GABY Inc. — Annual Report 2021

Apr 30, 2022

GABY INC.

CONSOLIDATED FINANCIAL STATEMENTS

December 31, 2021 and 2020 (in Canadian dollars)

April 29, 2022

Management’s Responsibility for Financial Reporting

The accompanying consolidated financial statements of Gaby Inc. and all information in Management’s Discussion and Analysis are the responsibility of management and have been approved by the Board of Directors. The consolidated financial statements have been prepared in accordance with International Financial Reporting Standards and, where appropriate, reflect management’s best estimates and judgments. Management is responsible for the accuracy, integrity, and objectivity of the consolidated financial statements within reasonable limits of materiality and has ensured consistency with the financial information presented elsewhere in Management’s Discussion and Analysis.

To assist management in the discharge of these responsibilities, the Corporation has established an organizational structure that provides appropriate delegation of authority, division of responsibilities, and selection and training of properly qualified personnel. Management is also responsible for the development of internal controls over the financial reporting process.

The Board of Directors is assisted in exercising its responsibilities through the Audit Committee of the Board, which is composed of a majority of independent directors. The Committee meets regularly with management and the independent auditors to satisfy itself that management’s responsibilities are properly discharged and to review the financial statements. The Audit Committee reports its findings to the Board of Directors for consideration in approving the consolidated financial statements for presentation to the shareholders. The external auditors have direct access to the Audit Committee of the Board of Directors.

The consolidated financial statements have been audited independently by Davidson & Company on behalf of the shareholders in accordance with generally accepted auditing standards. Their report outlines the nature of their audits and expresses their opinion on the consolidated financial statements.

[signed] [signed] Margot M. Micallef Paul Stacey Chair & CEO Chief Financial Officer

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INDEPENDENT AUDITOR’S REPORT

To the Shareholders of Gaby Inc.

Opinion

We have audited the accompanying consolidated financial statements of Gaby Inc. (the “Company”), which comprise the consolidated statements of financial position as at December 31, 2021 and 2020 and the consolidated statements of loss and comprehensive loss, changes in shareholders’ equity (deficiency), and cash flows for the years then ended, and notes to the consolidated financial statements, including a summary of significant accounting policies.

In our opinion, these consolidated financial statements present fairly, in all material respects, the financial position of the Company as at December 31, 2021 and 2020, and its financial performance and its cash flows for the years then ended in accordance with International Financial Reporting Standards (“IFRS”).

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 Consolidated 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 consolidated 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 in our audit is sufficient and appropriate to provide a basis for our opinion.

Material Uncertainty Related to Going Concern

We draw attention to Note 1 of the consolidated financial statements, which indicates that the Company incurred a net loss of $12.2 million during the year ended December 31, 2021 and, as of that date, has a working capital deficit was $7.3 million. As stated in Note 1, these events and conditions indicate that material uncertainties exist that cast significant doubt on the Company’s ability to continue as a going concern. Our opinion is not modified in respect of this matter.

Other Information

Management is responsible for the other information. The other information obtained at the date of this auditor's report includes Management’s Discussion and Analysis.

Our opinion on the consolidated financial statements does not cover the other information and we do not express any form of assurance conclusion thereon.

In connection with our audit of the consolidated financial statements, our responsibility is to read the other information and, in doing so, consider whether the other information is materially inconsistent with the consolidated financial statements or our knowledge obtained in the audit, or otherwise appears to be materially misstated.

We obtained Management’s Discussion and Analysis prior to the date of this auditor’s report. If, based on the work we have performed, we conclude that there is a material misstatement of this other information, we are required to report that fact. We have nothing to report in this regard.

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

Management is responsible for the preparation and fair presentation of the consolidated financial statements in accordance with IFRS, and for such internal control as management determines is necessary to enable the preparation of consolidated financial statements that are free from material misstatement, whether due to fraud or error.

In preparing the consolidated 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.

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

Auditor's Responsibilities for the Audit of the Consolidated Financial Statements

Our objectives are to obtain reasonable assurance about whether the consolidated 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 consolidated 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 consolidated 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 consolidated 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 consolidated financial statements, including the disclosures, and whether the consolidated financial statements represent the underlying transactions and events in a manner that achieves fair presentation.

• Obtain sufficient appropriate audit evidence regarding the financial information of the entities or business activities within the Company to express an opinion on the consolidated financial statements. We are responsible for the direction, supervision and performance of the group audit. We remain solely responsible for our audit opinion.

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.

We also provide those charged with governance with a statement that we have complied with relevant ethical requirements regarding independence, and to communicate with them all relationships and other matters that may reasonably be thought to bear on our independence, and where applicable, related safeguards.

The engagement partner on the audit resulting in this independent auditor’s report is Dylan Connelly.

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Vancouver, Canada April 29, 2022

Chartered Professional Accountants

GABY INC.

Consolidated Statements of Financial Position

GABY INC. Consolidated Statements of Financial Position
In Canadian dollars Note	As at December 31
	2021 2020
ASSETS Current Cash Restricted cash Accounts receivable 4 Inventories 5 Prepaid expenses Other current asset 3b	4,067,501 102,808 ‐ 83,760 160,309 611,107 1,341,670 642,883 473,332 86,857 617,098 ‐
Non‐current Property and equipment 6 Intangible assets and goodwill 7 Other assets 8	6,659,910 1,527,415 7,852,838 1,095,090 46,762,512 2,392,042 4,619,787 22,086
Total assets	65,895,047 5,036,633
LIABILITIES AND SHAREHOLDERS’ EQUITY (DEFICIENCY) Current liabilities Bank indebtedness 9 Accounts payable and accrued liabilities 10, 11 Income taxes payable 25 Deferred revenue 12 Short‐term notes payable 13 Promissory notes payable 14 Convertible debentures 15 Current portion of lease liabilities 16 Currentportion of long‐term debt 17	‐ 155,370 8,218,198 7,065,310 3,275,150 61,405 275,150 ‐ 18,984 89,264 265,200 1,411,233 526,116 653,904 744,046 61,504 679,325 85,400
Non‐current liabilities Lease liabilities 16 Long‐term debt 17 Other liabilities 18	14,002,169 9,583,390 7,917,728 569,157 33,270,179 207,196 6,817,163 16,729
Total liabilities	62,007,239 10,376,472
SHAREHOLDERS’ EQUITY (DEFICIENCY) Share issuance obligation 19h Share capital 20 Contributed surplus 20 Deficit Accumulated other comprehensive loss	‐ 119,947 63,638,128 45,074,695 8,491,777 5,721,708 (68,180,733) (55,933,646) (61,364) (322,543)
	3,887,808 (5,339,839)
Total liabilities and shareholders’ equity (deficiency)	65,895,047 5,036,633
Going concern 1 Contingencies 33 Subsequent events 36

See accompanying notes to the consolidated financial statements

[signed]

On behalf of board: Margot M. Micallef, Director

[signed]

Jackie Altwasser, Director

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GABY INC.

Consolidated Statements of Loss and Comprehensive Loss

In Canadian dollars Note	Year Ended December 31
	2021 2020
CONTINUING OPERATIONS REVENUE COST OF SALES Direct inventorycosts 21	32,435,377 4,071,546 19,705,701 3,616,874
Variable gross profit Allocated indirect costs 22 Distribution costs	12,729,676 454,672 672,969 329,928 237,945 276,757
Total cost of sales	20,616,615 4,223,559
Gross profit (loss) Selling, general and administrative expenses 23 Share‐based compensation and expenses 19 Depreciation of property and equipment 6 Amortization of intangible assets 7	11,818,762 (152,013) 10,715,463 6,740,942 1,551,236 637,498 646,212 291,487 805,646 ‐
**Loss from operations before the following: **	(1,899,795) (7,821,940)
Interest expense Impairment loss 7 Transaction costs 3e Other items of income(expense) 24	(3,340,790) (538,353) (2,374,035) (4,694,088) (1,213,046) ‐ (957,060) (83,361)
Total other income(expenses)	(7,884,931) (5,315,802)
Loss before income tax expense(recovery)	(9,784,726) (13,137,742)
Current income tax expense Deferred income tax recovery	2,698,552 5,565 (236,191) (314,465)
Income tax expense(recovery) 25	2,462,361 (308,900)
Net loss from continuing operations	(12,247,087) (12,828,842)
DISCONTINUED OPERATIONS Net loss from discontinued operations 26	‐ (1,161,772)
Net loss	(12,247,087) (13,990,614)
Other comprehensive income (loss), net of tax Items that may be reclassified to net profit or loss in the future: Exchange difference on translation Items reclassified to net profit in the current period: Divestiture or dissolution of subsidiary	261,179 229,825 ‐ (4,274)
Total comprehensive loss	(11,985,908) (13,765,063)
Net lossper share, basic and diluted: 27
Continuing operations Discontinued operations	($0.02) ($0.05) ‐ ($0.01)
	($0.02) ($0.06)

See accompanying notes to the consolidated financial statements

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GABY INC.

Consolidated Statements of Changes in Shareholders’ Equity (Deficiency)

In Canadian dollars Note Share issuance obligation	Share capital Contributed surplus Deficit Accumulated other comprehensive income(loss) Total
Balance as at December 31, 2019 ‐	43,068,525 5,373,688 (41,943,032) (548,094) 5,951,087
Net and comprehensive loss before reclassification ‐	‐ ‐ (13,994,888) 229,825 (13,765,063)
Reclassification of comprehensive loss ‐	‐ ‐ 4,274 (4,274) ‐
Issuance of shares aspayment for debts ‐	1,762,889 ‐ ‐ ‐ 1,762,889
Issuance of subscription shares ‐	250,000 ‐ ‐ ‐ 250,000
Equityissuance costs ‐	(6,719) ‐ ‐ ‐ (6,719)
Shares for services agreements 36,187	‐ ‐ ‐ ‐ 36,187
Subscriptions received in advance 83,760	‐ ‐ ‐ ‐ 83,760
Stock option and RSU expense, net ‐	‐ 359,315 ‐ ‐ 359,315
Other share‐based payments ‐	‐ (11,295) ‐ ‐ (11,295)
Balance as at December 31, 2020 119,947	45,074,695 5,721,708 (55,933,646) (322,543) (5,339,839)
Net and comprehensive loss ‐	‐ ‐ (12,247,087) 261,179 (11,985,908)
Issuance of Units 20 (36,187)	3,933,539 698,483 ‐ ‐ 4,595,835
Equityissuance costs 20 ‐	(990,608) 319,703 ‐ ‐ (670,905)
Shares for services agreements 19 ‐	471,655 ‐ ‐ ‐ 471,655
Vested RSUs issued as shares 19 ‐	188,198 (188,198) ‐ ‐ ‐
Equityissued to extinguish debts 20 ‐	735,223 8,000 ‐ ‐ 743,223
Subscription receipts issued 20 8,562,696	‐ ‐ ‐ ‐ 8,562,696
Spin off of subscription receipts 20 (8,646,456)	7,435,952 1,210,504 ‐ ‐ ‐
Share consideration ‐ business acquisition 3 ‐	6,789,474 ‐ ‐ ‐ 6,789,474
Stock option expense,net of forfeitures 19 ‐	‐ 75,834 ‐ ‐ 75,834
RSU expense 19 ‐	‐ 645,743 ‐ ‐ 645,743
Balance as at December 31, 2021 ‐	63,638,128 8,491,777 (68,180,733) (61,364) 3,887,808

See accompanying notes to the consolidated financial statements

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GABY INC.

Consolidated Statements of Cash Flows

In Canadian dollars Note	Year Ended December 31
	2021 2020
OPERATING ACTIVITIES Net loss Adjustments to arrive at cash flow from operations: Deferred income tax recovery Depreciation 6 Amortization of intangible assets 7 Impairment losses 7 Interest expense Share‐based payments 19 Unrealized foreign exchange loss Other adjustments 28	(12,247,087) (13,990,614) (236,191) (314,465) 980,970 462,930 805,646 ‐ 2,374,035 4,694,088 3,340,790 551,343 1,551,236 759,998 191,517 132,657 (151,617) (543,501)
Cash used in operating activities before the following: Net change in non‐cash working capital related to operations29	(3,390,701) (8,247,564) 3,506,324 6,544,788
Cashprovided by (used in) operating activities 26	115,623 (1,702,776)
INVESTING ACTIVITIES Purchase of property and equipment 6 Proceeds from sale of property and equipment Net cash outflow ‐ business acquisition 3 Deposits refunded (paid)	(40,221) (6,565) 136,058 109,895 (2,100,050) ‐ 1,881 (1,747)
Cashprovided by (used in) investing activities 26	(2,002,332) 101,583
FINANCING ACTIVITIES Proceeds of promissory notes Proceeds on long‐term debt 17 Advances and repayments from (to) related parties, net 11 Repayment of short‐term notes payable Repayment of long‐term debt Repayment of lease liabilities Issuance of common shares 20 Issuance of subscription receipts 20 Issuance of Units 20 Equity issuance costs 20 Cash from subscriptions received in advance Restricted cash Interest paid	‐ 905,788 ‐ 376,091 788 39,474 (68,055) ‐ (613,208) (85,840) (361,490) (163,456) ‐ 250,000 8,646,456 ‐ 922,868 ‐ (562,208) (6,719) ‐ 83,760 ‐ (83,760) (2,145,648) (321,849)
Cashprovided by financing activities 26	5,819,503 993,489
Foreign currency translation adjustment	31,899 11,561
Net change in cash Cash,beginningofyear	3,964,693 (596,143) 102,808 698,951
Cash, end ofyear	4,067,501 102,808

See accompanying notes to the consolidated financial statements, including Notes 28, 29 and 30

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GABY INC.

Notes to the Consolidated Financial Statements December 31, 2021 and 2020

In Canadian dollars, unless otherwise stated

NATURE OF BUSINESS

GABY Inc. (“GABY” or "the Corporation") is incorporated in Canada under the Business Corporations Act of Alberta. The Corporation’s registered office is 200, 209 – 8th Avenue SW, Calgary, Alberta T2P 1B8, Canada and it trades on the Canadian Securities Exchange (“CSE”) under the symbol GABY and on the OTCQB under the symbol GABLF. The Corporation has a retail focus and is the owner of the Mankind dispensary in San Diego, California. GABY packages and/or markets, for its own proprietary brands as well as for third parties, a variety of cannabis products including: flower, concentrates, pre‐rolls, edibles, topicals, tinctures, and other products derived from or infused with cannabis or hemp. As of the end of March 2020, GABY’s business is focused in the United States of America (“USA”). Prior to March 2020, GABY also produced and marketed health food products in the USA and Canada (see Note 26 in respect of the shuttering of traditional food operations) and prior to April 1, 2019, this comprised substantially all of the Corporation’s business activity. Thereafter, through acquisitions, the Corporation now produces, markets, and sells at retail, cannabis‐related consumer packaged goods (“CPG”) in California.

1) GOING CONCERN

These consolidated financial statements for the years ended December 31, 2021 and 2020 (“Financial Statements”) have been prepared using International Financial Reporting Standards (“IFRS”) applicable to a going concern, which contemplates the realization of assets and settlement of liabilities in the normal course of business as they come due.

During 2021, the Corporation continued to implement its strategy of raising equity financing, growing its portfolio of business holdings via acquisition and providing working capital to fund operations as needed.

Substantially all of the Corporation’s operations are in the USA cannabis sector, which has been legalized by certain USA states but remains federally illegal and is subject to legislative uncertainty.

For the year ended December 31, 2021, the Corporation had a net loss of $12.2 million (including non‐cash losses) and minimal cash flow from operations. As at December 31, 2021 the working capital deficit was $7.3 million. Management is continuing to address the need to increase revenue and control costs, which included the shuttering of an unprofitable subsidiary, Sonoma Pacific Distribution. Management has in the past obtained financing by accessing the capital markets as described in Note 20 to the Financial Statements. Management believes these activities, in conjunction with prudent management of working capital, will enable GABY to support operations over the next year and beyond.

Historically the Corporation has had operating losses, negative cash flows from operations and working capital deficiencies. While the Corporation expects to be able to reduce these losses by prudent management of its operations, whether, and when, the Corporation can attain profitability and positive cash flows from operations is uncertain. These uncertainties cast significant doubt upon the Corporation’s ability to continue as a going concern.

As such, the Corporation may need to raise additional capital to continue to pursue its growth strategy and to fund its operations. While the Corporation has been successful in raising capital in the past, there can be no assurance that it will be able to do so in the future. The ability to raise capital may be adversely impacted by uncertain market conditions.

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GABY INC.

Notes to the Consolidated Financial Statements December 31, 2021 and 2020

In Canadian dollars, unless otherwise stated

Should the Corporation be unable to continue as a going concern, it may be unable to realize the carrying value of its assets and to meet its liabilities as they come due. These Financial Statements do not reflect adjustments to the carrying values of assets and liabilities and the reported expenses and balance sheet classifications that would be necessary if the Corporation were unable to realize its assets and settle its liabilities as a going concern in the normal course of operation. These adjustments could be material.

2) BASIS OF PRESENTATION AND ACCOUNTING POLICIES

Statement of compliance

These Financial Statements have been prepared in accordance with IFRS as issued by the International Accounting Standards Board (“IASB”) and Interpretations of the International Financial Reporting Interpretations Committee.

These Financial Statements were approved and authorized for issue by the audit committee of the Corporation’s board of directors (“Board”) on April 26, 2022.

Basis of presentation

These Financial Statements have been prepared under the historical cost convention, except for financial instruments classified as financial instruments at fair value through profit and loss, which are stated at their fair value, and are expressed in Canadian dollars unless otherwise indicated. Other measurement bases used are outlined below and in the applicable notes.

