Exhibit 99.2









CARDIOL THERAPEUTICS INC.

FINANCIAL STATEMENTS

YEARS ENDED DECEMBER 31, 2021 AND 2020

(EXPRESSED IN CANADIAN DOLLARS)















|                  | Tel: 514-931-0841                  | BDO Canada s.r.l./S.E.N.C.R.L./LLP
|----------------- | ---------------------------------- | ----------------------------------
|Fax: 514-931-9491 | 1000 De La Gauchetière Street West
|www.bdo.ca        | Suite 200                         
|                  | Montréal, Québec H3B 4W5          



Report of Independent Registered Public Accounting Firm



Shareholders and Board of Directors

Cardiol Therapeutics Inc.

Oakville, Ontario



Opinion on the Financial Statements



We have audited the accompanying statements
of financial position of Cardiol Therapeutics Inc. (the “Company”) as of December 31, 2021 and 2020, the related statements
of loss and comprehensive loss, changes in equity, and cash flows for each of the years then ended, and the related notes (collectively
referred to as the “financial statements”). In our opinion, the financial statements present fairly, in all material respects,
the financial position of the Company at December 31, 2021 and 2020, and the results of its operations and its cash flows for each of
the years then ended, in conformity with International Financial Reporting Standards as issued by the International Accounting
Standards Board.



Basis for Opinion



These financial statements are the responsibility
of the Company’s management. Our responsibility is to express an opinion on the Company’s financial statements based on our
audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (“PCAOB”)
and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable
rules and regulations of the Securities and Exchange Commission and the PCAOB.



We conducted our audits in accordance
with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether
the financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor were
we engaged to perform, an audit of its internal control over financial reporting. As part of our audits we are required to obtain an understanding
of internal control over financial reporting but not for the purpose of expressing an opinion on the effectiveness of the Company’s
internal control over financial reporting. Accordingly, we express no such opinion.



Our audits included performing procedures
to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that
respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial
statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as
evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.







We have served as the Company's auditor since 2018.



Montréal, Québec

March 23, 2022



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



BDO is the brand name for the BDO network and for
each of the BDO Member Firms.













Cardiol Therapeutics Inc.

Statements of Financial Position

(Expressed in Canadian Dollars)



|                                                                    |  | As at 
    December 31, 
    2021 |             |   | As at 
    December 31, 
    2020 |  
|------------------------------------------------------------------- |  | --------------------------------- | ----------- | - | --------------------------------- | -
|ASSETS                                                              |  |                                   |             |   |                                   |  
|                                                                    |  |                                   |             |   |                                   |  
|Current assets                                                      |  |                                   |             |   |                                   |  
|Cash
and cash equivalents (note 6)                                  |  | $                                 | 83,899,070  |   |                                   | $
|Accounts receivable                                                 |  |                                   | 65,739      |   |                                   |  
|Other receivables                                                   |  |                                   | 341,388     |   |                                   |  
|Prepaid expenses (note 17)                                          |  |                                   | 2,495,141   |   |                                   |  
|Prepaid inventory (note 15(iv))                                     |  |                                   | 339,051     |   |                                   |  
|Inventory                                                           |  |                                   | -           |   |                                   |  
|Total current assets                                                |  |                                   | 87,140,389  |   |                                   |  
|                                                                    |  |                                   |             |   |                                   |  
|Non-current assets                                                  |  |                                   |             |   |                                   |  
|Property and equipment (note 7)                                     |  |                                   | 356,493     |   |                                   |  
|Intangible assets (note 8)                                          |  |                                   | 379,246     |   |                                   |  
|Total assets                                                        |  | $                                 | 87,876,128  |   |                                   | $
|                                                                    |  |                                   |             |   |                                   |  
|EQUITY
AND LIABILITIES                                              |  |                                   |             |   |                                   |  
|                                                                    |  |                                   |             |   |                                   |  
|Current liabilities                                                 |  |                                   |             |   |                                   |  
|Accounts payable and accrued liabilities (note 17)                  |  | $                                 | 4,859,352   |   |                                   | $
|Current portion of lease liability (note 9)                         |  |                                   | 44,708      |   |                                   |  
|Derivative liability (note 10)                                      |  |                                   | 6,661,122   |   |                                   |  
|Total current liabilities                                           |  |                                   | 11,565,182  |   |                                   |  
|                                                                    |  |                                   |             |   |                                   |  
|Non-current liabilities                                             |  |                                   |             |   |                                   |  
|Lease liability (note 9)                                            |  |                                   | 72,871      |   |                                   |  
|Total liabilities                                                   |  |                                   | 11,638,053  |   |                                   |  
|                                                                    |  |                                   |             |   |                                   |  
|Equity                                                              |  |                                   |             |   |                                   |  
|Share
                                            capital (note 11) |  |                                   | 142,918,829 |   |                                   |  
|Warrants (note 13)                                                  |  |                                   | 4,176,780   |   |                                   |  
|Contributed surplus (note 12)                                       |  |                                   | 12,660,329  |   |                                   |  
|Deficit                                                             |  |                                   | (83,517,863 | ) |                                   |  
|Total equity                                                        |  |                                   | 76,238,075  |   |                                   |  
|Total equity and liabilities                                        |  | $                                 | 87,876,128  |   |                                   | $



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



Commitments (notes 8 and 15)



Approved on behalf of the Board:



|"David Elsley", Director |  | "Guillermo Torre-Amione", Director
|------------------------ |  | ----------------------------------





- 1 -







Cardiol Therapeutics Inc.

Statements of Loss and Comprehensive Loss (Expressed in Canadian Dollars)



|                                                     |  | Year Ended   |             |   | Year Ended   |  
|---------------------------------------------------- |  | ------------ | ----------- | - | ------------ | -
|                                                     |  | December 31, |             |   | December 31, |  
|                                                     |  | 2021         |             |   | 2020         |  
|Revenue                                              |  |              |             |   |              |  
|Sales                                                |  | $            | 78,760      |   |              | $
|                                                     |  |              |             |   |              |  
|Operating expenses (notes 12, 16, 17)                |  |              |             |   |              |  
|General and administration                           |  | $            | 27,873,140  |   |              | $
|Research and development                             |  |              | 10,870,421  |   |              |  
|Loss before other income (expenses)                  |  |              | (38,664,801 | ) |              |  
|Interest income                                      |  |              | 106,001     |   |              |  
|Gain (loss) on foreign exchange                      |  |              | 1,892,023   |   |              |  
|Change in derivative liability (note 10)             |  |              | 4,916,304   |   |              |  
|Other income (note 18)                               |  |              | 112,229     |   |              |  
|Net loss and comprehensive loss for the year         |  | $            | (31,638,244 | ) |              | $
|                                                     |  |              |             |   |              |  
|Basic and diluted net loss per share
    (note 14)   |  | $            | (0.73       | ) |              | $
|Weighted average number of common shares outstanding |  |              | 43,222,819  |   |              |  



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





- 2 -







Cardiol Therapeutics Inc.

Statements of Cash Flows  (Expressed in Canadian Dollars)



|                                                                         |  | Year Ended   |             |   | Year Ended   |  
|------------------------------------------------------------------------ |  | ------------ | ----------- | - | ------------ | -
|                                                                         |  | December 31, |             |   | December 31, |  
|                                                                         |  | 2021         |             |   | 2020         |  
|Operating activities                                                     |  |              |             |   |              |  
|Net loss and other comprehensive loss for the year                       |  | $            | (31,638,244 | ) |              | $
|Adjustments for:                                                         |  |              |             |   |              |  
|Depreciation of property and equipment                                   |  |              | 135,977     |   |              |  
|Amortization of intangible assets                                        |  |              | 84,444      |   |              |  
|Share-based compensation                                                 |  |              | 8,497,830   |   |              |  
|Change in derivative liability                                           |  |              | (4,916,304  | ) |              |  
|Accretion on lease liability                                             |  |              | 12,929      |   |              |  
|Shares for services                                                      |  |              | 4,112,647   |   |              |  
|Research and development expenses to be settled through warrant exercise |  |              | 83,421      |   |              |  
|Changes in non-cash working capital items:                               |  |              |             |   |              |  
|Accounts receivable                                                      |  |              | (59,946     | ) |              |  
|Other receivables                                                        |  |              | (127,258    | ) |              |  
|Prepaid expenses                                                         |  |              | (2,147,333  | ) |              |  
|Prepaid inventory                                                        |  |              | -           |   |              |  
|Inventory                                                                |  |              | 17,968      |   |              |  
|Accounts payable and accrued liabilities                                 |  |              | 2,393,090   |   |              |  
|Net cash used in operating activities                                    |  |              | (23,550,779 | ) |              |  
|                                                                         |  |              |             |   |              |  
|Investing activities                                                     |  |              |             |   |              |  
|Purchase of property and equipment                                       |  |              | (12,916     | ) |              |  
|Net cash used in investing activities                                    |  |              | (12,916     | ) |              |  
|                                                                         |  |              |             |   |              |  
|Financing activities                                                     |  |              |             |   |              |  
|Issuance of units                                                        |  |              | 84,083,757  |   |              |  
|Share issuance costs                                                     |  |              | (5,240,756  | ) |              |  
|Issuance of warrants, net of issuance costs                              |  |              | 8,147       |   |              |  
|Proceeds from stock options exercised                                    |  |              | 2,837,083   |   |              |  
|Proceeds from warrants exercised                                         |  |              | 11,801,263  |   |              |  
|Payment of lease liability                                               |  |              | (51,916     | ) |              |  
|Net cash provided by financing activities                                |  |              | 93,437,578  |   |              |  
|Net change in cash and cash equivalents                                  |  |              | 69,873,883  |   |              |  
|Cash and cash equivalents, beginning of year                             |  |              | 14,025,187  |   |              |  
|Cash and cash equivalents, end of year                                   |  | $            | 83,899,070  |   |              | $



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





- 3 -







Cardiol Therapeutics Inc.

