FORM 51-102F4

BUSINESS ACQUISITION REPORT

Item 1 IDENTITY OF COMPANY

1.1 Name and Address of Company

Auxly Cannabis Group Inc. (“ Auxly ” or the “ Company ”) 777 Richmond St W Unit 002 Toronto, Ontario M6J 0C2

1.2 Executive Officer

The following executive officer of the Company is knowledgeable about the Acquisition (as defined below) and this report:

Hugo Alves Chief Executive Officer Telephone: 647-812-0121

Item 2 DETAILS OF ACQUISITION 2.1

Nature of Business Acquired

On November 22, 2021, the Company announced that it completed the acquisition of all the issued and outstanding securities of Auxly Leamington Inc. (formerly Sunens Farms Inc.) (“ Sunens ”) not already owned by the Company from the holders thereof (the “ Sellers ”) pursuant to a share purchase agreement (the “ Share Purchase Agreement ”), resulting in the Company having 100% ownership and control of Sunens (the “ Acquisition ”).

Sunens consists of a 1.1 million square foot greenhouse cannabis cultivation facility located in Leamington, Ontario which is fully licensed for cultivation, processing and sales under the Cannabis Act.

2.2 Acquisition Date

November 22, 2021.

2.3 Consideration

Pursuant to the Share Purchase Agreement, Auxly completed the Acquisition for consideration consisting of: (a) $0.5 million in cash; (b) $1.1 million of common shares of Auxly (“ Auxly Shares ”) with a value of $0.9 million, as calculated using the 5-day volumeweighted average trading price of the Auxly Shares on the Toronto Stock Exchange on the trading day immediately preceding the closing date of the Acquisition (the “ Closing Date ”) of $0.23 per common share at 4,017,531 common shares; (c) an unsecured promissory note in the principal amount of $3.4 million (the “ Promissory Note ”), which Promissory Note bears interest at a rate of 6% per annum and is payable by Auxly over 30 months in equal monthly installments, with the first payment being due on the first anniversary of the Closing Date; (d) an unsecured promissory note in the principal of $2.7 million which does not bear interest, is unsecured and due on demand; and (e) certain non-core non-monetary assets of Sunens.

Previously held interest in Sunens consists of: (a) $5.4 million of Class 1 shares; (b) $30.9 million of Class B shares; and (c) $42.6 million of Sunens’ debt, due to Auxly.

2.4 Effect on Financial Position

The Company does not currently have any plans or proposals for material changes in the business acquired pursuant to the Acquisition which may have a significant impact on the financial performance and financial position of the Company, including any proposal to sell, lease or exchange all or a substantial part of the business acquired pursuant to the Acquisition or to make any material changes to the Company’s business.

2.5 Prior Valuations

No valuation opinion was required by securities legislation or a Canadian exchange or market within the last 12 months to support the consideration paid by the Company pursuant to the Acquisition.

2.6 Parties to Transaction

The Acquisition was not with an informed person (as that term is defined in section 1.1 of National Instrument 51-102 – Continuous Disclosure Obligations ), associate or affiliate of the Company.

2.7 Date of Report

February 7, 2022.

Item 3 FINANCIAL STATEMENTS AND OTHER INFORMATION

The following financial statements and other information required by Part 8 of National Instrument 51-102 are attached hereto and form part of this Business Acquisition Report. The auditors have not been asked to provide their consent to include their audit reports in this business acquisition report.

Schedule A: Audited Consolidated Financial Statements of Sunens for the years ended December 31, 2020 and 2019 prepared in accordance with Canadian accounting standards for private enterprises (“ASPE”)

Schedule B: Unaudited Interim Consolidated Financial Statements of Sunens for the three and nine month periods ending September 30, 2021 and 2020 (prepared in accordance with ASPE)

Schedule C: Unaudited pro forma interim condensed consolidated financial statements of Auxly that give effect to the Acquisition as at September 30, 2021 and for the nine months ended September 30, 2021 and for the year ended December 31, 2020

Notice Regarding Forward-Looking Information:

This material change report contains certain "forward-looking information" within the meaning of applicable Canadian securities law. Forward-looking information is frequently characterized by words such as "plan", "continue", "expect", "project", "intend", "believe", "anticipate", "estimate", "may", "will", "potential", "proposed" and other similar words, or information that certain events or conditions "may" or "will" occur. This information is only a prediction. Various assumptions were used in drawing the conclusions or making the projections contained in the forward-looking information throughout this material change report. Forwardlooking information includes, but is not limited to: the anticipated benefits of the Acquisition; the Company’s execution of its product development and commercialization strategy; the intention to grow the business, operations and existing and potential activities of Auxly and Sunens; the expectation and timing of future revenues; the ability of the Company to maintain and grow its market share; discussions of plans or potential for expansion of capacity at the Sunens facility; consumer preferences; political change, future legislative and regulatory developments involving cannabis and cannabis products; and competition and other risks affecting the Company in particular and the cannabis industry generally.

A number of factors could cause actual results to differ materially from a conclusion, forecast or projection contained in the forward-looking information in this material change report including, but not limited to, whether: Sunens performs consistently with management's expectations; Sunens will generate sufficient cash flow to satisfy its payment obligations under the Amended and Restated Credit Facility; Sunens will remain in compliance with its operating covenants under the Amended and Restated Credit Facility; the Company is able to successfully integrate Sunens’ operations with its own; the expected benefits of the Acquisition materialize in the manner expected, or at all; Sunens is able to maintain the necessary governmental and regulatory authorizations to conduct business; there is acceptance and demand for current and future Company products by consumers and provincial purchasers; and general economic, financial market, regulatory and political conditions in which the Company and its subsidiaries operate will remain the same. Additional risk factors are disclosed in the annual information form of the Company for the financial year ended December 31, 2020 dated April 23, 2021 and the Company’s MD&A for the third quarter of 2021, dated November 12, 2021.

The forward-looking information in this material change report is based on information currently available and what management believes are reasonable assumptions. Forward-looking information speaks only to such assumptions as of the date of this material change report. In addition, this material change report may contain forward-looking information attributed to third party industry sources, the accuracy of which has not been verified by Auxly. Readers should not place undue reliance on forward-looking information contained in this material change report. The forward-looking information contained in this material change report is expressly qualified by the foregoing cautionary statements and is made as of the date of this material change report. Except as may be required by applicable securities laws, the Company does not undertake any obligation to publicly update or revise any forward-looking information to reflect events or circumstances after the date of this material change report or to reflect the occurrence of unanticipated events, whether as a result of new information, future events or results, or otherwise.

SCHEDULE A

(See attached)

Sunens Farms Inc. Financial Statements For the Year Ended December 31, 2020

	Contents
Independent Auditor's Report	1 - 2
Financial Statements
Balance Sheet	3
Statement of Operations and Deficit	4
Statement of Cash Flows	5
Notes to Financial Statements	6 - 20

Tel: 416 865 0200 Fax: 416 865 0887 www.bdo.ca

BDO Canada LLP 222 Bay Street Suite 2200, PO Box 131 Toronto, ON M5K 1H1 Canada

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Independent Auditor's Report

To the board of directors of Sunens Farms Inc.

Opinion

We have audited the financial statements of Sunens Farms Inc. (the "Company"), which comprise the balance sheet as at December 31, 2020, and the statements of operations and deficit, and cash flows for the year then ended, and notes to the financial statements, including a summary of significant accounting policies.

In our opinion, the accompanying financial statements present fairly, in all material respects, the financial position of the Company as at December 31, 2020, and its operations and cash flows for the year then ended in accordance with Canadian accounting standards for private enterprises.

Basis for Opinion

We conducted our audit in accordance with Canadian generally accepted auditing standards. Our responsibilities under those standards are further described in the Auditor’s Responsibilities for the Audit of the Financial Statements section of our report. We are independent of the Company in accordance with the ethical requirements that are relevant to our audit of the financial statements in Canada, and we have fulfilled our other ethical responsibilities in accordance with these requirements. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our opinion.

Material Uncertainty Related to Going Concern

We draw attention to Note 2 in the financial statements, which indicates that the Company incurred a net loss of $13,851,146 during the year ended December 31, 2020. As stated in Note 2, these events or conditions, along with other matters as set forth in Note 2, indicate that a material uncertainty exists that may cast significant doubt on the Company's ability to continue as a going concern. Our opinion is not modified in respect of this matter

Responsibilities of Management and Those Charged with Governance for the Financial Statements

Management is responsible for the preparation and fair presentation of the financial statements in accordance with Canadian accounting standards for private enterprises, and for such internal control as management determines is necessary to enable the preparation of 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, 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.

BDO Canada LLP, a Canadian limited liability partnership, is a member of BDO International Limited, a UK company limited by guarantee, and forms part of the international BDO network of independent member firms.

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Those charged with governance are responsible for overseeing the Company’s financial reporting process.

Auditor’s Responsibilities for the Audit of the 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 auditor’s report that includes our opinion. Reasonable assurance is a high level of assurance, but is not a guarantee that an audit conducted in accordance with Canadian generally accepted auditing standards will always detect a material misstatement when it exists. Misstatements can arise from fraud or error and are considered material if, individually or in the aggregate, they could reasonably be expected to influence the economic decisions of users taken on the basis of these financial statements.

As part of an audit in accordance with Canadian generally accepted auditing standards, we exercise professional judgment and maintain professional skepticism throughout the audit. We also:

Identify and assess the risks of material misstatement of the financial statements, whether due to fraud or error, design and perform audit procedures responsive to those risks, and obtain audit evidence that is sufficient and appropriate to provide a basis for our opinion. 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.
Obtain an understanding of internal control relevant to the audit in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control.
Evaluate the appropriateness of accounting policies used and the reasonableness of accounting estimates and related disclosures made by management.
Conclude on the appropriateness of management’s use of the going concern basis of accounting and, based on the audit evidence obtained, whether a material uncertainty exists related to events or conditions that may cast significant doubt on the Company’s ability to continue as a going concern. If we conclude that a material uncertainty exists, we are required to draw attention in our auditor’s report to the related disclosures in the financial statements or, if such disclosures are inadequate, to modify our opinion. Our conclusions are based on the audit evidence obtained up to the date of our auditor’s report. However, future events or conditions may cause the Company to cease to continue as a going concern.
Evaluate the overall presentation, structure and content of the financial statements, including the disclosures, and whether the financial statements represent the underlying transactions and events in a manner that achieves fair presentation.

We communicate with those charged with governance regarding, among other matters, the planned scope and timing of the audit and significant audit findings, including any significant deficiencies in internal control that we identify during our audit.