Certain comparative figures have been reclassified to conform to the current year’s presentation.

Basis of consolidation

The Financial Statements include the accounts of the Corporation and those of its subsidiaries, which are entities over which the Corporation has control. Control exists when the Corporation has power over an investee, is exposed to or has rights to variable returns from its involvement and has the ability to affect those returns. Intercompany transactions and balances are eliminated on consolidation. The results of operation of subsidiaries acquired during the period are included from their respective dates of acquisition, being the time at which the Corporation obtains control. The Corporation assesses control through share ownership and voting rights. The following companies have been consolidated in the Financial Statements:

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GABY INC.

Notes to the Consolidated Financial Statements December 31, 2021 and 2020

In Canadian dollars, unless otherwise stated

	Registered	Holding	Functional Currency
Gaby Inc.	Alberta, Canada	Parent Company	Canadian dollar
Gabriella’s Kitchen LLC	Delaware, USA	100%	United States dollar (“USD”)
Sonoma Pacific Distribution Inc. (“Sonoma Pac”)1	California, USA	100%	United States dollar (“USD”)
KJM Data and Research, LLC (“KJM”)2	California, USA	100%	United States dollar (“USD”)
GK Brands Inc.	California, USA	100%	United States dollar (“USD”)
2RISE Naturals Inc.	Arizona, USA	100%	United States dollar (“USD”)
Raw Chocolate Alchemy Inc.	Arizona, USA	100%	United States dollar (“USD”)
Miramar Professional Services (“MPS”)	California, USA	100%	United States dollar (“USD”)
Wild West Industries, Inc(“WWI”)	California, USA	100%	United States dollar(“USD”)

1Sonoma Pac was dissolved on March 31, 2022 (see Note 36) 2. KJM was dissolved on September 24, 2020.

Intercompany balances and transactions, and any unrealized gains or losses arising from intercompany transactions, are eliminated in preparing the Financial Statements.

Changes in accounting policies including initial adoption

The Corporation adopted or expanded accounting policies in 2021 relating to deferred revenue and income taxes as a result of them becoming applicable upon the acquisition of MPS and WWI, which are included in the policies below.

Business combinations

Business combinations are accounted for using the acquisition method when control is transferred to the Corporation. The consideration transferred in the acquisition is generally measured at fair value, along with identifiable net assets acquired. Any goodwill that arises is tested annually for impairment. Any gain on a bargain purchase is recognized in profit or loss immediately. Transaction costs are expensed as incurred.

The consideration transferred does not include amounts related to the settlements of pre‐existing relationships; such amounts are generally included in profit or loss.

Any contingent consideration is measured at fair value at the date of acquisition. If an obligation to pay contingent consideration that meets the definition of a financial instrument is classified as equity, then it is not remeasured, and settlement is accounted for within equity. Otherwise, other contingent consideration is remeasured at fair value at each reporting date and subsequent changes in the fair value of the contingent consideration are recognized in profit or loss.

Translation of foreign currencies

a. Transactions and balances

The accounts of the Corporation are presented in Canadian dollars. Transactions in foreign currencies are translated at the actual rates of exchange on the date the transaction occurred. Monetary assets and liabilities denominated in foreign currencies at the reporting date are translated to the Canadian dollar at the exchange rate at that date. Revenue and expense transactions are translated using the actual rate on the date of the transaction. Foreign exchange differences

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GABY INC.

Notes to the Consolidated Financial Statements December 31, 2021 and 2020

In Canadian dollars, unless otherwise stated

arising on translation are recognized in profit or loss. Non‐monetary assets and liabilities that are measured at the historical cost, and expenses related to them, are translated using the historical exchange rate at the date of the transaction.

b. Subsidiaries

Items included in the Financial Statements of each entity in the Corporation are measured using the currency of the primary economic environment in which the entity operates (the “functional currency”) and has been determined for each entity within the Corporation.

Where foreign operations are carried out as an extension of the reporting entity, rather than being carried out with a significant degree of autonomy, and the foreign entity does not generate revenue, the functional currency of the foreign subsidiary is determined to be the Canadian dollar. Accordingly, the translation of the subsidiary from foreign currencies to Canadian dollars is accounted for as a translation to the functional currency as described above.

Where foreign operations are carried out with a significant degree of autonomy and generate revenue, the functional currency is different than the presentation currency and its results and financial position are translated into Canadian dollars as follows:

• assets and liabilities for each statement of financial position presented are translated at the closing rate at the date of that statement of financial position

• income and expenses for each statement of income or loss and statement of comprehensive income or loss are translated at average exchange rates (unless this is not a reasonable approximation of the cumulative effect of the rates prevailing on the transaction dates, in which case income and expenses are translated at the dates of the transactions), and

• all resulting exchange differences are recognized in other comprehensive income or loss.

On consolidation, exchange differences arising from the translation of any net investment in foreign entities, and of borrowings and other financial instruments designated as hedges of such investments, are recognized in other comprehensive income or loss. When a foreign operation is sold or any borrowings forming part of the net investment are repaid, the associated exchange differences are reclassified to profit or loss, as part of the gain or loss on sale.

Goodwill and fair value adjustments arising on the acquisition of a foreign operation are treated as assets and liabilities of the foreign operation and translated at the closing rate as described above.

Cash

Cash consists of cash on hand and balances with financial institutions. Cash in bank deposit accounts, at times, exceeds federally insured limits. Cash that is unavailable for use by the Corporation as at the date of the statement of financial position is presented separately as Restricted cash.

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GABY INC.

Notes to the Consolidated Financial Statements December 31, 2021 and 2020

In Canadian dollars, unless otherwise stated

Inventories

Inventories are measured at the lower of cost and net realizable value. The cost of manufactured inventories is based on the first‐in first‐out method. The cost of procured finished goods and unprocessed raw material inventory is based on weighted average cost. Net realizable value is the estimated selling price in the ordinary course of business, less the estimated costs of completion and selling expenses. The cost of inventories includes expenditures incurred in acquiring the inventories, production or conversion costs, and other costs incurred in bringing the inventories to their existing location and condition. In the case of manufactured inventories, cost includes an appropriate share of production overheads based on normal operating capacity.

Property and equipment

Property and equipment are stated at cost less accumulated depreciation and impairment losses. Cost includes expenditures that are directly attributable to the acquisition of the asset or its development when those costs are necessarily incurred for the asset to function in the manner intended by management. When parts of an item of property and equipment have different useful lives, they are accounted for as separate items of property and equipment.

All assets having limited useful lives are depreciated using the straight‐line method over their estimated useful lives. Internally constructed assets are depreciated from the time an asset is capable of operating in the manner intended by management. No depreciation is recorded on property and equipment that is not available for use.

Subsequent costs are included in the asset's carrying amount when it is probable that future economic benefits associated with the asset will flow to the Corporation, and the costs can be measured reliably. This would include costs related to the refurbishment or replacement of major components of the asset, when the refurbishment results in a significant extension in the physical life of the component, and in which case, the carrying amount of the replaced part is derecognized. The costs of the day‐to‐day maintenance of property and equipment are expensed as incurred in profit or loss.

Any gain or loss on de‐recognition of an asset is determined by comparing the proceeds from disposal with the carrying amount of property and equipment and is recognized on a net basis in profit or loss.

The residual value, useful life and depreciation method applied to each class of assets are reassessed at each reporting date. The methods of depreciation and depreciation rates applicable for each class of asset are as follows:

Computer equipment	2‐3 years Straight‐line
Office and other equipment	4‐5 years Straight‐line
Furniture and fixtures	5 years Straight‐line
Production equipment	5 years Straight‐line
Vehicles	3‐5 years Straight‐line

Depreciation of leasehold improvements is recorded over the remaining term of the lease plus the first renewal option.

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GABY INC.

Notes to the Consolidated Financial Statements December 31, 2021 and 2020

In Canadian dollars, unless otherwise stated

Intangible assets

Intangible assets acquired separately are measured at cost on initial recognition. Intangible assets acquired in a business combination are recorded at fair value on the date of acquisition. Subsequent to initial recognition, intangible assets are carried at cost less accumulated amortization and accumulated impairment losses, if applicable.

The useful lives of intangible assets are assessed to be either finite or indefinite. Intangible assets with finite lives are amortized over their useful economic life and assessed for impairment whenever there is an indication that the intangible asset may be impaired. The amortization period and the amortization method for an intangible asset with a finite useful life are reviewed at least at each financial year‐end. The methods of amortization and amortization rates applicable for each class of asset are as follows:

Cannabis licenses 10 years Straight‐line

Intangible assets with indefinite useful lives are not amortized and are tested for impairment annually at the cash‐ generating unit (“CGU”) level. The useful life of an intangible asset with an indefinite life is reviewed annually to determine whether indefinite life assessment continues to be supportable.

In previous years, the life of cannabis licenses was determined to be indefinite. All of the intangible assets with useful lives assessed as indefinite have been fully impaired and disposed by December 31, 2021. In 2021, the licenses acquired were determined to be of finite life given the uncertainty in the industry and regulatory environment. Management’s estimate of the useful life of cannabis licenses acquired in 2021 is ten years.

Goodwill

Goodwill represents the excess of the purchase price paid for the acquisition of subsidiaries over the fair value of the net tangible and intangible assets acquired. Following initial recognition, goodwill is measured at cost less any accumulated impairment losses. Goodwill is allocated to CGU or groups of CGUs which are expected to benefit from the synergies of the combination. Goodwill is tested annually for impairment.

Leases

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

At inception or on reassessment of a contract that contains a lease component, the Corporation allocates the consideration in the contract to each lease component on the basis of their relative stand‐alone prices. However, for the leases of production equipment and land and buildings in which it is a lessee, the Corporation has elected not to separate non‐lease components and account for the lease and non‐lease components as a single lease component.

The Corporation recognizes a right‐of‐use asset and a lease liability at the lease commencement date. The right‐of‐use asset is initially measured at cost, which comprises the initial amount of the lease liability adjusted for any lease payments

15 | P a g e G A B Y I n c .

GABY INC.

Notes to the Consolidated Financial Statements December 31, 2021 and 2020

In Canadian dollars, unless otherwise stated

made at or before the commencement date, plus any initial direct costs incurred and an estimate of costs to dismantle and remove the underlying asset or to restore the underlying asset or the site on which it is located, less any lease incentive received.

The right‐of‐use asset is subsequently depreciated using the straight‐line method from the commencement date to the earlier of the end of the useful life of the right‐of‐use asset or the end of the lease term unless it is reasonably certain that the Corporation will purchase or receive title to the asset at or before the end of the lease term, in which case the asset is depreciated over its useful life regardless of the lease term. The estimated useful lives of right‐of use assets are determined on the same basis as those of property and equipment. In addition, the right‐of‐use asset is periodically reduced by impairment losses, if any, and adjusted for certain remeasurements of the lease liability.

The lease liability is initially measured at the present value of the lease payments that are not paid at the commencement date, discounted using the interest rate implicit in the lease or, if that rate cannot be readily determined, the Corporation’s incremental borrowing rate.

The lease liability is measured at amortized cost using the effective interest method. It is remeasured when there is a change in future lease payments arising from a change in an index or rate, if there is a change in the Corporation’s estimate of the amount expected to be payable under a residual value guarantee, or if the Corporation changes its assessment of whether it will exercise a purchase, extension or termination option. When the lease liability is remeasured in this way, a corresponding adjustment is made to the carrying amount of the right‐of‐use assets or is recorded in profit or loss if the carrying amount of the right‐of‐use assets has been reduced to nil.

The Corporation presents right‐of‐use assets that do not meet the definition of investment property in property and equipment and lease liabilities separately in the statement of financial position.

The Corporation has elected not to recognize right‐of‐use assets and lease liabilities for short‐term leases of assets that have a lease term of 12 months or less and leases of low value assets including information technology equipment. The Corporation recognizes the lease payments associated with these leases as an expense on a straight‐line basis over the lease term.

Impairment

a. Financial assets at amortized cost

An ‘expected credit loss’ impairment model applies, which requires a loss allowance to be recognized based on expected credit losses. The estimated present value of future cash flows associated with the asset is determined and an impairment loss is recognized for the difference between this amount and the carrying amount as follows: the carrying amount of the asset is reduced to estimated present value of the future cash flows associated with the asset, discounted at the financial asset’s original effective interest rate, either directly or through the use of an allowance account. The resulting loss is recognized in profit or loss for the period.

16 | P a g e G A B Y I n c .

GABY INC.

Notes to the Consolidated Financial Statements December 31, 2021 and 2020

In Canadian dollars, unless otherwise stated

In a subsequent period, if the amount of the impairment loss related to financial assets measured at amortized cost decreases, the previously‐recognized impairment loss is reversed through profit or loss to the extent that the carrying amount of the investment at the date the impairment is reversed does not exceed what the amortized cost would have been had the impairment not been recognized.

b. Non‐financial assets

The carrying amounts of the Corporation’s non‐financial assets, other than inventories and deferred tax assets, are reviewed at each reporting date to determine whether there is any indication of impairment. If such an indication exists, the recoverable amount is estimated.

For the purpose of impairment testing, assets are grouped together into the smallest group of assets that generates cash inflows from continuing use that are largely independent of cash inflows from other assets or groups of assets or CGU. The recoverable amount of an asset or a CGU is the greater of its value in use and its fair value less cost of disposal (“FVLCD”). In assessing value in use, the estimated future cash flows are discounted to their present value using a pre‐tax discount rate that reflects current market assessments of the time value of money and the risks specific to the asset or the CGU. Impairment losses recognized in prior years are reviewed by the Corporation at each reporting date for any indications that the loss has decreased or no longer exists. An impairment loss is reversed if there has been a change in the estimates used to determine the recoverable amount. An asset’s carrying amount, increased through the reversal of an impairment loss, must not exceed the carrying amount that would have been determined, net of depreciation or amortization, if no impairment loss had been recognized.

Financial Instruments

Financial assets and liabilities are recognized when the Corporation becomes a party to the contractual provisions of the instrument. Financial assets are derecognized when the rights to receive cash flows from the assets have expired or have been transferred and the Corporation has transferred substantially all risks and rewards of ownership.

Financial assets and liabilities are offset and the net amount reported in the statement of financial position when there is a legally enforceable right to offset the recognized amounts and there is an intention to settle on a net basis, or realize the asset and settle the liability simultaneously.

The Corporation classifies its financial instruments in the following categories: at fair value through profit and loss (“FVTPL”), at fair value through other comprehensive income (loss) (“FVTOCI”), or at amortized cost. The Corporation determines the classification of financial assets at initial recognition. The classification of debt instruments is driven by the Corporation’s business model for managing the financial assets and their contractual cash flow characteristics. Equity instruments that are held for trading are classified as FVTPL. For other equity instruments, on the date of acquisition the Corporation can make an irrevocable election (on an instrument‐by‐instrument basis) to designate them as at FVTOCI. Financial liabilities are measured at amortized cost, unless they are required to be measured at FVTPL (such as instruments held for trading or derivatives) or the Corporation has opted to measure them at FVTPL.

17 | P a g e G A B Y I n c .

GABY INC.

Notes to the Consolidated Financial Statements December 31, 2021 and 2020

In Canadian dollars, unless otherwise stated

The Corporation classifies the fair value of financial instruments according to the following hierarchy based on the reliability of observable inputs used to value the instrument.

Level 1 – Quoted prices are available in active markets for identical assets or liabilities as of the reporting date. Active markets are those in which transactions occur in sufficient frequency and volume to provide pricing information on an ongoing basis.

Level 2 – Pricing inputs are other than quoted prices in active markets included in Level 1. Prices in Level 2 are either directly or indirectly observable as of the reporting date. Level 2 valuations are based on inputs, including quoted forward prices for commodities, time value and volatility factors, which can be substantially observed or corroborated in the marketplace.

Level 3 – Valuations in this level are those with inputs for the asset or liability that are not based on observable market data.

The Corporation’s financial instruments include cash, restricted cash, accounts receivable, other current asset, bank indebtedness, accounts payable and accrued liabilities, short‐term notes payable, promissory notes payable, convertible debentures, lease liabilities, and long‐term debt. The carrying value of current financial instruments approximate their fair value due to their immediate or short term to maturity, or their ability to be liquidated at comparable amounts. The fair value of the Corporation’s non‐current financial instruments is approximated by their carrying values as the contractual interest rates are comparable to current market interest rates.

The Corporation has made the following classifications:

a. Receivables

Receivables are non‐derivative financial assets with fixed or determinable payments that are not quoted in an active market. The Corporation’s receivables are comprised of trade and other receivables and are included in current assets due to their short‐term nature. Receivables are initially recognized at the amount expected to be received less, when material, a discount to reduce the receivables to fair value. Subsequently, receivables are measured at amortized cost using the effective interest method less any provision for impairment.

b. Financial liabilities at amortized cost

Financial liabilities at amortized cost include bank indebtedness, trade accounts payable and accrued liabilities, short‐term notes payable, promissory notes payable, lease liabilities, and long‐term debt. Trade payables are initially recognized at the amount required to be paid less, when material, a discount to reduce the payables to fair value. Subsequently, trade payables are measured at amortized cost using the effective interest method. Other financial liabilities at amortized cost are initially recognized at fair value net of transaction costs that are directly attributable to the financial liability, and subsequently at amortized cost using the effective interest method.

18 | P a g e G A B Y I n c .

GABY INC.

