Document:

Exhibit 4.4

 

 

 

Ayr
Strategies Inc.

 

(Formerly Cannabis Strategies Acquisition
Corp.)

MANAGEMENT’S DISCUSSION AND
ANALYSIS

FOR THE THREE MONTHS AND YEAR ENDED
DECEMBER 31, 2019 AND 2018

(EXPRESSED IN UNITED STATES DOLLARS)

 

 

     

     

    

 

Ayr Strategies Inc. (formerly, Cannabis
Strategies Acquisition Corp.) 

Management’s Discussion and
Analysis

For the Three Months and Year Ended December
31, 2019 and 2018

 

 

Introduction

 

The following management’s discussion
and analysis (“MD&A”) of the financial condition and results of the operations of Ayr Strategies Inc. (formerly
Cannabis Strategies Acquisition Corp.) (“Ayr”, “the Corporation”, “we”, “our”
or “us”) constitutes management’s review of the factors that affected the Corporation’s financial and
operating performance for the three months and year ended December 31, 2019. This MD&A was written to comply with the requirements
of National Instrument 51-102 – Continuous Disclosure Obligations. This discussion should be read in conjunction with the
Corporation’s audited consolidated financial statements for the year ended December 31, 2019 and 2018, and the related notes
thereto (the “Financial Statements”). Results are reported in United States dollars, unless otherwise noted. In the
opinion of management, all adjustments (which consist only of normal recurring adjustments) considered necessary for a fair presentation
have been included. Until it completed its Qualifying Transaction (as defined below) on May 24, 2019, the Corporation was a special
purpose acquisition corporation (“SPAC”), and therefore the results presented for the year ended December 31, 2019
will not be indicative of the results that may be expected for any future period. See “Timing Issues Related to the December
Financial Statements” below. The Financial Statements and the financial information contained in this MD&A were prepared
in accordance with International Financial Reporting Standards (“IFRS”) as issued by the International Accounting
Standards Board (“IASB”) and interpretations of the IFRS Interpretations Committee (“IFRIC”). Further
information about the Corporation and its operations can be obtained on www.sedar.com.

 

The effective date of this MD&A is
March 20, 2020.

 

On May 24, 2019, the Corporation completed
its qualifying transaction under Part X of the NEO Exchange Inc. Listing Manual (the “Qualifying Transaction”)
in respect of its concurrent acquisitions of five Acquired Businesses. The Corporation, through its wholly-owned subsidiary CSAC
Acquisition Inc. (“CSAC AcquisitionCo”), acquired the businesses of Washoe Wellness, LLC (“Washoe”),
The Canopy NV, LLC (“Canopy”), Sira Naturals, Inc. (“Sira”), LivFree Wellness, LLC (“LivFree”)
and CannaPunch of Nevada, LLC (“CannaPunch”). Washoe, Canopy, Sira, LivFree and CannaPunch are collectively
referred to as the “Acquired Businesses”. The Acquired Businesses operate in the cultivation, manufacturing,
branding and/or retail, as applicable, of cannabis products in the Corporation’s anchor states of Massachusetts and Nevada.

 

Cautionary Note Regarding Forward-Looking
Information

 

Certain
statements in this MD&A are forward-looking statements within the meaning of applicable securities laws, including, but not
limited to, those statements relating to the Qualifying Transaction, information concerning the Acquired Businesses and the parties
and their financial capacity and availability of capital and other statements that are not historical facts. These statements are
based upon certain material factors, assumptions and analyses that were applied in drawing a conclusion or making a forecast or
projection, including experience of the Corporation and each of the Acquired Businesses, as applicable, and perception of historical
trends, current conditions and expected future developments, as well as other factors that are believed to be reasonable in the
circumstances. Forward-looking statements are provided for the purpose of presenting information about management’s current
expectations and plans relating to the future and readers are cautioned that such statements may not be appropriate for other purposes.
These statements may include, without limitation, statements regarding the operations, business, financial condition, expected
financial results, performance, prospects, opportunities, priorities, targets, goals, ongoing objectives, strategies and outlook
of the Corporation and the Acquired Businesses. Forward-looking statements include statements that are predictive in nature, depend
upon or refer to future events or conditions, or include words such as “pro forma”, “expects”, “anticipates”,
 “plans”, “believes”, “estimates”, “intends”, “targets”, “projects”,
 “forecasts”, “seeks”, “likely” or negative versions thereof and other similar expressions,
or future or conditional verbs such as “may”, “will”, “should”, “would” and “could”.

 

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Ayr Strategies Inc. (formerly, Cannabis
Strategies Acquisition Corp.) 

Management’s Discussion and
Analysis

For the Three Months and Year Ended December
31, 2019 and 2018

 

 

By their nature, forward-looking statements
are subject to inherent risks and uncertainties that may be general or specific and which give rise to the possibility that expectations,
forecasts, predictions, projections or conclusions will not prove to be accurate, that assumptions may not be correct and that
objectives, strategic goals and priorities will not be achieved. A variety of material factors, many of which are beyond the parties’
control, could affect operations, business, financial condition, performance and results of the parties that may be expressed or
implied by such forward-looking statements and could cause actual results to differ materially from current expectations of estimated
or anticipated events or results. These factors include, but are not limited to, the following:

 

		•	assumptions and expectations described in the Corporation’s critical accounting policies
and estimates;

  

		•	the adoption and impact of certain accounting pronouncements;

 

		•	the legislation, regulations and licensing related to the cultivation, production and sale of cannabis
and hemp products by the Corporation’s subsidiaries and other business interests, including but not limited to timing of
sales from expansion of the Corporation’s cultivation facilities in Massachusetts and Nevada (assumed to begin in May 2020
and June 2020, respectively) and the timing of the commencement of recreational sales in the Corporation’s Massachusetts
dispensaries (assumed to begin in May 2020 for one dispensary and in September 2020 for two further dispensaries);

 

		•	the expansion of the Corporation’s cultivation facilities in Massachusetts and Nevada producing
total annualized capacity of 12,000 pounds of flower and 1,200 pounds of oil in Massachusetts; total annualized capacity of 5,000
pounds of flower and 1,000 pounds of oil in Nevada;

 

		•	flower prices of $7,000 per pound at retail, $4,000 per pound at wholesale (on costs of $1,200
per pound), oil prices of $120 per gram at retail, $60 per gram at wholesale (on costs of $19 per gram) in Massachusetts; flower
prices of $3,500 per pound at retail (on costs of $900 per pound), oil prices of $50 per gram at retail (on costs of $15 per gram)
in Nevada;

 

		•	low double-digit revenue growth from assets in place as of December 31, 2019;

 

		•	higher margins in Nevada as substantial vertical integration is achieved from the completed cultivation
expansion;

 

		•	the number of users of cannabis or the size of the regulated cannabis market in the United States;

 

		•	the potential time frame for the implementation
of legislation to legalize and regulate medical or recreational cannabis (and the consumer products derived from each of the foregoing)
in the United States, and the potential form the legislation and regulations will take; 

 

		•	the Corporation’s future financial and operating performance;

 

		•	future performance, results and terms of strategic initiatives, strategic agreements and supply
agreements;

 

		•	the market for the Corporation’s current and proposed products and services, as well as the
Corporation’s ability to capture market share;

 

		•	the benefits and applications of the Corporation’s products and services and expected sales
thereof;

 

		•	development of affiliated brands, product diversification and future corporate development;

 

    3

     

    

  

Ayr Strategies Inc. (formerly, Cannabis
Strategies Acquisition Corp.) 

Management’s Discussion and
Analysis

For the Three Months and Year Ended December
31, 2019 and 2018

 

  

		•	anticipated investment in and results of research and development;

 

		•	inventory and production capacity, including discussions of plans or potential for expansion of
capacity at existing or new facilities;

 

		•	future expenditures, strategic investments and capital activities;

 

		•	the competitive landscape in which the Corporation operates and the Corporation’s market
expertise;

 

		•	the Corporation’s ability to secure further equity or debt financing, if required;

 

		•	consistent or increasing pricing of various cannabis products;

 

		•	the level of demand for cannabis products, including the Corporation’s and third-party products
sold by the Corporation;

  

		•	the Corporation’s ability to mitigate risks relating to the cannabis industry, the larger
economy, breaches of and unauthorized access to the Corporation’s systems and related cybersecurity risks, money laundering,
costly litigation, health pandemics;

 

		•	the application for additional licenses and the grant of licenses or renewals of existing licenses
that have been applied for;

 

		•	the rollout of new dispensaries, including as to the number of planned dispensaries to be opened
in the future and the timing and location in respect of the same, and related forecasts; and

 

		•	other events or conditions that may occur in the future.

 

In making these statements, in addition
to those described above and elsewhere herein, the parties have made assumptions with respect to expected cash provided by continuing
operations, future capital expenditures, including the amount and nature thereof, trends and developments in the industry, business
strategy and outlook, expansion and growth of business and operations, accounting policies, credit risks, anticipated acquisitions,
opportunities available to or pursued by the parties, and other matters.

 

Definition and Reconciliation of Non-IFRS
Measures

 

The Corporation reports certain non-IFRS
measures that are used to evaluate the performance of such businesses and the performance of their respective segments, as well
as to manage their capital structure. As non-IFRS measures generally do not have a standardized meaning, they may not be comparable
to similar measures presented by other issuers. Securities regulations require such measures to be clearly defined and reconciled
with their most directly comparable IFRS measure.

 

The Corporation references non-IFRS
measures including cannabis industry metrics, in this document and elsewhere. These measures are not recognized measures
under IFRS and do not have a standardized meaning prescribed by IFRS and are therefore unlikely to be comparable to similar
measures presented by other companies. Rather, these are provided as additional information to complement those IFRS measures
by providing further understanding of the results of the operations of the Corporation from management’s perspective.
Accordingly, these measures should not be considered in isolation, nor as a substitute for analysis of the
Corporation’s financial information reported under IFRS. Non-IFRS measures used to analyze the performance of the
Acquired Businesses include “Adjusted EBITDA” and “Adjusted Gross Profit”.

 

    4

     

    

 

Ayr Strategies Inc. (formerly, Cannabis
Strategies Acquisition Corp.) 

Management’s Discussion and
Analysis

For the Three Months and Year Ended December
31, 2019 and 2018

 

 

The Corporation believes that these non-IFRS
financial measures provide meaningful supplemental information regarding the Corporation’s performances and may be useful
to investors because they allow for greater transparency with respect to key metrics used by management in its financial and operational
decision-making. These financial measures are intended to provide investors with supplemental measures of the Corporation’s
operating performances and thus highlight trends in the Corporation’s core businesses that may not otherwise be apparent
when solely relying on the IFRS measures.

 

Adjusted EBITDA

 

“Adjusted EBITDA” represents
income (loss) from operations, as reported, before interest, and tax, and is adjusted to exclude extraordinary items, non-recurring
items, other non-cash items, including stock based compensation expense, depreciation, amortization, the adjustments for the accounting
of the fair value of biological assets and the incremental costs to acquire cannabis inventory in a business combination, and further
adjusted to remove acquisition related costs.

 

Adjusted Gross Profit

 

“Adjusted Gross Profit” represents
gross profit, as reported, adjusted to exclude the accounting for the fair value of biological assets and the incremental costs
to acquire cannabis inventory in a business combination.

 

Reconciliations are provided elsewhere
in this MD&A.

 

Description of Business

 

Ayr is a vertically-integrated multi-state
operator in the U.S. cannabis sector, with an initial anchor portfolio in Massachusetts and Nevada. Through its five operating
companies, Ayr is a leading cultivator, manufacturer and retailer of cannabis products and branded cannabis packaged goods. The
Corporation was previously a special purpose acquisition corporation which was incorporated for the purpose of effecting an acquisition
of one or more businesses or assets, by way of a merger, amalgamation, arrangement, share exchange, asset acquisition, share purchase,
reorganization, or any other similar business combination involving the Corporation, referred to as the Corporation’s “Qualifying
Transaction”. The Company had only one operating segment, cannabis sales, during the year ended December 31, 2019. As the
Corporation has experienced rapid growth with the Qualifying Transaction, operating segments will be further analyzed and are subject
to future change. The Corporation is a reporting issuer in each of the provinces and territories of Canada, other than Quebec.

 

On May 24, 2019, the Corporation completed
its concurrent acquisitions of the Acquired Businesses. In connection with the closing of the Qualifying Transaction, all non-redeemed
Class A Restricted Voting Shares (as defined below) were automatically converted into subordinate voting shares of the Corporation
(the “Subordinate Voting Shares”), and all Class B shares of the Corporation (the “Class B Shares”) were
automatically converted into multiple voting shares of the Corporation (the “Multiple Voting Shares”). Following the
closing of the Qualifying Transaction, the Subordinate Voting Shares, the Warrants and the Rights began trading on the NEO Exchange
Inc. (the “NEO Exchange”) under the symbols “AYR.A”, “AYR.WT” and “AYR.RT”, respectively,
while the Multiple Voting Shares were not listed on the NEO Exchange. On August 20, 2019, the Corporation stopped trading on the
NEO Exchange and began trading on the Canadian Stock Exchange (the “CSE”), under the same symbols. On June 26, 2019,
the Corporation began trading on the Over-the-Counter Market (“OTC”) and traded under the symbol “CBAQF”.
On July 5, 2019, the Corporation was approved to change its OTC symbol to “AYRSF”.

 

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Ayr Strategies Inc. (formerly, Cannabis
Strategies Acquisition Corp.) 

Management’s Discussion and
Analysis

For the Three Months and Year Ended December
31, 2019 and 2018

 

 

Each Multiple Voting Share has 25 votes
per share (subject, in the case of the Sponsor, to the terms of the Voting Agreement), whereas each
Subordinate Voting Share has one vote per share. The Multiple Voting Shares are convertible, at the discretion of the holders in
accordance with their terms, into Subordinate Voting Shares on a one-for-one basis. However, the Multiple Voting Shares are subject
to certain sunset provisions, as follows: the Multiple Voting Shares are automatically convertible into Subordinate Voting Shares
on a one-for-one basis, on the earlier of: (i) the date on which the aggregate number of Multiple Voting Shares has been reduced
to less than 33 1/3% of those issued and outstanding on the first date of issuance thereof, and (ii) the date that is five years
from the date of closing of the Qualifying Transaction.

 

On June 28, 2019, Ayr announced that its
sponsor, Mercer Park CB, L.P. (“Mercer Park”), agreed to contractually limit the voting rights attached to its Multiple
Voting Shares in respect of the election of directors while retaining the right to vote its Multiple Voting Shares on all other
matters. Specifically, subject to certain terms and conditions, Mercer Park agreed not to exercise any voting rights attached to
its Multiple Voting Shares in respect of the election of directors during a specified term. The term will expire on the second
anniversary, but is subject to early termination in various circumstances.

 

On December 31, 2018, the Corporation changed
its financial year-end to December 31 to better synchronize its financial reporting with that of its proposed Acquired Businesses
in connection with its proposed Qualifying Transaction. On May 24, 2019, in connection with its continuance into British Columbia,
the Corporation changed its name from “Cannabis Strategies Acquisition Corp.” to “Ayr Strategies Inc.”.
Further, after completing the Qualifying Transaction, the Corporation decided to change the presentation currency of its consolidated
financial statements from the Canadian dollar (CDN$) to the United States dollar (US$ or $) with effect from the financial period
ended June 30, 2019. The Board of Directors believe that US dollar financial reporting provides more relevant presentation of the
Corporation’s financial position, funding and treasury functions, financial performance and its cash flows.

 

The Corporation was incorporated on July
31, 2017 under the Business Corporations Act (Ontario) and continued on May 24, 2019 into British Columbia under the Business
Corporations Act (British Columbia) in connection with its Qualifying Transaction. The registered office of the Corporation
is located at 666 Burrard Street, Suite 1700, Vancouver, British Columbia V6C 2X8. The head office of the Corporation is located
at 590 Madison Avenue, 26th Floor, New York, New York, 10022.

  

On December 21, 2017, the Corporation completed
its initial public offering (the “Offering”) of 12,500,000 Class A Restricted Voting units (“Class A Restricted
Voting Units”) at CDN$10.00 per Class A Restricted Voting Unit. Each Class A Restricted Voting Unit consisted of one redeemable
Class A restricted voting share (“Class A Restricted Voting Share”), one share purchase warrant (each, a “Warrant”)
and one right (each, a “Right”).

 

In connection with the Offering, the Corporation
granted the underwriter, Canaccord Genuity Corp. (the “Underwriter”), a 30-day non-transferable option (the “Over-Allotment
Option”) to purchase up to an additional 1,875,000 Class A Restricted Voting Units, at a price of CDN$10.00 per Class A Restricted
Voting Unit, to cover over-allotments, if any, and for market stabilization purposes. On January 19, 2018, the Underwriter partially
exercised its Over-Allotment Option to acquire an additional 975,000 Class A Restricted Voting Units, and as a result, an aggregate
of 13,475,000 Class A Restricted Voting Units were issued pursuant to the Offering (for aggregate proceeds of CDN$134,750,000).

 

Concurrent with the completion of the
Offering, for total proceeds of CDN$25,000, Mercer Park CB, L.P. (the “Sponsor”), a limited partnership formed under
the laws of the State of Delaware, indirectly controlled by Mercer Park, L.P., a privately-held family office based in New York,
New York and Kamaldeep Thindal and Charles Miles (or persons or companies controlled by them) (collectively with the Sponsor,
the “Founders”) purchased an aggregate of 3,434,298 Class B Shares (“Founders’ Shares”), consisting of
3,415,438 Class B Shares purchased by the Sponsor, 9,430 Class B Shares purchased by Kamaldeep Thindal, and 9,430 Class B Shares
purchased by Charles Miles, including the forfeiture without compensation of an aggregate of 227,812 Founders’ Shares by
the Founders due to the partial exercise of the Over-Allotment Option). In addition, in connection with the Offering (and following
the exercise of the Over-Allotment Option), the Sponsor purchased an aggregate of 262,188 Class B Units (the “Class B Units”)
at CDN$10.00 per Class B Unit and 2,621,870 Warrants (“Founders’ Warrants”) at CDN$1.00 per Founders’
Warrant. Each Class B Unit consisted of one Class B Share, one Warrant and one Right. The Founders’ Warrants are (except
in certain circumstances in the event of early termination of the Warrants) subject to the same terms and conditions as the Warrants
underlying the Class A Restricted Voting Units and Class B Units. The Rights underlying the Class B Units were subject to the
same terms and conditions as the Rights underlying the Class A Restricted Voting Units.