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Chartered Professional Accountants, Licensed Public Accountants

Toronto, Ontario February 7, 2022

Sunens Farms Inc. Balance Sheet

	Sunens Farms Inc. Balance Sheet
December 31	2020 2019
Assets Current Cash Accounts and other receivables (Note 5) Inventory (Note 3) Prepaid expenses and deposits Due from 2633867 Ontario Inc.(Note 5) Property, plant and equipment (Notes 4 and 5)	$ - $ 708,740 397,313 3,644,292 5,980,337 - 1,020,539 32,349
	7,398,189 4,385,381 1,407,220 1,621,895 147,694,337 112,979,020
	$ 156,499,746 $118,986,296
Liabilities and Shareholders' Equity Current Bank indebtedness (Note 8) Accounts payable and accrued liabilities (Notes 5 and 7) Current portion of obligations under capital leases (Note 9) Current liabilities before callable debt Loans payable (Note 8) Obligations under capital leases (Note 9) Due to Auxly Cannabis Group Inc. (Notes 5 and 6) Commitments(Note 11) Shareholders' Equity Common shares (Note 10) Special shares (Redemption value $80,000,001 (2019 - $80,000,122)) (Note 10) Deficit	$ 786,940 $ - 2,030,558 4,151,280 1,718,286 -
	4,535,784 4,151,280 60,445,899 19,751,028
	64,981,683 23,902,308 11,266,408 - 48,493,529 49,474,715
	124,741,620 73,377,023
	100 100 50,000,001 50,000,124 (18,241,975) (4,390,951)
	31,758,126 45,609,273
	$ 156,499,746 $118,986,296

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

Sunens Farms Inc. Statement of Operations and Deficit

For theyear ended December 31,	2020 2019
Revenue Operating expenses Amortization Interest expense (Note 9) Wages and benefits (Note 5) Utilities (Note 5) Purchases (Note 5) Other direct costs Management and administrative fees (Note 5) Sub-Contracts Research and development Professional fees (Note 5) Office and general (Note 5) Rent (Note 5) Memberships and licences (Note 5) Travel (Note 5) Bank charges Advertising and promotion (Note 5) Training (Note 5) Difference between cost and fair value of finished goods inventory Loss before other income (expenses) Other income (expenses) Rental income (Note 5) Government grants Other expenses Net loss Deficit, beginning of the year Premium on redemption of shares (Note 10) Deficit,end of the year	$ - $ -
	2,124,773 148,506 1,740,804 145,498 1,469,259 1,453,709 1,388,009 422,839 724,268 633,221 652,361 66,670 519,026 258,273 440,741 - 274,037 78,600 228,389 103,997 161,217 6,355 96,537 216,000 73,003 19,551 13,918 76,140 7,385 162,453 3,284 13,356 - 12,449 3,937,631 -
	13,854,642 3,817,617
	(13,854,642) (3,817,617)
	3,000 27,630 2,928 5,081 (2,432) -
	3,496 32,711
	(13,851,146) (3,784,906) (4,390,951) (606,045) 122 -
	$ (18,241,975) $ (4,390,951)

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

For theyear ended December 31,	Sunens Farms Inc. Statement of Cash Flows 2020 2019
Cash flows used in operating activities Net loss Adjustments for non-cash items Amortization Loss on disposal of property, plant and equipment Interest on capital leases Amortization on deferred financing fees Changes in non-cash working capital: Accounts and other receivables Inventory Prepaid expenses and deposits Accounts payable and accrued liabilities Cash flows used in investing activities Acquisition of property, plant and equipment Advances from (to) 2633867 Ontario Inc. Cash flows from financing activities Increase of bank indebtedness Repayment of loans payable Proceeds from loans payable Repayment of obligations under capital lease Deferred financing fees Advances from (repayments to) Auxly Cannabis Group Inc. Proceeds from convertible note to Auxly Cannabis Group Inc. Redemption of special shares Net (decrease) increase in cash Cash,beginning of the year Cash,end of the year	$ (13,851,146) $ (3,784,906) 2,124,773 148,506 300,488 - 351,841 - 54,662 113,153
	(11,019,382) (3,523,247) 3,246,979 (3,565,149) (3,716,597) - (988,190) 13,967,651 (2,120,722) 4,063,348
	(14,597,912) 10,942,603
	(25,457,535) (109,107,785) (1,325) (1,621,895)
	(25,458,860) (110,729,680)
	786,940 - (1,124,813) - 42,029,323 20,157,276 (1,097,808) - (264,301) (519,401) (981,186) 30,448,908 - 50,000,000 (123) -
	39,348,032 100,086,783
	(708,740) 299,706 708,740 409,034
	$ - $ 708,740
Conversion of debt to equity (Note 6)	$ - $ 50,000,000

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

Sunens Farms Inc. Notes to Financial Statements

December 31, 2020

1. Significant accounting policies

Nature of business

Sunens Farms Inc. (the "Company") was incorporated under the laws of the Province of Ontario and its principal business activity is the production and sale of cannabis.

Basis of accounting

The financial statements have been prepared using Canadian accounting standards for private enterprises ("ASPE").

Revenue recognition

Revenue consists of interest income and rental revenue. Rental revenue from operating leases is recognized in income on a straight-line basis. Interest income is recognized on a monthly basis when it is earned, when the amount is estimable and collection is reasonably assured.

Income taxes The Company uses the income taxes payable method of accounting for income taxes. Under this method, the Company reports as an expense (income) of the year only the cost (benefit) of current income taxes determined in accordance with the rules established by taxation authorities. Financial instruments Financial instruments are recorded at fair value at initial recognition.

In subsequent years, all financial instruments are reported at cost or amortized cost less impairment, if applicable. Financial assets are tested for impairment when indicators of impairment exist. Transaction costs on the acquisition, sale or issue of financial instruments are expensed for those items measured at fair value and charged to the financial instrument for those measured at amortized cost.

The Company has elected to allocate the entire proceeds of a financial liability with a separate liability and equity component to the liability component and measure the equity component at zero.

Agriculture inventory Inventory consists of raw materials, productive biological assets and productive and harvested cannabis. biological assets

Raw materials include the purchased materials such as pots, netting and nutrients required to produce productive biological assets. These materials are recorded at cost which is determined on a first-in, first-out basis.

Productive biological assets are the plants that are in progress and are measured at cost. Cost includes the raw materials, salaries and benefits based on the tracked labour hours per plant, and other overhead expenses applied based on production days.

Sunens Farms Inc. Notes to Financial Statements

December 31, 2020

1. Significant accounting policies (continued)

Agricultural inventory finished goods include the harvested cannabis and is measured at net realizable value. Net realizable value is determined based on the fair value less the cost to sell. Any gains or losses from changes in the net realizable value are included in net income for the year.

Property, plant and equipment

Property, plant and equipment are stated at cost less accumulated amortization. Expenditures for repairs and maintenance are expensed as incurred. Betterments that extend the useful life of the asset are capitalized.

Construction in progress is not amortized until the item of property, plant and equipment is substantially complete and ready for use.

Amortization based on the estimated useful life of the asset is calculated as follows:

	Method	Rate
Greenhouses and buildings	Declining balance	4%
Machinery and equipment	Declining balance	20%
Automotive	Declining balance	30%
Office furniture and fixtures	Declining balance	20%
Computer equipment	Declining balance	30%
Computer software	Declining balance	30%
Leasehold improvements	Straight-line	10 years

Leases

Leases are classified as capital or operating leases. A lease that transfers substantially all of the benefits and risks incidental to the ownership of property is classified as a capital lease. At the inception of a capital lease, an asset and an obligation are recorded at an amount equal to the lesser of the present value of the minimum lease payments and the property's fair value. Assets recorded under capital leases are amortized on a declining balance basis over the estimated useful life of the assets as follows:

Machinery and equipment under capital lease Declining balance 20%

All other leases are accounted for as operating leases wherein rental payments are expensed as incurred.

Sunens Farms Inc. Notes to Financial Statements

December 31, 2020

1. Significant accounting policies (continued)

Impairment of long- In the event that facts and circumstances indicate that the lived assets Company's long-lived assets may be impaired, a test of recoverability would be performed.

Such a test entails comparing the estimated future undiscounted cash flows associated with the asset to the asset's carrying amount to determine if a write down to fair value is required.

For purposes of recognition and measurement of an impairment loss, a long-lived asset is grouped with other assets and liabilities to form an asset group at the lowest level for which identifiable cash flows are largely independent of the cash flows of other assets and liabilities.

Interest The Company capitalizes interest on construction projects when capitalization the interest expense is directly attributed to the construction activity and the project is developed over a significant amount of time. Foreign currency Foreign currency accounts are translated to Canadian dollars as follows:

At the transaction date, each asset, liability, revenue or expense is translated into Canadian dollars at the exchange rate in effect at that date. At the year end date, monetary assets and liabilities are translated into Canadian dollars by using the exchange rate in effect at that date and the resulting foreign exchange gains and losses are included in income in the current period.

Government Government assistance received during the year for current assistance expenses is included in the determination of net income for the year. Government assistance related to capital expenditures is shown as a reduction of the cost of such assets.

Use of estimates The preparation of financial statements in accordance with ASPE requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements, and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from management's best estimates as additional information becomes available in the future. Accounts specifically affected are the provision for doubtful accounts in respective of receivables, the cost and net realizable value of inventories, the useful lives of long-lived assets, the identification and measurement of impairment of long-lived assets and amount of accrued liabilities and contingencies.

Sunens Farms Inc. Notes to Financial Statements

December 31, 2020

2. Going concern

For the year ending December 31, 2020, the Company has incurred a net loss of $13,851,146. As at December 31, 2020, the Company has an accumulated deficit of $18,241,975 and a negative current ratio after callable debt. As a result, there is material uncertainty that may cast significant doubt as to whether the Company will have the ability to continue as a going concern.

The Company’s ability to continue as a going concern is therefore dependent upon its ability to obtain financing arrangements. Therefore, the Company may be unable to realize its assets and discharge its liabilities in the normal course of business.

These financial statements are prepared on a going concern basis in accordance with Canadian accounting standards for private enterprises which assumes that the Company will be able to obtain adequate financing as required and realize its assets and discharge its liabilities in the normal course of operations. If the going concern assumption was not appropriate for these financial statements then adjustments would be necessary to the carrying value of the assets and liabilities.

3. Inventory

Raw materials Agriculture inventory and productive biological assets Work in process Finished goods	2020 2019
	$ 538,095 $ - 2,560,662 - 542,727 - 2,338,853 -
	$ 5,980,337 $ -

Inventories of $1,376,629 (2019 - $Nil) are recognized as an expense and included in expenses.

Sunens Farms Inc. Notes to Financial Statements

December 31, 2020

4. Property, plant and equipment

Land Greenhouses and buildings Machinery and equipment Office furniture and fixtures Computer equipment Automotive Computer software Leasehold improvements Greenhouse under construction	2020 2019 Cost Accumulated Amortization Cost Accumulated Amortization	2020 2019 Cost Accumulated Amortization Cost Accumulated Amortization
	Cost
	$ 3,082,088 133,228,196 15,205,789 454,501 157,790 18,800 28,130 - 41,038	$ - $ 3,059,993 $ - 2,729,826 959,699 47,988 1,699,997 760,743 76,074 45,450 - - 31,188 29,487 4,423 7,614 18,800 2,820 7,920 14,512 2,177 - 300,488 15,024 - 107,983,804 -
	152,216,332	4,521,995 113,127,526 148,506
		$147,694,337 $112,979,020

Included in property, plant and equipment is $41,038 (2019 - $107,983,804) of greenhouse under construction that has not been amortized during the year as the asset was not in use at year end.

Included in machinery and equipment are assets held under capital lease with a total cost of $13,946,783 (2019 - $Nil) and related accumulated amortization of $1,078,867 (2019 - $Nil) for an ending book value of $12,867,916 (2019 - $Nil).