Notes to the Consolidated Financial Statements December 31, 2021 and 2020

In Canadian dollars, unless otherwise stated

c. Compound financial instruments

Convertible debentures, where applicable, are separated into their liability and equity components using the effective interest rate method. The fair value of the liability component at the time of issue was determined based on an estimated interest rate of the debentures without the conversion feature. The fair value of the equity components is determined as the difference between the proceeds received on the issuance of convertible debentures and accompanying equity components and the fair value of the liability component. The total fair value of the equity components is apportioned to the individual equity components based on the relative fair values thereof on the date of issuance as determined using the Black‐Scholes option pricing model. The liability component, net of transaction costs that are directly attributable to the acquisition or issue of the financial liability, is subsequently measured at amortized cost using the effective interest method.

Interest related to the financial liability is recognized in profit or loss. On conversion, the financial liability and amount attributable to the conversion feature previously recognized as contributed surplus is reclassified to equity and no gain or loss is recognized.

d. Warrants

Warrants that have been issued in combination with common shares or convertible instruments are evaluated under IAS 32, Financial Instruments: Presentation . Equity classification applies to instruments where a fixed amount of cash (or liability) denominated in the issuer’s functional currency is exchanged for a fixed number of shares (often referred to as the “fixed for fixed” criteria). Warrants that are classified as equity are valued under the Black Scholes Model. If a warrant is exercised, the value of the warrant is included in share capital. If a warrant expires, the value of the warrant is included in contributed surplus.

Accounting for government assistance

The Company applied IAS 20 – Accounting for Government Grants and Disclosure of Government Assistance in relation to receiving the Canada and US government assistance loans and related advances in 2020. Government assistance is recognized only when there is reasonable assurance that (a) the Company will comply with any conditions attached to the grant and (b) the grant will be received. Government assistance income is recognized in profit or loss on a systematic basis over the periods in which the Company recognizes the expense for the related costs for which the grants and/or subsidies are intended to compensate, if applicable. If the assistance does not relate to any specific expenditures or asset purchases, the income is recognized in full once the recognition criteria are met.

Income taxes

Income tax comprises current and deferred tax. Income tax is recognized in profit or loss except to the extent that it relates to items recognized directly in equity, in which case the income tax is also recognized directly in equity.

Current tax is the expected tax payable on the taxable income for the year, using tax rates enacted, or substantively enacted, at the end of the reporting period, and any adjustment to tax payable in respect of previous years or uncertain tax positions, as discussed below.

19 | P a g e G A B Y I n c .

GABY INC.

Notes to the Consolidated Financial Statements December 31, 2021 and 2020

In Canadian dollars, unless otherwise stated

In general, deferred tax is recognized in respect of temporary differences arising between the tax bases of assets and liabilities and their carrying amounts in the financial statements. Deferred income tax is determined on a non‐discounted basis using tax rate and laws that have been enacted or substantively enacted at the statement of financial statement date and are expected to apply when the deferred tax asset or liability is settled. Deferred tax assets are recognized to the extent that it is probable that the assets can be recovered. Deferred income tax assets and liabilities are presented as non‐ current.

As the Corporation operates in the cannabis industry, it is subject to the limits of IRC Section 280E under which the Corporation is only allowed to deduct expenses directly related to the cost of products or services sold.

The Corporation applies IFRIC 23, Uncertainty over income tax treatments , which is reflected in the following accounting Policy:

The Corporation recognizes uncertain income tax positions using a probability‐weighted approach to determine the amount that is more‐likely‐than‐not to be sustained upon examination by the relevant taxing authority. An uncertain income tax position will not be recognized if it has less than a 50% likelihood of being sustained. Recognition or measurement is reflected in the period in which the likelihood changes. Any interest and penalties related to unrecognized tax liabilities are presented within income tax expense.

Loss per common share

Basic loss per common share is calculated by dividing the net loss by the weighted average number of common shares outstanding during the period. Diluted loss per common share is calculated by dividing the applicable net loss by the sum of the weighted average number of common shares outstanding and all additional common shares that would have been outstanding if potentially dilutive common shares had been issued during the period. If the Corporation incurs a net loss during a reporting period, the calculation of fully diluted loss per share will not include potentially dilutive equity instruments which would reduce the net loss per share.

Revenue recognition

Revenue from the sale of products is recognized when the risks and rewards of the products have been substantially transferred to the customer (usually on delivery of the goods), which is the Corporation's sole performance obligation. The Corporation experiences few product returns and, accordingly, does not record a provision for estimated returns.

Marketing programs provided to customers and operators, including volume rebates, cooperative advertising and other trade marketing programs, are all customer‐specific programs to promote the Corporation’s products. Consequently, sales are recorded net of these estimated marketing costs at the time of sale. All other non‐customer‐specific marketing costs (general advertising, etc.) are expensed as incurred as selling, general and administrative expenses.

a. Deferred revenue

The Corporation records deferred revenue for rewards points earned by customers at time of product sales and recognizes

20 | P a g e G A B Y I n c .

GABY INC.

Notes to the Consolidated Financial Statements December 31, 2021 and 2020

In Canadian dollars, unless otherwise stated

the amounts as revenue when those points are redeemed. Rewards points expire after one year and are recognized as revenue upon expiry. The Corporation also includes outstanding gift cards in deferred revenue.

Share‐based payments

The Corporation has a share option plan which permits the Board to grant options to acquire common shares of the Corporation at an exercise price that is equal to or greater than the market price of the common shares on the date of the grant. The Corporation also has a restricted share unit (“RSU”) plan which permits the Board to grant RSUs which, upon vesting, grant to the holder the right to receive either shares or cash (based on the value of those shares) at the discretion of the Board. Share‐based payments to employees, executives and non‐employee directors are measured at the fair value of the instruments issued and amortized as compensation expense over the vesting periods with a corresponding increase to contributed surplus.

Share‐based payments to non‐employees are measured at the fair value of goods or services received or the fair value of the equity instruments issued, if it is determined that fair value of the goods or services cannot be reliably measured, and are recorded at the date the goods or services are received. The corresponding amount is recorded to:

Contributed surplus ‐ in the case of stock options and RSUs;

Share issuance obligation ‐ in the case of an obligation to issue a set amount of shares in the future; and Share capital ‐ where common shares are awarded directly.

The fair value of share options is determined using the Black‐Scholes option pricing model. The number of shares and options expected to vest is reviewed and adjusted at the end of each reporting period such that the amount recognized for services received as consideration for the equity instruments granted shall be based on the number of equity instruments that eventually vest.

Consideration paid on the exercise of options is credited to share capital and the associated amount in contributed surplus is reclassified to share capital. When shares are issued pursuant to the share issuance obligations, the corresponding amount is reclassified from share issuance obligation to share capital.

For equity instruments issued in advance of the services being provided, the share capital would be recognized when issued, with a corresponding prepaid expense asset for the portion of services yet to be received.

Critical accounting estimates, judgments and measurement uncertainty

The preparation of these Financial Statements requires management of the Corporation to make judgments in applying accounting policies. Judgments that have the most significant effect on the amounts recognized in the Financial Statements are described below. Management also makes assumptions and critical estimates. Critical estimates are those which are most subject to uncertainty and have the most significant risk of resulting in a material change to the carrying amounts of assets and liabilities within the next year. Judgments, assumptions, and estimates are based on historical experience, business trends, and all available information that management considers relevant at the time of the preparation of the Financial Statements. However, future events and their effects cannot be anticipated with certainty;

21 | P a g e G A B Y I n c .

GABY INC.

Notes to the Consolidated Financial Statements December 31, 2021 and 2020

In Canadian dollars, unless otherwise stated

accordingly, as confirming events occur, actual results could differ from those estimates and such differences could be material.

The following discusses the most significant accounting judgments and estimates that the Corporation has made in the preparation of these Financial Statements. The sensitivity analysis below should be used with caution as the changes are hypothetical and the impact of changes in each key assumption may not be linear.

a. Going concern

The assessment of the Corporation's ability to continue as a going concern involves judgment regarding future funding available for its operations and working capital requirements as discussed in Note 1.

b. Business combinations

In a business combination, all identifiable assets, liabilities, and contingent liabilities acquired are recorded at their fair values. One of the most significant estimates relates to the determination of the fair value of these assets and liabilities.

For any intangible asset identified, depending on the type of intangible asset and the complexity of determining its fair value, an independent valuation expert or management may develop the fair value, using appropriate valuation techniques, which are generally based on a forecast of the total expected future net cash flows. The evaluations are linked closely to the assumptions made by management regarding the future performance of the assets concerned and any changes in the discount rate applied. Certain fair values may be estimated at the acquisition date pending confirmation or completion of the valuation process. Where provisional values are used in accounting for a business combination, they may be adjusted retrospectively in subsequent periods. However, the measurement period will last for one year from the acquisition date.

c. Allowance for doubtful accounts

GABY applies the IFRS 9 simplified approach to measuring expected credit losses which uses a lifetime expected loss allowance for all trade receivables. To measure the expected credit losses, trade receivables have been grouped based on shared credit risk characteristics and the days past due. The carrying amount of the receivable is reduced through use of an allowance account, and impaired receivables are derecognized when they are assessed as uncollectible. Accordingly, management establishes an allowance for estimated losses arising from non‐payment and other sales adjustments (such as merchant charge backs), taking into consideration customer creditworthiness, current economic trends and past experience. If future collections differ from estimates, future earnings would be affected. See Note 4.

d. Share‐based payments

The Black‐Scholes option pricing model is used to determine the fair value of stock options and warrants. In estimating fair value, management is required to make certain assumptions and estimates such as the expected life of options, volatility of the Corporation’s future share price, risk free rate, future dividend yields and estimated forfeitures at the initial grant date. Changes in assumptions used to estimate fair value could result in materially different results.

22 | P a g e G A B Y I n c .

GABY INC.

Notes to the Consolidated Financial Statements December 31, 2021 and 2020

In Canadian dollars, unless otherwise stated

e. Fair value of financial instruments

The individual fair values attributed to the different components of a financing transaction, notably convertible debentures, were determined using valuation techniques. The Corporation uses judgment to select the methods used to make certain assumptions and in performing the fair value calculations in order to determine: (a) the values attributed to each component of a transaction at the time of their issuance; (b) the fair value measurements for certain instruments that require subsequent measurement at fair value on a recurring basis; and (c) for disclosing the fair value of financial instruments subsequently carried at amortized cost. These valuation estimates could be significantly different because of the use of judgment and the inherent uncertainty in estimating the fair value of these instruments that are not quoted in an active market.

f. Income taxes

The estimation of income taxes includes evaluating the recoverability of deferred tax assets based on an assessment of the Corporation’s ability to utilize the underlying future tax deductions against future taxable income before they expire. The Corporation’s assessment is based upon existing tax laws and estimates of future taxable income. If the assessment of the Corporation’s ability to utilize the underlying future tax deductions changes, the Corporation would be required to recognize more or fewer of the tax deductions as assets, which would decrease or increase the income tax expense in the period in which this is determined. See Note 25.

g. Inventories

Management makes estimates of the future customer demand for products when establishing appropriate provisions for inventory. In making these estimates, management considers the product life of inventory and the profitability of recent sales of inventory. In many cases, products sold by GABY turn quickly and inventory on‐hand values are low, thus reducing the risk of inventory obsolescence. Management ensures that systems are in place to highlight and properly value inventory that may be approaching obsolescence. To the extent that actual losses on inventory differ from those estimated, inventory, net loss, and comprehensive loss will be affected in future periods.

h. Property and equipment

Components of an item of property and equipment may have different useful lives. Management makes significant estimates and judgments when determining asset depreciation rates and useful lives, which require taking into account company‐specific factors, such as past experience and expected use. The Corporation monitors and reviews asset depreciation rates and useful lives at least once per year and revises them if they are different from previous estimates. The Corporation recognizes the effect of changes in estimates in net income prospectively. Changes to estimates could be caused by a variety of factors, including changes to the physical life of the assets. A change in any of the estimates would result in a change in the amount of depreciation and, as a result, a charge to net loss recorded in the period in which the change occurs, with a similar change in the carrying value of the asset in the statement of financial position.

Furthermore, property and equipment are reviewed for indicators of impairment at each reporting date. Where impairment indicators are identified, the Corporation uses the FVLCD approach to determine the recoverable amount of

23 | P a g e G A B Y I n c .

GABY INC.

Notes to the Consolidated Financial Statements December 31, 2021 and 2020

In Canadian dollars, unless otherwise stated

the assets included in property and equipment, which drives the conclusion of whether impairment exists, and if it does, the amount of impairment to record.

FVLCD is determined based on the best information available to reflect the amount that the entity could obtain from the disposal of the assets in an arm’s length transaction between knowledgeable, willing parties, after deducting costs to sell. This approach requires assumptions to be formulated about the overall physical condition of the assets and the costs involved to sell the equipment.

Management regularly evaluates these estimates and assumptions. Revisions to accounting estimates are recognized in the period in which the estimate is revised if the revision affects only that period or in the period of the revision and future periods if the revision affects both current and future periods.

i. Intangible assets and goodwill

Management uses estimates in determining the recoverable amount of intangible assets and goodwill. The determination of the recoverable amount for the purpose of impairment testing requires the use of significant estimates, such as:

• future cash flows;

• terminal growth rates; and

• discount rates.

Management regularly evaluates these estimates and assumptions. Revisions to accounting estimates are recognized in the period in which the estimate is revised if the revision affects only that period or in the period of the revision and future periods if the revision affects both current and future periods.

Judgment is also applied in choosing methods of amortizing intangible assets that management believes most accurately represent the consumption of those assets and are most representative of the economic substance of the intended use of the underlying assets. A change in the estimate would result in a change in the amount of amortization and, as a result, a charge to net loss recorded in the period in which the change occurs, with a similar change in the carrying value of the asset in the statement of financial position. See Note 7.

j. Lease accounting

The application of IFRS 16 Leases requires the Corporation to assess its significant judgments and certain key estimates when applying the standard as described herein. Critical judgments required in the application of IFRS 16 include the following:

• Determining whether it is reasonably certain that an extension, purchase or termination option will be exercised, on a lease‐by‐lease basis. The Corporation considers all facts and circumstances and examines whether there is an economic incentive or penalty affecting the decision to exercise an option.

Key sources of estimation uncertainty in the application of IFRS 16 include the following:

• Estimating the lease term. The Corporation determines the lease term as the non‐cancellable period of the lease at the commencement date, adjusted for any purchase, renewal or termination options it deems reasonably certain to exercise;

• 24 | P a g e G A B Y I n c .

GABY INC.

Notes to the Consolidated Financial Statements December 31, 2021 and 2020

In Canadian dollars, unless otherwise stated

• Determining the appropriate incremental borrowing rate specific to each leased asset. The Corporation establishes incremental borrowing rates used as discount factors in discounting payments reflecting the Corporation’s borrowing rate, duration of lease term and credit spread; and

• Assessing whether a right‐of‐use asset (“ROU asset”) is impaired if indicators are present.

Unanticipated changes in these judgments or estimates could affect the identification and determination of the fair value of lease liabilities and ROU assets at initial recognition, as well as the subsequent measurement of lease liabilities and ROU assets. Changes in the economic environment or changes in the cannabis and retail industry may impact management’s assessment of lease terms, and any changes in management’s estimate of lease terms may have a material impact on the Financial Statements. In addition, the Corporation’s assessed incremental borrowing rates are subject to change mainly due to macroeconomic changes in the environment and cannabis industry and the Corporation’s creditworthiness. These items could potentially result in changes to amounts reported in the Financial Statements.

k. Discontinued operations

A disposal group qualifies as a discontinued operation if it is a component of an entity for which operations and cash flows can be clearly distinguished from the rest of the Corporation, that either has been disposed of, or is classified as held for sale, and:

• represents a separate major line of business or geographical area of operations;

• is part of a single coordinated plan to dispose of a separate major line of business or geographical area of operations; or

• is a subsidiary acquired exclusively with a view to resale.

Management is required to make judgments about the points above in order to determine whether business components that have been discontinued or divested constitute a discontinued operation for financial reporting purposes. The decision based on those judgments could have a material impact on the presentation of the financial statements.

Classification as a discontinued operation occurs at the earlier of disposal or when the operation meets the criteria to be classified as held for sale. Discontinued operations are excluded from the results of continuing operations and are presented as a single amount in “Net loss from discontinued operations” in the consolidated statements of loss and comprehensive loss. When an operation is classified as a discontinued operation, the comparative consolidated statement of loss and comprehensive loss is re‐presented as if the operation had been discontinued from the beginning of the comparative year.

25 | P a g e G A B Y I n c .

GABY INC. Notes to the Consolidated Financial Statements December 31, 2021 and 2020 In Canadian dollars, unless otherwise stated

3) BUSINESS ACQUISITIONS

The Corporation’s 2021 acquisition activity is outlined below.

a) Description

Effective April 1, 2021, the Corporation acquired 100% of the issued and outstanding equity of MPS, a cannabis retailer, which owns 100% of the issued and outstanding equity of WWI, a cannabis manufacturing and distribution company (together, “Mankind”). Through the acquisition of Mankind, the Corporation has secured a Type 10 retail license (“Type 10 License”), a Type 6 manufacturing license (“Type 6 License”), and a Type 11 distribution license (“Type 11 License”) all issued by the Department of Cannabis Control in the state of California, and the retail and distribution facilities and related assets located in San Diego, California.