 

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Ayr Strategies Inc. (formerly, Cannabis
Strategies Acquisition Corp.) 

Management’s Discussion and
Analysis

For the Three Months and Year Ended December
31, 2019 and 2018

 

 

On September 12, 2018, the Corporation
incorporated a wholly owned subsidiary in Nevada, United States, named CSAC Holdings Inc., to facilitate the proposed Qualifying
Transaction. On September 17, 2018, CSAC Holdings Inc. incorporated a wholly owned subsidiary in Nevada, United States, CSAC AcquisitionCo.

 

Following the closing of the Qualifying
Transaction, each of the 13,474,000 non-redeemed Class A Restricted Voting Shares was automatically converted into one Subordinate
Voting Share. Each Warrant is exercisable to purchase one Subordinate Voting Share and each Right represents the entitlement to
automatically receive, for no additional consideration, one-tenth (1/10) of one Subordinate Voting Share. All Warrants became exercisable
at a price of CDN$11.50 per share, effective 65 days after the completion of the Qualifying Transaction, and will expire on the
day that is five years after the completion of the Qualifying Transaction (being May 24, 2024), or may expire earlier if the expiry
date of the Warrants is accelerated. Holders of Warrants were granted an additional right (the “Early Exercise Right”)
to exercise, for cash only, their Warrants at any time commencing on July 15, 2019 until July 26, 2019 (the “Early Exercise
Period”). For each Warrant duly exercised during the Early Exercise Period, Ayr paid a commitment fee of CDN$0.50, which
was offset against the payment of the applicable exercise price, resulting in a net payment of CDN$11.00. Throughout the Early
Exercise Period, 298,200 warrants were exercised at a price of $8.25 (CDN$11), resulting in proceeds of $2.4 million (CDN$3.3 million).

 

On October 1, 2019, the Corporation commenced
a stock repurchase program for up to 5% of outstanding Subordinate Voting Shares. The program lasts for 12 months and the maximum
number of Subordinate Voting Shares able to be repurchased are 725,892. As at December 31, 2019, the Corporation has repurchased
36,900 shares under this program, of which 7,400 have been cancelled and the balance are held by the Corporation as treasury shares.
Additionally, as at December 31, 2019, the Corporation had 3,140,338 rights outstanding which can be redeemed one tenth (1/10)
of one Subordinate Voting Share.

 

Please refer to the Corporation’s
final non-offering prospectus dated February 15, 2019 and the Corporation’s management information circular dated February
19, 2019 and the Corporation’s Annual Information Form for further for further information on the Qualifying Transaction,
including risk factors associated therewith.

  

Timing Issues Related to the December
Financial Statements

 

As noted above, the Qualifying Transaction
closed on May 24, 2019. The accounting effect of the Qualifying Transaction was to give rise to the consolidation of the five acquired
companies commencing on that date, the details of which can be found below. Accordingly, the Financial Statements include 221 days
of operating results of the companies acquired, from May 24 to December 31, 2019.

 

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Ayr Strategies Inc. (formerly, Cannabis
Strategies Acquisition Corp.) 

Management’s Discussion and
Analysis

For the Three Months and Year Ended December
31, 2019 and 2018

 

  

This gives rise to a number of abnormalities,
including the following:

 

		•	Ayr was a special purpose acquisition corporation prior to consummation of the Qualifying Transaction
and therefore, for the period between January 1, 2019 and May 24, 2019, there was no active operating business of Ayr and its subsidiaries,
other than its operations in seeking to complete the Qualifying Transaction.

 

		•	Following the closing of the Qualifying Transaction, there are only 221 days of operating results
in relation to the companies acquired in the Qualifying Transaction.

 

Readers of the Financial Statements and
this MD&A are therefore cautioned about annualizing the results from the year ended December 31, 2019, both in terms of the
abnormal impact to the financial statements of the Qualifying Transaction itself and the fact that there are only 221 days of operating
results for the Acquired Businesses. Further details on these matters are contained below.

 

References herein to the year ended December
31, 2019 therefore include the results of the Acquired Businesses only for the 221 days ended December 31, 2019.

 

Acquisition of Businesses

 

On May
24, 2019 (the “acquisition date”), the Corporation completed its concurrent acquisitions of the five Acquired Businesses.
Any summary information of certain material terms from definitive agreements in respect of the acquisitions of Washoe, Canopy,
Sira, LivFree, and CannaPunch (respectively, the “Washoe Agreement”, the “Canopy Agreement”, the “Sira
Agreement”, the “LivFree Agreement”, and the “CannaPunch Agreement”, collectively the “Definitive
Agreements”) is not exhaustive and is qualified in its entirety by reference to the terms of the Definitive Agreements, which
may be found on Ayr’s profile on SEDAR at www.sedar.com. 

 

Each
of the acquisitions are subject to specific terms relating to the satisfaction of the purchase price by the Corporation and its
wholly-owned subsidiary, CSAC AcquisitionCo, and incorporates payments in cash, shares and debt as well as certain contingent consideration.
The shares issued as consideration are non-voting exchangeable shares of CSAC AcquisitionCo (“Exchangeable Shares”)
that are exchangeable on a one-for-one basis into an equal number of Subordinate Voting Shares of the Corporation. The Corporation
treats the Exchangeable Shares as options with a value equal to a share of Subordinate Voting Shares, which represents the holder’s
claim on the equity of the Corporation. In order to comply with certain contractual requirements of the acquisition, the Corporation
and CSAC Acquisition Inc. are required to maintain the economic equivalency of such Exchangeable Shares with the publicly traded
Subordinated Voting Shares of the Corporation. This means the Exchangeable Shares are required to share the same economic benefits
and retain the same proportionate ownership in the assets of the Corporation as the holders of the Corporation’s publicly
traded Subordinated Voting Shares. The Corporation has presented these Exchangeable Shares as a part of shareholders’ equity
within these consolidated financial statements due to (i) the fact that they are economically equivalent to the Corporation’s
publicly traded Subordinated Voting Shares (ii) the holders of the Exchangeable Shares are subject to restrictions on transfer
under US securities laws, but may dispose of the Exchangeable Shares without such restriction by exchanging them for Subordinate
Voting Shares of the Corporation. Changes in these assumptions would affect the presentation of the Exchangeable Shares from shareholders’
equity to non-controlling interests; however, there would be no impact on earnings per share.

  

The details of the purchase price consideration
are summarized as follows:

	 	 	Cash	 	 	Debt Payable	 	 	Shares Issued	 	 	Other	 	 	Total	 
	 	 	$	 	 	$	 	 	$	 	 	$	 	 	$	 
	Calculated Consideration	 	 	76,420,000	 	 	 	37,140,000	 	 	 	125,421,479	 	 	 	31,471,789	 	 	 	270,453,268	 

 

The purchase consideration consists
of cash, debt, Exchangeable Shares, and other consideration. The other consideration includes a contingent cash payment based
on certain milestones being met as detailed in the Sira Agreement, a payment for excess inventory as outlined in the Sira
Agreement, and make-whole provisions as outlined in the Canopy Agreement and the Washoe Agreement.

 

    8

     

    

 

Ayr Strategies Inc. (formerly, Cannabis
Strategies Acquisition Corp.) 

Management’s Discussion and
Analysis

For the Three Months and Year Ended December
31, 2019 and 2018

 

  

Ayr obtained control of Washoe, Canopy,
and LivFree through separate management service agreements. Each management service agreement provides the Corporation significant
management rights over the entities’ operations. Through these management service agreements, Ayr has the power to control
relevant activities which affect the returns Ayr receives. As a result of the control obtained through the management service agreements,
these entities are consolidated on the Corporation’s consolidated financial statements. As at December 31, 2019, Washoe,
Canopy, and LivFree are awaiting state approval to transfer licenses to the Corporation. See Note 3.1 for a breakout of the various
management companies.

 

The
fair value of the identifiable assets acquired and liabilities assumed as at the acquisition date are as follows:

	US$	 	Livfree	 	 	Sira	 	 	Cannapunch	 	 	Washoe	 	 	Canopy	 	 	Total	 
	 	 	$	 	 	$	 	 	$	 	 	$	 	 	$	 	 	$	 
	ASSETS ACQUIRED	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 
	Cash and cash equivalents	 	 	1,258,928	 	 	 	270,280	 	 	 	7,233	 	 	 	21,458	 	 	 	147,930	 	 	 	1,705,829	 
	Accounts receivable	 	 	-	 	 	 	600,151	 	 	 	625,143	 	 	 	87,617	 	 	 	-	 	 	 	1,312,911	 
	Inventory	 	 	2,670,057	 	 	 	9,671,814	 	 	 	552,040	 	 	 	4,500,213	 	 	 	1,618,639	 	 	 	19,012,763	 
	Biological assets	 	 	-	 	 	 	1,996,642	 	 	 	-	 	 	 	1,763,516	 	 	 	-	 	 	 	3,760,158	 
	Prepaid expenses and other assets	 	 	96,157	 	 	 	340,428	 	 	 	-	 	 	 	129,477	 	 	 	160,748	 	 	 	726,810	 
	Intangible assets	 	 	105,000,000	 	 	 	57,000,000	 	 	 	2,390,000	 	 	 	22,800,000	 	 	 	10,750,000	 	 	 	197,940,000	 
	Property, plant and equipment	 	 	1,640,418	 	 	 	9,090,090	 	 	 	486,100	 	 	 	9,070,645	 	 	 	1,217,736	 	 	 	21,504,989	 
	Right-of-use assets	 	 	2,894,076	 	 	 	5,239,201	 	 	 	1,119,826	 	 	 	-	 	 	 	2,057,681	 	 	 	11,310,784	 
	Due from related parties	 	 	-	 	 	 	-	 	 	 	-	 	 	 	-	 	 	 	784,733	 	 	 	784,733	 
	Deposits	 	 	90,147	 	 	 	149,251	 	 	 	-	 	 	 	91,574	 	 	 	9,983	 	 	 	340,955	 
	Total assets acquired at fair value	 	 	113,649,783	 	 	 	84,357,857	 	 	 	5,180,342	 	 	 	38,464,500	 	 	 	16,747,450	 	 	 	258,399,932	 
	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 
	LIABILITIES ASSUMED	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 
	Trade payables	 	 	387,500	 	 	 	475,193	 	 	 	251,829	 	 	 	506,073	 	 	 	-	 	 	 	1,620,595	 
	Accrued liabilities	 	 	1,176,088	 	 	 	970,418	 	 	 	46,972	 	 	 	100,412	 	 	 	520,453	 	 	 	2,814,343	 
	Deferred tax liabilities	 	 	25,796,726	 	 	 	13,611,222	 	 	 	567,507	 	 	 	2,153,131	 	 	 	2,841,746	 	 	 	44,970,332	 
	Advance from related parties	 	 	187,809	 	 	 	-	 	 	 	-	 	 	 	784,733	 	 	 	-	 	 	 	972,542	 
	Lease obligations	 	 	2,520,437	 	 	 	6,514,038	 	 	 	1,083,189	 	 	 	-	 	 	 	2,553,502	 	 	 	12,671,166	 
	Debts payable	 	 	120,000	 	 	 	13,054	 	 	 	-	 	 	 	9,180,808	 	 	 	421,128	 	 	 	9,734,990	 
	Total liabilities assumed at fair value	 	 	30,188,560	 	 	 	21,583,925	 	 	 	1,949,497	 	 	 	12,725,157	 	 	 	6,336,829	 	 	 	72,783,968	 
	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 
	Goodwill	 	 	39,779,584	 	 	 	16,399,143	 	 	 	13,971,953	 	 	 	8,121,569	 	 	 	6,565,055	 	 	 	84,837,304	 
	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 
	Calculated Purchase Price	 	 	123,240,807	 	 	 	79,173,075	 	 	 	17,202,798	 	 	 	33,860,912	 	 	 	16,975,676	 	 	 	270,453,268	 

 

The goodwill recognized on acquisition
is attributable mainly to the expected future growth potential and expanded customer base arising as a result of completion of
Qualifying Transaction as explained in Note 1 to the Financial Statements. Goodwill has been allocated to the Cash Generating Units
(“CGU” or “CGU’s”) corresponding to each of the acquired businesses. None of the goodwill is expected
to be deductible for income tax purposes. The Corporation tests the recoverability of its goodwill annually, or more frequently
if events or changes in circumstances indicate that they might be impaired.

 

During the year ended December 31, 2019,
the Corporation incurred acquisition costs of $5,847,800, as reflected in the Financial Statements.

 

    9

     

    

 

Ayr Strategies Inc. (formerly, Cannabis
Strategies Acquisition Corp.) 

Management’s Discussion and
Analysis

For the Three Months and Year Ended December
31, 2019 and 2018

 

  

For the year ended December 31, 2019, $3,764,678
of expenses relating to the incremental costs to acquire cannabis inventory in a business combination is included on the Financial
Statements. This relates to the one-time adjustment of cannabis inventory from cost to fair value as part of the purchase price
allocation.

 

Sira Acquisition

 

Sira is a vertically-integrated cannabis
company with cultivation, extraction, production, manufacturing, distribution and retail dispensary operations in Massachusetts.
Sira operates its dispensaries in the medical market in Massachusetts.

 

Purchase consideration was comprised of the following:

	 	 	 	 	 	Shares	 	 	Value	 
	Cash	 	 	i	 	 	 	 	 	 	$	17,500,000	 
	Debt Payable	 	 	ii	 	 	 	 	 	 	 	5,000,000	 
	Shares Issued	 	 	iii	 	 	 	1,885,606	 	 	 	29,165,138	 
	Contingent Consideration	 	 	iv	 	 	 	 	 	 	 	21,820,132	 
	Inventory Payment	 	 	v	 	 	 	 	 	 	 	6,091,357	 
	Working
    Capital Receivable	 	 	vi	 	 	 	 	 	 	 	(403,552	)
	Total	 	 	 	 	 	 	1,885,606	 	 	 	79,173,075	 

 

Pursuant to the terms of the Sira Agreement,
Ayr satisfied the purchase price of $79.2 million for Sira through the following:

 

	i.	$17.5 million of the Sira purchase price was paid in the form of cash consideration;

 

	ii.	$5.0 million of the Sira purchase price was paid in the form of a promissory note payable;

 

	iii.	$29.2 million of the Sira purchase price was paid in the form of 1,885,606 Exchangeable Shares
that are exchangeable on a one-for-one basis into an equal number of Subordinate Voting Shares of the Corporation. These shares
have restrictions on their ability to be sold for twelve months (the “Lock-Up Provision”);

 

	iv.	A portion of the Sira purchase price is derived from an earn-out provision that may entitle the
sellers to earn additional consideration, if certain milestones are achieved at Sira’s planned final cultivation facility
in Milford, MA over its first full year of operation;

 

	v.	An amount equal to the fair market value of Sira’s inventory above a target level set at
$800,000 (the “Inventory Payment”), pursuant to a formula specified in the Sira Agreement; and

 

	vi.	Settlement following the final working capital adjustment.

 

One-third of the Inventory Payment, subject
to a cap of $2,500,000, was paid on the Closing Date, and is included in the cash consideration listed above. The remaining two-thirds
is part of the current portion of purchase consideration payable as set out on the Financial Statements.

 

Canopy Acquisition

 

Canopy is an owner and operator of cannabis
dispensaries in Nevada, with an established footprint in Reno, NV. Canopy operates its dispensaries in both the medical and adult-use
recreational markets.

 

    10

     

    

 

Ayr Strategies Inc. (formerly, Cannabis
Strategies Acquisition Corp.) 

Management’s Discussion and
Analysis

For the Three Months and Year Ended December
31, 2019 and 2018

 

 

Purchase consideration was comprised of the following:  

	 	 	 	 	 	Shares	 	 	Value	 
	Cash	 	 	i	 	 	 	 	 	 	$	7,000,000	 
	Debt Payable	 	 	ii	 	 	 	 	 	 	 	4,500,000	 
	Shares Issued	 	 	iii, iv	 	 	 	265,360	 	 	 	4,349,003	 
	Make-Whole Provision	 	 	v	 	 	 	 	 	 	 	1,389,182	 
	Working Capital Receivable	 	 	vi	 	 	 	 	 	 	 	(262,509	)
	Total	 	 	 	 	 	 	265,360	 	 	 	16,975,676	 

 

Pursuant to the terms of the Canopy Agreement,
Ayr satisfied the purchase price of $17.0 million for Canopy through the following:

 

	i.	$7.0 million of the Canopy purchase price was paid in the form of cash consideration;

 

	ii.	$4.5 million of the Canopy purchase price was paid in the form of a promissory note payable;

 

	iii.	$4.3 million of the Canopy purchase price was paid in the form of 250,000 Exchangeable Shares that
are exchangeable on a one-for-one basis into an equal number of Subordinate Voting Shares of the Corporation. These shares have
restrictions on their ability to be sold for six to twelve months (the “Lock-Up Provision”);

 

	iv.	An additional 15,360 Exchangeable Shares were issued to Canopy pursuant to certain make-whole provisions
(the “Canopy Make-Whole Provisions”);

 

	v.	Additional Exchangeable Shares are also issuable to the Canopy sellers under the Canopy Make-Whole
Provisions based on a formula specified therein relating to the market price of the Subordinate Voting Shares on certain specified
dates; and

 

	vi.	Settlement following the final working capital adjustment.

 

Washoe Acquisition

 

Washoe is a Nevada-based cannabis company
with cultivation, extraction, processing, manufacturing and distribution capabilities. Washoe operates in both the medical and
adult-use segments of the Nevada cannabis market.