Statements of Changes in Equity  (Expressed in Canadian Dollars)



|                                                 |  | Share capital |            |  |        |   |             | Contributed |  |   |            |   |  |         |           
|------------------------------------------------ |  | ------------- | ---------- |  | ------ | - | ----------- | ----------- |  | - | ---------- | - |  | ------- | ----------
|                                                 |  | Number        |            |  | Amount |   |             | Warrants    |  |   | surplus    |   |  | Deficit |           
|Balance,
    December 31, 2019                   |  |               | 25,877,686 |  |        | $ | 39,413,506  |             |  | $ | 1,731,250  |   |  | $       | 4,765,965 
|Issuance
    of units                            |  |               | 6,900,000  |  |        |   | 13,446,249  |             |  |   | 3,803,751  |   |  |         | -         
|Share
    issuance costs                         |  |               | -          |  |        |   | (1,243,485  | )           |  |   | 155,295    |   |  |         | -         
|Fair value
    of warrants expired               |  |               | -          |  |        |   | -           |             |  |   | (1,234,749 | ) |  |         | 1,234,749 
|Share-based
    compensation                     |  |               | -          |  |        |   | -           |             |  |   | -          |   |  |         | 2,765,059 
|Warrants
    exercised                           |  |               | 65,191     |  |        |   | 162,226     |             |  |   | 21,452     |   |  |         | -         
|Fair value
    of warrants exercised             |  |               | -          |  |        |   | 95,263      |             |  |   | (95,263    | ) |  |         | -         
|Shares
    for services                          |  |               | 17,414     |  |        |   | 49,712      |             |  |   | -          |   |  |         | -         
|Fair value
    of warrants earned                |  |               | -          |  |        |   | -           |             |  |   | 78,992     |   |  |         | -         
|Net
    loss and comprehensive loss for the year |  |               | -          |  |        |   | -           |             |  |   | -          |   |  |         | -         
|Balance,
    December 31, 2020                   |  |               | 32,860,291 |  |        | $ | 51,923,471  |             |  | $ | 4,460,728  |   |  | $       | 8,765,773 
|Issuance
    of units                            |  |               | 22,462,000 |  |        |   | 68,714,131  |             |  |   | 3,792,200  |   |  |         | -         
|Issuance
    of warrants, net of issuance costs  |  |               | -          |  |        |   | -           |             |  |   | 8,147      |   |  |         | -         
|Share
    issuance costs                         |  |               | -          |  |        |   | (5,003,222  | )           |  |   | (237,534   | ) |  |         | -         
|Fair value
    of expired warrants               |  |               | -          |  |        |   | -           |             |  |   | (75,886    | ) |  |         | 75,886    
|Options
    exercised                            |  |               | 998,333    |  |        |   | 2,837,083   |             |  |   | -          |   |  |         | -         
|Fair value
    of options exercised              |  |               | -          |  |        |   | 1,357,160   |             |  |   | -          |   |  |         | (1,357,160
|Warrants
    exercised                           |  |               | 3,675,283  |  |        |   | 11,656,287  |             |  |   | 144,976    |   |  |         | -         
|Fair value
    of warrants exercised             |  |               | -          |  |        |   | 3,999,272   |             |  |   | (3,999,272 | ) |  |         | -         
|Shares
    for services                          |  |               | 1,227,092  |  |        |   | 4,112,647   |             |  |   | -          |   |  |         | -         
|Share-based
    compensation                     |  |               | -          |  |        |   | -           |             |  |   | -          |   |  |         | 8,497,830 
|Fair value
    of warrants earned                |  |               | -          |  |        |   | -           |             |  |   | 83,421     |   |  |         | -         
|Performance
    share units exercised            |  |               | 700,000    |  |        |   | 3,322,000   |             |  |   | -          |   |  |         | (3,322,000
|Net
    loss and comprehensive loss for the year |  |               | -          |  |        |   | -           |             |  |   | -          |   |  |         | -         
|Balance, December 31, 2021                       |  |               | 61,922,999 |  |        | $ | 142,918,829 |             |  | $ | 4,176,780  |   |  | $       | 12,660,329



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





- 4 -







Cardiol
Therapeutics Inc.

Notes to Financial Statements Years Ended December 31, 2021 and 2020 (Expressed in Canadian Dollars)



|1. | Nature of operations
|-- | --------------------



Cardiol Therapeutics Inc. (the
 "Corporation") was incorporated under the laws of the Province of Ontario on January 19, 2017. The Corporation's registered
and legal office is located at 2265 Upper Middle Rd. E., Suite 602, Oakville, Ontario, L6H 0G5, Canada.



The Corporation is a clinical-stage
life sciences company focused on the research and clinical development of cannabidiol as an anti-fibrotic and anti-inflammatory therapy
for the treatment of cardiovascular disease ("CVD"). The Corporation's lead product, CardiolRx, is a pharmaceutically produced
oral cannabidiol formulation that is being clinically developed for use in cardiovascular medicine. CardiolRx is currently being evaluated
in a Phase II/III multi-national, randomized, double-blind, placebo-controlled study (the "LANCER" trial). LANCER is designed
to evaluate the efficacy and safety of CardiolRx as a cardioprotective therapy to reduce major cardiovascular and respiratory events
in patients hospitalized with COVID-19 who have a prior history of, or risk factors for, CVD, and to investigate the influence CardiolRx
has on key biomarkers associated with heart disease.



The Corporation has
also received an Investigational New Drug Application ("IND") authorization from the FDA to conduct a Phase II multi-national,
randomized, double-blind, placebo-controlled trial designed to evaluate the efficacy and safety of CardiolRx in acute myocarditis.
This disease remains an important cause of acute and fulminant heart failure and is a leading cause of sudden cardiac death in
people less than 35 years of age.



In addition, the Corporation is
developing a subcutaneous formulation of CardiolRx for the treatment of fibrosis and inflammation in the heart that is associated with
the development and progression of heart failure. Heart failure affects 26 million people in the developed world and remains a leading
cause of death and hospitalization, with associated annual healthcare costs in the U.S. alone exceeding $30 billion.



On December 20, 2018, the Corporation
completed its initial public offering (the "IPO") on the Toronto Stock Exchange (the "TSX"). As a result, the Corporation's
common shares commenced trading on that date on the TSX under the symbol "CRDL", and on May 12, 2021, warrants commenced trading
under the symbol "CRDL.WT.A". On May 30, 2019, the Corporation also began trading on the OTCQX Best Market ("OTCQX")
under the symbol "CRTPF". On August 10, 2021, the Corporation's common shares commenced trading on the Nasdaq Capital Market
("Nasdaq") under the symbol "CRDL". Concurrent with the listing on the Nasdaq, the common shares ceased to be quoted
on the OTCQX.



|2. | Significant accounting policies
|-- | -------------------------------



The policies applied in these
financial statements are based on IFRSs issued and outstanding as of March 23, 2022, the date the Board of Directors approved the statements.



|(a) | Statement of compliance
|--- | -----------------------



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



These financial statements have
been prepared on a historical cost basis. In addition, these financial statements have been prepared using the accrual basis of accounting
except for cash flow information.





- 5 -







Cardiol
Therapeutics Inc.

Notes to Financial Statements

Years Ended December 31, 2021 and 2020
(Expressed in
Canadian Dollars)



|2. | Significant accounting policies (continued)
|-- | -------------------------------------------



|(b) | Functional and presentation currency
|--- | ------------------------------------



These financial statements are
presented in Canadian dollars, being the functional currency of the Corporation. The functional currency for the Corporation is determined
by the currency of the primary economic environment in which it operates (“the functional currency”).



At the end of each reporting year,
monetary assets and liabilities denominated in foreign currencies are translated at the rates of exchange prevailing at that date; non-monetary
assets and liabilities carried at fair value that are denominated in foreign currencies are translated at the rates of exchange prevailing
at the date when fair value was determined; and non-monetary assets and liabilities that are measured in terms of historical cost in a
foreign currency are not retranslated. Such exchange differences arising from retranslation at year-end are recognized in the statement
of loss and comprehensive loss.



|(c) | Financial instruments
|--- | ---------------------



Recognition



The Corporation recognizes a financial
asset or financial liability on the statement of financial position when it becomes party to the contractual provisions of the financial
instrument. Financial assets are initially measured at fair value and are derecognized either when the Corporation has transferred substantially
all the risks and rewards of ownership of the financial asset, or when cash flows expire. Financial liabilities are initially measured
at fair value and are derecognized when the obligation specified in the contract is discharged, cancelled, or expired.



A write-off of a financial asset
(or a portion thereof) constitutes a derecognition event. A write-off occurs when the Corporation has no reasonable expectations of recovering
the contractual cash flows on a financial asset.



Classification and Measurement



The Corporation determines the
classification of its financial instruments at initial recognition. Financial assets and financial liabilities are classified according
to the following measurement categories:



|· | those to be measured subsequently at fair value, either through profit or loss (“FVTPL”)
or through other comprehensive income (“FVTOCI”); and,
|- | -----------------------------------------------------------------------------------------------------------------------------------------------

|· | those to be measured subsequently at amortized cost.
|- | ----------------------------------------------------



The classification and measurement
of financial assets after initial recognition at fair value depends on the business model for managing the financial asset and the contractual
terms of the cash flows. Financial assets that are held within a business model whose objective is to collect the contractual cash flows,
and that have contractual cash flows that are solely payments of principal and interest on the principal outstanding, are generally measured
at amortized cost at each subsequent reporting period. All other financial assets are measured at their fair values at each subsequent
reporting period, with any changes recorded through profit or loss or through other comprehensive income (which designation is made as
an irrevocable election at the time of recognition).