The Corporation has obtained a valuation of the underlying assets of Mankind including its property and equipment, intangibles (including the licenses) and goodwill, and Mankind’s final working capital balances. The acquisition‐date fair value of the total consideration is as follows:

	Note	USD CAD
Cash consideration Share consideration Debt consideration	b) b) b)	5,000,000 6,264,000 5,399,184 6,789,474 25,500,000 32,066,250
		35,899,184 45,119,724
Purchaseprice adjustment – net workingcapital	b)	(763,059) (959,547)
Total estimated consideration		35,136,125 44,160,177
The amounts recognized as of the acquisition date are as follows: Cash Accounts receivable – fair and gross value, estimate 100% recoverable Inventory Prepaid expenses and deposits Property and equipment Security deposits Intangibles – Type 6, 10 and 11 Licenses Net deferred tax liabilities Accounts payable and accrued liabilities Income taxes payable Deferred revenue Lease liabilities Long‐term debt Uncertain tax position liability Indemnification asset ‐ Uncertain taxposition liability	c) 6 7 16 17 18 8	3,311,292 4,163,950 21,299 26,783 1,242,056 1,561,885 157,601 198,183 6,698,255 8,423,056 68,273 85,853 8,597,000 10,810,727 (1,980,371) (2,490,317) (2,550,335) (3,207,046) (1,296,595) (1,630,468) (196,644) (247,280) (7,068,369) (8,888,474) (864,000) (1,086,480) (4,703,904) (5,915,159) 4,703,904 5,915,159
Net identifiable assets acquired Add: Goodwill	d)	6,139,462 7,720,372 28,996,663 36,439,805
		35,136,125 44,160,177

26 | P a g e G A B Y I n c .

GABY INC.

Notes to the Consolidated Financial Statements December 31, 2021 and 2020

In Canadian dollars, unless otherwise stated

b) Consideration

The Definitive Agreement provided for the acquisition of all equity securities of Mankind for total consideration of USD 36.5 million, subject to adjustment in accordance with the Definitive Agreement. The consideration was satisfied as follows:

• (i) the payment of USD 5.0 million in cash;

• (ii) the issuance of 157,894,737 common shares with a deemed value of USD 0.038 (CAD $0.05) per share, constituting USD 6.0 million of the consideration; and

• (iii) the issuance of a secured non‐convertible promissory note for USD 25.5 million bearing interest at a rate of 10% per annum. The promissory note requires quarterly interest‐only payments of the interest incurred in the quarter capped at USD 500,000 per quarter, with any additional interest incurred to be accrued (on an interest‐free basis) and paid with the next principal payment. The principal is required to be paid as follows: USD 5 million at the end of years two, four, and six, with the remaining USD 10.5 million due at the end of year seven.

The consideration is to be adjusted by the amount by which actual working capital (defined as working capital plus debt) is greater than (less than) target working capital of USD 587,733. The estimated purchase price adjustment is a reduction of the purchase price by USD 763,059, to be transacted through a reduction of quarterly interest payments on the promissory note of no more than USD 150,000 per quarter until the total purchase price adjustment has been satisfied. This right to reduce future interest payments is presented as Other current asset. During the year, the acquisition‐date balance was reduced by USD 450,000 (reduction of three interest payments) and increased by USD 174,534 relating to an indemnification claim related to an under‐accrual which directly affects the working capital calculation, for an outstanding balance in favor of the Corporation of USD 487,593 (CAD 617,098) as at December 31, 2021.

c) Acquisition cash flows

ition cash flows
In$	USD CAD
Cash consideration Less cash acquired on acquisition	(5,000,000) (6,264,000) 3,311,292 4,163,950
Net cash outflow – investing activities	(1,688,708) (2,100,050)

d) Goodwill

The composition of goodwill includes knowledge and experience of Mankind in respect of retail operations of cannabis products in the state of California; its established relationship with reputable cannabis manufacturers and distributors, as well as the expected synergies from the combination of Mankind’s retail license with GABY’s consumer packaged goods expertise in branding and retail operations. Any goodwill recognized would have $nil tax value.

e) Acquisition costs

Acquisition‐related costs of $1,213,046 that were not directly attributable to the issuance of shares are included in Transaction costs in the statement of loss and comprehensive loss and in operating cash flows in the statement of cash flows.

27 | P a g e G A B Y I n c .

GABY INC. Notes to the Consolidated Financial Statements December 31, 2021 and 2020

In Canadian dollars, unless otherwise stated

f) Revenue and loss contribution

Revenue and net income from the Mankind acquisition included in the results of the Corporation for the nine‐month period from April 1, 2021 to December 31, 2021 were $24,873,723 and $1,450,365, respectively. The revenue and net loss of the Corporation for the year ended December 31, 2021 would have been $40,747,065 (unaudited) and $12,361,629 (unaudited), respectively, had the acquisition of Mankind occurred on January 1, 2021.

The Corporation did not conduct any business combinations in the year 2020.

4) ACCOUNTS RECEIVABLE

ACCOUNTS RECEIVABLE
In$, Balance comprised of:	2021 2020
Trade accounts receivable GST receivable Other accounts receivable	307,357 888,369 23,371 68,055 17,867 ‐
Sub‐total before allowance Allowance for doubtful accounts	348,595 956,424 (188,286) (345,317)
	160,309 611,107
Aging of receivables:
30 days 60 days 90 days Over 90 days	58,521 177,852 675 9,483 42 42,397 289,357 726,692
	348,595 956,424
Exposure by geographic area:
Canada United States	35,251 81,020 313,344 875,404
	348,595 956,424

Trade accounts receivable bear normal commercial credit terms, usually 60 days or less, and are not interest bearing. The balance in other accounts receivable comprises various reimbursements to be received.

5) INVENTORIES

INVENTORIES
In$, Balance comprised of:	2021 2020
Raw and semi‐finished materials Packaging materials Finishedgoods andgoodspurchased for resale	10,646 138,614 63,796 170,174 1,267,228 334,095
	1,341,670 642,883

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GABY INC.

Notes to the Consolidated Financial Statements December 31, 2021 and 2020

In Canadian dollars, unless otherwise stated

Inventories expensed are as follows:

In$	2021 2020
Inventories expensed – cost of sales Inventories expensed – discontinued operations Inventorywrite‐downs – other items of income(expense)	20,616,615 4,223,559 ‐ 646,593 83,144 ‐
	20,699,759 4,870,152

Total write‐downs of inventory amounted to $83,144 included in other items of income (expense), which related to the closure of Sonoma Pacific (2020 ‐ $206,317 included in discontinued operations relating to the closure of the Gabriella’s Kitchen operations).

6) PROPERTY AND EQUIPMENT

Property and equipment, which includes right‐of‐use assets, is summarized as follows:

In$ Note	Right‐of‐use assets ‐ facilities Right‐of‐use assets ‐ equipment All other property and equipment Total
Balance as at December 31, 2019
Cost	6,876,295 163,877 1,852,539 8,892,711
Accumulated depreciation	(405,085) (107,298) (995,380) (1,507,763)
Net book value	6,471,210 56,579 857,159 7,384,948
Additions Disposals and lease terminations Depreciation1 Impairment loss Effect of foreign exchange2	‐ ‐ 6,565 6,565 (5,941,525) (56,579) (120,358) (6,118,462) (287,633) ‐ (175,297) (462,930) ‐ ‐ 12,338 12,338 285,878 ‐ (13,247) 272,631
Balance as at December 31, 2020
Cost	684,354 ‐ 811,653 1,496,007
Accumulated depreciation and impairment losses	(156,424) ‐ (244,493) (400,917)
Net book value	527,930 ‐ 567,160 1,095,090
Additions Business acquisition 3 Disposals and lease terminations Depreciation1 Effect of foreign exchange2	‐ 41,600 40,221 81,821 7,972,349 ‐ 450,707 8,423,056 (470,342) ‐ (326,017) (796,359) (759,585) (2,080) (219,305) (980,970) 35,901 508 (6,209) 30,200
Balance as at December 31, 2021
Cost	8,023,702 42,135 641,548 8,707,385
Accumulated depreciation and impairment losses	(717,449) (2,107) (134,991) (854,547)
Net book value	7,306,253 40,028 506,557 7,852,838

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GABY INC.

Notes to the Consolidated Financial Statements December 31, 2021 and 2020

In Canadian dollars, unless otherwise stated

1Depreciation recognized was allocated to the following accounts:	2021	2020
Cost of sales	334,758	166,809
Depreciation of property and equipment	646,212	291,487
Loss from discontinued operations	‐	4,634
	980,970	462,930

Detail of other property and equipment by type is as follows:

In $	Production equipment Leasehold improve‐ ments Equipment Vehicles Signs Furniture and fixtures Computer equipment Total
Balance as at December 31, 2019
Cost 957,669 287,874 104,978 377,765 15,947 46,979 61,327 1,852,539
Accumulated depreciation and impairment losses (594,324) (211,221) (81,315) (33,669) (15,947) (24,941) (33,963) (995,380)
Net book value 363,345 76,653 23,663 344,096 ‐ 22,038 27,364 857,159
Additions 720 ‐ ‐ ‐ ‐ ‐ 5,845 6,565 Disposals (82,775) (12,338) (23,663) ‐ ‐ ‐ (1,582) (120,358) Depreciation (58,066) (16,650) ‐ (78,732) ‐ (6,257) (15,592) (175,297) Impairment reversal ‐ 12,338 ‐ ‐ ‐ ‐ ‐ 12,338 Class transfers (12,229) ‐ ‐ ‐ ‐ 8,407 3,822 ‐ Foreign exchange2 (10,296) (436) ‐ (1,770) ‐ (466) (279) (13,247)
Balance as at December 31, 2020
Cost3 280,173 79,170 ‐ 374,371 ‐ 31,777 46,162 811,653
Accumulated depreciation and impairment losses3 (79,474) (19,603) ‐ (110,777) ‐ (8,055) (26,584) (244,493)
Net book value 200,699 59,567 ‐ 263,594 ‐ 23,722 19,578 567,160
Additions 13,805 ‐ 18,342 6,716 ‐ ‐ 1,358 40,221 Business acquisition 4,904 289,269 72,561 45,397 ‐ 32,890 5,686 450,707 Disposals (90,689) (48,184) ‐ (167,812) ‐ (12,834) (6,498) (326,017) Depreciation (44,059) (60,531) (13,892) (73,758) ‐ (12,844) (14,221) (219,305) Foreign exchange2 (2,443) 212 525 (3,979) ‐ (222) (302) (6,209)
Balance as at December 31, 2021
Cost3 96,186 291,132 91,607 109,344 ‐ 40,078 13,201 641,548
Accumulated depreciation and impairment losses3 (13,969) (50,799) (14,071) (39,186) ‐ (9,366) (7,600) (134,991)
Net book value 82,217 240,333 77,536 70,158 ‐ 30,712 5,601 506,557

2Foreign exchange difference arising on translation of foreign operation into Canadian dollars. 3Adjusted for disposal of fully depreciated assets

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GABY INC.

Notes to the Consolidated Financial Statements December 31, 2021 and 2020

In Canadian dollars, unless otherwise stated

7) INTANGIBLE ASSETS AND GOODWILL

In $	Computer software Website costs Cannabis licenses Goodwill Total
Balance as at December 31, 2019
Cost	20,924 70,984 3,387,683 10,313,571 13,793,162
Accumulated amortization and impairment losses	(20,924) (70,984) (583,380) (5,900,000) (6,575,288)
Net book value	‐ ‐ 2,804,303 4,413,571 7,217,874
Impairment losses Effect of foreign exchange1	‐ ‐ (1,738,283) (2,968,143) (4,706,426) ‐ ‐ (45,860) (73,546) (119,406)
Balance as at December 31, 2020
Cost2	‐ ‐ 2,758,443 10,143,542 12,901,985
Accumulated impairment losses2	‐ ‐ (1,738,283) (8,771,660) (10,509,943)
Net book value	‐ ‐ 1,020,160 1,371,882 2,392,042
Business acquisition Amortization Impairment losses Effect of foreign exchange1	‐ ‐ 10,810,728 36,439,805 47,250,533 ‐ ‐ (805,646) ‐ (805,646) ‐ ‐ (1,012,480) (1,361,555) (2,374,035) ‐ ‐ 51,574 248,044 299,618
Balance as at December 31, 2021
Cost2	‐ ‐ 10,880,363 46,765,356 57,645,719
Accumulated amortization and impairment losses2	‐ ‐ (816,027) (10,067,180) (10,883,207)
Net book value	‐ ‐ 10,064,336 36,698,176 46,762,512

1Foreign exchange difference arising on translation of foreign operation into Canadian dollars. 2Adjusted for disposal of fully amortized/impaired assets

a) Carrying amount of indefinite‐life intangible assets and goodwill by CGU

The carrying amount of intangible assets and goodwill by CGU as at December 31, 2021 and 2020 is as follows:

As at December 31, 2021	Indefinite life
Cash generating unit	intangibles1	Goodwill
Unlicensed operating segment	‐	‐	‐
Licensed operatingsegment ‐ Mankind	‐	36,698,176	36,698,176
	‐	36,698,176	36,698,176

1 All remaining intangible assets at December 31, 2021 have been assessed as having finite lives, with a useful life estimate of ten years.

As at December 31, 2020	Indefinite life
Cash generating unit	intangibles	Goodwill
Unlicensed operating segment	‐	1,371,882	1,371,882
Licensed operatingsegment – Sonoma Pac	1,020,160	‐	1,020,160
	1,020,160	1,371,882	2,392,042

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GABY INC.

Notes to the Consolidated Financial Statements December 31, 2021 and 2020

In Canadian dollars, unless otherwise stated

Annual impairment testing involves determining the recoverable amount of the CGU groups to which goodwill is allocated and comparing this to the carrying value of the CGU groups. To estimate the recoverable amount of each CGU, management calculated the FVLCD using an income approach, which is a Level 3 measurement within the fair value hierarchy.

For the unlicensed CGU, it was determined that the recent negative results of operations did not support any carrying value on an income basis. The recoverable amount was estimated on an asset basis as $83,637. As the value of the goodwill relating to the Unlicensed CGU was not supported under either basis, an impairment loss was recorded equal to the carrying value of the goodwill relating to this CGU.

For December 31, 2021, the key assumptions used in the calculation of the recoverable amounts for the Licensed CGU included in management’s projection of future cash flows (for a five‐year period with a terminal value thereafter) were based on consideration of economic, industry and entity‐specific risks and incorporated assumptions an independent market participant would apply. In addition, the following key assumptions were used for the Licensed CGU as outlined below:

December 31, 2021
Cashgenerating unit	Licensed
Terminal value growth rate	3.0%
After‐tax discount rate	10.5%
Average annual growth rate	4.0%
Gross margin	46.5%

Unlicensed CGU

As noted above, impairment was recorded related to the goodwill of the Unlicensed CGU in 2021 in order to reduce the carrying value to $nil. Management believes that due to a decrease in profitability and future prospects of this CGU, the carrying value of goodwill is no longer supportable.

Licensed CGU, Sonoma Pac

2021

The operations of Sonoma Pac were discontinued in August 2021. As the license held by Sonoma Pac was tied to the leased facility, and the lease was terminated, the license was forfeited. Accordingly, the carrying value of the license asset was adjusted to $nil and both the cost and accumulated impairment losses were removed.

2020

The Corporation estimated the recoverable amount of its indefinite‐life asset, the Type 11 License, to be $1,020,160 (USD 800,000) using FVLCD using a market approach and Level 2 inputs within the fair value hierarchy. This resulted in an impairment of its indefinite‐life intangibles of $1,738,283 (USD 1,363,146). Management estimated the FVLCD by referencing the purchase price allocated to Type 11 licenses in respect of business acquisitions of publicly listed entities, based on a weighting of prices. The assumption used is considered a significant estimate. If management would have

32 | P a g e G A B Y I n c .

GABY INC.

Notes to the Consolidated Financial Statements December 31, 2021 and 2020

In Canadian dollars, unless otherwise stated

weighted the transaction 10% more towards the lower end of the price range for a Type 11 License, the Corporation would have had to recognize an additional impairment of its Type 11 License of $153,024 (USD 120,000).

The Corporation determined that the carrying amount of goodwill in respect of its Licensed CGU, Sonoma Pac, was no longer recoverable as at December 31, 2020, based on FVLCD, being the present value of future cash flows expected to be derived from Sonoma Pac. It therefore recorded goodwill impairment of $2,968,143 (USD 2,327,590). This impairment was largely caused by the Corporation’s inability to implement its growth strategy due to the direct and indirect impacts of the COVID‐19 pandemic, as well as a lack of capital as the Corporation’s ability to raise capital was tied to the completion of a significant acquisition which took longer than expected. This resulted in the Corporation forecasting a reduction and delay of its anticipated growth of cash flows and the resulting impairment of goodwill.

Licensed CGU, Mankind

The recoverable amount of Mankind at December 31, 2021 was estimated to be $65,178,400 (USD 51,500,000) determined by its fair value less costs of disposal being the present value of future cash flows expected to be derived from Mankind.

The key assumptions used in the calculation of the recoverable amount relate to the cash flows and growth projections, future weighted average cost of capital, and terminal growth rate. These key assumptions were based on data from historical sources as well as industry and market trends. The Corporation estimated the recoverable amount of CGU based on discounted cash flows of five years and a terminal year thereafter and incorporated assumptions that an independent market participant would apply. The after‐tax discount rate used was 10.5% and the perpetual growth rate used was 3.0%.

The assumptions used above are considered significant estimates. The impact of possible changes thereto are as follows:

If the budgeted earnings before interest, taxes, depreciation and amortization had been 10% lower than management’s estimates at December 31, 2021, the recoverable amount would have changed by $9.2 million. If the after‐tax discount rate applied to the cash flow projections had been 1% higher than management’s estimates, the recoverable amount would have decreased by $7.8 million. If the terminal growth rate used had been 1% lower, the recoverable amount would have decreased by $5.7 million. No impairment is indicated under any of these scenarios.

b) Impairment losses (recovery)

The 2021 impairment loss is comprised of the following:

In$	Unlicensed	Licensed	Total
Cash generating unit		Sonoma Pac
Class of asset
Intangible assets	‐	1,012,480	1,012,480
Goodwill	1,361,555	‐	1,361,555
	1,361,555	1,012,480	2,374,035

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GABY INC.