 

Purchase consideration was comprised of
the following:

	 	 	 	 	 	Shares	 	 	Value	 
	Cash	 	 	i	 	 	 	 	 	 	$	21,670,000	 
	Debt Payable	 	 	ii	 	 	 	 	 	 	 	5,640,000	 
	Shares Issued	 	 	iii, iv	 	 	 	270,000	 	 	 	4,260,775	 
	Make-Whole Provision	 	 	v	 	 	 	 	 	 	 	1,424,536	 
	Working Capital Payable	 	 	vi	 	 	 	 	 	 	 	865,601	 
	Total	 	 	 	 	 	 	270,000	 	 	 	33,860,912	 

 

Pursuant to the terms of the Washoe Agreement, Ayr satisfied the purchase price of $33.9 million for Washoe through the following:

 

	i.	$21.7 million of the Washoe purchase price was paid in the form of cash consideration;

 

    11

     

    

 

Ayr Strategies Inc. (formerly, Cannabis
Strategies Acquisition Corp.) 

Management’s Discussion and
Analysis

For the Three Months and Year Ended December
31, 2019 and 2018

 

 

	ii.	$5.6 million of the Washoe purchase price was paid in the form of a promissory note payable;

  

	iii.	$4.3 million of the Washoe purchase price was paid in the form of 256,364 Exchangeable Shares that
are exchangeable on a one-for-one basis into an equal number of Subordinate Voting Shares of the Corporation. These shares have
restrictions on their ability to be sold for six to twelve months (the “Lock-Up Provision”);

 

	iv.	Pursuant to the terms of the Washoe Agreement, Ayr issued 13,636 Exchangeable Shares to a Washoe
lender;

 

	v.	Additional Exchangeable Shares are also issuable to the Washoe sellers pursuant to certain make-whole provisions (the “Washoe
Make-Whole Provisions”) in the Washoe Agreement based on a formula specified therein relating to the market price of the
Subordinate Voting Shares on certain specified dates; and

 

	vi.	Settlement following the final working capital adjustment.

 

CSAC AcquisitionCo agreed to fund a bonus
payment in the amount of $5,000,000 to various employees and consultants of Washoe; this amount is included in the cash consideration
above.

 

LivFree Acquisition

 

LivFree is a leading Nevada-based cannabis
company with retail dispensary operations in Las Vegas and Reno, Nevada. LivFree operates in both the medical and adult-use segments
of the Nevada cannabis market. LivFree operates three retail dispensaries where it sells products purchased in the wholesale market.
Livfree has licenses to operate medical marijuana dispensary, cultivation, and production facilities, and adult-use/recreational
marijuana retail dispensary and production facilities.

 

Purchase consideration was comprised of the following:

	 	 	 	 	 	Shares	 	 	Value	 
	Cash	 	 	i	 	 	 	 	 	 	$	29,500,000	 
	Debt Payable	 	 	ii	 	 	 	 	 	 	 	20,000,000	 
	Shares Issued	 	 	iii, iv	 	 	 	4,664,182	 	 	 	73,525,577	 
	Working Capital Payable	 	 	v	 	 	 	 	 	 	 	215,230	 
	Total	 	 	 	 	 	 	4,664,182	 	 	 	123,240,807	 

 

Pursuant to the terms of the LivFree Agreement, Ayr satisfied
the purchase price of $123.2 million for LivFree through the following:

 

	i.	$29.5 million of the LivFree purchase price was paid in the form of cash consideration;

 

	ii.	$20.0 million of the LivFree purchase price was paid in the form of a promissory note payable;

 

	iii.	$69.1 million of the LivFree purchase price was paid in the form of 4,342,432 Exchangeable Shares that are exchangeable on
a one-for-one basis into an equal number of Subordinate Voting Shares of the Corporation. These shares have restrictions on their
ability to be sold for six to twelve months (the “Lock-Up Provision”);

 

	iv.	$4.4 million of the LivFree purchase price was paid, pursuant to an amendment to the definitive
agreement in respect of the LivFree Acquisition, in the form of an additional 321,750 Exchangeable Shares to the LivFree sellers;
and

 

    12

     

    

 

Ayr Strategies Inc. (formerly, Cannabis
Strategies Acquisition Corp.) 

Management’s Discussion and
Analysis

For the Three Months and Year Ended December
31, 2019 and 2018

 

 

	v.	Settlement of the final working capital adjustment.

  

CannaPunch Acquisition

 

CannaPunch extracts raw cannabis plant
material to create processed cannabis oil for use in vaporizer cartridges and pens or as an input into other infused products,
as well as finished extract products such as wax and shatter. CannaPunch manufactures a variety of cannabis-infused products, including
beverages, gummies, chocolates, CBD cream, and vaporizer pens.

 

Purchase consideration was comprised of the following:

	 	 	 	 	 	Shares	 	 	Value	 
	Cash	 	 	i	 	 	 	 	 	 	$	750,000	 
	Debt Payable	 	 	ii	 	 	 	 	 	 	 	2,000,000	 
	Shares Issued	 	 	iii, iv	 	 	 	898,739	 	 	 	14,120,986	 
	Working Capital Payable	 	 	v	 	 	 	 	 	 	 	331,812	 
	Total	 	 	 	 	 	 	898,739	 	 	 	17,202,798	 

 

Pursuant to the terms of the CannaPunch
Agreement, Ayr satisfied the purchase price of $17.2 million for CannaPunch through the following:

 

	i.	$0.8 million of the CannaPunch purchase price was paid in the form of cash consideration;

 

	ii.	$2.0 million of the CannaPunch purchase price was paid in the form of a promissory note payable;

 

	iii.	$13.7 million of the CannaPunch purchase price was paid in the form of 866,668 Exchangeable Shares
that are exchangeable on a one-for-one basis into an equal number of Subordinate Voting Shares of the Corporation. These shares
have restrictions on their ability to be sold for six to twelve months (the “Lock-Up Provision”);

 

	iv.	$0.4 million of the CannaPunch purchase price was paid, pursuant to an amendment to the definitive
agreement in respect of the CannaPunch acquisition, in the form of an additional 32,071 Exchangeable Shares to the CannaPunch sellers;
and

 

	v.	Settlement of the final working capital adjustment.

 

Fair Value Considerations

 

The consideration has been allocated to
the assets acquired and liabilities assumed based on their estimated fair values at the date of acquisition. The purchases have
been accounted for by the acquisition method, with the results included in the Corporation’s net earnings from the date of
acquisition.

 

The Corporation used a Monte-Carlo simulation
model to estimate the fair value of the make-whole provision liability. The fair value as of the acquisition date was $2,813,718.The
earn-out provision in the Sira purchase agreement has been measured at fair value, which was $21,820,132, by taking a probability-weighted
average of possible outcomes, as estimated by management, and discounting the payment to the acquisition date.

 

    13

     

    

 

Ayr Strategies Inc. (formerly, Cannabis
Strategies Acquisition Corp.) 

Management’s Discussion and
Analysis

For the Three Months and Year Ended December
31, 2019 and 2018

 

 

Final valuations
of the assets acquired and liabilities assumed are not yet complete due to the inherent complexity associated with valuations.
Therefore, the purchase price allocation is preliminary and subject to adjustment on completion of the valuation process and analysis
of resulting tax effects. Management will finalize the accounting for the acquisitions no later than one year from the date of
the respective acquisition dates as required under IFRS 3. Accordingly, all fair value adjustments are in progress. Differences
between these provisional estimates and the final acquisition accounting may occur and these differences could have a material
impact on future financial performance.

 

Goodwill and Intangibles 

 

The goodwill balance reflects the benefits
of an assembled workforce, expected earnings and future market development. These benefits were not recognized separately from
goodwill because they do not meet the recognition criteria for identifiable intangible assets. Goodwill will not be amortized and
will be reviewed for impairment on an annual basis.

 

Pro Forma Disclosures

 

The above acquisitions contributed revenues
of $75.2 million and net income of $4.5 million, resulting in a decrease in the net loss per share of approximately $0.26 as part
of the Corporation’s consolidated results from the date of acquisition, excluding the impact of fair value adjustments and
any amortization of intangibles assumed on acquisition. If each acquisition had occurred on January 1, 2019, management estimates
that consolidated revenue would have increased by $36.6 million, and the net loss would have decreased by $12.6 million for the
year ended December 31, 2019, which would have resulted in a decrease in the net loss per share of approximately $3.40. In determining
these amounts, management has assumed that the fair value adjustments that arose on the date of acquisition would have been the
same if the acquisitions had occurred on January 1, 2019.

 

Outlook

 

The Corporation reaffirmed certain forward-looking
financial projections or targets for the year ended December 31, 2020 in a new release issued by the Corporation on February 26,
2020 in connection with the Corporation’s fourth quarter and year-end 2019 results.

 

That news release, which contains certain
forward-looking financial projections or targets for the year ended December 31, 2020, is available at www.sedar.com under the
Corporation’s profile.

 

As described in the February 26, 2020,
the targets of U.S. $207-227 million in revenue and U.S. $93-103 million in Adjusted EBITDA for the year ended December 31, 2020
were reaffirmed.

 

In developing the guidance set forth above,
Ayr made the following assumptions and relied on the following factors and considerations:

		•	The targets are based on discussions with management teams and historical results;

		•	The targets assume the organic growth on the existing asset base will contribute approximately
20% of the total revenue growth and approximately 10% of the total Adjusted EBITDA growth, year over year from 2019 to 2020;

		•	The targets are subject to the timing of the first sales from the cultivation facility expansions
in Massachusetts and Nevada, which are both growing plants as of the date of this MD&A. The targets assume the first sales
from these expansions occur in the second quarter of 2020, contributing approximately 50% of total revenue growth and approximately
65% of total Adjusted EBITDA growth, year over year from 2019 to 2020;

		•	The targets are subject to the timing of Massachusetts recreational dispensary approval. The targets
assume the sales from one recreational store will begin in May 2020 and sales from two further recreational stores will begin in
September 2020. The Massachusetts recreational dispensary assumptions contribute approximately 30% of the total revenue growth
and approximately 25% of the total Adjusted EBITDA growth, year over year from 2019 to 2020.

 

    14

     

    

 

Ayr Strategies Inc. (formerly, Cannabis
Strategies Acquisition Corp.) 

Management’s Discussion and
Analysis

For the Three Months and Year Ended December
31, 2019 and 2018

 

 

		•	Revenue growth assumptions for dispensaries and wholesale activities in markets transitioning
                                                                                                               from medical status to recreational status are based on anticipated production capacity available from a
                                                                                                               vertically-integrated supply chain, with capacity not taken up in dispensary sales available for wholesale. These
                                                                                                               assumptions include current production levels at cultivation and production facilities, plus production capacity in process
                                                                                                               of construction and planning, starting from target completion dates and adjusted for regulatory delays. Prices are projected
                                                                                                               forward at recently realized medical and recreational wholesale and retail prices.

		•	Cost of goods sold, before taking into account the impact of value changes in biological assets
(which are non-cash in nature, and, accordingly, are excluded from calculations of Adjusted EBITDA), have been projected based
on estimated costs of production and capacity available from a vertically-integrated supply chain. Cost of goods sold relating
to inventory purchased from third parties have been projected in line with historical levels.

		•	Selling, general and administrative expenses at the state level are assumed to increase in dollar
terms year over year, but to decrease as a percentage of revenues due to inherent scalability of selling, general and administrative
expenses. Additionally, total selling, general and administrative expenses include an allocation for corporate overhead and public
company costs.

 

    15

     

    

 

Ayr Strategies Inc. (formerly, Cannabis
Strategies Acquisition Corp.) 

Management’s Discussion and
Analysis

For the Three Months and Year Ended December
31, 2019 and 2018

 

 

Adjusted EBITDA Reconciliation for the
Three Months and Year Ended December 31, 2019 and 2018

 

	 	 	Three Months Ended 

December 31,	 	 	Year Ended December 31,	 	 	Annualized2 year ended December 31,	 
	 	 	2019	 	 	2018	 	 	2019	 	 	2018	 	 	2019	 
	Loss from operations	 	 	(16,898,258	)	 	 	(2,341,604	)	 	 	(37,467,213	)	 	 	(3,241,993	)	 	 	 	 
	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 
	Non-cash items accounting for adjustments of cannabis inventory	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 
	Incremental costs to acquire cannabis inventory in a business combination	 	 	3,764,678	 	 	 	-	 	 	 	3,764,678	 	 	 	-	 	 	 	 	 
	Fair value adjustment on sale of cultivated inventory	 	 	4,838,814	 	 	 	-	 	 	 	18,272,212	 	 	 	-	 	 	 	 	 
	Unrealized gain on biological asset transformation	 	 	(1,765,527	)	 	 	-	 	 	 	(10,108,105	)	 	 	-	 	 	 	 	 
	 	 	 	6,837,965	 	 	 	-	 	 	 	11,928,785	 	 	 	-	 	 	 	 	 
	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 
	Interest	 	 	295,630	 	 	 	-	 	 	 	295,630	 	 	 	-	 	 	 	 	 
	Depreciation and amortization (from statement of cash flows)	 	 	4,511,734	 	 	 	-	 	 	 	10,310,237	 	 	 	-	 	 	 	 	 
	Acquisition costs	 	 	724,139	 	 	 	-	 	 	 	5,847,800	 	 	 	-	 	 	 	 	 
	Stock-based compensation expense, non-cash	 	 	13,296,643	 	 	 	-	 	 	 	28,879,225	 	 	 	-	 	 	 	 	 
	Other1	 	 	472,326	 	 	 	-	 	 	 	1,105,694	 	 	 	-	 	 	 	 	 
	 	 	 	19,300,472	 	 	 	-	 	 	 	46,438,586	 	 	 	-	 	 	 	 	 
	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 
	Adjusted EBITDA (non-IFRS)	 	 	9,240,179	 	 	 	(2,341,604	)	 	 	20,900,158	 	 	 	(3,241,993	)	 	 	34,518,360	 

 

Notes:

1 Other adjustments made to
exclude the impact of non-recurring items.

2 Due to the  Qualifying
Transaction completed on May 24, 2019, the annual results have been normalized by taking the 221-day period and annualized to produce
a full year of results

 

Adjusted Gross Profit Reconciliation
for the Three Months and Year Ended December 31, 2019 and 2018

 

	($ in millions)	 	Three Months Ended 

December 31,	 	 	Year Ended December 31,	 	 	Annualized1 year ended December 31,	 
	 	 	2019	 	 	2018	 	 	2019	 	 	2018	 	 	2019	 
	Gross profit	 	 	8.3	 	 	 	-	 	 	 	26.3	 	 	 	-	 	 	 	 	 
	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 
	Non-cash items accounting for adjustments of cannabis inventory	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 
	Incremental costs to acquire cannabis inventory in a business combination	 	 	3.8	 	 	 	-	 	 	 	3.8	 	 	 	-	 	 	 	 	 
	Fair value adjustment on sale of cultivated inventory	 	 	4.8	 	 	 	-	 	 	 	18.3	 	 	 	-	 	 	 	 	 
	Unrealized gain on biological asset transformation	 	 	(1.8	)	 	 	-	 	 	 	(10.1	)	 	 	-	 	 	 	 	 
	 	 	 	6.8	 	 	 	-	 	 	 	11.9	 	 	 	-	 	 	 	 	 
	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 
	Adjusted gross profit (non-IFRS)	 	 	15.1	 	 	 	-	 	 	 	38.2	 	 	 	-	 	 	 	63.1	 

1 Due to the Qualifying Transaction
completed on May 24, 2019, the annual results have been normalized by taking the 221-day period and annualized to produce a full
year of results

 

    16

     

    

 

Ayr Strategies Inc. (formerly, Cannabis
Strategies Acquisition Corp.) 

Management’s Discussion and
Analysis

For the Three Months and Year Ended December
31, 2019 and 2018

 

  

Review of the Financial Results for
the Three Months and Year Ended December 31, 2019 and 2018

 

Selected Financial Information

 

	 	 	Three Months Ended 

December 31,	 	 	Year Ended December 31,	 
	($ in millions)	 	2019	 	 	2018	 	 	2019	 	 	2018	 
	Revenues, net of discounts	 	 	32.3	 	 	 	-	 	 	 	75.2	 	 	 	-	 
	Cost of goods sold excluding fair value items	 	 	(17.2	)	 	 	-	 	 	 	(37.0	)	 	 	-	 
	Incremental costs to acquire cannabis inventory in a business combination	 	 	(3.8	)	 	 	-	 	 	 	(3.8	)	 	 	-	 
	Gross profit before fair value adjustments	 	 	11.4	 	 	 	-	 	 	 	34.4	 	 	 	-	 
	Fair value adjustment on sale of cultivated inventory	 	 	(4.8	)	 	 	-	 	 	 	(18.3	)	 	 	-	 
	Unrealized gain on biological asset transformation	 	 	1.8	 	 	 	-	 	 	 	10.1	 	 	 	-	 
	Gross profit	 	 	8.3	 	 	 	-	 	 	 	26.3	 	 	 	-	 
	Total expenses	 	 	(25.2	)	 	 	(2.3	)	 	 	(63.7	)	 	 	(3.2	)
	Loss from operations	 	 	(16.9	)	 	 	(2.3	)	 	 	(37.5	)	 	 	(3.2	)
	Total other income (expenses)	 	 	2.0	 	 	 	(42.3	)	 	 	(121.9	)	 	 	(71.9	)
	Loss before income tax	 	 	(14.9	)	 	 	(44.6	)	 	 	(159.3	)	 	 	(75.1	)
	Provision for income taxes	 	 	(2.6	)	 	 	-	 	 	 	(4.8	)	 	 	-	 
	Net loss	 	 	(17.5	)	 	 	(44.6	)	 	 	(164.2	)	 	 	(75.1	)
	Foreign currency translation adjustment	 	 	0.5	 	 	 	(0.1	)	 	 	(0.2	)	 	 	3.5	 
	Net loss and comprehensive loss	 	 	(17.0	)	 	 	(44.7	)	 	 	(164.3	)	 	 	(71.6	)

 

Revenue 

 

Revenue for the three months ended December
31, 2019 was $32.3 million, an increase of $32.1 million from the three months ended December 31, 2018, when there was no revenue
generated. This increase was due to the operations of the businesses resulting from the closing of the Qualifying Transaction.