After initial recognition at fair value,
financial liabilities are classified and measured at either:



|· | amortized cost;
|- | ---------------

|· | FVTPL, if the Corporation has made an irrevocable election at the time of recognition, or when required
(for items such as instruments held for trading or derivatives); or,
|- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|· | FVTOCI, when the change in fair value is attributable to changes in the Corporation’s credit risk.
|- | --------------------------------------------------------------------------------------------------





- 6 -







Cardiol
Therapeutics Inc.

Notes to Financial Statements

Years Ended December 31, 2021 and 2020
(Expressed in
Canadian Dollars)



|2. | Significant accounting policies (continued)
|-- | -------------------------------------------



|(d) | Financial instruments (continued)
|--- | ---------------------------------



Classification and Measurement (continued)



The Corporation reclassifies financial
assets when and only when its business model for managing those assets changes. Financial liabilities are not reclassified.



Transaction costs that are directly
attributable to the acquisition or issuance of a financial asset or financial liability classified as subsequently measured at amortized
cost are included in the fair value of the instrument on initial recognition. Transaction costs for financial assets and financial liabilities
classified at fair value through profit or loss are expensed in profit or loss.



The Corporation’s
financial assets consist of cash and cash equivalents and accounts receivable, which are classified and measured at amortized cost. The
Corporation’s financial liabilities consist of accounts payable and accrued liabilities, and lease liability which are classified
and measured at amortized cost, and derivative liabilities which are classified and measured at FVTPL.



Impairment



The Corporation assesses all information
available, including on a forward-looking basis the expected credit losses associated with any financial assets carried at amortized cost.
The impairment methodology applied depends on whether there has been a significant increase in credit risk. To assess whether there is
a significant increase in credit risk, the Corporation compares the risk of a default occurring on the asset as at the reporting date
with the risk of default as at the date of initial recognition based on all information available, and reasonable and supportive forward-
looking information.



|(e) | Impairment of non-financial assets
|--- | ----------------------------------



At the end of each reporting period,
the Corporation reviews the carrying amounts of its non-financial assets to determine whether there is any indication that those assets
have suffered an impairment loss. Where such an indication exists, the recoverable amount of the asset is estimated in order to determine
the extent of the impairment loss. The recoverable amount is the higher of an asset’s fair value less cost to sell and its value
in use. 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. If the recoverable amount of
an asset is estimated to be less than its carrying amount, the carrying amount of the asset is reduced to its recoverable amount. An impairment
loss is recognized immediately in the statement of loss and comprehensive loss.



|(f) | Property and equipment
|--- | ----------------------



Property and equipment are stated
at cost, less accumulated depreciation and accumulated impairment losses. The initial cost of an asset comprises its purchase price or
construction cost, any costs directly attributable to bringing the asset into operation, the initial estimate of the rehabilitation obligation,
and for qualifying assets, borrowing costs. The purchase price or construction cost is the aggregate amount paid and fair value of any
other consideration given to acquire the asset. When parts of an item of property and equipment have different useful lives, they are
accounted for as separate items (major components) of property and equipment.





- 7 -







Cardiol
Therapeutics Inc.

Notes to Financial Statements
Years Ended December 31, 2021
and 2020
(Expressed in Canadian Dollars)



|2. | Significant accounting policies (continued)
|-- | -------------------------------------------



|(f) | Property and equipment (continued)
|--- | ----------------------------------



Property and equipment
are amortized as follows:



| | Computer equipment     | 30% per annum                                         | 
| | ---------------------- | ----------------------------------------------------- | 
| | Office equipment       | 20% per annum                                         | 
| | Equipment              | 30% per annum                                         | 
| | Right-of-use asset     | straight-line basis over the 5-year term of the lease | 
| | Leasehold improvements | straight-line basis over the 5-year term of the lease | 



An item of property and equipment
and any significant part initially recognized is derecognized upon disposal or when no future economic benefits are expected from its
use or disposal. Any gain or loss arising on derecognition of the asset (calculated as the difference between the net disposal proceeds
and the carrying amount of the asset) is included in the statement of loss and comprehensive loss when the asset is derecognized. The
assets’ residual values, useful lives and methods of depreciation are reviewed each reporting period, and adjusted prospectively
if appropriate.



|(g) | Cash and cash equivalents
|--- | -------------------------



Cash and cash equivalents in the
statements of financial position comprise cash at banks and short-term bank deposits with original maturity of three months or less. The
Corporation’s cash is invested with major financial institutions in business accounts that are available on demand by the Corporation
for its programs.



|(h) | Revenue Recognition
|--- | -------------------



The Corporation recognizes revenue
from customers when control of the goods is transferred to the customer, at an amount that reflects the consideration to which the Corporation
expects to be entitled in exchange for those goods. Sales tax collected from customers and remitted to governmental authorities are accounted
for on a net basis and therefore are excluded from revenues in the statements of loss and comprehensive loss. Contracts are not written
to include advertising allowances, tiered discounts, or any other performance obligation. Since there is only a single performance obligation,
there is no allocation of the transaction price.



Per Corporation policy, any product
that does not meet the contract mandated standards can be returned within the first 5 days of delivery in exchange for another product
or for a full refund. The Corporation accounts for customer returns utilizing the “expected value method.”



Expected amounts are excluded
from revenue and recorded as a “refund liability” that represents the Corporation’s obligation to return the customer’s
consideration. Estimates are based on actual historical data. Under IFRS 15, the Corporation must also recognize a “return asset”
for the value of goods recovered. The Corporation currently destroys all returned product for safety and quality purposes, and as such,
no return asset is recognized.



|(i) | Income taxes
|--- | ------------



Income tax on the profit or loss
for the years presented 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 it is recognized in equity.



Current tax expense is the expected
tax payable on the taxable income for the year, using tax rates enacted or substantively enacted at year end, adjusted for amendments
to tax payable with regards to previous years.





- 8 -







Cardiol
Therapeutics Inc.

Notes to Financial Statements

Years Ended December 31, 2021 and 2020
(Expressed in
Canadian Dollars)



|2. | Significant accounting policies (continued)
|-- | -------------------------------------------



|(i) | Income taxes (continued)
|--- | ------------------------



Deferred tax is provided using
the asset and liability method, providing for temporary differences between the carrying amounts of assets and liabilities for financial
reporting purposes and the amounts used for taxation purposes. Temporary differences are not provided for goodwill not deductible for
tax purposes and the initial recognition of assets or liabilities that affect neither accounting nor taxable profit. The amount of deferred
tax provided is based on the expected manner of realization or settlement of the carrying amount of assets and liabilities, using tax
rates enacted or substantively enacted at the financial position reporting date.



A deferred tax asset is recognized
only to the extent that it is probable that future taxable profits will be available against which the asset can be utilized. To the extent
that the Corporation does not consider it probable that a deferred tax asset will be recovered, it provides a valuation allowance against
that excess.



|(j) | Loss per share
|--- | --------------



The Corporation presents basic
and diluted loss per share data for its common shares, calculated by dividing the loss attributable to common shareholders of the Corporation
by the weighted average number of common shares outstanding during the year. Diluted loss per share is determined by adjusting the loss
attributable to common shareholders and the weighted average number of common shares outstanding for the effects of all instruments outstanding
that may add to the total number of common shares.



|(k) | Intangible assets
|--- | -----------------



Intangible assets are stated at
cost, less accumulated amortization and accumulated impairment losses. Intangible assets with finite useful lives are amortized over their
estimated useful lives. Research costs are expensed when incurred. The exclusive global license's useful life is 9 years.



|(l) | Share-based transactions
|--- | ------------------------



The fair value of share-based
transactions are recognized as an expense with a corresponding increase in equity. An individual is classified as an employee when the
individual is an employee for legal or tax purposes (direct employee) or provides services similar to those performed by a direct employee,
including directors of the Corporation.



The fair value of stock options
issued to employees is measured at the grant date and recognized on a graded-vesting basis over the period during which the options vest.
Stock options issued to non-employees are measured at the fair value of the goods or services received or the fair value of the equity
instruments issued if it is determined the fair value of the goods or services cannot be reliably measured, and are recorded at the date
the goods or services are received. The fair value of the options granted to employees is measured using the Black-Scholes option pricing
model, taking into account the terms and conditions upon which the options were granted. Consideration paid for the shares on the exercise
of stock options is credited to share capital. At each financial position reporting date, the amount recognized as an expense is adjusted
to reflect the actual number of share options that are expected to vest.



|(m) | Inventory
|--- | ---------



Inventories are valued at the lower
of cost and net realizable value. The cost of raw materials is determined on a specific identification basis for materials that are segregated
for a specific project and otherwise on a first-in, first-out basis.





- 9 -







Cardiol
Therapeutics Inc.