Notes to the Consolidated Financial Statements December 31, 2021 and 2020

In Canadian dollars, unless otherwise stated

The 2020 impairment loss is comprised of the following:

In$	Unlicensed	Licensed	Licensed	Total
Cash generating unit		KJM	Sonoma Pac
Class of asset
Property and equipment	‐	(12,338)	‐	(12,338)
Intangible assets	‐	‐	1,738,283	1,738,283
Goodwill	‐	‐	2,968,143	2,968,143
	‐	(12,338)	4,706,426	4,694,088

The 2020 impairment recovery in KJM is a result of vendor credits received in 2020 on leasehold improvements for which impairment had been recorded in 2019.

8) OTHER ASSETS

Other assets consist of the following at December 31, 2021 and 2020:

Balance comprised of:	In $
	2021 2020
Indemnification asset Security deposits Deferred tax assets	4,343,228 ‐ 86,406 22,086 190,153 ‐
	4,619,787 22,086

The indemnification asset was recorded upon acquisition of Mankind in relation to the indemnification agreement received in the Mankind purchase agreement for estimated potential liabilities of Mankind as at the acquisition date for uncertain tax positions. The related liability is included in Other liabilities.

9) BANK INDEBTEDNESS

Until September 2020, a demand operating loan was authorized by TD Canada Trust to a maximum of $150,000. In light of the Corporation’s involvement with the US cannabis industry, the bank closed the operating loan account in September 2020 with an amount owing of $152,080. By December 31, 2020, the loan had not been repaid and had accrued additional interest for a total ending balance of $155,370 included in bank indebtedness. As described in Note 11, a related party of GABY assumed the outstanding debt effective January 1, 2021 and subsequently rolled its resulting receivable into Units in the Non‐brokered Private Placement (see Note 20).

Up to September 2020, bank indebtedness was included in cash for purposes of the statement of cash flows. Given the change in its nature when the account was closed, it no longer is included in cash after the date of closure.

34 | P a g e G A B Y I n c .

GABY INC.

Notes to the Consolidated Financial Statements December 31, 2021 and 2020

In Canadian dollars, unless otherwise stated

10) ACCOUNTS PAYABLE AND ACCRUED LIABILITIES

10) ACCOUNTS PAYABLE AND ACCRUED LIABILITIES
Balance as at December 31, comprised of:	In $
	2021 2020
Trade accounts payable Credit cards payable Payroll liabilities Accrued liabilities Sales,excise,and use taxespayable	4,161,935 4,902,030 11,550 11,170 452,312 128,412 757,692 671,862 2,834,709 1,351,836
	8,218,198 7,065,310
Aging of trade accounts payable:
30 days 60 days 90 days Over 90 days	950,586 524,296 61,565 277,739 23,803 167,250 3,125,981 3,932,745
	4,161,935 4,902,030

As of December 31, 2021, accounts payable and accrued liabilities includes $107,280 (December 31, 2020 ‐ $591,583) due to shareholders, key management personnel, and other related entities in respect of items described in Note 11.

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GABY INC.

Notes to the Consolidated Financial Statements December 31, 2021 and 2020

In Canadian dollars, unless otherwise stated

11) RELATED PARTY TRANSACTIONS

These transactions are measured at the exchange amount, which is the amount of consideration established and agreed to by the related parties. No amounts are owing to or owing from the related parties in respect of the transactions unless otherwise referenced in the table below.

	In $
	2021 2020
a. Amounts included in operating expenses: Compensation of key management personnel (“KMP”)1: Cash compensation for services provided by separate management entities Cash compensation to individuals Share‐based compensation	282,083 133,333 394,092 325,157 816,608 131,863
Total compensation of KMP Consulting fees paid to an entity controlled by a close family member of a KMP2 Contract service fees to a company controlled by close family of certain KMP3 Rent charged by a company controlled by a director and officer b. Amounts included in Interest expense: Interest on convertible debentures to KMP and their respective management entities Interest on promissory notes to KMP and their respective management entities Interest on promissory notes to an entity controlled by close family of a KMP Leaseguarantee feepaid to KMP via share issuance(see Note 16)	1,492,783 590,353 180,000 180,000 43,733 ‐ ‐ 10,968 1,274 15,000 4,878 61,618 720 14,328 52,237 ‐
c. Due to related parties included in statement of financial position Included in Promissory notes payable: To directors and entities controlled by directors Included in Convertible debentures: To entity controlled by directors Included in Accounts payable and accrued liabilities Compensation payable to KMP or their separate management entities Other amounts due to KMP Interest payable in respect of b) above Rent payable to a company controlled by an officer and director Amounts due on reimbursements of expenses Consultingfeespayable to an entitycontrolled byclose familyof certain KMP	‐ 780,903 ‐ 100,000 62,704 302,305 15,260 47,718 ‐ 19,973 11,517 15,356 17,779 174,731 ‐ 31,500
d. Advances from (to) related parties, net Cash advances from certain KMP Payments on behalf of the Corporation byclose familyof certain KMP	788 6,000 ‐ 33,474
	788 39,474

1 KMP consist of those that have the authority and responsibility for planning, directing and controlling the activities of the Corporation, which includes the most senior executive team (C‐suite executives) and the Board.

2 The Corporation has a month‐to‐month agreement with this related party for $15,000 per month for provision of investor relations and consulting services.

3 The Corporation had a month‐to‐month agreement with this related party for USD 5,000 per month for provision of marketing and other corporate services. The party was selected to perform these services by Mankind before it was acquired by GABY, and the arrangement continued through October 2021 when management determined that the services were no longer needed.

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GABY INC.

Notes to the Consolidated Financial Statements December 31, 2021 and 2020

In Canadian dollars, unless otherwise stated

As described in Note 9, effective January 1, 2021, a KMP assumed the bank indebtedness liability, for which the Corporation agreed to compensate the party at the face value of the debt assumed (see Note 30). That compensation was rolled into the Non‐brokered Private Placement and issued as Units.

The following related party items, which were due to KMP and close family members of KMP, were rolled into the Non‐ brokered Private Placement and issued as Units, including the item above:

	In $
Accounts payable	724,488
Convertible debentures and accrued interest	121,247
Promissory notes and accrued interest	789,693
Prepayment of future services	189,000
	1,824,428

12) DEFERRED REVENUE

The balance in deferred revenue consists of the following as of December 31, 2021 and 2020:

	In $
	2021 2020
Outstanding rewards points Outstanding gift cards	258,374 ‐ 16,776 ‐
	275,150 ‐

13) SHORT‐TERM NOTES PAYABLE

	In $
	2021 2020
Promissorynotespayable of USD 15,000(2020 ‐ USD 70,000)	18,984 89,264

The above consisted of three non‐interest‐bearing short‐term notes payable due on closing of next financing transaction undertaken by the Corporation generating proceeds of at least $500,000, which occurred in February 2021. Two of the notes payable were repaid in 2021, leaving one note payable of USD 15,000 due on demand.

14) PROMISSORY NOTES PAYABLE

14) PROMISSORY NOTES PAYABLE
Note	In $
	2021 2020
Due to related parties, repaid during 2021 a Due to others: Promissory notes repaid during 2021 a Notespayable,includinginterest accrual of$10,268(Dec 31,2020 ‐$55,336) b	‐ 780,903 ‐ 324,995 265,200 305,335
	265,200 1,411,233

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GABY INC.

Notes to the Consolidated Financial Statements December 31, 2021 and 2020

In Canadian dollars, unless otherwise stated

• a) These promissory notes, along with accrued interest up to the repayment date, were exchanged for Units in February 2021 in the Non‐brokered Private Placement (see Note 20).

• b) This promissory note accrues interest at a rate of 12% per annum compounded annually. Until March 1, 2021, this promissory note was payable on demand. Effective March 1, 2021, the terms of the promissory note were modified to recharacterize $4,932 of accrued interest to principal and to extend the maturity date to April 1, 2022. The maturity was further extended subsequent to December 31, 2021 as described in Note 36.

15) CONVERTIBLE DEBENTURES

The following table summarizes the outstanding balance and changes in the amounts recognized in the components of the convertible debentures during the years:

	In $
	2021 2020
Beginning balance Additions (interest added to principal in conjunction with extension) Repayments through share issuance Interest accretion expense on warrants and legal	653,904 635,255 71,116 ‐ (202,008) ‐ 3,104 18,649
Ending balance of convertible debentures	526,116 653,904

a) Description

In 2019, the Corporation received gross proceeds of $1,300,000 from a non‐brokered private placement of 1,300 units (“Units”) of the Corporation at a price of $1,000 per Unit (“Offering”). Each Unit is comprised of a secured convertible debenture in the principal amount of $1,000 (“Debentures”) and 500 common share purchase warrants. The Corporation also received gross proceeds of $250,000 from a private placement of 250 Debentures in 2019. The Debentures accrue interest at a rate of 15% per annum and originally matured March 1, 2021. In March 2021, the remaining convertible debentures outstanding were modified to recharacterize a portion of the accrued interest payable to convertible debenture principal on the same terms as the original convertible debentures, and to extend the maturity date to April 1, 2022. The maturity was further extended subsequent to December 31, 2021 as described in Note 36.

The principal of the Debentures, plus any accrued and unpaid interest thereon, are redeemable by the Corporation and retractable by the holder of the Debenture at the option of such party. The holder of the Debenture also has the option to convert the principal amount of the Debentures, plus any accrued and unpaid interest thereon, at the greater of: (i) $0.37; or (ii) the last closing price of the Corporation’s common shares. The Debentures are secured by a general security agreement granted by the Corporation.

b) Interest expense

Total interest for the year ended December 31, 2021 relating to the convertible debentures, including coupon interest and accretion of issuance costs and debenture discount, is $82,842 (2020 ‐ $117,199).

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GABY INC.

Notes to the Consolidated Financial Statements December 31, 2021 and 2020

In Canadian dollars, unless otherwise stated

16) LEASE LIABILITIES

The Corporation is obligated under various lease agreements, all of which require escalating payments. The current payments as of December 31, 2021 are shown in the summary below, and the future escalating payments are reflected in the estimated future payment tables below. Except as noted, management has determined that it is reasonably certain that GABY will exercise all options to extend the leases. Accordingly, the lease terms used to calculate the lease liabilities include the renewal periods where applicable. A summary of long‐term lease obligations as at December 31, 2021 and 2020 is set forth below.

Finance leases, all secured by asset financed, due: Monthly instalments (CAD) including interest Interest	In $
	2021 2020
California, USA facilities Sonoma Pacific Distribution Lease terminated in September 20211 n/a n/a Miramar Professional Services2 May 2025 with extension to May 2030 55,873 8.00% Feb 2023, five‐year extension available but not included in the lease term 10,251 8.00% Wild West Industries Jan 2025, with extension to Jan 2030 32,132 8.00%	‐ 624,949 5,899,148 ‐ 142,334 ‐ 2,581,035 ‐
Production equipment Repaid in 2021 WWI Forklift, Oct 2026 737 2.14%	8,622,517 624,949 ‐ 5,712 39,257 ‐
Total lease liabilities Less current portion	8,661,774 630,661 (744,046) (61,504)
Long‐term lease liabilities	7,917,728 569,157
Estimatedpayments on finance leases are as follows	In $ 1,408,246 1,339,242 1,357,376 1,397,952 1,436,412 5,047,438 11,986,666 (3,324,892) 8,661,774
2022 2023 2024 2025 2026 Thereafter
Total future minimum lease payments Less amount representinginterest
Finance lease obligations

39 | P a g e G A B Y I n c .

GABY INC.

Notes to the Consolidated Financial Statements December 31, 2021 and 2020

In Canadian dollars, unless otherwise stated

GABY INC. Notes to the Consolidated Financial Statements December 31, 2021 and 2020 In Canadian dollars, unless otherwise stated
Estimatedprincipal repayments are as follows	In$
2022	744,046
2023	734,304
2024	812,894
2025	921,935
2026	1,037,922
Thereafter	4,410,673
	8,661,774

A reconciliation of the balance of lease liabilities for the years ended December 31, 2021 and 2020 is as follows:

In$ Note	2021 2020
Balance, beginning of period Acquired on business acquisition 3 Additions related to new lease agreements Divestitures and lease terminations1 Total cash outflows for leases Variable lease payments not included in the measurement of lease liabilities Portion of lease payments allocated to interest expense Guarantee fee paid to KMP2 Guarantee fee ‐ GABY warrants3 Effects of changes in foreign exchange rate	630,661 6,748,329 8,888,474 ‐ 39,742 ‐ (582,306) (6,236,504) (1,127,542) (587,756) 148,479 122,703 567,058 303,082 52,237 ‐ ‐ (10,405) 44,971 291,212
Balance, end ofperiod	8,661,774 630,661
Less currentportion	(744,046) (61,504)
Non‐currentportion, end ofperiod	7,917,728 569,157

• 1 Management made the decision to cease operations at Sonoma Pacific Distribution effective August 2021 and, accordingly, sought and obtained termination of the lease agreement effective September 1, 2021. All asset and liability balances relating to this lease were cleared as of that date, with the net difference being recorded to gain on lease termination.

• 2 The MPS leases are guaranteed personally by an officer and director of GABY, for which a guarantee fee of 2% per annum of the outstanding balance of the leases liabilities is accrued monthly and paid to the guarantor in GABY shares from time to time.

3 In 2019, to entice the lessor of one of the California facilities to approve the lease, GABY paid a lease guarantee fee in warrants (Note 19), the fair value of which was added to the lease liability and included in the lease summary and the future payment schedules. The lease was terminated in 2020 and the guarantee fee warrants were forfeited.

See Note 6 for information regarding the related right‐of‐use assets and depreciation of those assets.

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GABY INC.

Notes to the Consolidated Financial Statements December 31, 2021 and 2020

In Canadian dollars, unless otherwise stated

17) LONG‐TERM DEBT

Long‐term debt consists of the following at December 31, 2021 and 2020:

Interest	Maturity	In $
		2021 2020
Mankind acquisition note payable (Note a) 10.00% Accrued interest on the above	Apr 2028 Apr 2023	32,272,800 ‐ 533,112 ‐
Long‐term settlementpayable(Note b) 6.00%	Aug2024	32,805,912 ‐ 355,213 ‐
Vehicle finance loans secured by the vehicles financed: Outstanding loans with monthly payments of USD 1,150 5.24% Loans repaid during2021	Sep 2022	12,731 29,322 ‐ 142,537
		12,731 171,859
Long‐term debts held by Mankind on acquisition: WWI acquisition note payable (Note c) 6.00% WWI loan agreement(Note d) 18.50%	Jan 2022 Dec 2022	253,120 ‐ 386,252 ‐
		639,372 ‐
Government assistance loans, net of discount: Canada Emergency Business Account (“CEBA”) loan, interest free and eligible for 25% debt forgiveness if 75% repaid by December 31, 2022 (extended to December 31, 2023 by January 2022 announcement). Otherwise, the loan converts on that date into a 3‐year note bearing interest at 5% per annum US government assistance loans, bearing interest at 3.75% per annum, repayable over a term of 30 years with payments deferred until July 2021, after which the loans require aggregate payments of USD 1,212 per month		33,899 28,268 102,377 92,469
		136,276 120,737
Total long‐term debt Less: currentportion		33,949,504 292,596 (679,325) (85,400)
		33,270,179 207,196

• a) The Corporation issued a secured non‐convertible promissory note for USD 25.5 million bearing interest at a rate of 10% per annum as part of the consideration for the Mankind acquisition. The promissory note requires quarterly interest‐only payments of the interest incurred in the quarter capped at USD 500,000 per quarter, with any additional interest incurred to be accrued and paid with the next principal payment. The principal is required to be paid as follows: USD 5 million at the end of years two, four, and six, with the remaining USD 10.5 million due at the end of year seven. The promissory note is secured by a pledge of all issued and outstanding shares of MPS.

• b) Effective August 2021, the Corporation entered a settlement agreement with a former vendor for payment of outstanding amounts plus interest over a period of 3 years (see Note 24). The agreement requires blended interest and principal payments of USD 2,500 per month in year one, USD 3,500 per month in year two, and USD 4,500 per month in year three, with a balloon payment of the remaining principal and accrued interest due following the 3‐year payment period. Interest is incurred on the outstanding balance at an annual rate of 6.00% in year one, US prime rate + 4.00 % in year two, and US prime rate + 6.00 % in year three.

41 | P a g e G A B Y I n c .

GABY INC.

Notes to the Consolidated Financial Statements December 31, 2021 and 2020

In Canadian dollars, unless otherwise stated

• c) Upon acquisition of Mankind, MPS held a note payable to the former shareholders of WWI that bears interest at a rate of 6% per annum and requires principal payments of USD 18,000 plus interest due monthly thereafter through November 2021, USD 20,000 plus interest due in December 2021, and a final balloon payment of USD 200,000 plus interest due in January 2022.