5. Related party transactions

The Company entered into transactions during the year with the following related companies:

Nature Fresh Farms Inc. - a company owned by the ultimate shareholder of 2633867 Ontario Inc.
- Nature Fresh Farms Sales Inc. - a company owned by the ultimate shareholder of 2633867 Ontario Inc.
- South Essex Fabricating Inc. - a company owned by the ultimate shareholder of 2633867 Ontario Inc.
- 2633867 Ontario Inc. - a shareholder - Auxly Cannabis Group Inc. - a minority shareholder - Peter Quiring Holdings Inc. - a company owned by the ultimate shareholder of 2633867 Ontario Inc.
- Fresh Energy Inc. - a company owned by the ultimate shareholder of 2633867 Ontario Inc.

Sunens Farms Inc. Notes to Financial Statements

December 31, 2020

During the year, the following transactions occurred:

Rental revenue: Nature Fresh Farms Inc. Reimbursement of bonus: Nature Fresh Farms Inc. South Essex Fabricating Inc. Transfer of property, plant and equipment: 2633867 Ontario Inc. Purchase of property, plant and equipment: South Essex Fabricating Inc. Consulting fees: Peter Quiring Holdings Inc. Reimbursement of hydro: Fresh Energy Inc. Reimbursement of various expenses: Nature Fresh Farms Inc. Nature Fresh Farms Sales Inc. 2633867 Ontario Inc. Reimbursement of the following expenses to South Essex Fabricating Inc.: Supplies Wages and benefits Repair and maintenance Professional fees Rent Utilities Insurance Travel Security Property taxes Memberships and licenses Office Advertising Interest paid, capitalized to greenhouse under construction: Auxly Cannabis Group Inc.	2020 2019
	$ 3,000 $ 19,000 50,000 - 50,000 - - 1,621,895 25,387,949 110,729,678 519,026 255,573 1,509,500 73,092 56,619 4,075 32,063 3,162 1,325 - 255,734 298,035 46,698 1,027,190 20,458 642 13,337 23,058 8,527 184,904 1,808 242,163 - 186,210 - 70,039 - 32,427 - 25,804 - 15,563 - 12,028 - 5,427 - 974,715

Rental revenue:
Nature Fresh Farms Inc.
Reimbursement of bonus:
Nature Fresh Farms Inc.
South Essex Fabricating Inc.
Transfer of property, plant and equipment:
2633867 Ontario Inc.
Purchase of property, plant and equipment:
South Essex Fabricating Inc.
Consulting fees:
Peter Quiring Holdings Inc.
Reimbursement of hydro:
Fresh Energy Inc.
Reimbursement of various expenses:
Nature Fresh Farms Inc.
Nature Fresh Farms Sales Inc.
2633867 Ontario Inc.
Reimbursement of the following expenses to South
Essex Fabricating Inc.:
Supplies
Wages and benefits
Repair and maintenance
Professional fees
Rent
Utilities
Insurance
Travel
Security
Property taxes
Memberships and licenses
Office
Advertising
Interest paid, capitalized to greenhouse under
construction:
Auxly Cannabis Group Inc.

2020
2019

$
3,000
$ 19,000
50,000
-
50,000
-
-
1,621,895
25,387,949
110,729,678
519,026
255,573
1,509,500
73,092
56,619
4,075
32,063
3,162
1,325
-
255,734
298,035
46,698
1,027,190
20,458
642
13,337
23,058
8,527
184,904
1,808
242,163
-
186,210
-
70,039
-
32,427
-
25,804
-
15,563
-
12,028
-
5,427
-
974,715

These transactions are measured at the exchange amount, which is the amount of consideration established and agreed to by the related parties.

Sunens Farms Inc. Notes to Financial Statements

December 31, 2020

Included in accounts receivable are the following balances with related parties:

Nature Fresh Farms Inc.	60,252	2,260
Included in accounts payable and accrued liabilities are the following balances with related
parties:
Peter Quiring Holdings Inc.	70,625	73,383
South Essex Fabricating Inc.	70,731	3,693,485
Fresh Energy Inc.	307,793	73,830
Nature Fresh Farms Sales Inc.	3,720	2,592
Nature Fresh Farms Inc.	64,793	4,075
Included in obligations under capital lease are the following balances with related parties:
2633867 Ontario Inc.	1,135,014	-

The amount due from 2633867 Ontario Inc. bears no interest, is unsecured and has no specific terms of repayment.

The Company has committed to pay management fees to Peter Quiring Holdings Inc. for consulting work related to obtaining cultivation license and additional consulting thereafter. The Company has committed annual fees until June 2028.

6. Due to Auxly Cannabis Group Inc.

During the prior year, a convertible promissory note was issued to Auxly Cannabis Group Inc. ("Auxly"), a minority shareholder, for $35,000,000 with a maturity date of June 30, 2019. Subsequent to this date, additional funds were loaned to the Company for a total of $98,500,000 outstanding. In the prior year, an amended promissory note was issued in the amount up to $48,500,000 and $50,000,000 under the terms of the original note was converted to Class B special shares. The attributes of these shares are included in Note 10 and are redeemable at the option of the Company.

At year end, there is a balance due to Auxly of $48,493,529 (2019 - $49,474,715). This amount relates to a promissory note in the principal amount of $48,493,529 and the balance in the prior year being accrued interest on the note. This promissory note bears interest at 6%, is secured in second position behind the loans payable as disclosed in Note 8. No interest or principal repayments are required on the outstanding amount until July 1, 2022, when equal monthly principal payments will begin, and principal plus interest payments will begin on February 1, 2023, with the outstanding balance plus any accrued and unpaid interest owing thereon to be repaid over a period of four years, maturing on July 1, 2026.

2022 2023 2024 2025 Thereafter	$ 5,937,983 11,875,966 11,875,966 11,875,966 6,927,648
	$ 48,493,529

Sunens Farms Inc. Notes to Financial Statements

December 31, 2020

7. Government remittances

Included in accounts payable and accrued liabilities are government remittances payable of $66,046 (2019 - $9,035).

8. Loans payable

Revolver loan payable to Bank of Montreal, bearing interest at prime or the banker's acceptance rate, plus the applicable margin in effect, repayable in interest only payments with the balance to be repayable in full April 2022. Total authorized amount of the loan is $33,000,000. Remainder to be drawn down at various milestones as agreed to between the Company and Bank of Montreal. Term loan payable to Bank of Montreal, bearing interest at prime or the banker's acceptance rate, plus the applicable margin in effect, repayable in interest only payments until July 2021 or an earlier date if agreed to by the Company and the Bank of Montreal with the balance to be repayable in full April 2022. Loan payable to Hub International Ontario Limited, bearing interest at 4.641%, repayable in blended monthly payments of $128,052, maturing April 2021. Less deferred financing fees capitalized	2020 2019 $22,000,000 $ 7,500,000 38,500,000 12,657,276 561,786 -
	61,061,786 20,157,276 615,887 406,248
	$60,445,899 $ 19,751,028

Revolver loan payable to Bank of Montreal, bearing
interest at prime or the banker's acceptance rate,
plus the applicable margin in effect, repayable in
interest only payments with the balance to be
repayable in full April 2022. Total authorized
amount of the loan is $33,000,000. Remainder to be
drawn down at various milestones as agreed to
between the Company and Bank of Montreal.
Term loan payable to Bank of Montreal, bearing
interest at prime or the banker's acceptance rate,
plus the applicable margin in effect, repayable in
interest only payments until July 2021 or an earlier
date if agreed to by the Company and the Bank of
Montreal with the balance to be repayable in full
April 2022.
Loan payable to Hub International Ontario Limited,
bearing interest at 4.641%, repayable in blended
monthly payments of $128,052, maturing April
2021.
Less deferred financing fees capitalized

2020
2019
$22,000,000
$ 7,500,000
38,500,000
12,657,276
561,786
-

61,061,786
20,157,276
615,887
406,248

$60,445,899
$ 19,751,028

It is management's opinion that the demand features of the loans will not be enacted upon in the subsequent year. Assuming payment is not demanded, regular principal payments required are due as follows:

2021 2022	$ 561,786 60,500,000
	$ 61,061,786

Sunens Farms Inc. Notes to Financial Statements

December 31, 2020

8. Loans payable (continued)

Interest expense on the above loans payable for the year ended December 31, 2020 was $1,390,561 (2019 - $145,498). In addition, interest on the above loans payable of $19,239 (2019 - $76,723) was capitalized to the greenhouse under construction during the year.

Deferred financing fees represent the unamortized portion of financing fees paid to obtain Bank of Montreal.

Balance, beginning of year Financing fees paid Less: Amounts amortized to expense Balance, end of year	2020 2019 $ 406,248 $ - 264,301 519,401 (54,662) (113,153)
	$ 615,887 $ 406,248

The Company is subject to covenants as a condition of financing provided by the Bank of Montreal. The Company in conjunction with one of its shareholders, is required to maintain financial ratios together with restrictions on disbursements.

The Group has an operating credit facility, with a syndicate of banks, consisting of the following components:

Bank overdrafts (in Canadian Dollars),
Bankers' acceptances, and
Letters of Credit

The operating credit facility has a portion for account overdraft in Canadian Dollars from a syndicate of banks available to the Company to a maximum amount of $3,300,000, bearing interest at prime rate plus 0.75%. As at December 31, 2020 the Company has drawn $786,940 under the operating credit facility, such that $2,513,060 was unused and available at December 31, 2020.

The Bank of Montreal indebtedness is secured as follows:

(i) guarantee in the amount of $33,000,000 from one of the shareholders
(ii) unlimited guarantee from any future 100% wholly owned subsidiary
(iii) general security agreement with first charge over all tangible and intangible assets (excluding non-transferable and non-assignable licenses and agreements)
(iv) first charge debenture or collateral mortgage in the amount of $100,000,000 on the Leamington Property and real property at 427 and 431 Mersea Road 10
(v) limited recourse guarantee from each shareholder
(vi) cost overrun agreement from the shareholders
(vii) assignment, postponement and subordination of any loans provided by the shareholders
(viii) assignment of insurance

Sunens Farms Inc. Notes to Financial Statements

December 31, 2020

9. Obligations under capital lease

Proseal America Inc. Repayable in blended monthly payments of $178,864, bearing interest at 5.41%, due June 2027, secured by specific machinery and equipment with a net book value of $11,644,611 . Bioreactor Repayable in blended annual payments of $216,000, bearing interest at 6.00%, due June 2027 secured by specific machinery and equipment with a net book value of $1,104,603. Liftow Limited Repayable in blended monthly payments of $1,727, bearing interest at 4.80%, due June 2025 secured by specific machinery and equipment with a net book value of $83,729. Liftow Limited Repayable in blended monthly payments of $410, bearing interest at 4.80%, due June 2025 secured by specific machinery and equipment with a net book value of $19,869. Current portion Long-term portion of obligations	2020 2019 $11,740,240 $ - 1,135,014 - 89,242 - 20,198 -
	12,984,694 - 1,718,286 -
	$11,266,408 $ -

Proseal America Inc.
Repayable in blended monthly payments of
$178,864, bearing interest at 5.41%, due June 2027,
secured by specific machinery and equipment with
a net book value of $11,644,611 .
Bioreactor
Repayable in blended annual payments of $216,000,
bearing interest at 6.00%, due June 2027 secured by
specific machinery and equipment with a net book
value of $1,104,603.
Liftow Limited
Repayable in blended monthly payments of $1,727,
bearing interest at 4.80%, due June 2025 secured by
specific machinery and equipment with a net book
value of $83,729.
Liftow Limited
Repayable in blended monthly payments of $410,
bearing interest at 4.80%, due June 2025 secured by
specific machinery and equipment with a net book
value of $19,869.
Current portion
Long-term portion of obligations

2020
2019
$11,740,240
$ -
1,135,014
-
89,242
-
20,198
-

12,984,694
-
1,718,286
-

$11,266,408
$ -

Interest expense for the year related to capital leases is $351,719 (2019 - $Nil).