Notes to Financial Statements

Years Ended December 31, 2021 and 2020
 (Expressed in
Canadian Dollars)



|2. | Significant accounting policies (continued)
|-- | -------------------------------------------



|(n) | Investment tax credits
|--- | ----------------------



The investment tax credits ("ITC")
are amounts considered recoverable from the Canadian federal and provincial governments under the Scientific Research & Experimental
Development ("SR&ED") incentive program. The amounts claimed under the program represent amounts based on management estimates
of eligible research and development costs incurred during the year. Realization is subject to government approval. Refundable ITCs claimed
relating to qualifying expenditures are recorded to other income.



|3. | Significant accounting judgements and estimates
|-- | -----------------------------------------------



The preparation of these financial
statements requires management to make certain estimates, judgments, and assumptions that affect the reported amounts of assets and liabilities
at the date of the financial statements and reported amounts of expenses during the reporting period. Actual outcomes could differ from
these estimates. These financial statements include estimates that, by their nature, are uncertain. The impacts of such estimates are
pervasive throughout the financial statements and may require accounting adjustments based on future occurrences. Revisions to accounting
estimates are recognized in the period in which the estimate is revised and in future periods, if the revision affects both current and
future periods. These estimates are based on historical experience, current and future economic conditions, and other factors, including
expectations of future events that are believed to be reasonable under the circumstances.



Critical accounting estimates



Significant assumptions about
the future that management has made that could result in a material adjustment to the carrying amounts of assets and liabilities, in the
event that actual results differ from assumptions made, relate to, but are not limited to, the following:



|· | the inputs used in the Black-Scholes valuation model, including unobservable assumptions
when the Corporation was private at the time of issuance of certain equity instruments (share price and volatility), in accounting for
share-based payment transactions;
|- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|· | the valuation of the derivative liability;
|- | ------------------------------------------

|· | the estimate of the percentage of completion of certain research and development agreements;
|- | --------------------------------------------------------------------------------------------

|· | the valuation of income tax accounts; and
|- | -----------------------------------------

|· | the initial valuation and estimated useful lives of intangible assets.
|- | ----------------------------------------------------------------------



Critical accounting judgments



|· | management applied judgment in determining the functional currency of the Corporation as Canadian dollars;
|- | ----------------------------------------------------------------------------------------------------------

|· | management applied judgment in determining the Corporation’s ability to continue
as a going concern. The Corporation has incurred significant losses since inception. Management determined that a material going concern
uncertainty does not exist due to the sufficient working capital to support their planned expenditure levels. Additional financing may
come from product sales, licensing arrangements, research and commercial development partnerships, government grants, and/or corporate
finance arrangements;
|- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|· | management's assessment that no impairment exists for intangible assets, based
on the facts and circumstances that existed during the period; and
|- | -------------------------------------------------------------------------------------------------------------------------------------------------

|· | management's assessment of the impact the novel coronavirus (COVID-19) pandemic will have on operations.
|- | --------------------------------------------------------------------------------------------------------





- 10 -







Cardiol
Therapeutics Inc.

Notes to Financial Statements

Years Ended December 31, 2021 and 2020
(Expressed in
Canadian Dollars)



|4. | Capital risk management
|-- | -----------------------



The Corporation manages its capital
to ensure sufficient financial flexibility to achieve the ongoing business objectives including research activities, funding of future
growth opportunities and pursuit of acquisitions.



The Corporation monitors its capital
structure and makes adjustments according to market conditions in an effort to meet its objectives given the current outlook of the business
and industry in general. The Corporation may manage its capital structure by issuing new shares, repurchasing outstanding shares, adjusting
capital spending, or disposing of assets. The capital structure is reviewed by management and the Board of Directors on an ongoing basis.



The Corporation considers its capital
to be equity, comprising share capital, warrants, and contributed surplus less accumulated deficit, which at December 31, 2021 totaled
$76,238,075 (December 31, 2020 - $13,270,353).



The Corporation manages capital
through its financial and operational forecasting processes. The Corporation reviews its working capital and forecasts its future cash
flows based on operating expenditures, and other investing and financing activities. The forecast is updated based on activities related
to its research programs and reviewed with the Board of Directors of the Corporation.



The Corporation is not currently
subject to any capital requirements imposed by a lending institution or regulatory body. The Corporation expects that its capital resources
will be sufficient to discharge its liabilities as of the current statement of financial position date.



|5. | Financial instruments and risk management
|-- | -----------------------------------------



Fair value



The Corporation provides information
about its financial instruments measured at fair value at one of three levels according to the relative reliability of the inputs used
to estimate the fair value. The hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical assets
or liabilities and the lowest priority to unobservable inputs. The three levels of the fair value hierarchy are as follows:



|· | Level 1: quoted prices (unadjusted) in active markets for identical assets or liabilities;
|- | ------------------------------------------------------------------------------------------

|· | Level 2: inputs other than quotes prices included in Level 1 that are observable for the asset or liability,
either directly (i.e., as prices) or indirectly (i.e., derived from prices); and
|- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|· | Level 3: inputs for the asset or liability that are not based on observable market data (unobservable inputs).
|- | --------------------------------------------------------------------------------------------------------------



The Corporation's derivative liabilities
are measured at fair value Level 3 (see note 10). The fair value of all other financial instruments approximates their carrying amounts
due to the relatively short period to maturity.



Financial risks



The Corporation's activities expose
it to a variety of financial risks: credit risk, liquidity risk, and market risk (including interest rate and foreign currency risk).



Risk management is carried out by the Corporation's management
team under policies approved by the Board of Directors. The Board of Directors also provides regular guidance for overall risk management.



There were no changes to credit risk, liquidity risk, or
market risk for the year ended December 31, 2021.





- 11 -







Cardiol
Therapeutics Inc.

Notes to Financial Statements

Years Ended December 31, 2021 and 2020

(Expressed in
Canadian Dollars)



|5. | Financial instruments and risk management (continued)
|-- | -----------------------------------------------------



Financial risks (continued)



|(i) | Credit risk
|--- | -----------



Credit risk is the risk that one
party to a financial instrument will cause a financial loss for the other party by failing to discharge an obligation. The Corporation’s
financial instruments that are exposed to concentrations of credit risk relate primarily to cash and cash equivalents and accounts receivable.



The Corporation mitigates its risk
by maintaining its funds with large reputable financial institutions, from which management believes the risk of loss to be minimal. Accounts
receivable includes interest receivable relating to guaranteed investment certificates held with large reputable financial institutions,
as well as trade receivables. The Corporation’s management considers that all the above financial assets are of good credit quality.



|(ii) | Liquidity risk
|---- | --------------



Liquidity risk is the risk that
the Corporation encounters difficulty in meeting its obligations associated with financial liabilities. Liquidity risk includes the risk
that, as a result of operational liquidity requirements, the Corporation will not have sufficient funds to settle a transaction on the
due date; will be forced to sell financial assets at a value which is less than what they are worth; or may be unable to settle or recover
a financial asset. Liquidity risk arises from accounts payable and accrued liabilities, and the lease liability. The Corporation limits
its exposure to this risk by closely monitoring their cash flow.



The following table presents the contractual
maturities of the financial liabilities as of December 31, 2021:



|As at December 31, 2021                  |  | Carrying
 amount |           |  | Payable
 within 1 year |   |           | 1-3 years |  |   | Total  | 
|---------------------------------------- |  | ---------------- | --------- |  | ---------------------- | - | --------- | --------- |  | - | ------ | 
|Accounts payable and accrued liabilities |  | $                | 4,859,352 |  |                        | $ | 4,859,352 |           |  | $ | -      | 
|Lease liability                          |  |                  | 117,579   |  |                        |   | 44,708    |           |  |   | 72,871 | 
|                                         |  | $                | 4,976,931 |  |                        | $ | 4,904,060 |           |  | $ | 72,871 | 



|(iii) | Market risk
|----- | -----------



Market risk is the risk of loss
that may arise from changes in market factors, such as interest rates and foreign exchange rates.



|(a) | Interest rate risk
|--- | ------------------



The Corporation currently does
not have any short-term or long-term debt that is variable interest bearing and, as such, the Corporation’s current exposure to
interest rate risk is minimal.



|(b) | Foreign currency risk
|--- | ---------------------



Foreign exchange risk is the risk
that the fair value or future cash flows of a financial instrument will fluctuate because of changes in the foreign exchange rates. The
Corporation enters into foreign currency purchase transactions and has assets that are denominated in foreign currencies and thus is exposed
to the financial risk of earnings fluctuations arising from changes in foreign exchange rates and the degree of volatility of these rates.
The Corporation does not currently use derivative instruments to reduce its exposure to foreign currency risk.





- 12 -









|Cardiol Therapeutics Inc.
    Notes to Financial Statements
    Years Ended December 31, 2021 and 2020
    (Expressed in Canadian Dollars)
|------------------------------------------------------------------------------------------------------------------------------------------



|5. | Financial instruments and risk management (continued)
|-- | -----------------------------------------------------



Financial risks (continued)



(b)       Foreign currency
risk (continued)



The Corporation
holds balances in U.S. dollars which could give rise to exposure to foreign exchange risk. Sensitivity to a plus or minus 10% change in
the foreign exchange rate of the U.S. dollar against the Canadian dollar would affect the reported loss and comprehensive loss by approximately
$5,875,000 (December 31, 2020 - $219,000).



|6. | Cash and cash equivalents
|-- | -------------------------



Cash and cash equivalents include
a cashable Guaranteed Investment Certificate totaling $61,568 earning interest of 0.5% per annum and maturing on December 4, 2022 (December
31, 2020 - cashable Guaranteed Investment Certificate totaling $61,506 earning interest of 0.1% per annum and maturing on December 4,
2021). The Guaranteed Investment Certificate may be redeemed prior to maturity without penalty.