 

Revenue for the year ended December 31,
2019 was $75.2 million, an increase of $75.2 million from the year ended December 31, 2018, when there was no revenue generated.
This increase was due to the operations of the businesses resulting from the closing of the Qualifying Transaction.

 

Gross Profit Before Fair Value Adjustments

 

Gross profit before the fair value adjustments
for the three months ended December 31, 2019 was $11.4 million, an increase of $11.4 million from the three months ended December
31, 2018, a period when the Corporation had no meaningful operations. This change was driven by the operations of the businesses
resulting from the Qualifying Transaction. Gross profit percentage before the fair value adjustments was 35.2% for the three months
ended December 31, 2019 and the three months ended December 31, 2018 had no comparable operating result.

 

Gross profit before the fair value adjustments
for the year ended December 31, 2019 was $34.4 million, an increase of $34.4 million from the year ended December 31, 2018, a period
when the Corporation had no meaningful operations. This change was driven by the operations of the businesses resulting from the
Qualifying Transaction. Gross profit percentage before the fair value adjustments was 45.8% for the year ended December 31, 2019
and the year ended December 31, 2018 had no comparable operating results.

 

    17

     

    

  

Ayr Strategies Inc. (formerly, Cannabis
Strategies Acquisition Corp.) 

Management’s Discussion and
Analysis

For the Three Months and Year Ended December
31, 2019 and 2018

 

 

Gross profit
before the fair value adjustments for the three months and year ended December 31, 2019, includes $3.8 million of incremental
costs to acquire cannabis inventory in a business combination. This relates to the one-time adjustment of inventory from cost
to fair value as part of the purchase price allocation. The adjusted gross profit percentage of revenue for the three months and
year ended December 31, 2019, was 46.8% and 50.8% respectively.

 

Gross Profit

 

Gross profit after net gains on biological
asset transformation for the three months ended December 31, 2019 was $8.3 million, an increase of $8.3 million from three months
ended December 31, 2018, a period when the Corporation had no meaningful operations. This change was driven by the operations of
the businesses resulting from the Qualifying Transaction.

 

Gross profit after net gains on biological
asset transformation for the year ended December 31, 2019 was $26.3 million, an increase of $26.3 million from year ended December
31, 2018, a period when the Corporation had no meaningful operations. This change was driven by the operations of the businesses
resulting from the Qualifying Transaction.

 

Inventory of plants under production is
considered a biological asset. Under IFRS, biological assets are to be recorded at fair value at the time of harvest, less costs
to sell, which are transferred to inventory and the transfer becomes the deemed cost on a go-forward basis.

 

When the product is sold, the fair value
is relieved from inventory and the transfer is booked to cost of sales. Cost of sales also includes products and costs related
to other products acquired from other producers and sold by the Corporation. In addition, for the three months ended December 31,
2019, Cost of Sales includes $3.8 million of incremental costs to acquire cannabis inventory in a business combination. This relates
to the one-time adjustment of inventory from cost to fair value as part of the purchase price allocation.

 

Total Expenses 

 

Total expenses for the three months ended
December 31, 2019 were $25.2 million, an increase of $22.8 million from $2.3 million for the three months ended December 31, 2018.
This change was driven by the operations of the businesses resulting from the Qualifying Transaction.

 

The increase in total expenses was primarily
attributable to the inclusion of 92 days of operating expenses for the three months ended December 31, 2019 with the most significant
contribution being non-cash stock-based compensation of $13.3 million, general and administrative expenses of $7.2 million, and
amortization expenses of $2.4 million, as compared to general and administrative expenses of $2.3 million, with no other expenses
comprising total expenses, for the three months ended December 31, 2018.

 

Total expenses for the year ended December
31, 2019 were $63.7 million, an increase of $60.5 million from $3.2 million for the year ended December 31, 2018. This change was
driven by the operations of the businesses resulting from the Qualifying Transaction.

 

The increase in total expenses was primarily
attributable to the inclusion of 221 days of operating expenses for the year ended December 31, 2019 with the most significant
contribution being non-cash stock-based compensation of $28.9 million, amortization expense of $7.2 million, and general and administrative
expenses of $19 million as compared to general and administrative expenses of $3.2 million, with no other expenses comprising total
expenses, for the year ended December 31, 2018.

 

    18

     

    

 

Ayr Strategies Inc. (formerly, Cannabis
Strategies Acquisition Corp.) 

Management’s Discussion and
Analysis

For the Three Months and Year Ended December
31, 2019 and 2018

 

 

Total Other Income (Expenses)

 

Total other
income for the three months ended December 31, 2019 was $2 million, an increase of $44.3 million from total other expenses of
$(42.3) million for the three months ended December 31, 2018. This change was primarily driven by the changes in fair value of
financial liabilities.

 

Total other expenses for the year ended
December 31, 2019 were $(121.9) million, an increase in expenses of $50 million from $(71.9) million for the year ended December
31, 2018. This change was primarily driven by the changes in fair value of financial liabilities.

 

Income Tax

 

Income tax expense is recognized based
on the expected tax payable on the taxable income for the period and the deferred tax, using tax rates enacted or substantively
enacted at year-end. For three months ended December 31, 2019, income tax expense was $2.6 million as compared to $0.0 million
for the three months ended December 31, 2018.

 

Income tax expense for the year ended December
31, 2019 was $4.8 million as compared to $0.0 million for the year ended December 31, 2018.

 

Net Loss

 

Net loss for the three months ended December
31, 2019 was $17.5 million as compared to $44.6 million for the three months ended December 31, 2018. The increase was primarily
driven by the factors described above.

 

Net loss for the year ended December 31,
2019 was $164.2 million as compared to $75.1 million for the year ended December 31, 2018. The increase in net loss was primarily
driven by the factors described above.

 

Liquidity and Capital Resources as
at December 31, 2019

 

Selected Liquidity and Capital Resource
Information

 

	($ in millions)	 	December 31, 2019	 	 	December 31, 2018	 
	 	 	 	 	 	 	 
	Cash and cash equivalents	 	 	8.4	 	 	 	0.1	 
	Total current assets	 	 	29.9	 	 	 	0.4	 
	Total assets	 	 	355.1	 	 	 	100.1	 
	Total current liabilities	 	 	34.7	 	 	 	3.0	 
	Total long-term liabilities	 	 	151.8	 	 	 	173.1	 
	Total shareholders’ equity (deficiency)	 	 	168.6	 	 	 	(76.1	)

 

As at December 31, 2019, the Corporation
had cash and cash equivalents of $8.4 million, other current assets of $21.5 million, and current liabilities of $34.7 million,
and negative working capital of $4.8 million compared to December 31, 2018 which had cash and cash equivalents of $0.1 million,
other current assets of $0.3 million, current liabilities of $3.0 million, and negative working capital of $2.6 million to meet
its current obligations.

 

The Corporation, post the Qualifying Transaction,
is generating cash from sales and deploying its capital reserves to develop assets capable of producing additional revenues and
earnings over both the immediate and near term. Capital reserves are expected to be used for capital expenditures and improvements
to existing facilities, marketing and product development, as well as the share buyback program.

 

    19

     

    

 

Ayr Strategies Inc. (formerly, Cannabis
Strategies Acquisition Corp.) 

Management’s Discussion and
Analysis

For the Three Months and Year Ended December
31, 2019 and 2018

 

 

Selected Cash Flow Information

  

	 	 	Year Ended December 31,	 
	($ in millions)	 	2019	 	 	2018	 
	 	 	 	 	 	 	 	 	 
	Net cash provided by (used in) operating activities	 	 	3.6	 	 	 	(1.3	)
	Net cash provided by (used in) investing activities	 	 	5.2	 	 	 	(7.1	)
	Net cash (used in) provided by financing activities	 	 	(1.5	)	 	 	8.3	 
	Net increase (decrease) in cash and cash equivalents	 	 	7.3	 	 	 	(0.1	)
	Effect of foreign currency translation	 	 	1.0	 	 	 	(1.2	)
	Cash and cash equivalents, beginning of period	 	 	0.1	 	 	 	1.4	 
	Cash and cash equivalents, end of period	 	 	8.4	 	 	 	0.1	 

 

Operating Activities 

 

Net cash provided by operating activities
was $3.6 million for the year ended December 31, 2019, compared to the $(1.3) million net cash used in operating activities for
the year ended December 31, 2018. The increase in net cash provided by operating activities was primarily driven by the operations
of the businesses resulting from the Qualifying Transaction.

 

Investing Activities 

 

Net cash provided by investing activities
was $5.2 million for the year ended December 31, 2019, an increase of $12.4 million compared to the $(7.1) million net cash used
in investing activities for the year ended December 31, 2018. The increase was due to the closing of the Qualifying Transaction
and the resulting release of the restricted cash held in escrow netted against the cash consideration paid for the Acquired Businesses.

 

Financing Activities 

 

Net cash used in financing activities was
$(1.5) million for the year ended December 31, 2019, a decrease of $9.8 million compared to $8.3 million for the year ended December
31, 2018. The decrease in net cash provided by financing activities was primarily due to the proceeds of $8.3 million in the prior
period from the issuance of shares.

 

Capital Management 

 

The Corporation’s objectives when
managing capital are to ensure sufficient liquidity to support its financial obligations and to execute its operating and strategic
plans, managing healthy liquidity reserves and access to capital.

 

The Corporation manages its capital structure
and makes adjustments to it based on the funds available to the Corporation in order to support business development. The directors
do not establish quantitative return on capital criteria for management, but rather rely on the expertise of the Corporation’s
management to sustain future development of the business. In order to carry out the planned business development and pay for administrative
costs, the Corporation will spend its existing working capital and seek to raise additional amounts, as needed. There were no changes
in the Corporation’s approach to capital management during the year ended December 31, 2019. The Corporation is not subject to
externally imposed capital requirements apart from the need to maintain its listing in accordance with stock exchange requirements.

 

The Corporation raises capital, as necessary,
to meet its needs and take advantage of perceived opportunities and, therefore, does not have a numeric target for its capital
structure. Management reviews its capital management approach on an ongoing basis and believes that this approach, given the relative
size of the Corporation, is reasonable. The Corporation plans to use existing funds, as well as funds from the future sale of products,
to fund operations and expansion activities. However, the Corporation may attempt to issue new shares or issue new debt for acquisitions.
There can be no assurance that the Corporation will be able to continue raising capital in this manner.

 

    20

     

    

 

Ayr Strategies Inc. (formerly, Cannabis
Strategies Acquisition Corp.) 

Management’s Discussion and
Analysis

For the Three Months and Year Ended December
31, 2019 and 2018

 

 

Share Capital

 

As at December 31, 2019 and December 31,
2018 the Corporation had share capital of $382.2 million and $1.8 million, respectively. The share capital as at December 31, 2019
was comprised of $1.8 million from Multiple Voting Shares, $251.7 million from Subordinate Voting Shares, and $128.7 million from
Exchangeable Shares, while the share capital as at December 31, 2018 was comprised of $1.8 million from Class B Shares. The Class
A Restricted Voting Share shares were redeemable, and thus recorded as a liability, until the Qualifying Transaction when they
were, unless they were redeemed, converted into Subordinate Voting Shares and thus became part of the share capital.

 

Outstanding Shares

 

	 	 	December 31, 2019	 	 	December 31, 2018	 
	Issued and outstanding	 	 	 	 	 	 	 	 
	Class B Shares	 	 	-	 	 	 	3,696,486	 
	Multiple Voting Shares	 	 	3,696,486	 	 	 	-	 
	Subordinate Voting Shares	 	 	14,824,485	 	 	 	-	 
	Exchangeable Shares	 	 	8,373,792	 	 	 	-	 
	Treasury stock	 	 	(29,500	)	 	 	-	 
	 	 	 	 	 	 	 	 	 
	Total number of shares	 	 	26,865,263	 	 	 	3,696,486	 

 

As at December 31, 2019, the Corporation
had 16,060,858 Subordinate Voting Shares issuable upon the exercise of Warrants, 298,087 make-whole Exchangeable Shares, 3,837,150
restricted Exchangeable Share units, and 314,034 Subordinate Voting Shares issuable upon the exercise of Rights reserved for issuance.
As at December 31, 2018, the Corporation had 16,359,058 Class A Restricted Voting Shares issuable upon the exercise of Warrants
reserved for issuance.

 

Liquidity

 

As at December 31, 2019, the Corporation
had negative working capital of $4.8 million compared to December 31, 2018 when it had negative working capital of $2.6 million.

 

Summary of Future Commitments

 

	Year	 	 	Leases	 	 	Debt	 	 	Total	 
	2020	 	 	 	2,473,739	 	 	 	6,628,842	 	 	 	9,102,581	 
	2021	 	 	 	2,276,925	 	 	 	7,480,631	 	 	 	9,757,556	 
	2022	 	 	 	2,214,915	 	 	 	5,762,108	 	 	 	7,977,023	 
	2023	 	 	 	2,261,501	 	 	 	1,511,532	 	 	 	3,773,033	 
	2024	 	 	 	2,189,639	 	 	 	22,612,548	 	 	 	24,802,187	 
	Thereafter	 	 	 	16,020,041	 	 	 	-	 	 	 	16,020,041	 
	Total Commitments	 	 	 	27,436,760	 	 	 	43,995,661	 	 	 	71,432,421	 

 

    21

     

    

 

Ayr Strategies Inc. (formerly, Cannabis
Strategies Acquisition Corp.) 

Management’s Discussion and
Analysis

For the Three Months and Year Ended December
31, 2019 and 2018

 

 

Off-Balance Sheet Arrangements

 

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

 

Related Party Transactions

 

Related parties
are defined as management and members of the Corporation and/or members of their immediate family and/or other companies
and/or entities in which a member or senior officer is a principal owner or senior executive. Other than disclosed elsewhere in
the Financial Statements, related party transactions and balances are as follows:

 

The Corporation had entered into an administrative
services agreement with the Sponsor for an initial term of 18 months, subject to a possible extension, for office space, utilities
and administrative support, which may include payment for services of related parties, for, but not limited to, various administrative,
managerial or operational services or to help effect a Qualifying Transaction. The Corporation had agreed to pay $10,000 per month,
plus applicable taxes for such services. As at December 31, 2019, the Corporation satisfied $125,464, in respect of these services
and $89,657 was owed at December 31, 2018. The service agreement was terminated on May 24, 2019, the date the Qualifying Transaction
was completed.

 

Mercer Park, L.P. entered into a Management
Agreement with the Corporation dated May 24, 2019, to provide consulting and management advisory services. As at December 31, 2019,
$48,008 was included in prepaid expenses as an advance for these services. Included in expenses for the year ended December 31,
2019, are management fees of $1,368,855 and depreciation and interest expense for the embedded lease of $477,570. The management
fee is paid monthly and varied based on actual costs incurred by the related entity when providing the Corporation administrative
support, management services, office space, and utilities. The agreement is a month-to-month arrangement.

 

As at December 31, 2019 and December 31,
2018, the amount payable to the Corporation’s Chief Executive Officer were $Nil and $446,742, respectively for out-of-pocket expenses
paid on behalf of the Corporation with respect to the Qualifying Transaction. The amounts due to the Sponsor and the Corporation’s
Chief Executive Officer were unsecured, non-interest bearing and were payable no earlier than the date of the consummation of the
Qualifying Transaction, with no recourse against the funds held in the Escrow Account. Due to the short-term nature of this arrangement,
the fair value of the amounts due to related parties approximated their carrying amount.

 

During the years ended December 31, 2019
and 2018, the Corporation incurred professional fees of $30,131 and $30,096, respectively, to Marrelli Support Services Inc. (“Marrelli
Support”), an organization of which the Corporation’s former Chief Financial Officer is president. These services were incurred
in the normal course of operations for general accounting and financial reporting matters. As at December 31, 2019 and December
31, 2018, Marrelli Support was owed $Nil and $4,370, respectively. These amounts are included in trade payables and accrued liabilities
on the Financial Statements.

 

As at December 31, 2019, Mercer Park Brand
Acquisition Corp. (“Brand”), a special purpose acquisition company that has limited services shared with the Corporation,
owed Ayr $85,000. This amount is included in due from related parties on the Financial Statements.

 

As at December 31, 2019, the Corporation
incurred fees from Panther Residential Management, LLC (“Panther”), a company partially owned by certain former owners
of Sira. The total incurred fees are $534,410 of facility construction fees, $67,500 of office expenses, $262,500 of rental fees,
and $3,508 of interest expense and $12,441 of depreciation related to an office lease.

 

    22

     

    

 

Ayr Strategies Inc. (formerly, Cannabis
Strategies Acquisition Corp.) 

Management’s Discussion and
Analysis

For the Three Months and Year Ended December
31, 2019 and 2018

 

 

As at December 31, 2019, the Corporation
incurred fees from JOCHCO Investments, LLC (JOCHCO), a company owned by certain former owners of Washoe. The total incurred fees
are $87,055 of interest expense and $55,471 of depreciation related to a dispensary lease.

 

Directors and officers of the Corporation
are considered key members of management. Compensation for the directors and officers in the respective years were comprised of:

 

	 	 	Year
    Ended	 
	 	 	December
    31, 2019	 	 	December
    31, 2018	 
	 	 	$	 	 	$	 
	Compensation
    and benefits, included in management fee	 	 	861,593	 	 	 	          -	 
	Stock-based compensation, non-cash	 	 	28,879,225	 	 	 	-	 
	Total compensation	 	 	29,740,818	 	 	 	-	 

  

In connection with the Qualifying Transaction,
the Corporation issued notes, on an arm’s length basis, to certain persons who are now related parties including directors
in their capacities as sellers. The balance of these notes as at December 31, 2019 was $41,084,256. Additional related party disclosures
can be found in Note 14 to the Financial Statements.