Future minimum lease payments under the capital leases for subsequent years are as follows:

2021 2022 2023 2024 2025 Thereafter Less: imputed interest	$ 2,388,005 2,388,005 2,388,005 2,388,005 2,375,185 3,550,982
	15,478,187 (2,493,493)
	$ 12,984,694

Sunens Farms Inc. Notes to Financial Statements

December 31, 2020

10. Share capital

Authorized

Unlimited number of voting, non-cumulative Class 1 common shares Unlimited number of voting, non-cumulative Class 2 common shares

Unlimited number of non-voting, non-cumulative Class A special shares, redeemable at the option of the Company at $1 per share

Unlimited number of non-voting, non-cumulative Class B special shares, redeemable at the option of the Company at $1 per share

Unlimited number of voting, Class V special shares, redeemable at $0.0001 per share

Issued and outstanding shares:

10,000,000 Common shares (2019 - 10,000,000) 30,000,000 Class A special shares (2019 - 30,000,000) 0 Class V special shares (2019 - 1,224,490) 50,000,000 Class B special shares (2019 - 50,000,000)	2020 2019 $ 100 $ 100 1 1 - 123 50,000,000 50,000,000
	$50,000,101 $ 50,000,224

During the year, all of the issued Class V shares were redeemed.

11. Commitments

The Company has committed to purchase various supplies and services from multiple vendors with agreements ending between year end and June 2028. The total commitments over the next five years are as follows:

2021	$	9,755,291
2022		9,296,961
2023		22,243,857
2024		2,821,652
2025		1,000,000
	$	45,117,761

Sunens Farms Inc. Notes to Financial Statements

December 31, 2020

12. Income taxes

The provision for income taxes differs from the results which would be obtained by applying the combined Canadian Federal and Provincial statutory income tax rates to income before income taxes. The differences result from the following items:

Loss before income taxes Combined basic federal and provincial tax rates Expected income tax recovery Increase (decrease) in income tax expense resulting from: Permanent and temporary differences Losses carried forward	2020 2019 $ (13,851,146) $ (3,784,906) % 26.50 % 25.00
	$ (3,670,554) $ (946,227) - 47,988 3,670,554 898,239
	$ - $ -

Total losses available to be applied against taxable income in the future are $20,944,120.

13. Financial instruments

Liquidity risk

Liquidity risk is the risk that the Company will encounter difficulty in meeting its obligations associated with financial liabilities. Liquidity risk includes the risk that, as a result of operational liquidity requirements, the Company will not have sufficient funds to settle a transaction on the due date; will be forced to sell financial assets at a value, which is less than what they are worth; or may be unable to settle or recover a financial asset. The Company is exposed to this risk mainly in respect of its bank indebtedness, accounts payable and accrued liabilities, loans payable, obligations under capital lease, due to Auxly Cannabis Group Inc. and commitments.

Interest rate risk

Interest rate risk is the risk that the fair value or future cash flows of a financial instrument will fluctuate because of changes in market interest rates. The Company is exposed to interest rate risk on its loans payable. The Company holds loans payable with a variable interest rate which involves risks of default on interest and principal and price changes due to, without limitation, such factors as interest rates and general economic conditions. Fixed interest instruments, which includes obligations under capital lease and Due to Auxly Cannabis Group Inc. which subject the Company to a fair value risk.

Sunens Farms Inc. Notes to Financial Statements

December 31, 2020

14. Uncertainty due to COVID-19

The global pandemic has disrupted economic activities and supply chains. The Company continues to remain open subsequent to year. Although the disruption from the virus is expected to be temporary, given the dynamic nature of these circumstances, the duration of business disruption and the related financial impact cannot be reasonably estimated at this time. The Company's ability to continue to service debt and other obligations as they come due is dependent on the continued ability to generate earnings and cash flows.

15. Subsequent events

Subsequent to the year end, the Company received a $2,000,000 promissory note from the shareholders of the Company. The note is unsecured and bears interest of 6%. Repayments begin February 1, 2023. The note is due on July 1, 2026.

Effective February 8, 2021, an amending agreement was signed with the Bank of Montreal. Principal repayments on the term loan are to begin in December 31, 2021. The amending agreement bears interest at the banker's acceptance rate plus an applicable margin depending on certain ratios. The applicable margin ranges from 2.75% - 3.75%. The amounts mature on September 23, 2022. In addition, there is an additional covenant for certain revenue milestones, which commence on March 31, 2021 on a quarterly basis.

On April 16, 2021, Sunens received a notice of default from BMO in its capacity as lender, administrative agent and syndication agent under the credit facility with respect to Sunens' failure to satisfy recently established revenue milestones for the first quarter of 2021. Although the lenders have reserved their rights under the credit agreement, they advanced another $1 million pursuant to a borrowing request made pursuant to the credit facility and BMO has granted a one-month deferral of the equipment loan payment due in May 2021 in the amount of approximately $0.2 million, which will be used to fund day-to-day operations. In May 2021, Sunens started selling cannabis to Auxly Cannabis Group Inc. as production from the Sunens facility increased. In addition, a forbearance agreement with the lenders was signed on June 22, 2021 whereby the lenders agreed to forbear from taking certain actions available upon a default of the credit facility. The forbearance agreement expired on August 17, 2021. The credit facility was updated on November 22, 2021.

Sunens Farms Inc. Notes to Financial Statements

December 31, 2020

15. Subsequent events (continued)

On November 22, 2021, Auxly Cannabis Group Inc. (“Auxly”) acquired all the issued and outstanding securities of Sunens Farms Inc. not already owned by Auxly from the holders thereof pursuant to a share purchase agreement, resulting in Auxly having 100% ownership and control of Sunens (“Sunens Acquisition”). Pursuant to the Share Purchase Agreement, Auxly completed the acquisition for consideration consisting of:

(a) $500,001 in cash;

(b) $1.1 million of common shares of Auxly (“Auxly Shares”), as calculated using the 5-day volume-weighted average trading price of the Auxly Shares on the Toronto Stock Exchange on the trading day immediately preceding the closing date of the Sunens Acquisition (the “Closing Date”);

(c) an unsecured promissory note in the principal amount of $3.4 million (the “Promissory Note”), which Promissory Note bears interest at a rate of 6% per annum and is payable by Auxly over 30 months in equal monthly installments, with the first payment being due on the first anniversary of the Closing Date; and

(d) certain non-core non-monetary assets of Sunens.

Additionally, on November 22, 2021, and concurrently with the closing of the Sunens Acquisition, Sunens entered into the Amended and Restated Credit Facility, which provides for the following terms, among others:

Upon signing the Amended and Restated Credit Facility, Auxly made an immediate cash payment of $15 million to the Lenders, to be applied to the outstanding principal balance of the associated revolving credit facility (the “Revolving Credit Facility”), bringing the outstanding principal amount thereunder to $62.5 million;
The maturity date provided under Sunens’ secured credit facility initially entered into on September 23, 2019 was extended by one year to September 30, 2023, with an option for Sunens to extend for an additional year by repaying another $5 million of the outstanding principal amount under the Revolving Credit Facility by December 31, 2022; and
The obligations of Sunens under the Amended and Restated Credit Facility will continue to be supported by an unsecured $33 million limited recourse guarantee by Auxly and a pledge by Auxly of all of its securities in the capital of Sunens with revised revenue and EBITDA covenants.

16. Comparative figures

The comparative figures have been reclassified to conform to the current year's presentation.

Sunens Farms Inc. Notes to Financial Statements

December 31, 2020

17. Reconciliation to International Financial Reporting Standards

These financial statements are prepared in accordance with Canadian GAAP applicable to private enterprises, which are Canadian standards for private enterprises in Part II of the CPA Canada Handbook - Accounting, or ASPE.

The recognition, measurement and disclosure requirements of Canadian GAAP applicable to private enterprises differ from those of Canadian GAAP applicable to publicly accountable enterprises, which is International Financial Reporting Standards ("IFRS") incorporated into the CPA Canada Handbook - Accounting.

The below table quantifies and describes the material differences within the Statement of Operations in accordance with ASPE and IFRS for the year ended December 31, 2020 that do not eliminate upon the acquisition by Auxly. There were also no material adjustments for the year ended December 31, 2019 that do not eliminate upon the acquisition by Auxly.

		Stated in	Adjustments		Stated in
	accordance		from ASPE to		accordance
		with ASPE	IFRS		with IFRS
For the year-ended December 31, 2020
Unrealized fair value loss on biological
transformation (1)	$	-	$ 963,000	$	963,000
Net loss	$(13,851,146)		$ (963,000)	$(14,814,146)

Under ASPE, companies have the choice of adopting either the taxes payable method or the future income taxes method to account for income taxes. Under IFRS, the Company must use the deferred income taxes method, which is similar to the future income taxes method under ASPE. Given the losses described in Note 12, it does not appear more likely than not that the Company would utilize these losses, therefore, a deferred tax asset has not been recognized.

(1)

Under IFRS, an adjustment is required to record biological assets at fair value less cost to sell. Further, biological assets are transferred to inventory at fair value less cost to sell. An adjustment is made to recognize inventory at cost which is the fair value less cost of sell at the point where it transferred from biological assets. The following represent the key assumptions used in the determination of the fair value of the biological assets:

Weighted average selling price - flower (per gram): $1.20
Weighted average selling price - trim (per gram): $0.15
Yield per plant: 126 grams
Stage of growth: 46%

SCHEDULE B

(See attached)

Sunens Farms Inc. Interim Financial Statements (Unaudited) For the Three and Nine Months Ended September 30, 2021 and 2020

Sunens Farms Inc. Statements of Financial Position

Expressed in thousands of Canadian dollars Unaudited

		As at		As at
	September	30, 2021	December	31, 2020

Assets
Current assets
Cash and cash equivalents	$	1	$	-
Accounts receivables (Note 5)		1,101		61
Biological assets (Note 3)		3,153		3,099
Inventory (Note 3)		3,193		2,882
Prepaid expenses		1,079		1,021
Other receivables		-		336
	$	8,527	$	7,399
Non-current assets
Due from 2633867 Ontario Inc. (Note 5)		1,408		1,407
Property, plant and equipment,net(Note 4 and 5)	$	142,408	$	147,694
	$	143,816	$	149,101
Total assets	$	152,343	$	156,500
Liabilities
Current liabilities
Bank indebtedness (Note 8)	$	-	$	787
Accounts payable and accrued liabilities (Note 5 and 7)		5,448		2,030
Lease liability (Note 9)		1,773		1,718
Current liabilities before callable debt	$	7,221	$	4,535
Loanspayable(Note 8)		67,119		60,446
		74,340		64,981
Non-current liabilities
Lease liability (Note 9)	$	10,225	$	11,267
Due to Peter Quiring (Note 5)		1,100		-
Due to AuxlyCannabis GroupInc.(Note 5 and 6)		49,394		48,494
	$	60,719	$	59,761
Total liabilities	$	135,059	$	124,742
Equity
Share capital (Note 10)		50,000		50,000
Deficit		(32,716)		(18,242)
Total equity	$	17,284	$	31,758
Total liabilities and equity	$	152,343	$	156,500

*Presentation of financial statements have been aligned to Auxly Cannabis Group Inc.