|7. | Property and equipment
|-- | ----------------------



|Cost                       |  | Right-of- 
use asset |         | Equipment |   | Leasehold
 improvements |  | Office  equipment |         | Computer
 equipment |   | Total 
|-------------------------- |  | -------------------- | ------- | --------- | - | ----------------------- |  | ----------------- | ------- | ------------------- | - | ------
|Balance, December 31, 2019 |  | $                    | 200,319 |           | $ | 116,578                 |  | $                 | 234,772 |                     | $ | 52,917
|Additions                  |  |                      | -       |           |   | 6,480                   |  |                   | 2,476   |                     |   | 12,799
|Balance, December 31, 2020 |  |                      | 200,319 |           |   | 123,058                 |  |                   | 237,248 |                     | $ | 65,716
|Additions                  |  |                      | -       |           |   | 7,712                   |  |                   | -       |                     |   | -     
|Balance, December 31, 2021 |  | $                    | 200,319 |           | $ | 130,770                 |  | $                 | 237,248 |                     | $ | 65,716



|Accumulated Depreciation   |  | Right-of-
     use asset |         |  | Equipment |   | Leasehold

    improvements |  | Office
 equipment |         | Computer
 equipment |   | Total 
|-------------------------- |  | ------------------------ | ------- |  | --------- | - | --------------------------- |  | ----------------- | ------- | ------------------- | - | ------
|Balance, December 31, 2019 |  | $                        | 23,373  |  |           | $ | 23,996                      |  | $                 | 4,192   |                     | $ | 3,816 
|Depreciation for the year  |  |                          | 40,068  |  |           |   | 29,056                      |  |                   | 50,840  |                     |   | 11,828
|Balance, December 31, 2020 |  | $                        | 63,441  |  |           | $ | 53,052                      |  | $                 | 55,032  |                     | $ | 15,644
|Depreciation for the year  |  |                          | 40,068  |  |           |   | 22,159                      |  |                   | 50,840  |                     |   | 10,015
|Balance, December 31, 2021 |  | $                        | 103,509 |  |           | $ | 75,211                      |  | $                 | 105,872 |                     | $ | 25,659





|Carrying value             |  | Right-of- use asset |         |  | Equipment |   | Leasehold
 improvements |  | Office equipment |         | Computer
 equipment |   | Total 
|-------------------------- |  | ------------------- | ------- |  | --------- | - | ----------------------- |  | ---------------- | ------- | ------------------- | - | ------
|Balance, December 31, 2020 |  | $                   | 136,878 |  |           | $ | 70,006                  |  | $                | 182,216 |                     | $ | 50,072
|Balance, December 31, 2021 |  | $                   | 96,810  |  |           | $ | 55,559                  |  | $                | 131,376 |                     | $ | 40,057



- 13 -









|Cardiol Therapeutics Inc.
    Notes to Financial Statements
    Years Ended December 31, 2021 and 2020
    (Expressed in Canadian Dollars)
|------------------------------------------------------------------------------------------------------------------------------------------





|8. | Intangible assets
|-- | -----------------



|Cost                                                                 |  | Exclusive globallicense agreement |        
|-------------------------------------------------------------------- |  | --------------------------------- | -------
|Balance, December 31, 2019, December 31, 2020, and December 31, 2021 |  | $                                 | 767,228





|Accumulated Amortization   |  | Exclusive globallicense agreement |        
|-------------------------- |  | --------------------------------- | -------
|Balance, December 31, 2019 |  | $                                 | 219,094
|Amortization for the year  |  |                                   | 84,444 
|Balance, December 31, 2020 |  | $                                 | 303,538
|Amortization for the year  |  |                                   | 84,444 
|Balance, December 31, 2021 |  | $                                 | 387,982





|Carrying Value             |  | Exclusive globallicense agreement |        
|-------------------------- |  | --------------------------------- | -------
|Balance, December 31, 2020 |  | $                                 | 463,690
|Balance, December 31, 2021 |  | $                                 | 379,246



Exclusive global agreement ("Meros License Agreement")



In 2017, the Corporation was granted
by Meros Polymers Inc. (“Meros”) the sole, exclusive, irrevocable license to patented nanotechnologies for use with any drugs
to diagnose, or treat, cardiovascular disease, cardiopulmonary disease, and cardiac arrhythmias. Meros is focused on the advancement of
nanotechnologies developed at the University of Alberta.



Under the Meros License Agreement,
Cardiol agreed to certain milestones and milestone payments, including the following: (i) payment of $100,000 upon enrolling the first
patient in a Phase IIB clinical trial designed to investigate the safety and indications of efficacy of one of the licensed technologies;
(ii) payment of $500,000 upon enrolling the first patient in a Pivotal Phase III clinical trial designed to investigate the safety and
efficacy of one of the licensed technologies; (iii) $1,000,000 upon receiving regulatory approval from the FDA for any therapeutic and/or
prophylactic treatment incorporating the licensed technologies. Cardiol also agreed to pay Meros the following royalties:



(a)5% of worldwide proceeds of net sales of the licensed technologies containing cannabinoids, excluding non-royalty sub-license income
in (b) below, that Cardiol receives from human and animal disease indications and derivatives as outlined in the Meros License Agreement;



(b)7% of any non-royalty sub-license income that Cardiol receives from human and animal disease indications and derivatives for licensed
technologies containing cannabinoids as outlined in the Meros License Agreement;



(c)3.7% of worldwide proceeds of net sales that Cardiol receives from the licensed technology in relation to human and animal cardiovascular
and/or cardiopulmonary disease, heart failure, and/or cardiac arrhythmia diagnosis and/or treatments using the drugs, excluding cannabinoids
included in (a) above, outlined in the Meros License Agreement; and







- 14 -











|Cardiol Therapeutics Inc.
    Notes to Financial Statements
    Years Ended December 31, 2021 and 2020
    (Expressed in Canadian Dollars)
|------------------------------------------------------------------------------------------------------------------------------------------





|8 | Intangible assets (continued)
|- | -----------------------------



(d)5% of any non-royalty sub-license income that Cardiol receives in relation to any human and animal heart disease, heart failure
and/or arrhythmias indications, excluding cannabinoids included in (b) above, as outlined in the Meros License Agreement.



In addition, as part of the consideration
under the Meros License Agreement, Cardiol (i) issued to Meros 1,020,000 common shares; and (ii) issued to Meros 1,020,000 special warrants
convertible automatically into common shares for no additional consideration upon the first patient being enrolled in a Phase 1 clinical
trial using the licensed technologies as described in the Meros License Agreement.



|9. | Lease liability
|-- | ---------------



|                           |  | Carrying Value |        
|-------------------------- |  | -------------- | -------
|Balance, December 31, 2019 |  | $              | 190,752
|Repayments                 |  |                | (50,472
|Accretion                  |  |                | 16,286 
|Balance, December 31, 2020 |  | $              | 156,566
|Repayments                 |  |                | (51,916
|Accretion                  |  |                | 12,929 
|Balance, December 31, 2021 |  | $              | 117,579
|Current portion            |  |                | 44,708 
|Long-term portion          |  | $              | 72,871 





(i) When measuring the lease liability
for the property lease that was classified as an operating lease, the Corporation discounted the lease payments using its incremental
borrowing rate. The property lease expires on May 31, 2024, and the lease payments were discounted with a 9% interest rate.



|10. | Derivative liability
|--- | --------------------



On November 5, 2021, the Corporation
issued 8,175,000 warrants as part of a unit financing (see note 11). Each warrant is exercisable into one common share at the price of
USD$3.75 per share for a period of three years from closing. The estimated fair value of $11,577,426 was assigned to the 8,175,000 warrants
issued by using a fair value market technique incorporating the Black-Scholes option pricing model, with the following assumptions: a
risk-free interest rate of 1.01%; an expected volatility factor of 81%; an expected dividend yield of 0%; and an expected life of 3 years.
The only significant unobservable input is the volatility, which could cause an increase or decrease in fair value. The warrants have
been classified as a derivative liability on the statement of financial position and are re-valued at each reporting date, as the warrants
were issued in a currency other than the Corporation's functional currency. As at December 31, 2021, the fair value of the derivative
liability was $6,661,122, resulting in a change of derivative liability for the year ended December 31, 2021 of $4,916,304 (December 31,
2020 - nil).





- 15 -







|Cardiol Therapeutics Inc.
    Notes to Financial Statements
    Years Ended December 31, 2021 and 2020
    (Expressed in Canadian Dollars)
|------------------------------------------------------------------------------------------------------------------------------------------





|10. | Derivative liability (continued)
|--- | --------------------------------



Significant assumptions used in determining the fair value
of the derivative warrant liabilities at December 31, 2021 are as follows:





|                        |  | Year Ended
 December 31,
 2021 |     
|----------------------- |  | ------------------------------ | ----
|Share price             |  | USD$                           | 1.85
|Exercise price          |  | USD$                           | 3.75
|Risk-free interest rate |  | 1.02                           | %   
|Expected volatility     |  | 82                             | %   
|Expected life in years  |  | 2.85                           |     
|Expected dividend yield |  | Nil                            |     



|11. | Share capital
|--- | -------------



a) Authorized share capital



The authorized share capital consisted of unlimited
number of common shares. The common shares do not have a par value. All issued shares are fully paid.