 

Selected Quarterly Information

 

A summary of selected information for each
of the previous eight quarters is as follows:

 

	 	 	 	 	 	 	Net Income (Loss)	 
	Three Months Ended	 	 	Net Revenues	 	 	Total	 	 	Income (Loss) per Share1	 
	December 31, 2019	 	 	 	32,282,616	 	 	 	(17,464,233	)	 	 	(0.65	)
	September 30, 2019	 	 	 	32,087,805	 	 	 	26,180,617	2	 		0.99
	June 30, 2019	 	 	 	10,823,206	 	 	 	(38,511,790	)2	 	 	(2.34	)
	March 31, 2019	 	 	 	-	 	 	 	(137,078,730	)3	 	 	(37.08	)
	December 31, 2018	 	 	 	-	 	 	 	(44,613,609	)3	 	 	(12.07	)
	September 30, 2018	 	 	 	-	 	 	 	(24,638,034	)3	 	 	(6.64	)
	June 30, 2018	 	 	 	-	 	 	 	(5,567,083	)3	 	 	(1.51	)
	March 31, 2018	 	 	 	-	 	 	 	135,1703	 	 	 	0.04	 

 

Notes:

 

1 Per share amounts are rounded to the nearest cent,
therefore, aggregating quarterly amounts may not reconcile to year-to-date per share amounts. Amounts are calculated using basic
weighted average number of shares outstanding.

 

2 Net Income (Loss) for the
three months ended September 30, 2019 and June 30, 2019 was primarily due to fair value changes in financial liabilities.

 

3 Prior to the Qualifying Transaction,
Ayr was a special purpose acquisition corporation. Issues of seasonality have not had an impact on the results or operations while
a special purpose acquisition corporation. From July 31, 2017 to March 31, 2019, variations in the quarterly net income (loss)
were caused by fluctuations in the net unrealized gain (loss) on changes in the fair value of financial liabilities, transaction
costs and general and administrative expense. Fluctuations in the net unrealized gain (loss) on changes in the fair value of financial
liabilities has varied from quarter-to-quarter due primarily to changes in the fair value of the Corporation’s Class A Restricted
Voting Shares (prior to the Qualifying Transaction) and the liability associated with the Warrants.

 

Accounting Policies and Critical Accounting
Estimates

 

The application of the Corporation’s
accounting policies requires management to use estimates and judgments that can have significant effect on the revenues, expenses,
loss, assets and liabilities recognized, and disclosures made in the consolidated financial statements.

 

    23

     

    

 

Ayr Strategies Inc. (formerly, Cannabis
Strategies Acquisition Corp.) 

Management’s Discussion and
Analysis

For the Three Months and Year Ended December
31, 2019 and 2018

 

 

Management’s
best estimates concerning the future are based on the facts and circumstances available at the time estimates are made. Management
uses historical experience, general economic conditions and assumptions regarding probable future outcomes as the basis for determining
estimates. Estimates and their underlying assumptions are reviewed periodically, and the effects of any changes are recognized
at that time. Actual results could differ from the estimates used.

 

The following discusses the most significant
accounting judgments, estimates and assumptions that the Corporation has made in the preparation of its December 31, 2019 Financial
Statements.

 

Business combination

 

A business combination is a transaction
or event in which an acquirer obtains control of one or more businesses and is accounted for using the acquisition method. The
total consideration paid for the acquisition is the aggregate of the fair values of assets acquired, liabilities assumed, and equity
instruments issued in exchange for control of the acquire at the acquisition date. The acquisition date is the date when the Corporation
obtains control of the acquiree. The identifiable assets acquired and liabilities assumed are recognized at their acquisition date
fair values, except for deferred taxes and share-based payment awards where IFRS provides exceptions to recording the amounts at
fair value.

 

Goodwill represents the difference between
total consideration paid and the fair value of the net identifiable assets acquired. Acquisition costs incurred are expensed to
total expenses. Contingent consideration is measured at its acquisition date fair value and is included as part of the consideration
transferred in a business combination, subject to the applicable terms and conditions.

 

Contingent consideration that is classified
as equity is not remeasured at subsequent reporting dates and its subsequent settlement is accounted for within equity. Contingent
consideration that is classified as an asset or a liability is remeasured at subsequent reporting dates in accordance with IFRS
9 with the corresponding gain or loss recognized in net loss.

 

Based on the facts and circumstances that
existed at the acquisition date, management will perform a valuation analysis to allocate the purchase price based on the fair
values of the identifiable assets acquired and liabilities assumed on the acquisition date. Management has one year from the acquisition
date to confirm and finalize the facts and circumstances that support the finalized fair value analysis and related purchase price
allocation. Until such time, these values are provisionally reported and are subject to change. Changes to fair values and allocations
are retrospectively adjusted in subsequent periods.

 

In determining the fair value of all identifiable
assets acquired and liabilities assumed, the most significant estimates generally relate to contingent consideration and intangible
assets. Management exercises judgment in estimating the probability and timing of when earn-outs are expected to be achieved, which
is used as the basis for estimating fair value. Identified intangible assets are fair valued using appropriate valuation techniques
which are generally based on a forecast of the total expected future net cash flows of the acquiree. Valuations are highly dependent
on the inputs used and assumptions made by management regarding the future performance of these assets and any changes in the discount
rate applied.

 

Biological assets and inventory

 

In calculating the value of the biological
assets and inventory, management is required to make a number of estimates, including estimating the stage of growth of the cannabis
up to the point of harvest, harvesting costs, selling costs, average or expected selling prices and list prices, expected yields
for the cannabis plants, and oil conversion factors. In calculating final inventory values, management compares the inventory costs
to estimated net realizable value.

 

    24

     

    

 

Ayr Strategies Inc. (formerly, Cannabis
Strategies Acquisition Corp.) 

Management’s Discussion and
Analysis

For the Three Months and Year Ended December
31, 2019 and 2018

 

 

Estimated useful lives and depreciation
of property, plant and equipment 

 

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

 

Valuation, estimated life and impairment
of intangible assets and goodwill

 

Management uses significant judgment in
determining the fair value of intangible assets and goodwill, estimating the useful lives and impairment. Intangible assets that
have indefinite useful lives are not subject to amortization and are tested annually for impairment, or more frequently if events
or changes in circumstances indicate that they might be impaired.

 

The Corporation uses judgment in determining
the grouping of assets by identifying CGU’s for purposes of testing for impairment of goodwill and intangible assets. The
Corporation’s estimate of CGU’s or a group of CGU’s recoverable amount based on value in use involves estimating
future cash flows before taxes. Future cash flows are estimated based on multi-year extrapolation of the most recent historical
actual results and budgets calculated by discounting the final year in perpetuity.

 

Goodwill impairment

 

When determining the recoverable amount
of the CGU or CGUs to which goodwill is allocated, the Corporation relies on a number of factors, including historical results,
business plans, forecasts and market data. Changes in the conditions for these judgments and estimates can significantly affect
the recoverable amount.

 

Leases

 

Each capitalized lease is evaluated to
determine if the Corporation would exercise any of the renewal options offered. Several material factors are considered in determining
if the renewal options would be exercised, such as length of the renewal, renewal rate, and ability to transfer locations. When
measuring lease liabilities, the Corporation discounted lease payments using its incremental borrowing rate at May 24, 2019. The
weighted-average rate applied was in the range of 9.8% to 11.6% per annum.

 

Provisions and contingent liabilities

 

When the Corporation is more likely than
not to incur an outflow of resources to settle an obligation and the amount can be reasonably estimated, a contingent liability
is recorded. The contingent liability is recorded at management’s best estimates of the expenditure required to settle the
obligation at period end, discounted to the present value, if material.

 

Financial instruments

 

To determine the fair value of financial
instruments, the Corporation develops assumptions and selects certain methods to perform the fair value calculations. Various methods
considered include but are not limited to: (a) assigning the value attributed to the transaction at the time of origination; (b)
re-measuring the instrument if it requires concurrent fair value measurement; and (c) valuing the instrument at the issuance value
less any amortized costs. As judgment is a factor in determining the value and selecting a method, as well as, the inherent uncertainty
in estimating the fair value, the valuation estimates may be different.

 

    25

     

    

 

Ayr Strategies Inc. (formerly, Cannabis
Strategies Acquisition Corp.) 

Management’s Discussion and
Analysis

For the Three Months and Year Ended December
31, 2019 and 2018

 

 

Application
of the option pricing model requires estimates in expected dividend yields, expected volatility in the underlying assets and the
expected life of the financial instruments. These estimates may ultimately be different from amounts subsequently realized, resulting
in an overstatement or understatement of loss and comprehensive loss.

 

Stock-based compensation

 

The fair value of stock-based compensation
expenses are estimated using an option pricing model and rely on a number of estimates, such as expected life of the option, the
volatility of the underlying share price, the risk free rate of return, and the estimated rate of forfeitures of options granted.

 

Expected credit loss

 

Management determines expected credit loss
(“ECL”) by evaluating individual receivable balances and considering customers’ financial condition and current
economic conditions. Accounts receivable are written off when deemed uncollectible. Recoveries of accounts receivable previously
written off are recorded as income when received. All receivables are expected to be collected within one year of the year ended.

 

Income taxes

 

In assessing the probability of realizing
income tax assets, management make estimates related to the expectation of future taxable income, applicable tax planning opportunities,
expected timing of reversals of existing temporary differences and the likelihood that the tax positions taken will be sustained
upon examination by applicable tax authorities.

 

Risk Factors 

 

Please refer to the Corporation’s
final non-offering prospectus dated February 15, 2019, the Corporation’s management information circular dated February 19,
2019, and the Corporation’s Annual Information Form for information on the risk factors to which the Corporation is subject.
In addition, see “Cautionary Note Regarding Forward-Looking Information” above. 

 

Financial Instruments, Financial Risk
Management and Other Instruments 

 

The Corporation does not utilize financial
instruments such as derivatives to manage financial risks. The Corporation’s financial instruments consist of cash and cash equivalents,
deposits, restricted cash, short term investments, warrant liability, and make-whole provisions and contingent consideration included
as purchase consideration relating to business combinations. These financial instruments are measured at fair value or are short-term
in nature where fair value approximates their carrying value (see Note 22 to the Financial Statements).

 

The Corporation is exposed to credit risk,
liquidity risk and interest rate risk. The Corporation’s management oversees the management of these risks. The Corporation`s
management is supported by the members that advises on financial risks and the appropriate financial risk governance framework
for the Corporation. The Corporation’s financial risk activities are governed by appropriate policies and procedures and
financial risks are identified, measured and managed in accordance with Corporation policies and Corporation risk appetite.

 

    26

     

    

 

Ayr Strategies Inc. (formerly, Cannabis
Strategies Acquisition Corp.) 

Management’s Discussion and
Analysis

For the Three Months and Year Ended December
31, 2019 and 2018

 

 

Fair value measurements 

 

Fair
value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between
market participants at the measurement date. The fair value measurement is based on the presumption that the transaction to
sell the asset or transfer the liability takes place either in the principal market for the asset or liability or, in the
absence of a principal market, in the most advantageous market for the asset or liability. The principal or the most
advantageous market must be accessible by the Corporation.

 

The fair value of an asset or a liability
is measured using the assumptions that market participants would use when pricing the asset or liability, assuming that market
participants act in their economic best interest. A fair value measurement of a non-financial asset takes into account a market
participant’s ability to generate economic benefits from the asset’s highest and best use or by selling it to another market
participant that would utilize the asset in its highest and best use.

 

The Corporation uses valuation techniques
that are considered to be appropriate in the circumstances and for which there is sufficient data are with unobservable inputs.

 

All assets and liabilities for which fair
value is measured or disclosed in the unaudited condensed interim consolidated financial statements are categorized within the
fair value hierarchy. This is described, as follows, based on the lowest level input that is significant to the fair value measurement
as a whole:

 

		•	Level 1 inputs are quoted prices in active markets for identical assets or liabilities at the measurement
date.

 

		•	Level 2 inputs are observable inputs other than quoted prices included within Level 1, such as
quoted prices for similar assets or liabilities in active markets, quoted prices for identical assets or liabilities in markets
that are not active, or other inputs that are observable directly or indirectly.

 

		•	Level 3 inputs are unobservable inputs for the asset or liability that reflect the reporting entity’s
own assumptions and are not based on observable market data.

 

The hierarchy used to fair value the financial
instruments as at December 31, 2019 and December 31, 2018 were as follows:

 

		•	Level 1: Cash and cash equivalents, deposits, restricted cash, short term investments and warrant
liability

		•	Level 2: None

		•	Level 3: Make-whole provisions and contingent consideration issued as purchase consideration relating
to business combinations

 

There were no transfers between levels
in the hierarchy. For financial assets and liabilities not measured at fair value, their carrying value is considered to approximate
fair value due to their market terms.

 

    27

     

    

 

Ayr Strategies Inc. (formerly, Cannabis
Strategies Acquisition Corp.) 

Management’s Discussion and
Analysis

For the Three Months and Year Ended December
31, 2019 and 2018

 

 

	 	 	 	 	 	Carrying values	 	 	 	 	 	 	 	 	Fair values	 
	Financial assets	 	FVTPL	 	 	FVTOCI	 	 	AC	 	 	Total	 	 	Total	 
	December 31, 2019	 	$	 	 	$	 	 	$	 	 	$	 	 	$	 
	Cash and cash equivalents	 	 	8,403,196	 	 	 	-	 	 	 	-	 	 	 	8,403,196	 	 	 	8,403,196	 
	Deposit	 	 	740,666	 	 	 	-	 	 	 	-	 	 	 	740,666	 	 	 	740,666	 
	Accounts receivable	 	 	-	 	 	 	-	 	 	 	2,621,239	 	 	 	2,621,239	 	 	 	2,621,239	 
	 	 	 	9,143,862	 	 	 	-	 	 	 	2,621,239	 	 	 	11,765,101	 	 	 	11,765,101	 
	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 
	December 31, 2018	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 
	Cash and cash equivalents	 	 	109,952	 	 	 	-	 	 	 	-	 	 	 	109,952	 	 	 	109,952	 
	Restricted cash and short-term investments held in escrow	 	 	99,684,243	 	 	 	-	 	 	 	-	 	 	 	99,684,243	 	 	 	99,684,243	 
	Deposit	 	 	274,886	 	 	 	-	 	 	 	-	 	 	 	274,886	 	 	 	274,886	 
	 	 	 	100,069,081	 	 	 	-	 	 	 	-	 	 	 	100,069,081	 	 	 	100,069,081	 

 

	 	 	Carrying values	 	 	 	 	 	 	 	 	Fair values	 
	Financial liabilities	 	FVTPL	 	 	AC	 	 	Total	 	 	Total	 
	December 31, 2019	 	$	 	 	$	 	 	$	 	 	$	 
	Warrant liability	 	 	36,874,124	 	 	 	-	 	 	 	36,874,124	 	 	 	36,874,124	 
	Trade payables	 	 	-	 	 	 	6,806,053	 	 	 	6,806,053	 	 	 	6,806,053	 
	Accrued liabilities	 	 	-	 	 	 	5,123,865	 	 	 	5,123,865	 	 	 	5,123,865	 
	Accrued interest payable	 	 	-	 	 	 	815,662	 	 	 	815,662	 	 	 	815,662	 
	Debts payable	 	 	-	 	 	 	43,995,661	 	 	 	43,995,661	 	 	 	43,995,661	 
	 	 	 	36,874,124	 	 	 	56,741,241	 	 	 	93,615,365	 	 	 	93,615,365	 
	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 
	December 31, 2018	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 
	Class A Restricted Voting Shares subject to redemption	 	 	-	 	 	 	145,694,363	 	 	 	145,694,363	 	 	 	145,694,363	 
	Warrant liability	 	 	23,983,372	 	 	 	-	 	 	 	23,983,372	 	 	 	23,983,372	 
	Accrued liabilities	 	 	-	 	 	 	2,489,096	 	 	 	2,489,096	 	 	 	2,489,096	 
	 	 	 	23,983,372	 	 	 	148,183,459	 	 	 	172,166,831	 	 	 	172,166,831	 

 

The Corporation is exposed to credit risk,
liquidity risk and interest rate risk. The Corporation’s management oversees the management of these risks. The Corporation`s
management is supported by the board members that advise on financial risks and the appropriate financial risk governance framework
for the Corporation. The Corporation’s financial risk activities are governed by policies and procedures and financial risks
are identified, measured and managed in accordance with the Corporation’s policies and the Corporation’s risk appetite.

 

The Corporation quantified the sensitivity
of inputs in relation to the contingent consideration as at December 31, 2019 and 2018, and would expect the following effect on
fair value in the event of changes to the discount rate:

 

	Significant assumption	 	Range of inputs	 	 	Sensitivity	 	 	Value at year end	 
	 	 	 	 	 	 	 	 	December 31, 2019	 	 	December 31, 2018	 
	 	 	 	 	 	 	 	 	 	 	 	$	 	 	$	 
	 	 	 	 	 	 	 	Increase 5%	 	 	 	22,502,442	 	 	-	 
	Discount rate	 	 	6.3%	 	 	 	 	 	 	 	 	 	 	 	 
	 	 	 	 	 	 	 	Decrease 5%	 	 	 	22,813,159	 	 	-	 

 

    28

     

    

 

Ayr Strategies Inc. (formerly, Cannabis
Strategies Acquisition Corp.) 

Management’s Discussion and
Analysis

For the Three Months and Year Ended December
31, 2019 and 2018

 

 

Credit Risk

 

Credit risk is the risk of unexpected loss
if a customer or third party to a financial instrument fails to meet its contractual obligations. Financial instruments which potentially
subject the Corporation to concentrations of credit risk consist of cash and cash equivalents, deposits and accounts receivable.
To address its credit risk arising from cash and cash equivalents and deposits, the Corporation ensures to keep these balances
with reputable financial institutions. The Corporation has not recorded an expected credit loss as all amounts are considered to
be recoverable and are immaterial. The Corporation is not significantly exposed to its accounts receivable due to its diversified
customer base and a stringent collection policy. No expected credit loss (“ECL”) has been recorded by the Corporation
as all receivables are expected to be collected and are not significant. As at December 31, 2019 and December 31, 2018 the maximum
amount exposed to credit risks was $11,024,435 and $109,952, respectively. The components of accounts receivable as at December
31, 2019 were:

 

	 	 	 	0-30 days	 	 	31-90 days	 	 	Over 90 days	 	 	Total	 
	Balance, as at December 31, 2019 (in $)	 	 	 	2,456,226	 	 	 	115,808	 	 	 	49,205	 	 	 	2,621,239	 

 

Liquidity Risk

 

Liquidity risk is the risk that the Corporation
is unable to generate or obtain sufficient cash in a cost-effective manner to fund its obligations as they come due. The Corporation’s
approach to managing liquidity risk is to ensure that it will have sufficient liquidity to meet liabilities when due. The Corporation
manages liquidity risk through maintaining sufficient funds on hand and continuously monitoring forecast and actual cash flows.
As at December 31, 2019, all trade payables and accrued liabilities are due within a year. Refer to the Summary of Future Commitments
table for future lease and debt commitments.