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

Sunens Farms Inc. Statements of Income/(Loss) Expressed in thousands of Canadian dollars Unaudited

==> picture [464 x 367] intentionally omitted <==

----- Start of picture text -----

For the periods ended: Three months September 30 Nine months September 30
2021 2020 2021 2020
Revenue $ 8,728 $ - $ 13,670 $ -
Costs of sales
- -
Costs of finished cannabis inventory sold $ 9,900 $ $ 19,297 $
Inventory impairment 1,659 - (1,879) -
- -
Gross profit $ (2,831) $ $ (3,748) $
Expenses
Selling, general, and administrative expenses (Note 5) $ 3,021 $ 540 $ 5,179 $ 3,676
Amortization 925 478 2,805 606
Interest expense (Note 9) 902 1,451 2,652 1,685
Total expenses $ 4,848 $ 2,469 $ 10,636 $ 5,967
Other income/(loss)
Interest and other income (Note 5) $ 7 $ (4) $ 7 $ 5
- -
Gain/(loss) on settlement of assets and liabilities (61) (61)
Foreign exchange gain/(loss) 2 (5) (36) (8)
Total other income/(loss) $ (52) $ (9) $ (90) $ (3)
Net loss before income tax $ (7,731) $ (2,478) $ (14,474) $ (5,970)
Income tax recovery - - - -
Net loss $ (7,731) $ (2,478) $ (14,474) $ (5,970)
Deficit, beginning $ (24,985) $ (7,883) $ (18,242) $ (4,391)
Deficit, ending $ (32,716) $ (10,361) $ (32,716) $ (10,361)
----- End of picture text -----

*Presentation of financial statements have been aligned to Auxly Cannabis Group Inc.

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

Sunens Farms Inc. Statements of Cash Flows Expressed in thousands of Canadian dollars Unaudited

For the periods ended:	Three	months	September 30	September 30	Nine months	Nine months	September 30	September 30
		2021		2020		2021		2020
Operating activities
Net loss for the period	$	(7,731)	$	(2,478)	$	(14,474)	$	(5,970)
Items not affecting cash:
Inventory impairment		1,659		-		(1,879)		-
Amortization		925		478		2,805		606
Loss on settlement of assets and liabilities		61		-		61		-
Amortization on deferred financingfees(Note 8)		181		16		331		36
Cash used in operating activities before net
working capital adjustments	$	(4,905)	$	(1,984)	$	(13,156)	$	(5,328)
Net change in non-cash workingcapital		4,862		(10,136)		7,400		(5,647)
Cash used in operating activities	$	(43)	$	(12,120)	$	(5,756)	$	(10,975)
Investing activities
Purchase of capital assets	$	(34)	$	(12,236)	$	(949)	$	(39,522)
Proceeds from sale of assets		140		-		140		-
Advances(to)from 2633867 Ontario Inc		-		-		(2)		-
Cash used in investing activities	$	106	$	(12,236)	$	(811)	$	(39,522)
Financing activities
Increase in bank indebtedness (Note 8)	$	-	$	-	$	(787)	$	-
Proceeds from (repayment of) loans payable (Note 8)		(505)		27,966		6,795		53,340
Payment on lease liabilities		(393)		-		(987)		-
Deferred financing fees (Note 8)		(108)		(170)		(453)		(234)
Advances from (repayments to) Auxly Cannabis
Group Inc. (Note 6)		-		775		900		2,315
Advances from(repayments to)Peter Quiring (Note 5)		-		-		1,100		-
Cashprovided by (used in) financing activities	$	(1,006)	$	28,571	$	6,568	$	55,421
Decrease in cash and cash equivalents	$	(943)	$	4,215	$	1	$	4,924
Cashposition,beginningofperiod		944		1,418		-		709
Cash and cash equivalents, end of period	$	1	$	5,633	$	1	$	5,633

*Presentation of financial statements have been aligned to Auxly Cannabis Group Inc.

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

Sunens Farms Inc. Notes to Financial Statements

Expressed in thousands of Canadian dollars Unaudited

1. Significant accounting policies

Nature of business

Basis of accounting

Revenue recognition

Income taxes

Financial instruments

Sunens Farms Inc. (the "Company") was incorporated under the laws of the Province of Ontario and its principal business activity is the production and sale of cannabis.

The financial statements have been prepared using Canadian accounting standards for private enterprises ("ASPE").

Revenue consists of interest income and rental revenue. Rental revenue from operating leases is recognized in income on a straightline basis. Interest income is recognized on a monthly basis when it is earned, when the amount is estimable and collection is reasonably assured.

The Company uses the income taxes payable method of accounting for income taxes. Under this method, the Company reports as an expense (income) of the year only the cost (benefit) of current income taxes determined in accordance with the rules established by taxation authorities.

Financial instruments are recorded at fair value at initial recognition.

The Company has elected to allocate the entire proceeds of a financial liability with a separate liability and equity component to the liability component and measure the equity component at zero.

Agriculture inventory and productive biological assets

Inventory consists of raw materials, productive biological assets and harvested cannabis.

Sunens Farms Inc. Notes to Financial Statements

Expressed in thousands of Canadian dollars Unaudited

1. Significant accounting policies (continued)

Property, plant and Property, plant and equipment are stated at cost less accumulated equipment amortization. Expenditures for repairs and maintenance are expensed as incurred. Betterments that extend the useful life of the asset are capitalized.

Construction in progress is not amortized until the item of property, plant and equipment is substantially complete and ready for use.

Amortization based on the estimated useful life of the asset is calculated as follows:

alculated as follows:
	Method	Rate
Greenhouses and buildings	Declining balance	4%
Machinery and equipment	Declining balance	20%
Automotive	Declining balance	30%
Office furniture and fixtures	Declining balance	20%
Computer equipment	Declining balance	30%
Computer software	Declining balance	30%
Leasehold improvements	Straight-line	10 years

Leases

Machinery and equipment under capital lease Declining balance 20%

All other leases are accounted for as operating leases wherein rental payments are expensed as incurred.

Impairment of long- lived assets

In the event that facts and circumstances indicate that the Company's long-lived assets may be impaired, a test of recoverability would be performed.

Such a test entails comparing the estimated future undiscounted cash flows associated with the asset to the asset's carrying amount to determine if a write down to fair value is required.

Interest capitalization

The Company capitalizes interest on construction projects when the interest expense is directly attributed to the construction activity and the project is developed over a significant amount of time.

Sunens Farms Inc. Notes to Financial Statements Expressed in thousands of Canadian dollars Unaudited

1. Significant accounting policies (continued)

Foreign currency

Foreign currency accounts are translated to Canadian dollars as follows:

At the transaction date, each asset, liability, revenue or expense is translated into Canadian dollars at the exchange rate in effect at that date. At the reporting date, monetary assets and liabilities are translated into Canadian dollars by using the exchange rate in effect at that date and the resulting foreign exchange gains and losses are included in income in the current period.

Government assistance

Use of estimates

Government assistance received during the year for current expenses is included in the determination of net income for the year. Government assistance related to capital expenditures is shown as a reduction of the cost of such assets.

The preparation of financial statements in accordance with ASPE requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements, and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from management's best estimates as additional information becomes available in the future. Accounts specifically affected are the provision for doubtful accounts in respective of receivables, the cost and net realizable value of inventories, the useful lives of long-lived assets, the identification and measurement of impairment of longlived assets and amount of accrued liabilities and contingencies.

2. Going concern

For the nine months ending September 30, 2021, the Company has incurred a net loss of $14,473. As at September 31, 2021, the Company has an accumulated deficit of $32,716 and a negative current ratio after callable debt. As a result, there is material uncertainty that may cast significant doubt as to whether the Company will have the ability to continue as a going concern.

Sunens Farms Inc. Notes to Financial Statements

Expressed in thousands of Canadian dollars Unaudited

3. Inventory

Inventory
		As at		As at
	September	30, 2021	December	31,2020
Raw Materials	$	767	$	538
Agriculature inventoryandproductive biological assets		2,386		2,561
Total biological assets	$	3,153	$	3,099
Work in progress		179		543
Finishedgoods		3,014		2,339
Total inventory	$	3,193	$	2,882

4. Property, plant and equipment

==> picture [446 x 179] intentionally omitted <==

----- Start of picture text -----

As at September 30, 2021 As at December 31, 2020
Accumulated Accumulated
Cost Amortization Cost Amortization
Land $ 3,082 $ - $ 3,082 $ -
Greenhouses and buildings 133,350 7,626 133,227 2,730
Machinery and equipment 15,887 2,819 15,364 1,731
Office furniture and fixtures 498 86 455 45
- - - -
Computer equipment
Automotive 47 12 19 8
Computer software 28 13 28 8
- - - -
Leasehold improvements
Greenhouse under construction 72 - 41 -
$ 152,964 $ 10,556 $ 152,216 $ 4,522
$ 142,408 $ 147,694
----- End of picture text -----

Included in property, plant and equipment is $72 (December 31, 2020 - $41) of greenhouse under construction that has not been amortized during the year as the asset was not in use at the reporting date.

Included in machinery and equipment are assets held under capital lease with a total cost of $13,947 (December 31, 2020 - $13,947) and related accumulated amortization of $2,080 (December 31, 2020 - $1,079) for an ending book value of $11,866 (December 31, 2020 - $12,868).

5. Related party transactions

The Company entered into transactions during the reporting period with the following related companies:

Nature Fresh Farms Inc.
a company owned by the ultimate shareholder of 2633867 Ontario Inc.
Nature Fresh Farms Sales Inc. - a company owned by the ultimate shareholder of 2633867 Ontario Inc.

Sunens Farms Inc. Notes to Financial Statements

Expressed in thousands of Canadian dollars Unaudited

5. Related party transactions (continued)

South Essex Fabricating Inc. - a company owned by the ultimate shareholder of 2633867 Ontario Inc.
2633867 Ontario Inc.
Auxly Cannabis Group Inc.
Peter Quiring Holdings Inc.
Fresh Energy Inc.
Peter Quiring
a shareholder
a minority shareholder
a company owned by the ultimate shareholder of 2633867 Ontario Inc.
a company owned by the ultimate shareholder of 2633867 Ontario Inc.
a majority shareholder

The following transactions occurred during the reporting period:

For the periods ended:	Three months September	Three months September	Three months September	Three months September	30		Nine months	Nine months	September 30
		2021		2020			2021		2020
Rental Revenue:
Nature Fresh Farms Inc	$	-	$	-		$	-		$	3
Reimbursement of bonus:
Nature Fresh Farms Inc		-		-			-			50
South Essex Fabricating Inc		-		-			-			50
Purchase of property, plant and equipment:
South Essex Fabricating		-		545				21	25,213
Consulting Fees:
Peter Quiring Holdings Inc		-		188			250		332
Reimbursement of hydro:
Fresh Energy Inc		1,494		361			3,063		566
Reimbursement of various expesnes:
Nature Fresh Farms Inc			44		5			65		33
Nature Fresh Farms Sales Inc			6		9			36		19
South Essex Fabricating Inc		614		12,360			1,483		12,500
Capital Infusion:
Peter Quiring		-		-			1,100		-

These transactions are measured at the exchange amount, which is the amount of consideration established and agreed to by the related parties.