• d) Upon acquisition of Mankind, WWI held a note payable to a private lender for USD 500,000. The loan is secured by substantially all assets of Mankind. The loan accrues interest at a rate of 18.5% per annum and requires blended monthly principal and interest payments of USD 28,053. All amounts advanced shall bear interest for not less than 12 months; if the advance is repaid before that time, the interest for the remainder of the one‐year period will be payable at that time. The loan will be fully due and payable two years after the date of the first required interest payment. In addition to making the required payments, the Corporation is also required to meet various covenants to avoid an event of default. The Corporation has made all required payments on time, but is not in compliance with all of the covenants as of December 31, 2021. In the event of a continuing default under the terms of the loan agreement, subject to defenses available to the Corporation, all amounts owing could become due on demand and interest of an additional 10% per annum could be charged on the outstanding principal balance at the option of the lender. The lender has not communicated any intention of accelerating the maturity or charging additional interest. Further, the remaining balance is already due within the next year and included in current portion of long‐term debt.

The US government assistance loans are two loans separately guaranteed and secured by the tangible and intangible personal property of the two unlicensed subsidiaries that are the borrowers.

The following table summarizes the outstanding balance and changes in the amounts recognized in the components of the government assistance loans during the years ended December 31, 2021 and 2020:

In$	2021 2020
Beginning balance Gross proceeds – CEBA loan Gross proceeds – US government assistance loans – USD 248,500 Discount to apply effective interest method Foreign exchange adjustment	120,737 ‐ ‐ 40,000 ‐ 336,091 ‐ (262,167) (596) (5,529)
Remaining liability initially recognized	120,141 108,395
Accrued interest during no‐payment period Principal payments Interest accretion expense – effective interest method	5,979 5,191 (3,097) ‐ 13,253 7,151
Ending balance of Government assistance loans, net of discount	136,276 120,737

42 | P a g e G A B Y I n c .

GABY INC.

Notes to the Consolidated Financial Statements December 31, 2021 and 2020

In Canadian dollars, unless otherwise stated

The amortization and servicing of the principal of long‐term debt is scheduled as follows:

	Other loans	Government assistance loans	Government assistance loans
	Principal	Payments Interest per agreement Accretion of loan discount	Net change	Total
20221 2023 2024 2025 2026 Thereafter	672,896	18,407 (11,977) (13,795)	(7,365)	665,531 6,933,007 300,742 6,327,500 (225) 19,722,949
	6,894,026	58,407 (11,732) (7,694)	38,981
	301,506	18,407 (11,477) (7,694)	(764)
	6,328,000	18,407 (11,213) (7,694)	(500)
	‐	18,407 (10,938) (7,694)	(225)
	19,616,800	437,164 (149,553) (181,462)	106,149
	33,813,228	569,199 (206,890) (226,033)	136,276	33,949,504

1 Note that the 2022 debt amortization amount is not equal to the current portion of long‐term debt because the accretion of loan discounts is not included in the current portion in order to more accurately reflect what is due in the coming year.

18) OTHER LIABILITIES

Other liabilities consist of the following at December 31, 2021 and 2020:

Balance comprised of:	In $
	2021 2020
Estimated liability for uncertain tax positions1 Deferred tax liabilities	4,343,228 ‐ 2,473,935 16,729
	6,817,163 16,729

1 See description of this liability in Note 25 and description of the related indemnification asset in Note 8.

43 | P a g e G A B Y I n c .

GABY INC.

Notes to the Consolidated Financial Statements December 31, 2021 and 2020

In Canadian dollars, unless otherwise stated

19) SHARE‐BASED PAYMENTS AND SHARE ISSUANCE OBLIGATION

Amounts recognized from share‐based payment transactions during the year are as follows:

In $	Note	2021	2020
Share‐based payments included in operating expenses:
Stock option plan employee compensation and consulting fees	19a	109,957	476,620
Forfeiture of options		(34,123)	(398,978)
Total expense relating to stock option plan		75,834	77,642
Consulting services settled through issuance of warrants	19c	‐	4,000
Consulting services settled through issuance of shares	19c	471,655	‐
Share issuance obligation relating to marketing services	19h	‐	36,187
RSU plan employee and consultant compensation	19b	645,743	184,173
Amortization ofprepaid share‐basedpayments		358,004	335,496
Total share‐basedpayments included in operating expenses		1,551,236	637,498
Other expenses:
Interest expense – lease guarantee fee paid in shares	11	52,237	‐
KJM settlement payment–netted against gain on lease termination	19g	‐	60,462
Total share‐basedpayments included in other income(expenses)		52,237	60,462
Total share‐basedpayments included in net loss from continuing operations		1,603,473	697,960
Discontinued operations:
RSU plan expense included in loss from discontinued operations	19b	‐	130,000
Cancellation of RSUs		‐	(32,500)
Common shares issued for payment of severance	19e	‐	25,000
Total share‐based payments included in loss from discontinued operations		‐	122,500
Total share‐based expenses included in net loss and comprehensive loss		1,603,473	820,460
Other share‐based payments:
Payment of accounts payable in lieu of cash payment	19f	743,223	547,844
Payment of amounts due to a director in lieu of cash payment		‐	33,898
Broker warrants issued,netted against common shares	19d	319,703	‐
Total share‐basedpayments		2,666,399	1,402,202

a. Stock option plan

The Corporation has an incentive stock option plan (the "Option Plan") which provides that the Board may from time to time, in its discretion, grant to directors, officers, employees and consultants of the Corporation, non‐transferable options ("Options") to purchase Common Shares. The purpose of the plan is to advance the interests of the Corporation and its shareholders by attracting, retaining, and motivating such directors, officers, employees and consultants and to encourage and enable such persons to acquire and retain a proprietary interest in the Corporation through ownership of Common Shares.

The Option Plan provides that, subject to the requirements of the Exchange, the aggregate number of securities reserved for issuance, set aside and made available for issuance under the Option Plan may not exceed 10% of the issued and

44 | P a g e G A B Y I n c .

GABY INC.

Notes to the Consolidated Financial Statements December 31, 2021 and 2020

In Canadian dollars, unless otherwise stated

outstanding Common Shares at the time of granting of Options (including all Options previously granted by the Corporation).

The number of Common Shares which may be reserved in any 12‐month period for issuance to any one individual upon exercise of all Options held by that individual may not exceed 5% of the issued and outstanding Common Shares of the Corporation at the time of grant.

The Option Plan is to be administered by the Board, or a committee thereof, either of which has full and final authority with respect to the granting of Options under the Option Plan.

The exercise price of any Options granted under the Option Plan shall be determined by the Board, but may not be less than the market price of the Common Shares on the Exchange on the date of the grant. The term of any Options granted under the Option Plan shall be determined by the Board at the time of grant but provided that the term of any Options may not exceed ten years. Options granted up to December 31, 2020, including the affect of the amendment described below, vest evenly on the anniversary dates from the original grant date at either 33% per year, or 1/3 immediately and two anniversary dates following; and in one case 1/3 immediately and 2/3 in year two. Options are not transferable or assignable, other than by will or other testamentary instrument or pursuant to the laws of succession.

Subject to certain exceptions, if a director or officer ceases to hold office, any Options held by such person will expire 60 days after they cease to hold office. Subject to certain exceptions, if an employee or consultant ceases to act in that capacity in relation to the Corporation, Options held by such person will expire 60 days after they cease to act in that capacity in relation to the Corporation.

Set out below are summaries of options granted under the Corporation stock option plan:

	2021 2020
	Average exercise price per option Number of options Average exercise price per option Number of options
Opening Forfeited/cancelled	$0.30 6,165,000 $0.30 11,790,000 $0.27 (1,290,000) $0.30 (5,625,000)
Closing	$0.31 4,875,000 $0.30 6,165,000
Vested and exercisable atperiod end	$0.30 4,208,334 $0.29 3,860,000

Share options outstanding at the end of the year have the following range of exercise prices and weighted average remaining contractual life:

45 | P a g e G A B Y I n c .

GABY INC.

Notes to the Consolidated Financial Statements December 31, 2021 and 2020

In Canadian dollars, unless otherwise stated

	2021	2021	2020	2020
		Weighted		Weighted
		average		average
		contractual		contractual
Exercise price	Number	life in years	Number	life in years
$0.125	150,000	2.88	150,000	3.88
$0.270	1,450,000	2.76	2,740,000	3.76
$0.286	1,250,000	1.67	1,250,000	2.67
$0.350	25,000	2.32	25,000	3.32
$0.360	2,000,000	2.59	2,000,000	3.59
	4,875,000	2.42	6,165,000	3.49

Fair value of options granted

There were no options granted in 2021 or 2020. The amount included in Share‐based compensation and expenses for the year, net of forfeitures, was $75,834 (2020 ‐ $77,642), and is classified as contributed surplus in the Corporation’s consolidated statement of financial position. Of the foregoing amount, $87,119 was in respect of key management personnel (2020 ‐ $15,990).

b. Restricted share units

The Corporation implemented an RSU plan in 2020. The RSU Plan is to be administered by the Board, or a committee thereof, either of which has full and final authority with respect to the granting of RSUs under the RSU Plan. The vesting conditions of any RSUs granted under the RSU Plan shall be determined by the Board at the time of grant but provided that the vesting term of any RSUs may not exceed three years.

The RSU Plan provides that, subject to the requirements of the Exchange, the aggregate number of securities reserved for issuance, set aside and made available for issuance under the RSU plan and the Corporation’s Option Plan may not exceed 10% of the issued and outstanding Common Shares at the time of granting of Options (including all Options previously granted by the Corporation).

The RSUs granted up to December 31, 2021 vest either one year from the grant date or one‐third each over the first, second and third anniversary year from the date of grant and are each issuable into one common share of the Corporation. The share price at date of 2021 grants ranged from $0.025 to $0.105 per share. The fair value of the RSUs adjusted for projected forfeitures is estimated as $1,260,940 (2020 ‐ $667,955). Of this amount, $113,063 will be expensed over one year, and the remainder will be recorded as an expense over the three years in which services are received with a corresponding amount recorded as contributed surplus.

Subject to certain exceptions, if a director or officer ceases to hold office, or an employee is terminated, any unvested RSUs held by such person will expire immediately. The settlement of RSUs into shares shall generally occur on or shortly after the vesting date, subject to security regulations including black‐out periods. The Corporation has the sole and absolute discretion to purchase its own shares on the CSE, or if approved by the Board, to issue shares from treasury. Until 46 | P a g e G A B Y I n c .

GABY INC.

Notes to the Consolidated Financial Statements December 31, 2021 and 2020

In Canadian dollars, unless otherwise stated

and unless common shares have been issued in accordance with the RSU Plan, the holder of the RSUs has no shareholder rights in respect of the RSUs, including the right to receive dividends.

Set out below is a summary of RSUs activity for the years ended December 31, 2021 and 2020:

Number of RSUs	2021 2020
Opening Granted Forfeited Vested and settled in shares	16,375,000 ‐ 34,400,000 17,830,000 (6,253,333) (1,455,000) (5,125,001) ‐
Closing	39,396,666 16,375,000
Vested atperiod end	‐ ‐

The weighted average fair value of the RSUs granted during the year was $0.04 (2020 ‐ $0.05) per RSU, which was based on the common share closing price on the CSE on the date of grant and assumes no future expected dividends.

The amount included in net loss for the year 2021 is $645,743 (2020 ‐ $306,673, $130,000 of which is included in loss from discontinued operations) and is classified as contributed surplus in the Corporation’s consolidated statement of financial position. Of the foregoing amounts, $377,923 was in respect of KMP for the year (2020 ‐ $115,873).

c. Warrants issued for services

The Corporation did not issue any warrants for services in 2021.

On May 1, 2020, the Corporation issued four tranches of warrants totaling 2,000,000 in number as partial compensation for services of a consultant. Each warrant has a three‐year life and is exercisable into one common share for a set exercise price per warrant upon the common shares reaching varying targets of volume weighted average price over 20 consecutive days (“Target VWAP”) as outlined in the table below.

The Corporation measured the fair value of the service received by reference to the fair value of the warrants granted using the Black‐Scholes Model which takes into account the inputs, including the probability of attaining the market performance condition (“Market Probability”):

Number of	Target	Exercise	Expected	Market
Warrants	VWAP	price	life in years	Probability
500,000	$0.15	$0.20	2	76%
500,000	$0.20	$0.25	3	5%
500,000	$0.25	$0.30	3	0%
500,000	$0.30	$0.35	3	0%
2,000,000

The resulting amount included in share‐based compensation for the year 2020 is $4,000.

47 | P a g e G A B Y I n c .

GABY INC.

Notes to the Consolidated Financial Statements December 31, 2021 and 2020

In Canadian dollars, unless otherwise stated

d. Broker warrants

In conjunction with the private equity capital raise of $12.7 million in February 2021, the Corporation issued 7,992,569 broker warrants as compensation to the broker agents engaged for the offering (“Broker Warrants”). The Broker Warrants are described further in Note 20f.

The fair value of the Broker Warrants was estimated on the date of grant using the following assumptions:

• i) Share price of $0.065 at the measurement date

• ii) Expected volatility of 115%

• iii) Risk‐free interest rate of 0.90% based on interest rate on six‐month Government of Canada treasury bills

• iv) Expected life of 0.5 years

• v) Expected dividend yield of 0%

e. Shares issued or issuable for services

Shares issued in respect of:	2021 2020
	Number $ Number $
To satisfyshare issuance obligation at Dec 31,2020 i	741,228 36,187 ‐ ‐
Consulting services ii Employment contract – CEO iii Other employment contracts payments Lease guarantee fee 16 Severancepay– discontinued operations iv	5,786,970 346,889 ‐ ‐ 1,000,000 50,000 ‐ ‐ 500,000 12,500 ‐ ‐ 1,204,069 62,266 ‐ ‐ ‐ ‐ 500,000 25,000
	8,491,039 471,655 500,000 25,000
Total common shares issued for services	9,232,267 507,842 500,000 25,000

Shares issuable in respect of:	2021 2020
	Number $ Number $
Shares for services agreement – Chief Marketing Advisor i Shares for services agreement – MarketingAdvisor i	‐ ‐ 657,895 32,020 ‐ ‐ 83,333 4,167
Total common shares issuable for services	‐ ‐ 741,228 36,187

• i) In 2021, the Corporation issued 741,228 Units (each consisting of one common share and one warrant) to satisfy the share issuance obligation of $36,187 in respect of shares for services contracts with marketing advisors in 2020 for which the Units were issued in 2021.

• ii) In 2021, various consultants agreed to receive payment for their fee in shares rather than cash. The consultants provided services relating to market research, investment advisory, interim CFO services, and retail process improvement. While many of these consultants were new in 2021, one had provided services in 2020, but was not consistently paid in shares and as such was included in shares paid to settle accounts payable, but not shares issued for services in 2020.

• iii) Per the revised contract with the CEO’s management entity in 2021, the CEO’s management entity is to receive an annual allotment of 1,000,000 common shares. As the value of the CEO’s services that is allocable to the

48 | P a g e G A B Y I n c .

GABY INC.

Notes to the Consolidated Financial Statements December 31, 2021 and 2020

In Canadian dollars, unless otherwise stated

shares cannot be reliably estimated, these shares were valued based on the share price on the date of issuance of the shares.

• iv) In 2020, the Corporation issued 500,000 RSUs to a former employee in lieu of severance pay. The RSUs were subsequently cancelled, and 500,000 common shares were issued in their stead valued at $25,000.

• f. Shares issued as payment of accounts payable

For the years ended December 31, 2021 and 2020, the following shares were issued as payment of accounts payable:

For the years ended December 31, 2021 and 2020, the follow	ing shares were issued as payment of accounts payable:
Shares issued in respect of:	2021 2020
	Number $ Number $
Consulting service fees payable i Consulting services fees payable to related party ii Corporate service fees payable iii Legal fees payable iv Settlement ofprevious‐year contract v	‐ ‐ 3,341,809 173,250 ‐ ‐ 3,214,324 186,869 1,762,600 75,612 645,491 28,920 4,575,803 437,624 3,176,101 158,805 2,114,164 229,987 ‐ ‐
Total common shares issued	8,452,567 743,223 10,377,725 547,844

• i) In 2020, a consultant agreed to receive payment for eleven months of consulting fees in shares rather than cash. The Corporation measured the fair value of services received as invoiced as measured when such services were previously paid in cash. In 2021, as the consultant continued to be paid in shares, the amounts were presented in share‐based compensation and shares issued for services rather than shares issued as payment of accounts payable, to better reflect the substance of the arrangement.

• ii) In 2020, a consultant who is close family of certain KMP agreed to receive payment for eleven months of consulting fees in shares rather than cash. The Corporation measured the fair value of services received as invoiced as measured when such services were previously paid in cash. In 2021, this consultant was paid for the whole year in conjunction with the February financing, and the fees are included in share‐based compensation.

• iii) A corporate services provider agreed to receive payment for service fees in shares rather than cash. The Corporation measured the fair value of services received as invoiced as measured when such services were previously paid in cash. The common shares were measured using the share price on date of issuance.

• iv) Two providers of corporate legal services agreed to receive payment for various invoices in shares rather than cash. The Corporation measured the fair value of services received as invoiced as measured when such services were previously paid in cash. The common shares were measured using the share price on date of issuance.

• v) The Corporation issued 2,114,164 common shares and 200,000 warrants to settle a consultant’s claims under a contract in effect in previous years. The common shares were valued based on the share price on the date of issuance, and the warrants were valued at $0.04 per warrant using the Black‐Scholes valuation model. The difference between the value attributed to the equity issued and the amount being settled was $29,987 and is included in gain on extinguishment of debts within other items of income (expense).

49 | P a g e G A B Y I n c .

GABY INC.