 

Interest Rate Risk

 

Interest rate risk is the risk that the
fair value or future cash flows of a financial instrument will fluctuate because of changes in market interest rates. The Corporation
is exposed to interest rate risk on its cash and cash equivalents, deposit and long-term debts. Cash and cash equivalents and deposits
bear interest at market rates. The Corporation’s debts have fixed rates of interest. The Corporation does not use any derivative
instruments to hedge against interest rate risk and believes that the change in interest rates will not have a significant impact
on its financial results.

 

Currency Risk

 

The operating results and financial position
of the Corporation are reported in United States dollars. As the Corporation operates in an international environment, some of
the Corporation’s financial instruments and transactions are denominated in currencies other than the United States dollar.
The results of the Corporation’s operations are subject to currency transaction and translation risks.

 

At December 31, 2019, the Corporation had
no hedging agreements in place with respect to foreign exchange rates. The Corporation has not entered into any agreements or purchased
any instruments to hedge possible currency risks at this time. The Corporation believes that a change in exchange rates will not
have a significant impact on financial results. The Corporation performed a sensitivity analysis on the conversion rate applied
to Canadian balances:

 

	Balance sheet account	 	Value at year end	 	 	Conversion rate	 	 	Sensitivity	 	Effect on fair value	 
	 	 	Dr (Cr.)	 	 	 	 	 	 	 	as at December 31, 2019	 
	 	 	CDN $	 	 	 	 	 	 	 	$	 
	Cash and cash equivalents	 	 	2,363,162	 	 	 	0.7653	 	 	Increase / Decrease 1%	 	 	18,085	 
	Warrants	 	 	(36,874,124	)	 	 	0.7653	 	 	Increase / Decrease 1%	 	 	(282,198	)

 

    29

     

    

 

Ayr Strategies Inc. (formerly, Cannabis
Strategies Acquisition Corp.) 

Management’s Discussion and
Analysis

For the Three Months and Year Ended December
31, 2019 and 2018

 

 

Licenses Overview

 

The following table provides a list of
the licenses granted to companies and facilities for which the Corporation provides management or consulting services.

 

	Entity	Address Attached to License	License	Certificate/ License #	Expiration/Renewal Date	Summary
	LivFree Wellness LLC	3900 Ponderosa Way, Las Vegas, NV 89118	State of Nevada Medical Marijuana Cultivation Registration Certificate – Department of Taxation	7437872370

4914675084	June 30, 2020	Cultivation - Medical
	State of Nevada Marijuana Cultivation Facility License – Department of Taxation	6809636143

3916615303	October 31, 2020	Cultivation - Recreational
	State of Nevada Medical Marijuana Production Registration Certificate – Department of Taxation	5286412731

2203226338	June 30, 2020	Production - Medical
	State of Nevada Marijuana Product Manufacturing  License – Department of Taxation	5999865722

4967428496	October 31, 2020	Production - Recreational
	The Dispensary	5347 S. Decatur, Las Vegas, NV 89118	State of Nevada Medical Marijuana Dispensary Registration Certificate – Department of Taxation	6021571222

1216816750	June 30, 2020	Retail - Medical
	State of Nevada Retail Marijuana Store License – Department of Taxation	7122432936

9156133247	June 30, 2020	Retail - Recreational
	State of Nevada Retail Marijuana Distributor License – Department of Taxation	1450479965

1148975256	June 30, 2020	Distribution - Recreational
	50 N. Gibson, Henderson, NV 89014	State of Nevada Medical Marijuana Dispensary Registration Certificate – Department of Taxation	5440315991

9762505142	June 30, 2020	Retail - Medical
	State of Nevada Retail Marijuana Store License – Department of Taxation	0879234311

0299625005	June 30, 2020	Retail - Recreational
	100 W. Plumb Lane, Reno, NV 89509	State of Nevada Medical Marijuana Dispensary Registration Certificate – Department of Taxation	0418648144

0349513323	June 30, 2020	Retail - Medical
	State of Nevada Retail Marijuana Store License – Department of Taxation	7170238961

1437559364	June 30, 2019	Retail - Recreational
	435 Eureka Avenue, Reno, NV 89512	State of Nevada Medical Marijuana Cultivation Registration Certificate – Department of Taxation	9680469072

1657828547	June 30, 2020	Cultivation - Medical

 

    30

     

    

 

Ayr Strategies Inc. (formerly, Cannabis
Strategies Acquisition Corp.) 

Management’s Discussion and
Analysis

For the Three Months and Year Ended December
31, 2019 and 2018

 

 

	Entity	Address Attached to License	License	Certificate/ License #	Expiration/Renewal Date	Summary
	 	 	State of Nevada Medical Marijuana Production Registration Certificate – Department of Taxation	1866888188

8004789228	June 30, 2019	Production - Medical
	 	 	State of Nevada Marijuana Cultivation Facility License – Department of Taxation	9410415425

4817748080	November 30, 2020	Cultivation - Recreational
	 	 	State of Nevada Marijuana Product Manufacturing  License – Department of Taxation	5669362935

5290417097	November 30, 2020	Production - Recreational
	Kynd Cannabis Company	1645 Crane Way, Sparks, NV 89431	State of Nevada Medical Marijuana Cultivation Registration Certificate – Department of Taxation	8284254296

4915513809	June 30, 2020	Cultivation - Medical
	State of Nevada Marijuana Cultivation Facility License – Department of Taxation	2085618856

3796491040	June 30, 2019	Cultivation - Recreational
	State of Nevada Medical Marijuana Production Registration Certificate – Department of Taxation	1207807263

7090304628	June 30, 2019	Production - Recreational
	State of Nevada Marijuana Product Manufacturing License – Department of Taxation	7616374874

6660781629	June 30, 2020	Manufacturing - Recreational
	The State of Nevada Marijuana Distributor License – Department of Taxation	7702771103

3924812731	June 30, 2020	Distribution - Medical/Rec
	Tahoe-Reno Botanicals LLC	Marijuana Cultivation - Adult Use Quarterly License	S080844Q-LIC	March 31, 2019 (issued quarterly)	Cultivation - Medical/Rec
	Tahoe-Reno Extractions LLC	Medical/Retail Marijuana Production Facility License

(Issued to Tahoe-Reno Extractions LLC dba Kynd Cannabis Company)	S080842Q-LIC	March 31, 2019 (issued quarterly)	Production - Medical/Recreational
	Retail Marijuana Distributor License

(Issued to Tahoe-Reno Extractions LLC dba Kynd Cannabis Company)	S080843Q-LIC	March 31, 2019 (issued quarterly)	Distribution - Retail
	Industrial Hemp Handler Certificate - Department of Agriculture	202042H	December 31, 2020	Cultivation - Hemp
	Mynt Cannabis Dispensary	132 E. Second St., Reno, NV 89501	State of Nevada Medical Marijuana Dispensary Registration Certificate –  Department of Taxation	9751934830

3293892007	June 30, 2020	Retail - Medical
	State of Nevada Retail Marijuana Store License – Department of Taxation	4693433860

4709544132	June 30, 2020	Retail - Recreational

 

    31

     

    

 

Ayr Strategies Inc. (formerly, Cannabis
Strategies Acquisition Corp.) 

Management’s Discussion and
Analysis

For the Three Months and Year Ended December
31, 2019 and 2018

 

 

	Entity	Address Attached to License	License	Certificate/ License #	Expiration/Renewal Date	Summary
	 	 	City of Reno – Medical Marijuana Dispensary License	R101872Q	March 31, 2020 (issued quarterly)	Retail - Medical
	 	 	Marijuana Establishment – Retail Marijuana Store License	R145321Q	March 31, 2020 (issued quarterly)	Retail - Recreational
	Lemon Aide, LLC	340 Lemmon Drive, Reno, NV  89506	State of Nevada Medical Marijuana Dispensary Registration Certificate – Department of Taxation	8099457823

9784321818	June 30, 2020	Retail - Medical
	State of Nevada Retail Marijuana Store License –Department of Taxation	1324430324

7046007918	July 31, 2020	Retail - Recreational
	Washoe County Marijuana License

(Issued to Lemon Aide LLC dba MYNT Cannabis Dispensary)	W000013ME-LIC	April 1, 2020 (issued quarterly)	Retail - Medical/Recreational
	Sira Naturals, Inc.	1001 Massachusetts Avenue, Cambridge, MA 02138	Registered Marijuana Dispensary Registration	RMD-325	June 29, 2020	Retail - Medical
	240 Elm Street, Somerville, MA 02114	Registered Marijuana Dispensary Registration	RMD-245	June 27, 2020	Retail - Medical
	29 Franklin Street, Needham, MA 02492	Registered Marijuana Dispensary Registration	RMD-625	July 12, 2020	Retail - Medical
	13 Commercial Way, Milford, MA 01757	Marijuana Establishment License (Cultivation/Tier 3 – Indoor)	MC281252	July 30, 2020	Cultivation
	Marijuana Establishment License (Product Manufacturer)	MP281303	July 30, 2020	Production
	Marijuana Establishment License (Transporter with Other Existing ME License)	MX281310	July 30, 2020	Transportation

 

    32

     

    

 

Ayr Strategies Inc. (formerly, Cannabis
Strategies Acquisition Corp.) 

Management’s Discussion and
Analysis

For the Three Months and Year Ended December
31, 2019 and 2018

 

 

Federal Regulatory Environment 

 

The federal government of the United States
regulates controlled substances through the Controlled Substances Act (CSA), which places controlled substances on one of five
schedules. Currently, marijuana is classified as a Schedule I controlled substance. A Schedule I controlled substance means the
Drug Enforcement Agency considers it to have a high potential for abuse, no accepted medical treatment, and a lack of accepted
safety for the use of it even under medical supervision. Overall, the United States federal government has specifically reserved
the right to enforce federal law regarding the sale and disbursement of medical or adult-use marijuana even if such sale and disbursement
is sanctioned by state law. Accordingly, there are a number of significant risks associated with the business of the Corporation
and unless and until the United States Congress amends the CSA with respect to medical and/or adult-use cannabis (and as to the
timing or scope of any such potential amendments there can be no assurance), there is a significant risk that federal authorities
may enforce current federal law, and the business of the Corporation may be deemed to be producing, cultivating, extracting, or
dispensing cannabis or aiding or abetting or otherwise engaging in a conspiracy to commit such acts in violation of federal law
in the United States.

 

The
Corporation’s operations, to the Corporation’s knowledge, are in compliance with applicable state laws,
regulations and licensing requirements in all material respects. Additionally, the Corporation uses the same proprietary,
best-practices policies and procedures in its managed facilities as in its owned facilities in order to ensure systematic
operations and, as such, to the Corporation’s knowledge, the facilities that the Corporation manages are in compliance
with applicable state laws, regulations and licensing requirements in all material respects.

 

Nonetheless, for the reasons described
above and risks described under the “Cautionary Note Regarding Forward-Looking Information”, but not limited
to these reasons, there are significant risks associated with the business of the Corporation. Readers are strongly encouraged
to carefully read all the risk factors contained herein and in the Corporation’s Annual Information Form.

 

The following sections describe the legal
and regulatory landscape in respect of the states in which the Corporation currently operates.

 

While the Corporation’s compliance
controls have been developed to mitigate the risk of any material violations of a license arising, there is no assurance that the
Corporation’s licenses will be renewed in the future in a timely manner. Any unexpected delays or costs associated with the
licensing renewal process could impede the ongoing or planned operations of the Corporation and have a material adverse effect
on the Corporation’s business, financial condition, results of operations or prospects.

 

Nevada

 

Nevada Regulatory Landscape

 

The use of medical marijuana use was legalized
in Nevada by a ballot initiative in 2000. Nevada has legislatively enacted the licensing of medical marijuana business establishments
since 2013. Adult-use was approved in November 2016, when voters in Nevada passed an adult-use marijuana measure to allow for the
sale of recreational marijuana in the state. The first retail stores to sell adult-use marijuana began sales in July 2017. The
Nevada Department of Taxation (“DOT”) currently is the regulatory agency overseeing the medical and adult use
cannabis programs. Cities and counties in Nevada are allowed to determine the number of local marijuana licenses they will issue
up to the maximum number allocated by the statute. The Corporation only manages or provides consulting services for facilities
that operate in Nevada cities or counties with clearly defined marijuana programs. Currently the Corporation manages or provides
consulting services for facilities located in the City of Las Vegas, Clark County and Washoe County jurisdictions.

 

Licenses

 

The Corporation has control over 3 cultivation
facilities, 3 production facilities, 3 distribution licenses, and 5 dispensaries/retail stores in the state of Nevada through separate
management services agreements. Under applicable laws, the licenses issued for these facilities permit the companies for which
the Corporation provides management and consulting services to cultivate, manufacture, process, package, sell, and purchase marijuana
pursuant to the terms of the licenses and Nevada regulations.

 

    33

     

    

 

Ayr Strategies Inc. (formerly, Cannabis
Strategies Acquisition Corp.) 

Management’s Discussion and
Analysis

For the Three Months and Year Ended December
31, 2019 and 2018

 

 

Licenses are renewed annually and there
is no ultimate expiry after which no renewals are permitted. Additionally, in respect of the renewal process, provided that the
requisite renewal fees are paid, the renewal application is submitted in a timely manner along with the necessary supporting documents,
including requisite background investigations, and regulatory requirements are met, the licensee would expect to receive the applicable
renewed license in the ordinary course of business.

 

Regulations

 

In the state of Nevada, only marijuana
that is grown/produced in the state by a licensed establishment may be sold in the state. The companies for which the Corporation
provides management and consulting services are vertically-integrated and have the capabilities to cultivate, harvest, process
and sell/dispense/deliver adult-use and medical cannabis and cannabis products.

 

Reporting Requirements

 

The state of Nevada uses METRC solution
(“METRC”) as the state’s computerized seed-to-sale tracking system used to track commercial marijuana activity.
Individual licensees whether directly or through third-party integration systems are required to push data to the state to meet
reporting requirements. The companies for which the Corporation provides management and consulting services each have a seed-to-sale
system in the state which is designed to capture the required data points for cultivation, manufacturing and retail as required
in Nevada Revised Statutes sections 453A and 453D.

 

Massachusetts

 

Massachusetts Regulatory Landscape

 

The use of cannabis for medical use was
legalized in Massachusetts by a voter approval of the Massachusetts Marijuana Initiative in 2012. The law took effect on January
1, 2013, eliminating criminal and civil penalties for the possession and use of up to a 60-day or ten (10) ounce supply of marijuana
for medical use for patients possessing a state issued registration card.

 

On November 8, 2016, Massachusetts voters
approved Question 4 or the Massachusetts Marijuana Legalization Initiative, which allowed for recreational or “adult use”
cannabis in the Commonwealth. On September 12, 2017, the Cannabis Control Commission (“CCC”) was established
under Chapter 55 of the Acts of 2017 (the “Massachusetts Act”) to implement and administer laws enabling access
to medical and adult-use cannabis.

 

On November 16, 2018, the CCC issued the
first notices for retail marijuana establishments to commence adult-use operations in Massachusetts.

 

Under the current program there are no
state-wide limits on the total number of licenses permitted; however, no individual or entity shall be a controlling person over
more than three licenses in a particular class of license. Similarly, no individual, corporation or other entity shall be in a
position to control the decision making of more than three licenses in a particular class of license. In addition, all marijuana
establishments are required to enter into host community agreements with the municipality in which they are located.

 

    34

     

    

 

Ayr Strategies Inc. (formerly, Cannabis
Strategies Acquisition Corp.) 

Management’s Discussion and
Analysis

For the Three Months and Year Ended December
31, 2019 and 2018

 

 

Licenses

 

The Corporation maintains 1 cultivation
license, 1 production license, 1 transportation license, and 3 dispensary licenses in the state of Massachusetts. Under applicable
laws, the licenses permit the Corporation to cultivate, manufacture, process, package, sell, and purchase marijuana pursuant to
the terms of the licenses.

 

Provisional marijuana establishment licenses
are valid for one (1) year and licenses must be renewed annually thereafter in accordance with CCC guidelines. There is no ultimate
expiry after which no renewals are permitted. Additionally, in respect of the renewal process, provided that the requisite renewal
fees are paid, the renewal application is submitted in a timely manner, the applicable licensee provides an accounting of the financial
benefits accruing to the municipality as the result of the host community agreement, and regulatory requirements are met, the licensee
would expect to receive the applicable renewed license in the ordinary course of business.

 

Regulations

 

Under
the terms of the marijuana cultivator license, the licensee may cultivate, process and package marijuana, to transfer and
deliver marijuana products to marijuana establishments, but not to consumers. A marijuana product manufacturer is an entity
authorized to obtain, manufacture, process and package marijuana and marijuana products, to deliver marijuana and marijuana
products to marijuana establishments and to transfer marijuana and marijuana products to other marijuana establishments, but
not to consumers. A marijuana retailer is an entity authorized to purchase and deliver marijuana and marijuana products from
marijuana establishments and to sell or otherwise transfer marijuana and marijuana products to marijuana establishments and
to consumers. A marijuana retailer provides a retail location which may be accessed by consumers 21 years of age or older or,
if the retailer is co-located with a registered marijuana dispensary (“RMD”) by individuals who are registered
qualifying patients with the Medical Use of Marijuana Program with a registration card.