Sunens Farms Inc. Notes to Financial Statements

Expressed in thousands of Canadian dollars Unaudited

5. Related party transactions (continued)

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----- Start of picture text -----

As at As at
September 30, 2021 December 31, 2020
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Included in accounts receivable are the following balances with related
parties:
Nature Fresh Farms Inc.	$	-		$	60
Included in accounts payable and accrued liabilities are the following
balances with related parties:
Peter Quiring Holdings Inc.		283			71
South Essex Fabricating Inc.		698			71
Fresh Energy Inc.		1,316			308
Nature Fresh Farms Sales Inc.			10		4
Nature Fresh Farms Inc.			54		65
Included in obligations under capital lease are the following balances with
related parties:
2633867 Ontario Inc.		1,135			1,135

The amount due from 2633867 Ontario Inc. bears no interest, is unsecured and has no specific terms of repayment.

The Company has suspended the payment of management fees to Peter Quiring Holdings Inc., please see note 15 for more details.

6. Due to Auxly

During 2019, a convertible promissory note was issued to Auxly Cannabis Group Inc. ("Auxly"), a minority shareholder, for $35,000 with a maturity date of June 30, 2019. Subsequent to this date, additional funds were loaned to the Company for a total of $98,500 outstanding. In the 2019, an amended promissory note was issued in the amount up to $48,500 and $50,000 under the terms of the original note was converted to Class B special shares. The attributes of these shares are included in Note 10 and are redeemable at the option of the Company.

As at September 30, 2021, there is a balance due to Auxly of $49,394 (December 30, 2021 - $48,494). This amount primarily relates to a promissory note in the principal amount of $48,494 and the balance in 2019 being accrued interest on the note. This promissory note bears interest at 6%, is secured in second position behind the loans payable as disclosed in Note 8. No interest or principal repayments are required on the outstanding amount until July 1, 2022, when equal monthly principal payments will begin, and principal plus interest payments will begin on February 1, 2023, with the outstanding balance plus any accrued and unpaid interest owing thereon to be repaid over a period of four years, maturing on July 1, 2026.

In the first quarter of 2021, an additional promissory note was received in the principal amount of $900. The note is unsecured and bears interest of 6%. No interest or principal repayments are required on the outstanding amount until July 1, 2022, when equal monthly principal payments will begin February 1, 2023. The note is maturing on July 1, 2026.

Sunens Farms Inc. Notes to Financial Statements

Expressed in thousands of Canadian dollars Unaudited

6. Due to Auxly (continued)

2022	6,048
2023	12,096
2024	12,096
2025	12,096
Thereafter	7,056
	49,394

7. Government remittances

Included in accounts payable and accrued liabilities are government remittances payable of $254 (December 31, 2021 - $66).

8. Loans payable

Loans payable
		As at		As at
	September	30, 2021	December	31,2020
Revolver loan payable to Bank of Montreal, bearing interest at prime or
the banker's acceptance rate, plus the applicable margin in effect,
repayable in interest only payments with the balance to be repayable in
full April 2022. Total authorized amount of the loan is $33,000.
Remainder to be drawn down at various milestones as agreed to
between the Company and Bank of Montreal.	$	28,500	$	22,000
Term loan payable to Bank of Montreal, bearing interest at prime or the
banker's acceptance rate, plus the applicable margin in effect, repayable
in principal installments commencing on the first business day of each
calendar quarter following the repayment start date of December 31,
2021, maturing September 2022.		38,500		38,500
Loan payable to Hub International Ontario Limited, bearing interest at
4.75%, repayable in blended monthly payments of $173. maturing March
2022.		857		562
	$	67,857	$	61,062
Less deferred financingfees capitalized		738		616
	$	67,119	$	60,446

Remaining 2021 2022	512 $ 67,345
	67,857 $

Sunens Farms Inc. Notes to Financial Statements

Expressed in thousands of Canadian dollars Unaudited

8. Loans payable (continued)

Interest expense on the above loans payable for the three and nine months September 30, 2021 were $728 and $2,212, respectively (2020 - $549 for the three months and $763 for the nine months ended.

Deferred financing fees represent the unamortized portion of financing fees paid to obtain Bank of Montreal.

of Montreal.
		As at		As at
	September 30, 2021		December 31,2020
Balance, beginning of year	$	616	$	406
Financing fees paid		191		264
Less: Amounts amortized to expense		(69)		(54)
Balance, end of year	$	738	$	616

The Group has an operating credit facility, with a syndicate of banks, consisting of the following components:

Bank overdrafts (in Canadian Dollars),
Bankers' acceptances, and
Letters of Credit

The operating credit facility has a portion for account overdraft in Canadian Dollars from a syndicate of banks available to the Company to a maximum amount of $3,300, bearing interest at prime rate plus 0.75%. As at September 30, 2021, the Company has drawn $nil (December 31, 2020 - $787) under the operating credit facility, such that $3,300 was unused and available at September 30, 2021 (December 31, 2020 - $2,513).

The Bank of Montreal indebtedness is secured as follows:

(i) guarantee in the amount of $33,000 from one of the shareholders
(ii) unlimited guarantee from any future 100% wholly owned subsidiary
(iii) general security agreement with first charge over all tangible and intangible assets (excluding non-transferable and non-assignable licenses and agreements)
(iv) first charge debenture or collateral mortgage in the amount of $100,000 on the Leamington Property and real property at 427 and 431 Mersea Road 10
(v) limited recourse guarantee from each shareholder
(vi) cost overrun agreements from the shareholders
(vii) assignment, postponement and subordination of any loans provided by the shareholders (viii) assignment of insurance

Sunens Farms Inc. Notes to Financial Statements

Expressed in thousands of Canadian dollars Unaudited

9. Obligations under capital leases

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----- Start of picture text -----

As at As at
September 30, 2021 December 31, 2020
Proseal America Inc.
Repayable in blended monthly payments of $179 bearing interest at 5.41%,
due June 2027, secured by specific machinery and equipment with a net
book value of $11,645 .
$ 10,769 $ 11,740
Bioreactor
Repayable in blended annual payments of $216, bearing interest at 6.00%,
due June 2027 secured by specific machinery and equipment with a net
book value of $1,105. 1,135 1,135
Liftow Limited
Repayable in blended monthly payments of $2, bearing interest at 4.80%,
due June 2025 secured by specific machinery and equipment with a net
book value of $84.
77 90
Liftow Limited
Repayable in blended monthly payments (which translates into annual
payments of $5), bearing interest at 4.80%, due June 2025 secured by
specific machinery and equipment with a net book value of $20. 17 20
$ 11,998 $ 12,985
Current portion 1,773 1,718
Long-term portion of obligations $ 10,225 $ 11,267
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9. Obligations under capital leases (continued)

Interest expense related to capital leases for the three and nine months ended September 30, 2021 were $150 and $463, respectively (2020 - $111 for the three and nine months ended).

Future minimum lease payments under the capital leases for subsequent years are as follows:

Remaining 2021	$	759
2022		2,388
2023		2,388
2024		2,388
2025		2,383
Thereafter		3,794
Total	$	14,100
Less: imputed interest		(2,102)
	$	11,998

Sunens Farms Inc. Notes to Financial Statements

10. Share capital

Expressed in thousands of Canadian dollars Unaudited

Authorized:

Unlimited number of voting, non-cumulative Class 1 common shares Unlimited number of voting, non-cumulative Class 2 common shares

Unlimited number of non-voting, non-cumulative Class A special shares, redeemable at the option of the Company at $1 per share

Unlimited number of non-voting, non-cumulative Class B special shares, redeemable at the option of the Company at $1 per share

Unlimited number of voting, Class V special shares, redeemable at $0.0001 per share

Issued and outstanding shares:

			As at		As at
		September	30, 2021	December	31,2020
10,000,000	Common shares (2020 - 10,000,000)	$	-	$	-
30,000,000	Class A special shares (2020 - 30,000,000)		-		-
-	Class V special shares (2020 - 0)		-		-
50,000,000	Class B special shares(2020 - 50,000,000)		50,000		50,000
		$	50,000	$	50,000

During 2020, all of the issued Class V shares were redeemed.

11. Commitments

Remaining	$	2,008
2022		7,842
2023		20,374
2024		1,808
2025		100
Total	$	32,132

Sunens Farms Inc. Notes to Financial Statements Expressed in thousands of Canadian dollars Unaudited

12. Income taxes

For the periods ended:	Three months	Three months	September 30	September 30	Nine months	Nine months	September 30	September 30
Loss before income taxes	$	2021 (7,731)	$	2020 (2,478)	$	2021 (14,474)	$	2020 (5,970)
Combined basic federal andprovincial tax rates		26.50%		26.50%		26.50%		26.50%
Expected income tax recovery	$	(2,049)	$	(657)	$	(3,836)	$	(1,582)
Increase (decrease) in income tax resulting from:
Losses carried forward	$	2,049 -	$	657 -	$	3,836 -	$	1,582 -

Total losses available to be applied against taxable income in the future are $28,238.

13. Financial instruments

Liquidity risk

Interest rate risk

Sunens Farms Inc. Notes to Financial Statements Expressed in thousands of Canadian dollars Unaudited

14. Uncertainty due to COVID-19

15. Default

On April 16, 2021, Sunens received a notice of default from the Bank of Montreal in its capacity as lender, administrative agent and syndication agent under the credit facility with respect to Sunens' failure to satisfy recently established revenue milestones for the first quarter of 2021. Although the lenders have reserved their rights under the credit agreement, they advanced another $1 million pursuant to a borrowing request made pursuant to the credit facility and BMO has granted a onemonth deferral of the equipment loan payment due in May 2021 in the amount of approximately $0.2 million, which will be used to fund day-to-day operations. In May 2021, Sunens started selling cannabis to Auxly Cannabis Group Inc. as production from the Sunens facility increased. The lenders have retained an accounting firm to provide them advice with respect to the credit facility in the form of a report which was delivered on July 12, 2021. In addition, a forbearance agreement with the lenders was signed on June 22, 2021 whereby the lenders agreed to forbear from taking certain actions available upon a default of the credit facility. The forbearance agreement expired on August 17, 2021. However, discussions with the lenders with respect to a formal credit facility amendment are continuing, and although there can be no assurance that a revised agreement with the lenders or Peter Quiring will be reached, the parties have made substantial progress in their negotiations on a credit facility amendment that is acceptable to all relevant parties. During these negotiations, and subsequent to the notice of default, payments to Peter Quiring Holdings Inc. for consulting services were suspended.

16. Comparative figures

The comparative figures have been reclassified to conform to the current year's presentation.

SCHEDULE C

(See attached)

AUXLY CANNABIS GROUP INC.