Notes to the Consolidated Financial Statements December 31, 2021 and 2020

In Canadian dollars, unless otherwise stated

g. Other share‐based payments

In 2020, the Corporation issued 1,007,692 common shares to the former owners of KJM in final settlement of all obligations between the parties. The shares were valued at $60,462 based on the share price on the date of issuance.

h. Share issuance obligation

Share issuance obligation as of December 31, 2021 and 2020 consists of the following:

Shares issuable in respect of:	2021 2020
	Number $ Number $
Shares for services agreements 19e Proceeds of Subscription Receipts received in advance	‐ ‐ 741,228 36,187 ‐ ‐ 1,715,790 83,760
Total common shares issuable	‐ ‐ 2,457,018 119,947

50 | P a g e G A B Y I n c .

GABY INC.

Notes to the Consolidated Financial Statements December 31, 2021 and 2020

In Canadian dollars, unless otherwise stated

20) SHARE CAPITAL AND CONTRIBUTED SURPLUS

Authorized share capital

The Corporation is authorized for an unlimited number of shares without nominal or par value as follows:

Unlimited number of Class A common voting shares

Unlimited number of Class B non‐voting, retractable, redeemable, preferred shares, issuable in series

Common shares issued and outstanding and Contributed surplus

A reconciliation of the Corporation’s Share Capital and Contributed surplus is as follows:

Note	Share Capital
	Class A common voting shares	Contributed Surplus	Total transaction
	Number $	$	$
Balance as at December 31, 2019 Issuance of shares as payment of indebtedness 20c Issuance of shares for settlement of promissory notes Issuance of shares to director from treasury 20d Equity issuance costs Stock option expense RSU compensation expense Stock option forfeitures Warrant forfeitures RSU cancellation Share‐basedpayments	205,775,825 43,068,525 16,666,666 1,083,333 462,497 46,250 3,003,003 250,000 ‐ (6,719) ‐ ‐ ‐ ‐ ‐ ‐ ‐ ‐ ‐ ‐ 11,885,417 633,306	5,373,688 ‐ ‐ ‐ ‐ 476,620 314,173 (398,978) (25,490) (32,500) 14,195	48,442,213 1,083,333 46,250 250,000 (6,719) 476,620 314,173 (398,978) (25,490) (32,500) 647,501
Closingbalance,December 31,2020	237,793,408 45,074,695 5,721,708 50,796,403
Issuance of Units – private placement 20a Issuance of Units – other subscriptions 20b Issuance of shares for business acquisition 3 Spin off of Subscription Receipts 20a Share‐based payments 19 RSUs issued as common shares 19b Equity issuance costs 20a,b Stock option expense, net of forfeitures 19a RSU expense 19b	80,140,444 3,446,039 12,500,000 487,500 157,894,737 6,789,474 172,929,123 7,435,952 16,943,606 1,206,878 5,125,001 188,198 ‐ (990,608) ‐ ‐ ‐ ‐	560,983 137,500 ‐ 1,210,504 8,000 (188,198) 319,703 75,834 645,743	4,007,022 625,000 6,789,474 8,646,456 1,214,878 ‐ (670,905) 75,834 645,743
Closing balance, December 31, 2021	683,326,319 63,638,128 8,491,777 72,129,905

a. Private Placement

On February 4, 2021, the Corporation closed a brokered private placement of subscription receipts of the Corporation (the “Brokered Private Placement”) together with a non‐brokered private placement of units of the Corporation (the “Non‐ Brokered Private Placement”) for aggregate gross proceeds (including non‐cash consideration) of $12.7 million.

Pursuant to the Brokered Private Placement, the Corporation issued 172,929,123 subscription receipts of the Corporation (“Subscription Receipts”) at a price of $0.05 per Subscription Receipt. The total value of $8,646,456 was bifurcated between share capital and contributed surplus when the Subscription Receipts were converted to Units in June 2021 based on the relative fair value of the common shares and Warrants issued.

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GABY INC.

Notes to the Consolidated Financial Statements December 31, 2021 and 2020

In Canadian dollars, unless otherwise stated

Each Subscription Receipt represented the right to receive, without payment of additional consideration or further action on the part of the holder thereof, one unit of the Corporation (each, a “Unit”) upon the later of: (i) the satisfaction of certain escrow release conditions; and (ii) the date that is the earlier of: (A) June 5, 2021; and (B) the second business day following the filing of a qualifying prospectus.

Each Unit consists of: (i) one GABY Share; and (ii) one GABY Share purchase warrant (each, a “Warrant”). Each Warrant entitles the holder to purchase one GABY Share at an exercise price of $0.09, at any time up to 24 months following the date of issuance; provided that if, at any time prior to the expiry date of the Warrants, the volume weighted average trading price of the common shares on the CSE, or other principal exchange on which the GABY Shares are listed, is greater than $0.18 for 5 consecutive trading days, the Corporation may, within 10 business days of the occurrence of such event, deliver a notice to the holders of the Warrants (the “Acceleration Right”) accelerating the expiry date of the Warrants to the date that is 30 days following the date of such notice (the “Accelerated Exercise Period”). Any unexercised Warrants will automatically expire at the end of the Accelerated Exercise Period.

The Corporation issued Broker Warrants valued at $319,703 (see Note 20f) and paid other fees and expenses of $596,571, for aggregate equity issuance costs of $916,274 which was offset against share capital.

Pursuant to the Non‐Brokered Private Placement, the Corporation issued 80,140,444 Units at a price of $0.05 per Unit. The total value of $4,007,022 has been bifurcated between share capital and contributed surplus based on the relative fair value of the common shares and Warrants. Of the total value, $3,709,154 consisted of debts rolled into the Non‐ Brokered Private Placement by various related and unrelated parties, as follows:

Balance comprised of, in $:	Relatedparty	Other	Total
Accounts payable	724,488	271,500	995,988
Convertible debentures and accrued	121,247	102,333	223,580
Promissory notes and accrued interest	789,693	391,424	1,181,117
Share issuance obligation	‐	38,270	38,270
Prepayment of future services	189,000	66,000	255,000
Payment of transaction costs	‐	1,015,199	1,015,199
	1,824,428	1,884,726	3,709,154

b. Other subscriptions

In October 2021, the Corporation issued 12,500,000 Units on the same basis as the Non‐Brokered Private Placement described above for total proceeds of $625,000. The Corporation incurred a finder’s fee of $74,334 directly relating to this investment, which was offset against share capital. Half of the fee was to be paid in cash and half in Units under the same definition as the Units subscribed for by the investor.

c. Shares issued from treasury as payment of indebtedness to a related party

In January 2020, 16,666,666 common shares issued at $0.065 per share were issued to a company controlled by a director and officer of the Corporation as payments of amounts owing of $1,083,333 as detailed in the table below. The share price was based on the closing price of the shares on the grant date.

52 | P a g e G A B Y I n c .

GABY INC.

Notes to the Consolidated Financial Statements December 31, 2021 and 2020

In Canadian dollars, unless otherwise stated

GABY INC. Notes to the Consolidated Financial Statements December 31, 2021 and 2020 In Canadian dollars, unless otherwise stated
	USD CAD
Promissory notes plus interest issued in USD Promissory note plus interest issued in CAD Accountspayable	447,167 583,099 n/a 466,336 n/a 33,898
	1,083,333

d. Shares issued from treasury to a company controlled by a director

In February 2020, 3,003,003 common shares were issued to a director for total proceeds of $250,000 or $0.083 per share, based on the five‐day weighted‐average closing price of the shares prior to the date of issuance.

e. Warrants

Set out below are summaries of warrants granted by the Corporation:

	2021	2020
	Average exercise price per warrant Number of warrants	Average exercise price per warrant Number of warrants
Opening Granted Expired Forfeited	$0.38 38,404,193 $0.09 259,519,567 $0.38 (35,304,193) ‐ ‐	$0.38 78,590,766 $0.28 2,000,000 $0.37 (41,686,573) $0.54 (500,000)
Closing	$0.09 262,619,567	$0.38 38,404,193
Vested and exercisable atyear end	$0.09 260,019,567	$0.38 35,804,193

Warrants outstanding as at the end of the year have the following range of exercise prices and weighted average remaining contractual lives:

contractual lives:
		2021		2020
			Weighted		Weighted
			average		average
			contractual life		contractual
Exercise price		Number	in years	Number	life in years
	$0.09	259,319,567	1.34	‐	‐
	$0.15	200,000	0.31	‐	‐
	$0.20 ‐ $0.35	2,000,0001	1.33	2,000,0001	2.33
	$0.37	‐	‐	650,000	0.16
	$0.375 ‐ 0.38	300,000	2.59	34,104,193	0.47
	$0.42 ‐ $0.50	800,000	0.89	1,650,000	1.34
		262,619,567	1.34	38,404,193	0.60

1 See Note 19 for market vesting conditions for 2,000,000 warrants exercisable at an average of $0.28

The fair value assigned to the warrants granted during the year as outlined in the table above were determined using the Black Scholes Model with the following inputs:

53 | P a g e G A B Y I n c .

GABY INC.

Notes to the Consolidated Financial Statements December 31, 2021 and 2020

In Canadian dollars, unless otherwise stated

		Share price at	Risk free		Expected	Expected
	Exercise	measurement	interest	Expected	life in	dividend
Grant date	Price	date	rate1	volatility2	years	yield
February 2021	$0.09	$0.065	0.90%	115%	0.5	0%
April 2021	$0.15	$0.105	0.90%	115%	1	0%
June 2021	$0.09	$0.065	0.90%	115%	0.5	0%
October 2021	$0.09	$0.035	1.08%	170%	2	0%

1 Based on interest rates of Government of Canada Bonds or Treasury Bills with similar maturity at the date of grant

2 GABY’s actual stock volatility over a period similar to the expected life of the warrant. The expected volatility reflects the assumption that the historical volatility over a period similar to the expected life of the warrants is indicative of future trends.

f. Broker Warrants

The Corporation from time to time issues instruments exercisable for the purchase of common shares and Warrants for the purpose of compensating brokers or agents in connection with financing transactions, which are referred to above as Broker Warrants. The balance included in Broker Warrants is comprised of the following:

	2021 2020
	Number $ Number $
Broker Warrants – February 2021 i Broker Warrants – June 20191	7,992,569 319,703 ‐ ‐ ‐ ‐ 4,522,634 927,140
Special Warrants	319,703 927,140

1 Reflects expiration of these broker warrants in June 2021

i. Broker Warrants – February 2021

The Corporation issued Broker Warrants to the brokers in the February 2021 Brokered Private Placement. Each Broker Warrant entitles the holder to acquire one common share and one warrant at a combined price of $0.05 for a period of 24 months following the Escrow Release Date of June 5, 2021. Each warrant acquired through exercise of the Broker Warrants entitles the holder to acquire one common share at a price of $0.09 per share for a period of 24 months from the Escrow Release Date. The weighted average remaining life of the Broker Warrants is 1.43 years.

If at any time after the date of issuance, the volume weighted average trading price per common share is equal to or greater than $0.18 for any five consecutive trading days, the Corporation shall be entitled, at the sole option of the Corporation, within ten business days of such event, to accelerate the Expiration Date to the date that is thirty days following the delivery of a written notice of acceleration to the holder.

21) DIRECT INVENTORY COSTS

21) DIRECT INVENTORY COSTS
Balance comprised of, in $:	2021	2020
Salaries and benefits	1,547,764	850,660
Direct material	16,956,814	2,669,224
Other direct costs	1,201,123	96,990
	19,705,701	3,616,874

54 | P a g e G A B Y I n c .

GABY INC.

Notes to the Consolidated Financial Statements December 31, 2021 and 2020

In Canadian dollars, unless otherwise stated

22) ALLOCATED INDIRECT COSTS

22) ALLOCATED INDIRECT COSTS
Balance comprised of, in $:	2021	2020
Salaries and benefits	57,405	‐
Production licenses and permits	53,445	90,092
Production facility costs	300,539	123,688
Depreciation of production equipment	235,933	58,066
Other overhead costs	25,647	58,082
	672,969	329,928

23) SELLING, GENERAL AND ADMINISTRATIVE EXPENSES

23) SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
Balance comprised of, in $:	2021	2020
Salaries and benefits	5,316,400	2,970,587
Consulting fees	570,195	981,885
Administrative costs	2,792,029	1,572,542
Advertising and promotion	982,147	172,045
Professional fees	1,054,692	1,043,883
	10,715,463	6,740,942

24) OTHER ITEMS OF INCOME (EXPENSE)

24) OTHER ITEMS OF INCOME (EXPENSE)
Balance comprised of, in $:	Note	2021	2020
Foreign exchange loss		(424,921)	(122,577)
Interest income		1,955	‐
Legal settlements	i	(374,966)	‐
Gain on extinguishment of debts	ii	250,058	61,255
Gain (loss) on disposal of assets	iii	(189,960)	963
Gain on lease terminations	16	91,519	199,388
Government assistance income	iv	‐	267,579
Loss on inventory write‐down	5	(83,144)	‐
Penalties and interest on past‐due taxes		(211,404)	(490,214)
Other income(expense)		(16,197)	245
		(957,060)	(83,361)

i) Legal settlements

During 2021, GABY Inc. and one of its subsidiaries incurred new or additional liabilities based on the outcome of certain legal proceedings against them.

In the case of GABY Inc., a suit was brought due to non‐payment of legacy payables from the discontinued operations. Additional amounts were added to the payable already carried, and a payment plan was established. Accordingly, the full

55 | P a g e G A B Y I n c .

GABY INC.

Notes to the Consolidated Financial Statements December 31, 2021 and 2020

In Canadian dollars, unless otherwise stated

amount of the payable was recorded as a long‐term note payable, which is included in long‐term debt under the caption “Long‐term settlement payable”.

In the case of the subsidiary, a suit was brought by a former employee, and the judgment that ensued established a payable of USD 210,000 payable in three installments. One of the USD 70,000 payments was made in 2021; accrual for the other two installments was recorded in 2021, which payments are required to be made in 2022.

ii) Gain on extinguishment of debts

During the years 2021 and 2020, the Corporation recognized gains on extinguishment of debts primarily relating to paying debts with shares valued at less than the debt amount, or by obtaining and fulfilling agreements with legacy vendors to extinguish trade payables for less than the face value of the debts.

iii) Gain (loss) on disposal of assets

The majority of the loss on disposal of assets in 2021 relates to assets sold at a loss, scrapped, or abandoned in conjunction with the closure of Sonoma Pacific Distribution.

iv) Government assistance

In 2020, the Corporation received three loans from government entities as a mode of government assistance. These loans were provided at below‐market interest rates and one contains a debt forgiveness provision if repaid by a certain date (see Note 17 for further detail).

The proceeds of the US government assistance loans received are required to be used for working capital needs, and the borrower is required to obtain and itemize receipts and contracts for all loan funds spent and retain these records for three years from the date of final disbursement. The borrowers could be required to provide reviewed financial statements and/or other records if requested. Any amount not spent in accordance with the agreement by the reporting date is immaterial. The loans require security interests in certain assets of the entities to which they were issued, as disclosed in Note 17.

Government assistance income was calculated and recognized for the difference between the obligations discounted at an estimated market rate of 18.50% and the face value of the loans, as follows:

			Obligation
		Face Value	discounted	Government
	Rate	(CAD)	at 18.50%	assistance
Canada Emergency Business Account loan	0%	40,000	24,514	15,486
US government assistance loan – USD 147,200	3.75%	199,265	53,015	146,250
US government assistance loan – USD 101,300	3.75%	136,826	36,395	100,431
Grants in relation to loans – USD 4,000	n/a	n/a	n/a	5,412
				267,579

56 | P a g e G A B Y I n c .

GABY INC. Notes to the Consolidated Financial Statements December 31, 2021 and 2020 In Canadian dollars, unless otherwise stated

25) INCOME TAXES

The Corporation is subject to U.S. Internal Revenue Code Section 280E. This section disallows deductions and credits attributable to a trade or business of trafficking in controlled substances. Under U.S. federal law, marijuana is a schedule 1 controlled substance. The Corporation has taken the position that any costs included in cost of goods sold should not be treated as amounts subject to Section 280E. The measurement of deferred income tax assets requires management to make judgements in the interpretation and application of the relevant tax laws. The actual amount of income taxes only becomes final upon filing and acceptance of the tax return by the relevant authorities.

A reconciliation of income taxes at statutory rates with the reported taxes is as follows:

	In $
	2021 2020
Loss for the year before income taxes	(9,784,726) (14,299,514)
Expected income tax recovery Change in statutory, foreign tax, foreign exchange rates and other Non‐deductible expenses Share issue costs Change in unrecognized deductible temporarydifferences	(2,250,487) (3,431,883) (735,037) (959,938) 3,615,260 1,553,929 (154,308) (1,612) 1,986,933 2,530,604
Total income tax expense(recovery)	2,462,361 (308,900)
Current income tax expense Deferred income tax recovery	2,698,552 5,565 (236,191) (314,465)

Income tax payable is comprised of the following, based on filed income tax returns or current income tax provisions as of December 31, 2021 and 2020:

In$	2021 2020
Federal income tax payable relating to the year 2018 or prior Federal income tax payable relating to the year 2019 Federal income tax payable for Mankind stub period1 Federal income tax provision for 2021 California income taxprovision for 2021	31,820 54,760 3,431 6,645 512,358 ‐ 2,435,148 ‐ 292,393 ‐
Total income taxpayable	3,275,150 61,405

1 Six months ended March 31, 2021, for cut‐off between previous ownership and GABY ownership

The Corporation has recorded a provision for uncertain tax positions relating to the application of IRC Section 280E of $4,343,228 as at December 31, 2021 ($nil as at December 31, 2020) which is included in Other liabilities in the Consolidated Statements of Financial Position. The amounts recorded relate to federal income tax for prior open tax years. The full amount recorded is from tax periods of Mankind under the previous ownership and is covered by an indemnification clause in the Mankind purchase agreement as it relates to tax periods before the acquisition date. An indemnification asset of that amount has been recognized in consolidation and is included in Other assets. Since the acquisition date, the Corporation has taken a more conservative approach to Mankind’s income tax filings in order to reduce risk to the Corporation and ensure compliance with United States income tax legislation.

