and 2020

(in thousands of Canadian dollars except share data or unless otherwise specified)

The net cash flows provided by (used in) the discontinued operations were as follows:

The cost of inventory recognized as an expense and included in cost of sales for the year ended December 31, 2021 was $567,783 (2020 - $521,964). Included in cost of sales are $202 (2020 - $270) in write-downs of inventory to estimated net realizable value. No inventory write-downs recognized in previous years were reversed in the current year. The Company's inventory is included in the calculation of its credit facility borrowing base, under the terms of the Company's credit facility (note 12).

Alcanna Inc.

Notes to the Consolidated Financial Statements

December 31, 2021 and 2020

(in thousands of Canadian dollars except share data or unless otherwise specified)

Alcanna Inc.

Notes to the Consolidated Financial Statements

December 31, 2021 and 2020

(in thousands of Canadian dollars except share data or unless otherwise specified)

As at December 31, 2021, the amount of property and equipment classified as under construction or development, and therefore not being depreciated, was $4,701 (2020-$1,068).

Included in property and equipment are fully depreciated assets with a cost of $19,192 (2020 - $21,022) that are still in use. During the year, the Company accelerated depreciation on the assets of stores where there was a change in estimated useful life because the store either underwent or was confirmed for renovation or closure. Depreciation expense related to the accelerated depreciation of such assets was $2,913 (2020 - $1,632).

Alcanna Inc.

Notes to the Consolidated Financial Statements

December 31, 2021 and 2020

(in thousands of Canadian dollars except share data or unless otherwise specified)