 

In order for a customer to be dispensed
marijuana, they must present a valid government issued photo ID immediately upon entry of the retail facility. If the individual
is younger than 21 years old but 18 years of age or older, he or she shall not be admitted unless they produce an active medical
registration card issued by the DPH. If the individual is younger than 18 years old, he or she shall not be admitted unless they
produce an active medical registration card and they are accompanied by a personal caregiver with an active medical registration
card. In addition to the medical registration card, registered qualifying patients 18 years of age and older and personal caregivers
must also produce proof of identification. Each recreational customer may be dispensed no more than one ounce of marijuana or
five grams of marijuana concentrate per transaction as outlined in 935 CMR 500.140(4). Medical patients may be dispensed up to
a 60-day supply of marijuana, or the equivalent amount of marijuana in marijuana infused products (“MIPs”), that a
registered qualifying patient would reasonably be expected to need over a period of 60 calendar days for his or her personal medical
use, which is ten ounces, subject to 105 CMR 725.010(I).

 

Allowable forms of marijuana in Massachusetts
include smokable dried flower, dried flower for vaporizing, cannabis derivative products (i.e., vape pens, gel caps, tinctures,
etc.) and medical cannabis-infused products, including edibles.

 

In the state of Massachusetts, only cannabis
that is grown and manufactured in the state can be sold in the state. Massachusetts is not a vertically-integrated system, as a
result a marijuana retailer may purchase and transport marijuana products from marijuana establishments and transport, sell or
otherwise transfer marijuana products to marijuana establishments and to consumers. Licensed cultivators and product manufacturers
may cultivate, harvest, process, produce package and sell marijuana products to marijuana establishments.

 

Reporting Requirements

 

The state of Massachusetts has selected
METRC as the state’s track-and-trace (“T&T”) system used to track commercial cannabis activity and movement
across the distribution chain (“seed-to-sale”). The system allows for other third-party system integration via
API.

 

    35

     

    

 

Ayr Strategies Inc. (formerly, Cannabis
Strategies Acquisition Corp.) 

Management’s Discussion and
Analysis

For the Three Months and Year Ended December
31, 2019 and 2018

 

 

For a more detailed analysis of the federal
and state regulatory environment, view the Corporation’s prospectus’, filed on February 15, 2019, Cannabis Market Overview
section.

 

    36Exhibit
4.5

  

 

 

Ayr
Strategies Inc.

 

UNAUDITED
CONDENSED INTERIM CONSOLIDATED FINANCIAL STATEMENTS

 

FOR
THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2020 AND 2019

 

(EXPRESSED
IN UNITED STATES DOLLARS) 

 

 

 

Notice
to Reader

 

The
accompanying unaudited condensed interim consolidated financial statements (“interim financial statements”) for Ayr
Strategies Inc. (“Ayr” or “the Corporation”) have been prepared by management. Pursuant to subsection
4.3(3)(a) of National Instrument 51-102 Continuous Disclosure Requirements, the Corporation advises that the accompanying interim
financial statements, which are the responsibility of management, are unaudited. 

 

     

     

    

 

Ayr
Strategies Inc.

Interim
Financial Statements

 

September
30, 2020 and 2019

  

	Interim Financial Statements	 	 
	 	 	 
	Unaudited
    Condensed Interim Consolidated Statements of	 	 
	Financial Position
    (“Interim Statements of Financial Position”)	 	1
	 	 	 
	Unaudited
    Condensed Interim Consolidated Statements of	 	 
	(Loss) Income and
    Comprehensive (Loss) Income (“Interim Statements of	 	 
	(Loss) Income and
    Comprehensive (Loss) Income”)	 	2
	 	 	 
	Unaudited
    Condensed Interim Consolidated Statements of	 	 
	Changes in Shareholders’
    Equity (Deficiency) (“Interim Statements of	 	 
	Changes in Shareholders’
    Equity (Deficiency)”)	 	3
	 	 	 
	Unaudited
    Condensed Interim Consolidated Statements of	 	 
	Cash Flows (“Interim
    Statements of Cash Flows”)	 	4
	 	 	 
	Notes to the Interim Financial Statements	 	5 - 46

 

     

     

    

 

Ayr
Strategies Inc.

Interim
Statements of Financial Position

(Expressed
in United States Dollars)

 

	 	 	As of	 
	 	 	September 30, 

2020	 	 	December 31, 

2019	 
	 	 	 	$	 	 	 	$	 
	ASSETS	 	 	 	 	 	 	 	 
	Current	 	 	 	 	 	 	 	 
	Cash and cash equivalents	 	 	23,180,198	 	 	 	8,403,196	 
	Accounts receivable	 	 	2,929,522	 	 	 	2,621,239	 
	Due from related parties [Note 11]	 	 	85,000	 	 	 	85,000	 
	Inventory [Note 5]	 	 	32,989,013	 	 	 	13,718,840	 
	Biological assets [Note 6]	 	 	12,690,663	 	 	 	2,935,144	 
	Prepaid expenses and other current assets	 	 	3,809,485	 	 	 	2,163,329	 
	 	 	 	75,683,881	 	 	 	29,926,748	 
	Non-current	 	 	 	 	 	 	 	 
	Property, plant and equipment [Note 7]	 	 	39,354,982	 	 	 	37,152,861	 
	Intangible assets [Note 8]	 	 	180,066,136	 	 	 	189,802,136	 
	Right-of-use assets [Note 9]	 	 	11,795,599	 	 	 	12,315,417	 
	Goodwill [Note 4]	 	 	84,837,304	 	 	 	84,837,304	 
	Equity investments [Note 10]	 	 	487,717	 	 	 	427,399	 
	Notes Receivable [Note 18]	 	 	3,000,000	 	 	 	-	 
	Other assets	 	 	685,545	 	 	 	638,394	 
	Total assets	 	 	395,911,164	 	 	 	355,100,259	 
	 	 	 	 	 	 	 	 	 
	LIABILITIES	 	 	 	 	 	 	 	 
	Current	 	 	 	 	 	 	 	 
	Trade payables	 	 	7,512,946	 	 	 	6,806,053	 
	Accrued liabilities	 	 	7,160,365	 	 	 	5,123,865	 
	Lease obligations - current portion [Note 9]	 	 	1,117,605	 	 	 	1,087,835	 
	Purchase consideration payable [Notes 4 and 14]	 	 	5,687,806	 	 	 	9,831,700	 
	Income tax payable [Note 20]	 	 	19,140,631	 	 	 	5,202,943	 
	Debts payable - current portion [Note 12]	 	 	8,908,820	 	 	 	6,628,843	 
	 	 	 	49,528,173	 	 	 	34,681,239	 
	Non-current	 	 	 	 	 	 	 	 
	Deferred tax liabilities [Note 20]	 	 	45,471,419	 	 	 	41,077,761	 
	Warrant liability [Note 14]	 	 	65,130,370	 	 	 	36,874,124	 
	Lease obligations - non-current portion [Note 9]	 	 	12,977,535	 	 	 	13,033,310	 
	Contingent consideration [Notes 4 and 14]	 	 	23,744,258	 	 	 	22,656,980	 
	Debts payable - non-current portion [Note 12]	 	 	31,804,104	 	 	 	37,366,818	 
	Accrued interest payable	 	 	1,894,747	 	 	 	815,662	 
	Total liabilities	 	 	230,550,606	 	 	 	186,505,894	 
	 	 	 	 	 	 	 	 	 
	SHAREHOLDERS’ EQUITY (DEFICIENCY)	 	 	 	 	 	 	 	 
	Share capital [Note 13]	 	 	386,509,334	 	 	 	382,210,006	 
	Treasury stock	 	 	(556,899	)	 	 	(245,469	)
	Contributed surplus	 	 	54,828,781	 	 	 	28,879,225	 
	Accumulated other comprehensive income	 	 	2,845,964	 	 	 	3,265,610	 
	Deficit	 	 	(278,266,622	)	 	 	(245,515,007	)
	Total shareholders’ equity	 	 	165,360,558	 	 	 	168,594,365	 
	Total liabilities and shareholders’ equity	 	 	395,911,164	 	 	 	355,100,259	 

 

Nature
of operations [Note 1]

Commitments
and Contingencies [Note 18]

Subsequent
events [Note 21]

 

	Approved on behalf of
    the Board:	 
	“Jonathan Sandelman” (signed)	“Charles Miles” (signed)
	Director	Director

 

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

 

    1 

     

    

 

Ayr
Strategies Inc.

Interim
Statements of (Loss) Income and Comprehensive (Loss) Income

(Expressed
in United States Dollars)

 

	 	 	Three Months Ended	 	 	Nine Months Ended	 
	 	 	September 30, 

2020	 	 	September 30, 

2019	 	 	September 30, 

2020	 	 	September 30, 

2019	 
	 	 	 	$	 	 	 	$	 	 	 	$	 	 	 	$	 
	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 
	Revenues, net of discounts	 	 	45,486,365	 	 	 	32,087,805	 	 	 	107,349,679	 	 	 	42,912,940	 
	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 
	Cost of goods sold before biological asset adjustments	 	 	18,127,313	 	 	 	14,887,337	 	 	 	46,257,581	 	 	 	19,850,991	 
	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 
	Gross profit before fair value adjustments	 	 	27,359,052	 	 	 	17,200,468	 	 	 	61,092,098	 	 	 	23,061,949	 
	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 
	Fair value adjustment on sale of inventory	 	 	(4,844,505	)	 	 	(8,736,926	)	 	 	(21,176,075	)	 	 	(13,433,398	)
	Unrealized gain on biological asset transformation [Note 6]	 	 	18,242,342	 	 	 	5,862,775	 	 	 	44,574,730	 	 	 	8,342,578	 
	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 
	Gross profit	 	 	40,756,889	 	 	 	14,326,317	 	 	 	84,490,753	 	 	 	17,971,129	 
	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 
	Expenses	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 
	General and administrative [Note 16]	 	 	9,319,917	 	 	 	8,836,934	 	 	 	27,084,857	 	 	 	11,788,182	 
	Sales and marketing	 	 	643,005	 	 	 	509,472	 	 	 	1,586,849	 	 	 	881,556	 
	Depreciation [Notes 7 and 9]	 	 	523,311	 	 	 	283,007	 	 	 	1,649,293	 	 	 	375,795	 
	Amortization [Note 8]	 	 	2,998,667	 	 	 	3,400,331	 	 	 	8,996,000	 	 	 	4,788,308	 
	Stock-based compensation [Note 17]	 	 	4,700,795	 	 	 	11,062,444	 	 	 	25,949,556	 	 	 	15,582,582	 
	Acquisition expense	 	 	557,457	 	 	 	968,580	 	 	 	1,054,766	 	 	 	5,123,661	 
	Total expenses	 	 	18,743,152	 	 	 	25,060,768	 	 	 	66,321,321	 	 	 	38,540,084	 
	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 
	Income (Loss) from operations	 	 	22,013,737	 	 	 	(10,734,451	)	 	 	18,169,432	 	 	 	(20,568,955	)
	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 
	Other (expense) income	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 
	Share of loss on equity investments [Note 10]	 	 	(8,244	)	 	 	(420,626	)	 	 	(31,383	)	 	 	(313,714	)
	Foreign exchange	 	 	(6,421	)	 	 	(104,834	)	 	 	(9,038	)	 	 	(123,202	)
	Unrealized (loss) gain - changes to fair value of financial liabilities [Note 14]	 	 	(38,210,209	)	 	 	40,427,308	 	 	 	(29,321,360	)	 	 	(122,006,820	)
	Interest expense	 	 	(729,469	)	 	 	(1,272,421	)	 	 	(2,249,046	)	 	 	(1,859,213	)
	Interest income	 	 	5,034	 	 	 	31,834	 	 	 	5,034	 	 	 	396,352	 
	Other	 	 	(141,079	)	 	 	12,864	 	 	 	19,971	 	 	 	17,152	 
	Total other (expense) income	 	 	(39,090,388	)	 	 	38,674,125	 	 	 	(31,585,822	)	 	 	(123,889,445	)
	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 
	(Loss) Income before income tax	 	 	(17,076,651	)	 	 	27,939,674	 	 	 	(13,416,390	)	 	 	(144,458,400	)
	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 
	Current tax [Note 20]	 	 	(6,674,153	)	 	 	(3,502,178	)	 	 	(14,941,568	)	 	 	(4,932,991	)
	Deferred tax [Note 20]	 	 	(3,042,171	)	 	 	1,743,121	 	 	 	(4,393,657	)	 	 	2,676,022	 
	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 
	Net (loss) income	 	 	(26,792,975	)	 	 	26,180,617	 	 	 	(32,751,615	)	 	 	(146,715,369	)
	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 
	Foreign currency translation adjustment	 	 	(1,371,781	)	 	 	255,298	 	 	 	(419,646	)	 	 	(624,738	)
	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 
	Net (loss) income and comprehensive (loss) income	 	 	(28,164,756	)	 	 	26,435,915	 	 	 	(33,171,261	)	 	 	(147,340,107	)
	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 
	Basic (loss) earnings per share	 	 	(0.96	)	 	 	0.99	 	 	 	(1.20	)	 	 	(10.23	)
	Diluted (loss) earnings earnings per share	 	 	(0.96	)	 	 	0.84	 	 	 	(1.20	)	 	 	(10.23	)
	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 
	Weighted average number of shares outstanding (basic)	 	 	27,909,251	 	 	 	26,406,682	 	 	 	27,247,047	 	 	 	14,337,386	 
	Weighted average number of shares outstanding (diluted)	 	 	27,909,251	 	 	 	31,179,896	 	 	 	27,247,047	 	 	 	14,337,386	 

 

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

 

    2 

     

    

 

Ayr
Strategies Inc.

Interim
Statements of Changes in Shareholders’ Equity (Deficiency)

(Expressed
in United States Dollars)

 

	 	 	Share
    Capital	 	 	Treasury
    Stock	 	 	Contributed surplus	 	 	Accumulated
                                         other
	 	 	Deficit	 	 	Total	 
	 	 	Class
    B shares	 	 	Multiple
    Voting Shares	 	 	Subordinate
    Voting Shares	 	 	Exchangeable
    Shares	 	 	 	 	 	 	 	 	comprehensive
	 	 	 	 	 	 	 
	 	 	Number	 	 	Amount	 	 	Number	 	 	Amount	 	 	Number	 	 	Amount	 	 	Number	 	 	Amount	 	 	Number	 	 	Amount	 	 	 	 	 	income	 	 	 	 	 	 	 
	 	 	#	 	 	$	 	 	#	 	 	$	 	 	#	 	 	$	 	 	#	 	 	$	 	 	#	 	 	$	 	 	$	 	 	$	 	 	$	 	 	$	 
	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 
	Balance,
    December 31, 2019	 	-	 	 	-	 	 	3,696,486	 	 	1,821,997	 	 	14,824,485	 	 	251,721,350	 	 	8,373,792	 	 	128,666,659	 	 	(29,500	)	 	(245,469	)	 	28,879,225	 	 	3,265,610	 	 	(245,515,007	)	 	168,594,365	 
	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 
	Stock-based compensation
    [Note 17]	 	-	 	 	-	 	 	-	 	 	-	 	 	-	 	 	-	 	 	-	 	 	-	 	 	-	 	 	-	 	 	25,949,556	 	 	-	 	 	-	 	 	25,949,556	 
	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 
	Exercise of Rights [Note 13]	 	-	 	 	-	 	 	-	 	 	-	 	 	162,379	 	 	-	 	 	-	 	 	-	 	 	-	 	 	-	 	 	-	 	 	-	 	 	-	 	 	-	 
	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 
	Exercise of Warrants [Note 13]	 	-	 	 	-	 	 	-	 	 	-	 	 	42,000	 	 	533,401	 	 	-	 	 	-	 	 	-	 	 	-	 	 	-	 	 	-	 	 	-	 	 	533,401	 
	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 
	Conversion of Exchangeable Shares [Note
    13]	 	-	 	 	-	 	 	-	 	 	-	 	 	2,940,337	 	 	46,189,714	 	 	(2,940,337	)	 	(46,189,714	)	 	-	 	 	-	 	 	-	 	 	-	 	 	-	 	 	-	 
	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 
	Share issuance - make-whole
    [Note 14]	 	-	 	 	-	 	 	-	 	 	-	 	 	-	 	 	-	 	 	614,515	 	 	3,765,927	 	 	-	 	 	-	 	 	-	 	 	-	 	 	-	 	 	3,765,927	 
	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 
	Repurchase of Subordinate
    Voting Shares [Note 13]	 	-	 	 	-	 	 	-	 	 	-	 	 	-	 	 	-	 	 	-	 	 	-	 	 	(34,300	)	 	(311,430	)	 	-	 	 	-	 	 	-	 	 	(311,430	)
	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 
	Net loss for the period	 	-	 	 	-	 	 	-	 	 	-	 	 	-	 	 	-	 	 	-	 	 	-	 	 	-	 	 	-	 	 	-	 	 	-	 	 	(32,751,615	)	 	(32,751,615	)
	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 
	Foreign currency translation
    adjustment	 	-	 	 	-	 	 	-	 	 	-	 	 	-	 	 	-	 	 	-	 	 	-	 	 	-	 	 	-	 	 	-	 	 	(419,646	)	 	-	 	 	(419,646	)
	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 
	Balance,
    September 30, 2020	 	-	 	 	-	 	 	3,696,486	 	 	1,821,997	 	 	17,969,201	 	 	298,444,465	 	 	6,047,970	 	 	86,242,872	 	 	(63,800	)	 	(556,899	)	 	54,828,781	 	 	2,845,964	 	 	(278,266,622	)	 	165,360,558	 
	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 
	Balance,
    December 31, 2018 - Restated (Note 3.22)	 	3,696,486	 	 	1,821,997	 	 	-	 	 	-	 	 	-	 	 	-	 	 	-	 	 	-	 	 	-	 	 	-	 	 	-	 	 	3,422,120	 	 	(81,335,403	)	 	(76,091,286	)
	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 
	Share exchange - Qualifying
    Transaction [Notes 1 and 4]	 	(3,696,486	)	 	(1,821,997	)	 	3,696,486	 	 	1,821,997	 	 	13,474,000	 	 	248,411,016	 	 	-	 	 	-	 	 	-	 	 	-	 	 	-	 	 	-	 	 	-	 	 	248,411,016	 
	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 
	Share issuance - Qualifying
    Transaction [Note 4]	 	-	 	 	-	 	 	-	 	 	-	 	 	-	 	 	-	 	 	7,983,887	 	 	125,421,479	 	 	-	 	 	-	 	 	-	 	 	-	 	 	-	 	 	125,421,479	 
	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 
	Stock-based compensation
    [Note 17]	 	-	 	 	-	 	 	-	 	 	-	 	 	-	 	 	-	 	 	-	 	 	-	 	 	-	 	 	-	 	 	15,582,582	 	 	-	 	 	-	 	 	15,582,582	 
	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 
	Exercise of Rights [Note 13]	 	-	 	 	-	 	 	-	 	 	-	 	 	1,054,215	 	 	-	 	 	-	 	 	-	 	 	-	 	 	-	 	 	-	 	 	-	 	 	-	 	 	-	 
	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 
	Exercise of Warrants [Note 13]	 	-	 	 	-	 	 	-	 	 	-	 	 	298,200	 	 	3,376,539	 	 	-	 	 	-	 	 	-	 	 	-	 	 	-	 	 	-	 	 	-	 	 	3,376,539	 
	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 
	Net loss for the period	 	-	 	 	-	 	 	-	 	 	-	 	 	-	 	 	-	 	 	-	 	 	-	 	 	-	 	 	-	 	 	-	 	 	-	 	 	(146,715,369	)	 	(146,715,369	)
	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 
	Foreign currency translation
    adjustment	 	-	 	 	-	 	 	-	 	 	-	 	 	-	 	 	-	 	 	-	 	 	-	 	 	-	 	 	-	 	 	-	 	 	(624,738	)	 	-	 	 	(624,738	)
	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 
	Balance,
    September 30, 2019	 	-	 	 	-	 	 	3,696,486	 	 	1,821,997	 	 	14,826,415	 	 	251,787,555	 	 	7,983,887	 	 	125,421,479	 	 	-	 	 	-	 	 	15,582,582	 	 	2,797,382	 	 	(228,050,772	)	 	169,360,223	 

   

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

 

    3 

     

    

 

Ayr
Strategies Inc.