Unaudited pro forma interim condensed consolidated financial statements

As at September 30, 2021 and for the nine months ended September 30, 2021 and for the year ended December 31, 2020

Auxly Cannabis Group Inc. Pro Forma Interim Condensed Consolidated Statement of Financial Position

As at: (thousands ofCanadiandollars) (unaudited)	September 30, 2021
	Auxly Cannabis Group Inc. Sunens Farms Inc. Pro Forma Adjustments Notes 37,215 $ 1 $ (500) $ 3(a) 140 - - 19,802 1,101 (1,099) 3(c) 598 3,153 (963) 3(e) 52,750 3,193 (4,829) 3(a),3(b) 3,764 1,079 - 13,490 - - 3,285 - - 131,044 $ 8,527 $ (7,391) $ 77,491 $ 142,408 $ (1,482) $ 3(a),3(f) 71,716 - 30,333 3(a) 23,641 - - 8,010 - - 78,488 - (78,488) 3(b) - 1,408 (1,408) 3(a) 1,600 - - 260,946 $ 143,816 $ (51,045) $ 1,438 - - 393,428 $ 152,343 $ (58,436) $	Pro Forma Consolidated
Assets Current assets Cash and cash equivalents Short-term investments Accounts receivables Biological assets Inventory Prepaid expenses Deposits Other receivables		36,716 $ 140 19,804 2,788 51,114 4,843 13,490 3,285
		132,180 $
Non-current assets Property, plant and equipment, net Intangible assets, net Goodwill Long-term investments Investment in joint venture Due from 2633867 Ontario Inc. Long-termdeposits		218,417 $ 102,049 23,641 8,010 - - 1,600
Assets held for sale		353,717 $ 1,438
Total assets		487,335 $
Liabilities Current liabilities
Accounts payable and accrued liabilities	29,481 $ 5,448 $ (1,099) $ 3(b) 213 - - 1,143 1,773 - 10,361 - - 736 - - 41,934 7,221 (1,099) - 67,119 738 3(a) 41,934 $ 74,340 $ (361) $ 1,266 $ - $ - $ 8,649 10,225 62 3(a) 93,140 - - 1,510 - - - 1,100 2,300 3(a) - 49,394 (49,394) 3(d) 17,091 - 8,038 3(a) 1,079 - (1,079) 3(b) 122,735 $ 60,719 $ (40,073) $ 801 - - 165,470 $ 135,059 $ (40,433) $ 432,147 $ 50,000 $ (49,076) $ 3(a) 112,905 - - (22,573) - - (290,092) (32,716) 31,073 3(a)-3(f) 232,387 $ 17,284 $ (18,003) $ (4,429) - - 227,958 $ 17,284 $ (18,003) $ 393,428 $ 152,343 $ (58,436) $	33,830 $
Interest payable Lease liability Convertible debenture Loanspayable		213 2,916 10,361 736
Current liabilities before callable debt Loanspayable - callable debt		48,056 67,857
		115,913 $
Non-current liabilities Interest payable Lease liability Convertible debenture Loans payable Promissory note Due to Auxly Cannabis Group Inc. Deferred tax liability Other non-current liabilities		1,266 $ 18,936 93,140 1,510 3,400 - 25,129 -
Liabilities held for sale		143,381 $ 801
Total liabilities		260,096 $
Equity Share capital Reserves Accumulated other comprehensive loss Deficit		433,071 $ 112,905 (22,573) (291,735)
Total equity attributable to shareholders of the Company Total equityattributable to non-controllinginterest		231,668 $ (4,429)
Total equity		227,239 $
Total liabilities and equity		487,335 $

Auxly Cannabis Group Inc. Pro Forma Interim Condensed Consolidated Statement of Loss and Comprehensive Loss

For the period ended: (thousands ofCanadiandollars) (unaudited)	Nine months September 30, 2021
	Auxly Cannabis Group Inc. Sunens Farms Inc. Pro Forma Adjustments Notes 77,520 $ 13,670 $ (12,697) $ 3(c) (23,009) - - 54,511 13,670 (12,697) 39,380 19,297 (9,168) 3(c) 1,070 (1,879) - 14,061 (3,748) (3,529) 922 - - (1) - - 14,982 (3,748) (3,529) 32,833 5,179 - 6,829 2,805 244 3(f) 13,320 2,652 - 52,982 10,636 244 414 - - 1,283 7 (1,138) 3(b) (11,426) - - 21,104 (61) 12 3(a),3(b) 1,355 - - (6,048) - 6,048 3(b) (546) (36) - 6,136 (90) 4,922 (31,864) (14,474) 1,149 4,330 - - (27,534) $ (14,474) $ 1,149 $ 12,156 - - (15,378) $ (14,474) $ 1,149 $ (15,363) $ (14,474) $ 1,149 $ (15) $ - $ - $ (608) $ - $ - $ (16) - - (16,002) $ (14,474) $ 1,149 $ (16,005) $ (14,474) $ 1,149 $ 3 $ - $ - $ (0.04) $ 0.02 (0.02) $ 767,844,307 4,017,531 3(a)	Pro Forma Consolidated
CONTINUING OPERATIONS Revenue Revenue from sales of cannabis products Excise taxes		78,493 $ (23,009)
Total net revenue Costs of sales Costs of finished cannabis inventory sold Inventoryimpairment		55,484 49,509 (809)
Gross profit excluding fair value items Unrealized fair value gain/(loss) on biological transformation Realizedfair value gain/(loss) on inventory		6,784 922 (1)
Gross profit Expenses Selling, general, and administrative expenses Depreciation and amortization Interest and accretionexpense		7,705 38,012 9,878 15,972
Total expenses Other income/(loss) Fair value gain/(loss) for financial instruments accounted under FVTPL Interest and other income Impairment of long-term assets Gain/(loss) on settlement of assets and liabilities and other expenses Gain on disposal of subsidiary Share of loss on investment in joint venture Foreignexchange gain/(loss)		63,862 414 152 (11,426) 21,055 1,355 - (582)
Total other income/(loss) Net loss before income tax Income tax recovery		10,968 (45,189) 4,330
Net loss from continuing operations Net income/(loss) from discontinued operations		(40,859) $ 12,156
Net income/(loss) Net income/(loss) attributable to shareholders of the Company Net loss attributable to non-controlling interest Other comprehensive income/(loss) Fair value gain/(loss) on fair value through other comprehensive income investments - not subsequently reclassified to profit or loss Currency translationadjustment-subsequentlyreclassified to profit or loss		(28,703) $ (28,688) $ (15) $ (608) $ (16)
Total comprehensive income/(loss)		(29,327) $
Total comprehensive income/(loss) attributable to shareholders of the Company Total comprehensive income/(loss) attributable to non-controlling interest Net income/(loss) per common share From continuing operations Fromdiscontinued operations		(29,330) $ 3 $ (0.05) $ 0.02
Net income/(loss) per common share - basic and diluted		(0.04) $
Weighted average number of shares outstanding Basic and diluted		771,861,838

Auxly Cannabis Group Inc.

Pro Forma Consolidated Statement of Loss and Comprehensive Loss

For the period ended: (thousands ofCanadiandollars) (unaudited)	Year ended December 31, 2020
	Auxly Cannabis Group Inc. Sunens Farms Inc. Pro Forma Adjustments Notes 57,182 $ - $ - $ 4,147 - - (10,533) - - 50,796 - - 33,858 - - 2,750 - - 3,393 3,938 - 10,795 (3,938) - 537 - (963) 3(e) (193) - - 11,139 (3,938) (963) 48,855 6,051 - 9,384 2,125 (65) 3(f) 13,043 1,741 - 71,282 9,917 (65) (4,408) - - 477 7 - (6,146) - - (10,048) - 7,476 3(a),3(b) (7,407) - 7,407 3(c) (437) (3) - (27,969) 4 14,883 (88,112) (13,851) 13,985 681 - - (87,431) $ (13,851) $ 13,985 $ (85,426) $ (13,851) $ 13,985 $ (2,005) $ - $ - $ (1,004) $ - $ - $ (287) - - (88,722) $ (13,851) $ 13,985 $ (86,646) $ (13,851) $ 13,985 $ (2,076) $ - $ - $ (0.14) $ 631,528,750 4,017,531 3(a)	Pro Forma Consolidated
Revenue Revenue from sales of cannabis products Other revenue Excise taxes		57,182 $ 4,147 (10,533)
Total net revenue Costs of sales Costs of finished cannabis inventory sold Research contracts and other Inventoryimpairment		50,796 33,858 2,750 7,331
Gross profit excluding fair value items Unrealized fair value gain/(loss) on biological transformation Realizedfair value gain/(loss) on inventory		6,857 (426) (193)
Gross profit Expenses Selling, general, and administrative expenses Depreciation and amortization Interest and accretionexpense		6,238 54,906 11,444 14,784
Total expenses Other income/(loss) Fair value gain/(loss) for financial instruments accounted under FVTPL Interest and other income Impairment of long-term assets Gain/(loss) on settlement of assets and liabilities and other expenses Share of loss on investment in joint venture Foreignexchange gain/(loss)		81,134 (4,408) 484 (6,146) (2,572) - (440)
Total other income/(loss) Net loss before income tax Income tax recovery		(13,082) (87,978) 681
Net income/(loss) Net income/(loss) attributable to shareholders of the Company Net loss attributable to non-controlling interest Other comprehensive income/(loss) Fair value gain/(loss) on fair value through other comprehensive income investments - not subsequently reclassified to profit or loss Currency translationadjustment-subsequentlyreclassified to profit or loss		(87,297) $ (85,292) $ (2,005) $ (1,004) $ (287)
Total comprehensive income/(loss)		(88,588) $
Total comprehensive income/(loss) attributable to shareholders of the Company Total comprehensive income/(loss) attributable to non-controlling interest		(86,512) $ (2,076) $
Net income/(loss) per common share - basic and diluted		(0.13) $
Weighted average number of shares outstanding Basic and diluted		635,546,281

1. Description of the Transaction

On November 22, 2021, Auxly Cannabis Group Inc. (“Auxly”) acquired all of the issued and outstanding securities of Auxly Leamington Inc. (formerly Sunens Farms Inc.) (“Sunens”) not already owned by Auxly from the holders thereof. Following the completion of the Sunens Acquisition, Auxly has 100% ownership and control of Sunens and its operations (the “Transaction”).

2. Basis of Presentation

The unaudited pro forma interim condensed consolidated statement of financial position as at September 30, 2021, the unaudited pro forma interim condensed consolidated statement of loss and comprehensive loss for the nine months ended September 30, 2021 and for the year ended December 31, 2020 and the notes thereto (collectively, the “Pro Forma Financial Information”) of Auxly were prepared in connection with the Transaction as discussed above.

The Transaction was accounted for in accordance with IFRS 3 – Business Combinations (“IFRS 3”) in the Pro Forma Financial Information with Auxly as the acquirer and reflecting the identifiable assets acquired and the liabilities assumed of Sunens at fair value.

The Pro Forma Financial Information was prepared for illustrative purposes only, in compliance with National Instrument 51-102 – Continuous Disclosure Obligations . The Pro Forma Financial Information is derived from and should be read in conjunction with the following:

the unaudited interim condensed consolidated financial statements of Auxly as at and for the nine months ended September 30, 2021;
the unaudited interim condensed consolidated financial statements of Sunens as at and for the nine months ended September 30, 2021;
the audited consolidated financial statements of Auxly and of Sunens as at and for the year ended December 31, 2020.

The unaudited pro forma interim condensed consolidated statement of loss and comprehensive loss for the nine months ended September 30, 2021 and the consolidated statement of loss and comprehensive loss for the year ended December 31, 2020 give pro forma effect to the Transaction as if it had occurred on January 1, 2020. The unaudited pro forma interim condensed consolidated statement of financial position as at September 30, 2021 assumes that the Transaction was completed on September 30, 2021.