b) Common shares issued





|                                                |  | Number of
 common
 shares |            |  | Amount |  
|----------------------------------------------- |  | ------------------------- | ---------- |  | ------ | -
|Balance, December 31, 2019                      |  |                           | 25,877,686 |  |        | $
|Shares for services (i)                         |  |                           | 17,414     |  |        |  
|Issuance of units (ii)                          |  |                           | 6,900,000  |  |        |  
|Share issuance costs (ii)                       |  |                           | -          |  |        |  
|Fair value of warrants (note 13)                |  |                           | -          |  |        |  
|Warrants exercised (note 13)                    |  |                           | 65,191     |  |        |  
|Fair value of warrants exercised (note 13)      |  |                           | -          |  |        |  
|Fair value of warrants earned (note 13)         |  |                           | -          |  |        |  
|Balance, December 31, 2020                      |  |                           | 32,860,291 |  |        | $
|Issuance of units (iii, iv)                     |  |                           | 22,462,000 |  |        |  
|Fair value of warrants (iii, iv)                |  |                           | -          |  |        |  
|Share issuance cost (iii, iv)                   |  |                           | -          |  |        |  
|Shares for services (v)                         |  |                           | 1,227,092  |  |        |  
|Stock options exercised (note 12)               |  |                           | 998,333    |  |        |  
|Fair value of stock options exercised (note 12) |  |                           | -          |  |        |  
|Warrants exercised (note 13)                    |  |                           | 3,675,283  |  |        |  
|Fair value of warrants exercised (note 13)      |  |                           | -          |  |        |  
|Performance share units exercised (note 12)     |  |                           | 700,000    |  |        |  
|Balance, December 31, 2021                      |  |                           | 61,922,999 |  |        | $





- 16 -









|Cardiol Therapeutics Inc.
    Notes to Financial Statements
    Years Ended December 31, 2021 and 2020
    (Expressed in Canadian Dollars)
|------------------------------------------------------------------------------------------------------------------------------------------



11. Share capital (continued)



(i) March 30, 2020, the Corporation issued
6,914 common shares, with a fair value of $20,742, in exchange for $28,140 of services rendered. The valuation was based on the fair
value of the shares issued. As a result, the Corporation recorded other income of $7,398. On November 2, 2020, the Corporation
issued 6,500 common shares, with a fair value of $18,850, and on December 17, 2020, issued 4,000 common shares with a fair value of
$10,120 for services rendered. The fair value of the shares issued on November 2, 2020 and December 17, 2020 were determined to be
equal to the value of the services rendered.



(ii)On
June 4, 2020, the Corporation completed its short form prospectus offering by issuing 6,900,000 common share units at $2.50 per unit
for gross proceeds of $17,250,000. Each unit consisted of one common share and one-half of one common share purchase warrant. Each
whole warrant was exercisable into one common share at the price of $3.25 per share for a period of two years from closing,
accelerated to October 12, 2021 as the volume weighted average trading price of the common shares was equal to or greater than $4.50
for a ten consecutive trading day period.



The fair value of $3,803,751 was
assigned to the 3,450,000 warrants issued as part of the units as estimated by using a fair value market technique incorporating the Black-Scholes
option pricing model, using the following assumptions: a risk-free interest rate of 0.32%; an expected volatility factor of 85%; an expected
dividend yield of 0%; and an expected life of 2 years.



The underwriters were paid cash
fees of $735,000 and 294,000 compensation warrants. Each compensation warrant entitled the holder to acquire one additional common share
unit of the Corporation at $2.50 for a period of 24 months from closing. The grant date fair value of $507,059 was assigned to the compensation
warrants issued as estimated by using a fair value market technique incorporating the Black-Scholes option pricing model, using the following
assumptions: a risk-free interest rate of 0.32%; an expected volatility factor of 85%; an expected dividend yield of 0%; and an expected
life of 2 years.



(iii)On
May 12, 2021, the Corporation completed its short form base shelf prospectus offering by issuing 6,112,000 common share units at
$3.60 per unit for gross proceeds of $22,003,200, as well as an additional 433,400 warrants at $0.02 per warrant for $8,668. Each
unit consisted of one common share and one-half of one common share purchase warrant. Each whole warrant is exercisable into one
common share at the price of $4.60 per share for a period of three years from closing. The underwriters were paid cash fees of
$1,025,590.



The fair value of $3,792,200 was
assigned to the 3,056,000 warrants issued as part of the units as estimated by using a fair value market technique incorporating the Black-Scholes
option pricing model, using the following assumptions: a risk-free interest rate of 0.53%; an expected volatility factor of 81%; an expected
dividend yield of 0%; and an expected life of 3 years.



(iv)On
November 5, 2021, the Corporation completed its short form base shelf prospectus offering by issuing 16,350,000 common share units at
USD$3.07 per unit for gross proceeds of USD$50,194,500 ($62,080,558). Each unit consisted of one common share and one-half of one common
share purchase warrant. Each whole warrant is exercisable into one common share at the price of USD$3.75 per share for a period of three
years from closing. The underwriters were paid cash fees of USD$3,011,670 ($3,724,833).



The fair value of $11,577,426
was assigned to the 8,175,000 warrants issued as part of the units as estimated by using a fair value market technique incorporating the
Black-Scholes option pricing model (see note 10) on the statement of financial position and are re-valued at each reporting date.





- 17 -







|Cardiol Therapeutics Inc.
    Notes to Financial Statements
    Years Ended December 31, 2021 and 2020
    (Expressed in Canadian Dollars)
|------------------------------------------------------------------------------------------------------------------------------------------





|11. | Share capital (continued)
|--- | -------------------------



(v)During the year ended December 31, 2021, the Corporation issued 1,227,092 shares for services with a cumulative fair value of $4,112,647.
The fair value of the shares was determined to be equal to the value of the services rendered. Included within these issuances are the
following shares subject to vesting conditions: 100,000 restricted common shares that contain service-based conditions and vest 1/4 on
each of September 29, 2021, March 29, 2022, September 29, 2022, and March 29, 2023; and 100,000 common shares that vest 1/4 on each of
November 17, 2021, February 17, 2022, May 17, 2022, and August 17, 2022.



|12. | Share-based payments
|--- | --------------------



The Corporation has adopted an
Omnibus Equity Incentive Plan in accordance with the policies of the TSX, which permits the grant or issuance of options, Restricted Share
Units ("RSUs"), Performance Share Units ("PSUs") and Deferred Share Units ("DSUs"), as well as other share-based
payment arrangements. The maximum number of shares that may be issued upon the exercise or settlement of awards granted under the plan
may not exceed 15% of the Corporation's issued and outstanding shares from time to time. The Board of Directors determines the price per
common share and the number of common shares which may be allotted to directors, officers, employees, and consultants, and all other terms
and conditions of the option, subject to the rules of the TSX.



(a) Stock Options





|                           |  |  | Number of 
stock options |           |   | Weighted average
exercise price ($) |  
|-------------------------- |  |  | ------------------------ | --------- | - | ----------------------------------- | -
|Balance, December 31, 2019 |  |  |                          | 1,760,000 |   |                                     | $
|Issued                     |  |  |                          | 1,304,300 |   |                                     |  
|Expired                    |  |  |                          | (203,000  | ) |                                     |  
|Balance, December 31, 2020 |  |  |                          | 2,861,300 |   |                                     | $
|Issued                     |  |  |                          | 2,666,666 |   |                                     |  
|Expired                    |  |  |                          | (227,833  | ) |                                     |  
|Exercised                  |  |  |                          | (998,333  | ) |                                     |  
|Balance, December 31, 2021 |  |  |                          | 4,301,800 |   |                                     | $





At the grant date, the fair value stock options issued was
estimated using the Black-Scholes option pricing model based on the following weighted average assumptions:





|                                          |  | Year Ended
 December 31,
 2021 |      |   | Year Ended
 December 31,
 2020 |  
|----------------------------------------- |  | ------------------------------ | ---- | - | ------------------------------ | -
|Fair value of stock options at grant date |  | $                              | 2.33 |   |                                | $
|Share price                               |  | $                              | 4.04 |   |                                | $
|Exercise price                            |  | $                              | 4.04 |   |                                | $
|Risk-free interest rate                   |  |                                | 0.73 | % |                                |  
|Expected volatility                       |  |                                | 93   | % |                                |  
|Expected life in years                    |  |                                | 3.71 |   |                                |  
|Expected dividend yield                   |  |                                | Nil  |   |                                |  





- 18 -







|Cardiol Therapeutics Inc.
    Notes to Financial Statements
    Years Ended December 31, 2021 and 2020
    (Expressed in Canadian Dollars)
|------------------------------------------------------------------------------------------------------------------------------------------





|12. | Share-based payments (continued)
|--- | --------------------------------



|(a) | Stock Options (continued)
|--- | -------------------------



The following table reflects the actual stock options issued
and outstanding as of December 31, 2021:



|Expiry date        |  |  | Exercise
 price ($) |      |  | Weighted
average
remaining
contractual
life (years) |  |      | Number of 
options
 outstanding |  |  | Number
of
options
vested
(exercisable) | 
|------------------ |  |  | ------------------- | ---- |  | --------------------------------------------------- |  | ---- | ------------------------------- |  |  | -------------------------------------- | 
|June 22, 2022      |  |  |                     | 2.58 |  |                                                     |  | 0.47 |                                 |  |  | 83,334                                 | 
|February 8, 2023   |  |  |                     | 4.56 |  |                                                     |  | 1.11 |                                 |  |  | 416,666                                | 
|February 18, 2023  |  |  |                     | 4.80 |  |                                                     |  | 1.13 |                                 |  |  | 560,000                                | 
|February 22, 2023  |  |  |                     | 4.46 |  |                                                     |  | 1.15 |                                 |  |  | 130,000                                | 
|October 15, 2024   |  |  |                     | 3.23 |  |                                                     |  | 2.79 |                                 |  |  | 60,000                                 | 
|December 2, 2024   |  |  |                     | 4.08 |  |                                                     |  | 2.92 |                                 |  |  | 60,000                                 | 
|December 5, 2024   |  |  |                     | 3.69 |  |                                                     |  | 2.93 |                                 |  |  | 60,000                                 | 
|February 23, 2025  |  |  |                     | 3.54 |  |                                                     |  | 3.15 |                                 |  |  | 81,800                                 | 
|August 16, 2025    |  |  |                     | 5.00 |  |                                                     |  | 3.63 |                                 |  |  | 200,000                                | 
|August 19, 2025    |  |  |                     | 2.12 |  |                                                     |  | 3.64 |                                 |  |  | 100,000                                | 
|August 30, 2025    |  |  |                     | 5.00 |  |                                                     |  | 3.67 |                                 |  |  | 480,000                                | 
|October 7, 2025    |  |  |                     | 2.90 |  |                                                     |  | 3.77 |                                 |  |  | 35,000                                 | 
|December 2, 2025   |  |  |                     | 2.59 |  |                                                     |  | 3.92 |                                 |  |  | 130,000                                | 
|January 2, 2026    |  |  |                     | 4.30 |  |                                                     |  | 4.01 |                                 |  |  | 150,000                                | 
|January 24, 2026   |  |  |                     | 5.34 |  |                                                     |  | 4.07 |                                 |  |  | 60,000                                 | 
|March 29, 2026     |  |  |                     | 4.51 |  |                                                     |  | 4.24 |                                 |  |  | 400,000                                | 
|April 1, 2026      |  |  |                     | 5.77 |  |                                                     |  | 4.25 |                                 |  |  | 140,000                                | 
|April 4, 2026      |  |  |                     | 5.42 |  |                                                     |  | 4.26 |                                 |  |  | 60,000                                 | 
|May 12, 2026       |  |  |                     | 3.00 |  |                                                     |  | 4.36 |                                 |  |  | 75,000                                 | 
|June 5, 2026       |  |  |                     | 3.26 |  |                                                     |  | 4.43 |                                 |  |  | 60,000                                 | 
|August 16, 2026    |  |  |                     | 3.26 |  |                                                     |  | 4.63 |                                 |  |  | 60,000                                 | 
|August 24, 2026    |  |  |                     | 3.81 |  |                                                     |  | 4.65 |                                 |  |  | 140,000                                | 
|September 13, 2026 |  |  |                     | 4.88 |  |                                                     |  | 4.70 |                                 |  |  | 55,000                                 | 
|December 8, 2026   |  |  |                     | 2.65 |  |                                                     |  | 4.94 |                                 |  |  | 380,000                                | 
|December 8, 2026   |  |  |                     | 3.59 |  |                                                     |  | 4.94 |                                 |  |  | 325,000                                | 
|                   |  |  |                     | 4.16 |  |                                                     |  | 3.30 |                                 |  |  | 4,301,800                              | 



|(b) | Performance Share Units and Other Share-Awards
|--- | ----------------------------------------------



The Corporation has
also issued performance share units ("PSUs") to certain consultants of the Corporation. Grants of PSUs require the
completion of certain performance criteria specific to each grant. During the year ended December 31, 2021, 1,900,000 PSUs have been
granted. Of these, 700,000 have been exercised for a cumulative value of $3,322,000. As of December 31, 2021 there are 1,200,000
PSUs outstanding (December 31, 2020 - nil). These PSUs have an expiry date of June 30, 2022.



- 19 -













Cardiol Therapeutics Inc.

Notes to Financial Statements

Years Ended December 31, 2021 and 2020

(Expressed in
Canadian Dollars)





|13. | Warrants
|--- | --------



|                                   |  | Number of
 warrants |            |   | Amount |  
|---------------------------------- |  | ------------------- | ---------- | - | ------ | -
|Balance, December 31, 2019         |  |                     | 4,212,026  |   |        | $
|Issued (ii) (note 11 (ii))         |  |                     | 3,762,796  |   |        |  
|Expired                            |  |                     | (3,388,026 | ) |        |  
|Exercised                          |  |                     | (65,191    | ) |        |  
|Earned (i)                         |  |                     | -          |   |        |  
|Balance, December 31, 2020         |  |                     | 4,521,605  |   |        | $
|Issued (ii), (note 11 (iii), (iv)) |  |                     | 11,792,602 |   |        |  
|Expired                            |  |                     | (186,746   | ) |        |  
|Exercised                          |  |                     | (3,675,283 | ) |        |  
|Earned (i)                         |  |                     | -          |   |        |  
|Balance, December 31, 2021         |  |                     | 12,452,178 |   |        | $



(i)During the year ended December 31, 2021, 20,856 warrants with a fair value of $83,421 (year ended December 31, 2020 - 19,748 warrants
with a fair value of $78,992) were earned pursuant to the Caro Development Agreement (see note 15 (iii)).



(ii)128,203 warrants with a fair value of $144,976 carrying an exercise price of $3.25 and an original expiry date of June 4, 2022,
are included in this amount as a result of the exercise of 256,409 warrants carrying a price of $2.50 (December 31, 2020 - 18,796 warrants
with a fair value of $21,452 carrying an exercise price of $3.25, and as a result of the exercise of 37,591 warrants carrying a price
of $2.50). At the grant date, the fair value of the warrants issued was estimated using the Black-Scholes option pricing model based on
the following weighted average assumptions:





|                                     |  | Year Ended   |      |   | Year Ended   |  
|------------------------------------ |  | ------------ | ---- | - | ------------ | -
|                                     |  | December 31, |      |   | December 31, |  
|                                     |  | 2021         |      |   | 2020         |  
|Fair value of warrants at grant date |  | $            | 1.13 |   |              | $
|Share price                          |  | $            | 3.88 |   |              | $
|Exercise price                       |  | $            | 3.25 |   |              | $
|Risk-free interest rate              |  |              | 0.16 | % |              |  
|Expected volatility                  |  |              | 83   | % |              |  
|Expected life in years               |  |              | 1.10 |   |              |  
|Expected dividend yield              |  |              | Nil  |   |              |  





- 20 -











Cardiol Therapeutics Inc.

Notes to Financial Statements

Years Ended December 31, 2021 and 2020

(Expressed in
Canadian Dollars)





|13. | Warrants (continued)
|--- | --------------------



The following table reflects the
actual warrants issued and outstanding as of December 31, 2021, excluding 1,020,000 special warrants convertible automatically into common
shares for no additional consideration in accordance with the original escrow release terms as described in the Meros License Agreement
(see note 8):



|Expiry date         |  | Exercise
 price ($) |      |  | Remaining
contractual
life (years) |  |      | Warrants
 exercisable | 
|------------------- |  | ------------------- | ---- |  | ---------------------------------- |  | ---- | --------------------- | 
|August 31, 2022     |  |                     | 4.00 |  |                                    |  | 0.64 |                       | 
|May 12, 2024        |  |                     | 4.60 |  |                                    |  | 2.36 |                       | 
|November 5, 2024(1) |  |                     | 4.79 |  |                                    |  | 2.85 |                       | 
|                    |  |                     | 4.69 |  |                                    |  | 2.57 |                       | 



(1) Warrants carry an exercise
price of USD$3.75. This amount was translated to CAD for presentation purposes at the December 31, 2021 rate of 1.28. These warrants are
classified as a derivative liability on the statement of financial position (see note 10).



|14. | Loss per share
|--- | --------------



For the year ended December 31,
2021, basic and diluted loss per share has been calculated based on the loss attributable to common shareholders of $31,638,244 (year
ended December 31, 2020 - $20,640,935) and the weighted average number of common shares outstanding of 43,222,819 (year ended December
31, 2020 - 29,857,136). Diluted loss per share did not include the effect of stock options, PSUs, other share-awards, and warrants as
they are anti- dilutive.



| | 15. | Commitments
| | --- | -----------



(i)The Corporation has leased premises with third parties. The minimum committed lease payments, which include the lease liability
payments shown as base rent, are approximately as follows:



|     |  | Base rent |         |  | Variable rent |   |         | Total | 
|---- |  | --------- | ------- |  | ------------- | - | ------- | ----- | 
|2022 |  | $         | 53,934  |  |               | $ | 51,846  |       | 
|2023 |  |           | 55,376  |  |               |   | 51,846  |       | 
|2024 |  |           | 23,073  |  |               |   | 21,603  |       | 
|     |  | $         | 132,383 |  |               | $ | 125,295 |       | 



(ii)The Corporation has signed various agreements with consultants to provide services. Under the agreements, the Corporation has the
following remaining commitments.



|2022 |  | $ | 689,662 | 
|---- |  | - | ------- | 





- 21 -











Cardiol Therapeutics Inc.

Notes to Financial Statements

Years Ended December 31, 2021 and 2020

(Expressed in
Canadian Dollars)



|15. | Commitments (continued)
|--- | -----------------------



(iii)Cardiol entered into a development agreement (the “Caro Development Agreement”) with the Clinical Academic Research
Organization, S.A. DE C.V. (“Caro”) dated August 28, 2018, for the further research and development of proprietary drug formulations
for the treatment of heart failure. Caro is a Mexican corporation dedicated to providing clinical and scientific experimentation and consulting,
as well as performing development activities by itself or through third-party providers.



Pursuant to the terms of the Caro
Development Agreement, Caro will provide scientific experimentation, research activities, medical drug development activities, and medical
drug formulation and discovery to Cardiol (the “Development Activities”), as set out in a development plan (the “Development
Plan”). Under the Caro Development Agreement, Caro may also engage third-party providers of development activities in support of
the Development Plan, which is anticipated to be limited to third-party vendors of materials.



Pursuant to the terms of the Caro
Development Agreement, Cardiol will immediately upon execution of the Caro Development Agreement allot and set aside 824,000 Common Shares
of Cardiol, and issue to Caro 824,000 warrants (the “Caro Compensation Warrants”), each warrant having the following qualifications:
(i) an expiry date of August 31, 2022, or such earlier date as may be specified by a relevant stock exchange; (ii) an exercise price of
$4 per share (to be settled through the issuance of invoices by Caro); and (iii) each of the Caro Compensation Warrants entitles Caro
to purchase one Common Share of Cardiol for the exercise price. Cardiol also further agreed to pay Caro US$400,000 in cash (paid).