57 | P a g e G A B Y I n c .

GABY INC.

Notes to the Consolidated Financial Statements December 31, 2021 and 2020

In Canadian dollars, unless otherwise stated

For Canadian income tax purposes, the Corporation has losses carried forward from prior years which can be applied to reduce future years' taxable income. These losses expire as follows:

Expiry	Balance	Expiry	Balance
2026 2027 2028 2030 2031 2032 2033	15,105	2034 2035 2036 2037 2038 2039 2040 2041	288,500
	27,748		2,580,737
	89,553		2,851,694
	350		3,370,176
	145,291		6,110,466
	119,422		8,241,688
	895,431		4,706,752
			5,598,686
		Total	35,041,599

The Corporation also has capital losses of $7,889,363 which carry forward indefinitely to offset future capital gains. In addition to the losses carried forward presented above, the Corporation has losses for United States federal income tax purposes of USD 6,822,146 (CAD 8,634,108) which carry forward indefinitely, losses for California state income tax purposes of USD 14,188,873 (CAD 17,957,438) which expire in 2038‐2041, and losses for Arizona state income tax purposes of USD 246,207 (CAD 311,600) which expire in 2024‐2026.

Deferred income tax assets are recognized for loss carry‐forwards and other deductible temporary differences to the extent that the realization of the related tax benefit through future taxable profits is probable. With the exception of Mankind, the Corporation does not yet have a history of profitability or other supporting evidence of future profitability to support the recognition of deferred tax assets in excess of deferred tax liabilities. Accordingly, any net deferred tax assets by entity (other than Mankind) and by jurisdiction are not recognized. The Corporation’s net deferred income tax liabilities are as follows:

Deferred tax balances relating to:	In $
	2021 2020
Deferred tax assets: Losses available for offset against future taxable income Expenses deducted over futureperiods for taxpurposes	12,278,494 10,676,139 628,902 422,340
Unrecognized deferred tax assets Deferred tax assets unavailable for offset against liabilities	12,907,396 11,098,479 (12,582,311) (10,718,823) (190,153) ‐
Deferred tax assets available for offset against liabilities	134,932 379,656
Deferred tax liabilities: Intangible assets Long‐term debt Propertyand equipment	2,478,442 304,416 54,701 57,442 75,724 34,527
Deferred tax liabilities	2,608,867 396,385
Net deferred income tax liabilities	2,473,935 16,729

58 | P a g e G A B Y I n c .

GABY INC. Notes to the Consolidated Financial Statements December 31, 2021 and 2020

In Canadian dollars, unless otherwise stated

26) DISCONTINUED OPERATIONS

The Corporation shuttered its traditional food operations based in Canada in March 2020. The following amounts have been reclassified out of continuing operations in the Consolidated Statements of Loss and Comprehensive Loss for the years ended December 31, 2021 and 2020:

In $

In $
Net loss from discontinued operations comprised of:	2021 2020
Revenue	‐ 201,696
Cost of sales Direct inventory costs Allocated indirect costs Distribution costs	‐ 384,241 ‐ 213,154 ‐ 49,198
Total cost of sales	‐ 646,593
Gross margin	‐ (444,897)
Selling, general, and administrative expenses Employee salaries and benefits Consulting fees Administrative costs Advertising and promotion Sellingcosts	‐ 120,444 ‐ 6,961 ‐ 141,584 ‐ 18,158 ‐ 103,015
Total selling, general,and administrative expenses	‐ 390,162
Share‐based compensation and expenses Depreciation of plant and equipment Amortization of intangible assets	‐ 122,500 ‐ 4,634 ‐ ‐
Operatingloss from discontinued operations	‐ (962,193)
Other income (expense) Gain on lease termination Gain on disposal of assets Impairment losses Interest on lease liabilities Inventorywrite‐down	‐ 7,718 ‐ 12,010 ‐ ‐ ‐ (12,990) ‐ (206,317)
Total other income(expense)	‐ (199,579)
Net loss from discontinued operations	‐ (1,161,772)

Cash flows from discontinued operations for the years ended December 31, 2021 and 2020 are as follows:

In $ Net cash flows from discontinued operations:
	2021 2020
Net cash used in operating activities Net cash generated by investing activities Net cash used in financingactivities	‐ (222,867) ‐ 39,010 ‐ (66,805)
	‐ (250,662)

59 | P a g e G A B Y I n c .

GABY INC. Notes to the Consolidated Financial Statements December 31, 2021 and 2020

In Canadian dollars, unless otherwise stated

27) LOSS PER SHARE

Basic loss per share is calculated by dividing the net loss by the weighted average number of shares outstanding during the year. The potentially dilutive Common Shares issuable on the outstanding Warrants, Broker Warrants, RSUs, and Stock Options are non‐dilutive and are therefore excluded from the diluted loss per share for the periods in which they were outstanding. The weighted average numbers of shares outstanding for the year was 539,476,460 (2020 – 228,937,349).

28) OTHER ADJUSTMENTS TO ARRIVE AT CASH FLOW FROM OPERATIONS

In$ Note	2021 2020
Balance comprised of: Non‐cash government assistance income 24 Gain on extinguishment of debts 24 Loss (gain) on disposal of assets 24 Gain on lease terminations 24	‐ (262,167) (250,058) (61,255) 189,960 (12,973) (91,519) (207,106)
	(151,617) (543,501)

29) NET CHANGE IN NON‐CASH WORKING CAPITAL RELATED TO OPERATIONS

In$		2021 2020
Balance comprised of: Accounts receivable Inventories Prepaid expenses Other current asset Bank indebtedness Accounts payable and accrued liabilities Deferred revenue Income taxes payable	i	293,025 1,523,160 859,129 947,147 (285,774) 246,790 342,449 ‐ 152,080 718,066 3,661,052 26,291 ‐ 1,553,138 14,559
		3,506,324 6,544,788

• i) The change in bank indebtedness presented represents the amount of bank indebtedness moved from cash to a liability when the bank account providing the operating line was closed in September 2020 (see Note 9). Up to that date, the bank indebtedness balance was included in cash for purposes of the statement of cash flows because it was an integral part of cash management. When the bank account was closed, it no longer met the definition of cash.

60 | P a g e G A B Y I n c .

GABY INC.

Notes to the Consolidated Financial Statements December 31, 2021 and 2020

In Canadian dollars, unless otherwise stated

30) NON‐CASH TRANSACTIONS AND CASH FLOW DISCLOSURES

Non‐cash transactions took place during the years as follows:

In$

2021 2020

1 The following adjustments were recorded as a result of lease terminations: Increase in accounts receivable Decrease in property and equipment, net (including right of use assets) Decrease in security deposits Decrease in lease liabilities Decrease in accounts payable and accrued liabilities Gain on lease terminations 2 Payment of accounts payable through issuance of common shares: Increase in share capital Increase in contributed surplus Decrease in accounts payable Loss on extinguishment of debt 3 Extinguishment of debts through issuance of equity securities: Increase in accounts receivable Increase in prepaid expenses Decrease in promissory notes Decrease in accounts payable and amounts due to related parties Decrease in convertible debentures Decrease in short‐term notes payable Decrease in share issuance obligation Increase in common shares Increase in contributed surplus Loss on foreign exchange Gain on extinguishment of debt 4 Lease capitalization: Increase in lease liability Increase in right‐of‐use assets Decrease in prepaid expenses 5 Business acquisitions: Increase in share capital Increase in long‐term debt Increase in other current assets Increase in indemnification asset Increase in goodwill and intangible assets Increase in deferred tax liability relating to intangible assets Increase in consolidated assets (other than those listed above) Increase in consolidated liabilities (other than those listed above)

‐ 16,500 467,767 5,839,014 19,833 201,021 579,119 6,059,983 ‐ 232,579 91,519 269,027 743,223 547,844 8,000 ‐ 681,818 534,225 69,405 13,619 11,250 ‐ 243,750 ‐ 1,181,117 1,066,453 2,011,187 33,898 223,580 ‐ ‐ 98,093 38,270 ‐ 3,189,872 1,129,583 519,282 ‐ ‐ 6,013 ‐ 74,874 32,128 ‐ 33,293 ‐ 1,165 ‐ 6,789,474 ‐ 32,066,250 ‐ 959,547 ‐ 5,915,159 ‐ 47,250,533 ‐ 2,657,407 ‐ 14,626,800 ‐ 20,974,908 ‐

61 | P a g e G A B Y I n c .

GABY INC.

Notes to the Consolidated Financial Statements December 31, 2021 and 2020

In Canadian dollars, unless otherwise stated

GABY INC. Notes to the Consolidated Financial Statements December 31, 2021 and 2020 In Canadian dollars, unless otherwise stated
In $	2021 2020
6 Non‐cash equity issuance costs: Decrease in accounts payable Increase in contributed surplus Decrease in share capital (equity issuance costs recorded) 7 Accounts payable converted to long‐term debt: Increase in long‐term debt Decrease in accounts payable 8 Assumption of line of credit by KMP: Increase in due to related party Decrease in bank indebtedness 9 Spin off of Subscription Receipts: Decrease in share issuance obligation Increase in share capital Increase in contributed surplus 10 Settlement of vested RSUs with common shares: Increase in share capital Decrease in contributed surplus	85,153 ‐ 319,703 ‐ 404,856 ‐ 357,105 ‐ 357,105 ‐ 155,370 ‐ 155,370 ‐ 8,646,456 ‐ 7,435,952 ‐ 1,210,504 ‐ 188,198 ‐ 188,198 ‐

The Corporation paid income taxes of $1,346,683 during 2021 (2020 ‐ $nil). Interest paid is disclosed in the consolidated statements of cash flows.

31) FAIR VALUE OF FINANCIAL INSTRUMENTS

The Corporation's current financial instruments include cash, restricted cash, accounts receivable, other current asset, accounts payable and accrued liabilities, short‐term notes payable, promissory notes payable, and convertible debentures and are measured at amortized cost. The carrying values of these instruments approximate their fair value due to their short‐term maturities. The Corporation’s non‐current financial instruments include lease liabilities and long‐term debt, which are measured at amortized cost.

The Corporation’s activities are exposed to a variety of financial risks, including price risk, credit risk and liquidity risk. The Corporation’s overall risk management program focuses on the unpredictability of financial and economic markets and seeks to minimize potential adverse effects on the Corporation’s financial performance. Risk management is carried out by financial management in conjunction with overall corporate governance.

The Corporation is exposed to the following risks in respect of certain of the financial instruments held:

(a) Interest rate risk

The Corporation's exposure to interest rate fluctuations is with respect to the long‐term settlement payable included in long‐term debt which bears interest at floating rates after year 1 (see Note 17). The rates are tied to the US prime rate of interest. Rate changes are likely to be minimal. A 1.00% change in the US prime rate would increase interest expense over the remainder of the term of the loan by approximately $7,200 (USD 5,700).

62 | P a g e G A B Y I n c .

GABY INC. Notes to the Consolidated Financial Statements December 31, 2021 and 2020

In Canadian dollars, unless otherwise stated

(b) Credit risk

The Corporation is exposed to credit risk in the event of non‐performance by customers. The maximum credit risk is the fair value of the accounts receivable. The allowance for doubtful accounts and past due receivables is reviewed by management for each reporting period. The Corporation updates its estimate of the allowance for doubtful accounts based on the evaluation of the recoverability of accounts receivable balances of each customer taking into account historic collection trends, the contractual relationship with the customer and the nature of the customer. Management has determined that significant credit risk exists with relation to the remaining trade accounts receivable; accordingly, the majority has been reduced by an allowance. Management will continue to monitor the risk for these customers and seek to collect the accounts. See Note 4 for detail of the Corporation’s exposure to credit risk for trade receivables by aging of the accounts and by geographic area.

Accounts receivable from one major customer amounted to 73% of gross trade accounts receivable as at December 31, 2021 (2020 – 48%). However, concentration risk does not affect the Corporation with respect to this customer balance, as it relates to a customer in the Sonoma Pacific Distribution business, which has been permanently closed.

Credit risk relating to the Other current asset (see Note 3b) is low, as the Corporation controls recovery of this amount by reducing future interest payments.

(c) Foreign currency risk

The Corporation on a consolidated basis conducts most of its operations in United States dollars. However, the functional currency of GABY Inc. is the Canadian dollar. As at December 31, 2021, the following working capital balances denominated in US dollars were included in the accounts of GABY Inc.:

denominated in US dollars were included in the accounts of GABY Inc.:
	Receivable (Payable)
	USD CAD equivalent
Other current asset Accounts payable and accrued liabilities Short‐term notespayable	487,593 617,098 (317,225) (401,479) (15,000) (18,984)
Net exposure	155,368 196,635

In addition to the balances above, the Corporation has foreign exchange exposure with regards to long‐term debt totaling USD 26,201,900 (CAD 33,161,125). As at December 31, 2021, each one cent strengthening (weakening) in the USD relative to the CAD would decrease (increase) the Corporation’s comprehensive loss by about $260,000. The Corporation’s net exposure to foreign currency risk has not been hedged.

(d) Other price risk

The Corporation’s exposure to other price risk is limited since there are no significant financial instruments which fluctuate as a result of changes in market prices.

63 | P a g e G A B Y I n c .

GABY INC.

Notes to the Consolidated Financial Statements December 31, 2021 and 2020

In Canadian dollars, unless otherwise stated

(e) Liquidity risk

Prudent liquidity risk management implies maintaining sufficient cash and the availability of funding through an adequate amount of committed credit lines. The Corporation’s accounts payable and accrued liabilities, income taxes payable, short‐ term notes payable, promissory notes payable, convertible debentures, and current portions of lease liabilities and long‐ term debt are due within one year. The degree to which the Corporation is leveraged may reduce its ability to obtain additional financing for working capital and to finance investments to improve cash flows from operations.

The Corporation manages its liquidity risk through the management of its capital structure and financial leverage as outlined in Note 32. It also manages liquidity risk by continuously monitoring actual cash flows.

32) CAPITAL DISCLOSURE

The Corporation’s objectives when managing capital are:

• to ensure sufficient liquidity to enable the internal financing of capital projects;

• to develop a strong capital base to increase investor, creditor and market confidence; and

• to ultimately provide an adequate return to shareholders.

The Corporation’s capital is currently composed of share capital and contributed surplus, long‐term debt, convertible debentures, promissory notes payable, and short‐term notes payable. The Corporation’s primary uses of capital in the past have been to finance its operations, growth (internal and through business acquisitions), and property and equipment purchases. The Board does not establish quantitative return on capital criteria for management. The Corporation is not subject to any externally‐imposed capital requirements except for the aforementioned general security in Note 17.

33) CONTINGENCIES

From time to time, the Corporation is subject to legal proceedings and or claims in the normal course of business. Management vigorously defends any allegations under such suits or claims that arise from time to time and believes that the ultimate liability, if any, under any pending matters will not materially affect the financial position or results of operations of the Corporation.

34) STOCK APPRECIATION RIGHTS

In 2021 the Corporation issued nil (2020 ‐ 824,000) stock appreciation rights (SARs) to employees, consultants, and vendors of the Corporation. Total issued SARs units outstanding as at December 31, 2021 and 2020 was 15,007,000, including ineligible SARs which have been forfeited but not yet cancelled. The SARs hold no value until a liquidity event occurs, defined in the SARs Plan as either the sale of all or substantially all the assets or shares of the corporation. As of December 31, 2021, no liquidity event has occurred.

35) SEGMENTED INFORMATION

The Corporation’s chief operating decision makers are the Chief Executive Officer, the President and the Chief Financial Officer. They review the operating performance of the Corporation by two segments comprised of licensed and unlicensed channels, both of which are or were in the manufacturing, distribution, and marketing of consumer products. The licensed channel includes cannabis‐related products to which the manufacturing, sale and distribution are subject to

64 | P a g e G A B Y I n c .

GABY INC.

Notes to the Consolidated Financial Statements December 31, 2021 and 2020

In Canadian dollars, unless otherwise stated

regulation. The unlicensed channel includes all other non‐THC products, including CBD‐infused products, not subject to the licensing requirements in respect of cannabis. The accounting policies of the segments are the same as those described in the summary of significant accounting policies contained in the Annual Financial Statements. The chief operating decision makers utilize gross profit as a key measure in making operating decisions and assessing performance. With the acquisition of Mankind, the Unlicensed segment is immaterial and, accordingly, segmented figures are not presented.

36) SUBSEQUENT EVENTS

a) Issuance of equity instruments

Subsequent to December 31, 2021, the Corporation has issued the following:

• 5,689,066 common shares valued at $159,907 as share‐based compensation and payment of accounts payable

• 854,840 Units (each Unit comprising one common share and one common share purchase warrant) valued at $42,742 as payment of a finder’s fee accrued in 2021

• 331,667 common shares valued at $13,054 in satisfaction of vested RSUs

• 2,150,000 RSUs with estimated fair value of $36,013

b) Debt modifications

In March 2022, the terms of various of the convertible debentures totaling $471,116 and the promissory note payable were modified to further extend the due date to April 1, 2023.

c) Dissolution of Sonoma Pacific Distribution

Effective March 31, 2022, Sonoma Pacific Distribution was wound up and dissolved. The financial effect of this event is still being determined.

65 | P a g e G A B Y I n c .