The Pro Forma Financial Information is for illustrative and information purposes only and may not be indicative of the operating results or financial condition that actually would have been achieved if the Transaction had occurred on the dates indicated or of the results that may be obtained in the future. The historical consolidated financial statements have been adjusted in the Pro Forma Financial Information to give effect to pro forma events that are (1) directly attributable to the Transaction, (2) factually supportable and (3) with respect to the statements of loss and comprehensive loss, expected to have a material continuing impact on the results of Auxly.

The accounting policies used in the preparation of the Pro Forma Financial Information are consistent with those described in the audited consolidated financial statements of Auxly as at and for the year ended December 31, 2020. All amounts are stated in thousands of Canadian dollars unless otherwise noted, except common shares.

The pro forma adjustments contained in these unaudited pro forma interim condensed and audited consolidated financial statements reflect estimates and assumptions by the management of Auxly based on currently available information. Auxly’s management believes that such assumptions provide a reasonable basis for presenting all of the significant effects of the Transaction and that the pro forma adjustments give appropriate effect to those assumptions and are properly applied in the Pro Forma Financial Information.

Actual amounts recorded upon consummation of the Transaction will differ from such Pro Forma Financial Information. Since the Pro Forma Financial Information was developed retroactively to show the effect of the Transaction that is expected to occur at a later date (even though this was accomplished by following generally accepted practice and using reasonable assumptions), there are limitations inherent in the very nature of such Pro Forma Financial Information.

Unless otherwise indicated, all amounts are expressed in thousands of Canadian dollars and rounded to the nearest thousand.

3. Pro Forma Adjustments

The pro forma adjustments contained in these unaudited pro forma interim condensed and audited consolidated financial statements reflect estimates and assumptions by management of Auxly based on currently available information and are subject to change as the acquisition fair values have not been finalized.

(a) For accounting purposes in accordance with IFRS 3, the fair value of the purchase consideration for the Transaction is assumed to be $86,490 and is calculated as follows:

==> picture [408 x 117] intentionally omitted <==

----- Start of picture text -----

$
Cash 500
Auxly Promissory Note 3,400
QuiringCo Promissory Note 2,745
Auxly Common Shares 924
Fair value of previously held equity interest before acquisition (Class 1) 5,437
Fair value of previously held equity interest before acquisition (Class B) 30,881
Fair value of pre-existing balances effectively settled on the acquisition 42,603
86,490
----- End of picture text -----

The unsecured promissory note in the principal amount of $3.4 million bears interest at a rate of 6% per annum and is payable by Auxly over 30 months in equal monthly installments, with the first payment being due on November 22, 2022.

The unsecured promissory note in the principal amount of $2.7 million does not bear interest, is unsecured and due on demand. This promissory note is made for business purposes and is a “business agreement” as defined in the Limitations Act, 2002 (the “Act”).

The common shares of Auxly were calculated using the 5-day volume-weighted average trading price of Auxly’s shares on the Toronto Stock Exchange on the trading day immediately preceding the closing date of the Transaction. The fair value of Auxly shares issued for the Transaction is assumed to be $924 calculated as 4,017,531 common shares at an issue price of $0.23 per common share.

The fair value of Auxly’s existing ownership interest in Sunens Class 1 and Class B shares is $5,437 for 4.5 million shares and $30,881 for 50 million shares, respectively.

Assuming an acquisition date of September 30, 2021, the following is a preliminary estimate of the values of the assets to be acquired and the liabilities to be assumed by Auxly in connection with the Transaction:

==> picture [391 x 185] intentionally omitted <==

----- Start of picture text -----

$
Cash 1
Accounts and other receivables 1,101
Biological assets and Inventory 5,046
Prepaid expenses and deposits 1,079
Due from 2633867 Ontario Inc 1,408
Property, plant and equipment 142,025
Intangible asset / Goodwill 30,333
Accounts payable and accrued liabilities (5,448)
Current portion of obligations under capital leases (1,773)
Loans payable (67,857)
Obligations under capital leases (10,287)
Due to Peter Quiring (1,100)
Deferred tax liability (8,038)
Purchase consideration transferred 86,490
----- End of picture text -----

Auxly’s management believes the fair values recognized above are based on reasonable estimates derived from currently available information. A final determination of the fair value of assets acquired and liabilities assumed will be based on the actual assets and liabilities of Sunens that exist as at the closing date of the Transaction and completion of the related fair value analysis. Any differences between the carrying value and the fair value of assets acquired and liabilities assumed would result in a respective change in goodwill and other potential intangibles.

Fair value adjustments for net assets acquired include:

Adjusting cannabis inventory to its net realizable value resulting in a decrease in inventory of $1,300;
The decrease in the right of use asset of $383 and an increase in the obligations under capital leases of $62. The obligations under capital leases represent Sunens’ capital leases, where the implicit rates approximate the interest rates under the loans payable; and
The increase in loans payable by $738 to reflect the total payment obligations to the Bank of Montreal led syndicate of $67 million. The fair value of the loan is the face value of the debt as it is a variable rate debt, and the terms are market terms.

Goodwill and other intangible assets arising on the Transaction are estimated to be $30,333, with a deferred tax liability of $8,038. The finite-lived intangible assets that are expected to be separately recognized include Sunens’ cannabis cultivation, processing and sales licenses. Any such intangible assets and related deferred taxes, which could be material in amount, can only be determined upon completion of the determination of fair values related to the Transaction.

Other transactions as part of the Transaction include:

Sunens’ sale of certain real property with a cost of $960 to 2633867 Ontario Inc. (“QuiringCo”) in exchange for a promissory note of $1,337, resulting in a gain on sale of $377. Including the previously outstanding promissory note due to Sunens from QuiringCo, the outstanding balance from QuiringCo is $2,745;

Reduction in Sunen’s stated capital in respect to the Class B special shares by $2,745, and distribution of the QuiringCo debt to Auxly as a repayment of capital in respect thereof;
Auxly and QuiringCo agreed to set off the $2,745 owing by Auxly to QuiringCo from the purchase consideration against the $2,745 owing by QuiringCo from the repayment of capital, resulting in both debts paid in full and cancelled; and
The note receivable of $1,100 from Sunens to be assigned from QuiringCo to Auxly for $924 of Auxly common shares as part of the purchase consideration.

The equity of Sunens is eliminated on consolidation.

(b) These adjustments represent consolidation of Sunens as a wholly owned subsidiary of Auxly resulting in the elimination of the current investment in associate of $78,488 as at September 30, 2021 and the related share of net loss of associate of $6,048 and $7,407 for the nine months ended September 30, 2021 and for the year ended December 31, 2020, respectively. Auxly’s share of net loss of associate of $6,048 for the nine months ended September 30, 2021 is net of $33 of upstream loss.

In November 2020, the Company consented to the redemption by Sunens of the Class V preferred shares, which reduced the Company’s ownership of the joint venture from 51% to 45%. The Company amended the secured promissory note it has with the joint venture and the amendment was treated as a debt modification under IFRS 9. A gain of $423 and a loss of $7,099 for the nine months ended September 30, 2021 and for the year ended December 31, 2020, respectively, have been recognized. Auxly’s interest income on the promissory note of $1,138 was eliminated for the nine months ended September 30, 2021.

As a part of the debt financing provided to Sunens, Auxly has guaranteed payments up to $33,000 in the event of default. The carrying value of the guarantee of $1,079 has been eliminated against retained earnings as Auxly assumes the full liability of the loan payable upon acquisition. The associated expected credit loss on the guarantee of $58 and $993 for the nine months ended September 30, 2021 and for the year ended December 31, 2020, respectively, have also been eliminated.

(c) All intercompany transactions and balances are eliminated on consolidation. This includes Sunens revenue of $12,697 for the nine months ended September 30, 2021, which was eliminated against Auxly’s cost of goods sold for $9,168 with the remainder to inventory. Intercompany receivables/payables of $1,099 and Auxly’s investment in Sunens of $6,645 was eliminated from the pro forma interim condensed consolidated statement of financial position.
(d) This adjustment reflects a reclassification of Sunens’ debt that is due to Auxly to retained earnings as to reflect the settlement of debt on consolidation.
(e) As Sunens was prepared in accordance with ASPE, this adjustment reflects an ASPE to IFRS adjustment on biological assets, resulting in a $963 unrealized loss on biological assets.
(f) This adjustment represents the alignment of Sunens’ amortization policy on property, plant and equipment to Auxly’s, from declining balance to straight line method. The alignment resulted in an increase of $244 amortization expense for the nine months ended September 30, 2021, a decrease of $65 amortization expense for the year ended December 31, 2020 and a decrease of $40 amortization expense for the year ended December 19, 2019.

AI assistant

Auxly Cannabis Group — M&A Activity 2022

43847_rns_2022-02-07_2a07d954-36dc-4e08-865d-aa5241b147e5.pdf

FORM 51-102F4

BUSINESS ACQUISITION REPORT

Item 1 IDENTITY OF COMPANY

1.1 Name and Address of Company

1.2 Executive Officer

Item 2 DETAILS OF ACQUISITION 2.1

Nature of Business Acquired

2.2

Acquisition Date

2.3

Consideration

2.4 Effect on Financial Position

2.5 Prior Valuations

2.6 Parties to Transaction

2.7 Date of Report

Item 3 FINANCIAL STATEMENTS AND OTHER INFORMATION

Notice Regarding Forward-Looking Information:

SCHEDULE A

Sunens Farms Inc. Financial Statements For the Year Ended December 31, 2020

Independent Auditor's Report

To the board of directors of Sunens Farms Inc.

Opinion

Basis for Opinion

Material Uncertainty Related to Going Concern

Responsibilities of Management and Those Charged with Governance for the Financial Statements

Auditor’s Responsibilities for the Audit of the Financial Statements

Sunens Farms Inc. Balance Sheet

Sunens Farms Inc. Statement of Operations and Deficit

Sunens Farms Inc. Notes to Financial Statements

December 31, 2020

1. Significant accounting policies

Sunens Farms Inc. Notes to Financial Statements

December 31, 2020

1. Significant accounting policies (continued)

Property, plant and equipment

Leases

Sunens Farms Inc. Notes to Financial Statements

December 31, 2020

1. Significant accounting policies (continued)

Sunens Farms Inc. Notes to Financial Statements

December 31, 2020

2. Going concern

3. Inventory

Sunens Farms Inc. Notes to Financial Statements

December 31, 2020

4. Property, plant and equipment

5. Related party transactions

December 31, 2020

Sunens Farms Inc. Notes to Financial Statements

December 31, 2020

6. Due to Auxly Cannabis Group Inc.

Sunens Farms Inc. Notes to Financial Statements

December 31, 2020

7. Government remittances

8. Loans payable

December 31, 2020

8. Loans payable (continued)

Sunens Farms Inc. Notes to Financial Statements

9. Obligations under capital lease

Sunens Farms Inc. Notes to Financial Statements

December 31, 2020

10. Share capital

Authorized

11. Commitments

December 31, 2020

12. Income taxes

13. Financial instruments

Liquidity risk

Interest rate risk

December 31, 2020

14. Uncertainty due to COVID-19

15. Subsequent events

Sunens Farms Inc. Notes to Financial Statements

December 31, 2020

15. Subsequent events (continued)

16. Comparative figures

Sunens Farms Inc. Notes to Financial Statements

Auxly Cannabis Group M&A Activity 2022