Pursuant to the terms of the Caro
Development Agreement, both Cardiol and Caro may terminate the Caro Development Agreement if either party believes in good faith that
the continued performance of the Development Activities may be commercially unwise, jeopardize safety, or otherwise be unethical or illegal.
However, if Caro terminates the Caro Development Agreement for any reason except breach of contract by Cardiol, or terminates the development
activities under the contract prior to achievement of all milestones in the Development Plan, then any unexercised Caro Compensation Warrants
that are not related to Development Activities and milestones in the Development Plan that have been attained up to the time of termination
of the Caro Development Agreement shall be deemed terminated as of the time of termination of the Caro Development Agreement.



Further, if Cardiol terminates
the Caro Development Agreement for any reason (including breach of contract by Caro), or requires Caro to terminate the Development Activities
prior to achievement of all milestones in the Development Plan, then the Caro Compensation Warrants issued to Caro that can be invoiced
for the CARO Development Activities completed up to the time of termination shall be considered to have been earned notwithstanding such
termination.



The CARO Compensation Warrants
that cannot be exercised (because invoices for CARO Development Activities not completed cannot be issued) will be deemed terminated,
null and void as of termination.



(iv)Cardiol entered into an exclusive supply agreement (the "Exclusive Supply Agreement”) with Noramco, Inc. (“Noramco”)
dated September 28, 2018, as amended on December 7, 2018, December 11, 2018, July 2, 2019 and September 11, 2019, and November 12, 2019
pursuant to which Noramco will be the exclusive supplier of pharmaceutical cannabidiol for Cardiol, provided Noramco is able to meet Cardiol’s
supply requirements.



During 2020,
the Exclusive Supply Agreement was assigned to Purisys, LLC ("Purisys"), an affiliate of Noramco headquartered in Athens, Georgia.
This assignment had no impact on Cardiol’s rights under the Exclusive Supply Agreement.





- 22 -











Cardiol Therapeutics Inc.

Notes to Financial Statements

Years Ended December 31, 2021 and 2020

(Expressed in
Canadian Dollars)



|15. | Commitments (continued)
|--- | -----------------------



(iv)(continued) Pursuant to the terms of the Exclusive Supply Agreement, Cardiol paid a non-refundable payment of US$3,000,000 (the
 “Exclusivity Payment”). The Exclusivity Payment represents a prepayment for inventory and is being credited towards purchases.



Effective upon entering into a
supply agreement with Shoppers Drug Mart Inc. on March 16, 2020, Purisys shall not sell pharmaceutical cannabidiol to any third party
for use in the production of products sold to retail pharmacies in Canada and Mexico, such as Shoppers Drug Mart Inc. Notwithstanding
this restriction, Purisys shall have the right to sell pharmaceutical cannabidiol to third parties outside Canada for use in products
that are approved as prescription medicines by the Therapeutic Products Directorate of Health Canada for delivery into Canada.



The Exclusive Supply Agreement expires
on December 31, 2038, subject to certain renewal provisions.



(v)Pursuant to the terms of agreements with various other contract research organizations, the Corporation is committed for contract
research services for 2021 at a cost of approximately $1,043,244.



|16. | Other expenses and adjustments
|--- | ------------------------------



The following details highlight
certain components of the research and development and general and administration expenses classified by nature. Remaining research and
development and operating expenses include personnel costs and expenses paid to third parties:





|                                           |  | Year Ended   |           |  | Year Ended   | 
|------------------------------------------ |  | ------------ | --------- |  | ------------ | 
|                                           |  | December 31, |           |  | December 31, | 
|                                           |  | 2021         |           |  | 2020         | 
|Research and
    development expenses      |  |              |           |  |              | 
|Non-cash
    share-based compensation      |  |              | 599,145   |  |              | 
|                                           |  |              |           |  |              | 
|General and
    administration expenses    |  |              |           |  |              | 
|Depreciation
    of property and equipment |  |              | 135,977   |  |              | 
|Amortization
    of intangible assets      |  |              | 84,444    |  |              | 
|Non-cash
    share-based compensation      |  |              | 7,898,685 |  |              | 



|17. | Related party transactions
|--- | --------------------------



|(a) | The Corporation entered into the following transactions with related parties:
|--- | -----------------------------------------------------------------------------



(i) Included in research and development
expense is $1,354,866 for the year ended December 31, 2021 (year ended December 31, 2020 - $1,149,098) paid to a company related to a
director. As at December 31, 2021, $671,462 (December 31, 2020 - $505,195) was owed to this company and this amount was included in accounts
payable and accrued liabilities, and $12,402 (December 31, 2020 - $1,470) was paid to this company and was included in prepaid expenses.





- 23 -









Cardiol Therapeutics Inc.

Notes to Financial Statements

Years Ended December 31, 2021 and 2020
 (Expressed in
Canadian Dollars)





|17. | Related party transactions (continued)
|--- | --------------------------------------



(b)Key management personnel are those persons having authority and responsibility for planning, directing, and controlling the activities
of the Corporation directly or indirectly, including any directors (executive and non-executive) of the Corporation. Remuneration of
directors and key management personnel of the Corporation, except as noted in (a) above, was as follows:



|                      |  | Year Ended
 December 31, |           |  | Year Ended December 31, |  
|--------------------- |  | ------------------------ | --------- |  | ----------------------- | -
|                      |  | 2021                     |           |  | 2020                    |  
|Salaries and benefits |  | $                        | 2,503,893 |  |                         | $
|Share-based payments  |  |                          | 1,188,462 |  |                         |  
|                      |  | $                        | 3,692,355 |  |                         | $





As at December 31, 2021, $46,488
(December 31, 2020 - $190,940) was owed to key management personnel and this amount was included in accounts payable and accrued liabilities.



|18. | Income taxes
|--- | ------------



The income tax allowance differs
from the amount resulting from the application of the combined Canadian income tax rate as follows:



|                                              |  | December 31,

    2021 |             |   | December 31,

    2020 |  
|--------------------------------------------- |  | ---------------------- | ----------- | - | ---------------------- | -
|Loss before income taxes                      |  | $                      | (31,638,244 | ) |                        | $
|Statutory income tax rate                     |  |                        | 26.50       | % |                        |  
|                                              |  |                        |             |   |                        |  
|Expected income tax recovery                  |  |                        | (8,384,135  | ) |                        |  
|Non-taxable income or non-deductible expenses |  |                        | 511,078     |   |                        |  
|Tax rate differential and other               |  |                        | 168,007     |   |                        |  
|Unapplied non-capital losses                  |  |                        | 7,705,050   |   |                        |  
|                                              |  |                        |             |   |                        |  
|                                              |  | $                      | -           |   |                        | $





During the year ended December
31, 2021, the Corporation received refundable investment tax credits ("ITCs"), for qualifying scientific research and experimental
development ("SRED") expenses, of $93,076 related to its 2019 Canadian income tax return. The Corporation intends to claim non-refundable
ITCs on its 2020 and 2021 Canadian income tax returns. The amount of the qualifying SRED expenses and ITCs are unknown at the date of
the audit report.





- 24 -









Cardiol Therapeutics Inc.

Notes to Financial Statements

Years Ended December 31, 2021 and 2020

(Expressed in
Canadian Dollars)



|18. | Income taxes (continued)
|--- | ------------------------



Deferred taxes are a result of
temporary differences that arise due to the differences between the income tax values and the carrying amount of assets and liabilities.
The significant components of the deferred tax assets and liabilities not recognized as at December 31, 2021 and 2020 are as follows:



|                                                   |  | Year Ended   |            |  | Year Ended   |  
|-------------------------------------------------- |  | ------------ | ---------- |  | ------------ | -
|                                                   |  | December 31, |            |  | December 31, |  
|                                                   |  | 2021         |            |  | 2020         |  
|Unrecognized
    deferred tax assets:              |  |              |            |  |              |  
|Non-capital losses carried forward                 |  | $            | 64,266,641 |  |              | $
|Share
    issue costs                              |  |              | 744,506    |  |              |  
|Scientific
    Research & Experimental Development |  |              | 2,037,231  |  |              |  
|Total
    unrecognized deferred tax asset          |  | $            | 67,048,378 |  |              | $



The tax losses expire from 2036 to
2041. The other temporary differences do not expire under current legislation.



|2036 |  | $ | 1,368,251  | 
|---- |  | - | ---------- | 
|2037 |  |   | 5,394,542  | 
|2038 |  |   | 636,496    | 
|2039 |  |   | 9,573,962  | 
|2040 |  |   | 18,504,405 | 
|2041 |  |   | 28,788,985 | 
|     |  | $ | 64,266,641 | 



As at December 31, 2021, the Corporation had scientific
research and experimental development deduction carryforward balance of $2,037,231 (December 31, 2020 - $541,015).



|19. | Uncertainty due to COVID-19
|--- | ---------------------------



The recent novel coronavirus (COVID-19)
pandemic has impacted and could further impact our expected timelines, operations, and the operations of our third-party suppliers, manufacturers,
and CROs as a result of quarantines, facility closures, travel and logistics restrictions, and other limitations in connection with the
outbreak. While we expect this to be temporary, there is uncertainty around its duration and its broader impact. The Corporation had not
experienced any adverse material affects as at December 31, 2021.



|20. | Comparative figures
|--- | -------------------



Certain of the prior period figures
have been reclassified to conform with the presentation adopted in the current period. These reclassifications were solely related to
grouping of operating expenses and had no effect on the reported results of operations.





- 25 -