Interim
Statements of Cash Flows

(Expressed
in United States Dollars)

 

	 	 	Nine Months Ended	 
	 	 	September 30, 2020	 	 	September 30, 2019	 
	 	 	 	$	 	 	 	$	 
	Operating activities	 	 	 	 	 	 	 	 
	Net loss	 	 	(32,751,615	)	 	 	(146,715,369	)
	Adjustments for:	 	 	 	 	 	 	 	 
	Acquisition costs associated with financing activities	 	 	-	 	 	 	129,236	 
	Net unrealized loss on changes in the fair value of financial liabilities	 	 	29,321,360	 	 	 	122,006,820	 
	Stock-based compensation	 	 	25,949,556	 	 	 	15,582,582	 
	Depreciation	 	 	3,283,383	 	 	 	1,010,195	 
	Amortization on intangible assets	 	 	10,136,000	 	 	 	4,788,308	 
	Share of loss on equity investments	 	 	31,383	 	 	 	313,714	 
	Fair value adjustment on sale of inventory	 	 	21,176,075	 	 	 	13,433,398	 
	Unrealized gain on biological asset transformation	 	 	(44,574,730	)	 	 	(8,342,578	)
	Deferred tax expense (benefit)	 	 	4,393,657	 	 	 	(2,676,022	)
	Interest accrued	 	 	1,079,085	 	 	 	931,542	 
	Changes in non-cash operations, net of business acquisition:	 	 	 	 	 	 	 	 
	Accounts receivable	 	 	(308,283	)	 	 	445,793	 
	Inventory and biological assets	 	 	(5,627,037	)	 	 	(2,957,318	)
	Prepaid expenses and other assets	 	 	(1,693,307	)	 	 	(1,127,045	)
	Trade payables	 	 	2,900,278	 	 	 	2,147,083	 
	Accrued liabilities	 	 	2,036,500	 	 	 	(781,144	)
	Income tax payable	 	 	13,937,688	 	 	 	1,407,872	 
	Cash provided by (used in) operating activities	 	 	29,289,993	 	 	 	(402,933	)
	 	 	 	 	 	 	 	 	 
	Investing activities	 	 	 	 	 	 	 	 
	Transfer of restricted cash and short term investments held in escrow and
    interest income	 	 	-	 	 	 	99,684,243	 
	Purchase of property, plant and equipment	 	 	(6,291,344	)	 	 	(6,445,302	)
	Deferred underwriters commission paid	 	 	-	 	 	 	(3,457,154	)
	Cash paid for business combinations, net of cash acquired	 	 	-	 	 	 	(74,714,171	)
	Cash paid for business combinations, working capital	 	 	(603,092	)	 	 	(490,435	)
	Payments for interests in equity accounted investments	 	 	(91,700	)	 	 	(500,000	)
	Advances from related corporation	 	 	-	 	 	 	(724,191	)
	Bridge financing and deposits for business combinations	 	 	(3,000,000	)	 	 	-	 
	Purchases of intangible assets	 	 	(400,000	)	 	 	-	 
	Cash (used in) provided by investing activities	 	 	(10,386,136	)	 	 	13,352,990	 
	 	 	 	 	 	 	 	 	 
	Financing activities	 	 	 	 	 	 	 	 
	Proceeds from exercise of Warrants	 	 	361,043	 	 	 	2,460,150	 
	Redemption of Class A shares	 	 	-	 	 	 	(7,519	)
	Repayments of debts payable	 	 	(3,282,737	)	 	 	(1,660,425	)
	Repayments of lease obligations (principal portion)	 	 	(893,731	)	 	 	(166,414	)
	Repurchase of Subordinate Voting Shares	 	 	(311,430	)	 	 	-	 
	Cash (used in) provided by financing activities	 	 	(4,126,855	)	 	 	625,792	 
	 	 	 	 	 	 	 	 	 
	Net increase in cash	 	 	14,777,002	 	 	 	13,575,849	 
	Effect of foreign currency translation	 	 	-	 	 	 	972,111	 
	Cash and cash equivalents, beginning of the period	 	 	8,403,196	 	 	 	109,952	 
	Cash and cash equivalents, end of the period	 	 	23,180,198	 	 	 	14,657,912	 
	 	 	 	 	 	 	 	 	 
	Supplemental disclosure of cash flow information:	 	 	 	 	 	 	 	 
	Interest paid during the period	 	 	1,898,207	 	 	 	321,619	 
	Taxes paid during the period	 	 	1,003,880	 	 	 	111,607	 

  

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

 

    4 

     

    

 

Ayr
Strategies Inc.

Notes
to the Interim Financial Statements

For
the Three and Nine Months Ended September 30, 2020 and 2019

 

 

		1.	NATURE
OF OPERATIONS

 

Ayr
Strategies Inc. (formerly, Cannabis Strategies Acquisition Corp.) (“Ayr” or “the Corporation”) is a vertically-integrated
multi-state operator in the U.S. cannabis sector, with a portfolio in Massachusetts and Nevada. Through its operating companies,
Ayr is a leading cultivator, manufacturer and retailer of cannabis products and branded cannabis packaged goods, including through
operational and service agreements to licensed cannabis companies. The Corporation was previously a special purpose acquisition
corporation (“SPAC”) which was incorporated for the purpose of effecting an acquisition of one or more businesses
or assets, by way of a merger, amalgamation, arrangement, share exchange, asset acquisition, share purchase, reorganization, or
any other similar business combination involving the Corporation, referred to as the Corporation’s “Qualifying Transaction”.
The Corporation had only one operating segment, cannabis sales, during the period ended September 30, 2020. As the Corporation
has experienced rapid growth with the Qualifying Transaction, operating segments will be further analyzed and are subject to future
change. The Corporation is a reporting issuer in each of the provinces and territories of Canada, other than Quebec.

 

The
Corporation was incorporated on July 31, 2017 under the Business Corporations Act (Ontario) and continued on May 24, 2019 into
British Columbia under the Business Corporations Act (British Columbia) in connection with its Qualifying Transaction. The registered
office of the Corporation is located at 666 Burrard Street, Suite 1700, Vancouver, British Columbia V6C 2X8. The head office of
the Corporation is located at 590 Madison Avenue, 26th Floor, New York, New York, 10022.

 

For
information on the Corporation’s initial public offering, please refer to the Corporation’s final non-offering prospectus
dated February 15, 2019 and the Corporation’s management information circular dated February 19, 2019.

 

On
September 12, 2018, the Corporation incorporated a wholly owned subsidiary in Nevada, United States, named CSAC Holdings Inc.,
to facilitate the proposed Qualifying Transaction. On September 17, 2018, CSAC Holdings Inc. incorporated a wholly owned subsidiary
in Nevada, United States, named CSAC Acquisition Inc. (“CSAC AcquisitionCo”). On May 24, 2019, the Corporation completed
its concurrent acquisitions, including through operational and service agreements, of the target businesses of Washoe Wellness,
LLC (“Washoe”), The Canopy NV, LLC (“Canopy”), Sira Naturals, Inc. (“Sira”), LivFree Wellness,
LLC (“LivFree”) and CannaPunch of Nevada LLC (“CannaPunch”), which collectively constituted its Qualifying
Transaction (collectively, the “Qualifying Transaction”). For more information regarding the Qualifying Transaction,
view the December 31, 2019 audited consolidated financial statements.

 

The
Corporation’s subordinate voting shares (“Subordinate Voting Shares”), warrants (“Warrants”), and
rights (“Rights”) are trading on the Canadian Stock Exchange (the “CSE”), under the symbols “AYR.A”,
 “AYR.WT” and “AYR.RT”, respectively. The Corporation’s Subordinate Voting Shares are also trading
on the Over-the-Counter Market (“OTC”) in the United States under the symbol “AYRSF”.

 

    5 

     

    

 

Ayr
Strategies Inc.

Notes
to the Interim Financial Statements

For
the Three and Nine Months Ended September 30, 2020 and 2019

 

 

		2.	BASIS
OF PRESENTATION

 

2.1
Statement of compliance

 

These
interim financial statements for the three and nine months ended September 30, 2020 and 2019 have been prepared in accordance
with International Accounting Standard (“IAS”) 34 – Interim Financial Reporting. Accordingly, they do
not include all of the information required for full annual financial statements required by International Financial Reporting
Standards (“IFRS”) as issued by the International Accounting Standards Board (“IASB”).

 

These
interim financial statements should be read in conjunction with the Corporation’s audited consolidated financial statements
for the year ended December 31, 2019, and the related notes thereto, and have been prepared using the same accounting policies
described therein.

 

These
interim financial statements were approved and authorized for issuance by the board of directors of the Corporation (the “Board
of Directors”) on November 18, 2020.

 

2.2
Basis of presentation and measurement

 

These
interim financial statements have been prepared on the going concern basis under the historical cost basis except for certain
financial instruments, biological assets, and warrant liability, which are measured at fair value, as explained in the accounting
policies set out in Note 3.

 

The
interim financial statements are presented in United States dollars which, following the close of the Qualifying Transaction became
the Corporation’s presentation currency. The Corporation’s previous presentation currency was Canadian Dollars (“CAD”
or “CDN$”). See Note 3.22 for change in accounting policy related to the change in presentation currency. The functional
currency of each entity is determined separately in accordance with International Accounting Standard IAS 21 – Foreign
Exchange and is measured using the currency of the primary economic environment in which the entity operates (“the functional
currency”). The functional currency of Ayr, the parent, is CDN$ and for each of the United States subsidiaries is United
States dollars (US$ or $).

  

    6 

     

    

 

Ayr
Strategies Inc.

Notes
to the Interim Financial Statements

For
the Three and Nine Months Ended September 30, 2020 and 2019

 

  

		3.	SUMMARY
OF SIGNIFICANT ACCOUNTING POLICIES

 

3.1
Basis of consolidation

 

The
interim financial statements for the three and nine months ended September 30, 2020 include the accounts of the Corporation, its
wholly-owned subsidiaries, and entities over which the Corporation has control as defined in IFRS 10, all of which also have a
December 31 year-end. Entities over which the Corporation has control are presented on a consolidated basis from the date control
commences. Control, as defined in IFRS 10 for purposes of determining the consolidated basis of financial statement presentation
exists when the Corporation is exposed, or has rights, to variable returns from its involvement with the entity and has the ability
to affect those returns through its power and rights in respect of the entity. All of the consolidated entities were under control,
as defined in IFRS 10 for purposes of determining the consolidated basis of financial statement presentation, during the entirety
of the periods for which their respective results of operations were included in the consolidated statements (i.e., from the date
of the completion of the Qualifying Transaction). All intercompany balances and transactions are eliminated on consolidation.
The Corporation’s consolidated subsidiaries are listed below, and are owned 100% by the Corporation unless otherwise noted:

 

	Subsidiaries	State
    of operation	Purpose
	Ayr Strategies Inc.	Canada	Parent Company
	CSAC Holdings Inc.	NV	Corporate - Holding Company
	CSAC Acquisition Inc.	NV	Corporate - Holding Company
	CSAC Acquisition MA Corp. (2)	MA	Corporate - Holding Company
	Ayr NJ, LLC	NV	Corporate - Holding Company
	CSAC LLC (2)	NV	Corporate - Holding Company
	CSAC Ohio, LLC (2)	OH	Corporate - Holding Company
	Sira Naturals, Inc.	MA	Cultivation, Production, and Retail
	CSAC-LivFree Wellness LLC	NV	Management Company
	CSAC-Washoe Wellness LLC (6)	NV	Management Company
	CSAC-The Canopy NV LLC	NV	Management Company
	CannaPunch of Nevada LLC	NV	Production
	LivFree Wellness, LLC (1)(3)	NV	Managed Services - Retail
	Washoe Wellness, LLC (1)(4)	NV	Managed Services - Cultivation and Production
	Kynd-Strainz, LLC (1)(5)	NV	Managed Services - Retail
	Lemon Aide, LLC (1)(5)	NV	Managed Services - Retail

  

		(1)	Entered
                                         into an Equity Purchase Agreement with CSAC Acquisition, Inc. pending regulatory approval
                                         for the license transfers by the Nevada Cannabis Compliance Board. The Corporation has
                                         control, as defined in IFRS 10 for purposes of determining the consolidated basis of
                                         financial statement presentation, through operational and service agreements. All intercompany
                                         balances and transactions are eliminated for consolidation.

		(2)	Entities
                                         that are inactive as of September 30, 2020.

		(3)	LivFree
                                         includes a wholly-owned subsidiary BP Solutions LLC.

		(4)	Washoe
                                         includes wholly-owned subsidiaries Klymb Project Management, Inc, Tahoe-Reno Botanicals,
                                         LLC, Tahoe-Reno Extractions, LLC.

		(5)	Canopy
                                         is the parent company of Kynd-Strainz, LLC and Lemon Aide, LLC.

		(6)	CSAC-Washoe
                                         Wellness LLC includes a wholly-owned subsidiary DWC Investments, LLC.

 

3.2
Revenue

 

IFRS
15 – Revenue from contracts with customers (“IFRS 15”) specifies how and when revenue should be recognized based
on a five-step model, which is applied to all contracts with customers. The pattern and timing of revenue recognition is consistent
with prior year practice. The Corporation’s accounting policy for revenue recognition under IFRS 15 is to follow a five-step
model to determine the amount and timing of revenue to be recognized:

 

		•	Identifying
                                         the contract with a customer

		•	Identifying
                                         the performance obligations within the contract

		•	Determining
                                         the transaction price

		•	Allocating
                                         the transaction price to the performance obligations

		•	Recognizing
                                         revenue when/as performance obligation(s) are satisfied.

 

    7 

     

    

 

Ayr
Strategies Inc.

Notes
to the Interim Financial Statements

For
the Three and Nine Months Ended September 30, 2020 and 2019

 

 

		3.	SUMMARY
OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

 

3.2
Revenue (continued)

 

In
some cases, judgment is required in determining whether the customer is a business or the end consumer. This evaluation is made
on the basis of whether the business obtains control of the product before transferring to the end consumer. Control of the product
transfers at a point in time either upon shipment to or receipt by the customer, depending on the contractual terms. In determining
the appropriate time of sale, the Corporation takes into consideration a) the Corporation’s right to payment for the goods
or services; b) customer’s legal title; c) transfer of physical possession of the goods; and d) timing of acceptance of
goods.

 

Revenue
is recognized based on the sale of cannabis for a fixed price when control is transferred. The amount recognized reflects the
consideration that the Corporation expects to receive taking into account any variation that is expected to result from rights
of return. Dispensary revenue is recognized at the point of sale while wholesale revenue is recognized once Ayr transfers the
significant risks and rewards of ownership of the goods and does not retain material involvement associated with ownership or
control over the goods sold.

 

3.3
Cash 

 

The
Corporation considers all investments with original maturities of three months or less, that are highly liquid and readily convertible
into cash, to be cash equivalents.

 

3.4
Business combination

 

Acquisitions
of subsidiaries and businesses are accounted for using the acquisition method. The Corporation measures goodwill as the fair value
of the consideration transferred, including the recognized amount of any non-controlling interest in the acquiree, less the net
recognized amount of the identifiable assets and liabilities assumed, all measured as of the acquisition date.

 

Consideration
transferred includes the fair value of the assets transferred (including cash), the liabilities incurred by the Corporation on
behalf of the acquiree, any contingent consideration and any equity interests issued by the Corporation. Transaction costs, other
than those associated with the issuance of debt or equity securities that the Corporation incurs in connection with a business
combination, are expensed as incurred.

 

The
acquisition date is the date when the Corporation obtains control of the acquiree. Contingent consideration is measured at its
acquisition date fair value and included as part of the consideration transferred in a business combination. Contingent consideration
that is classified as a liability is re-measured at subsequent reporting dates in accordance with the criteria and guidance provided
under IFRS with corresponding gain or loss recorded in the interim statements of (loss) income and comprehensive (loss) income.

 

    8 

     

    

 

Ayr
Strategies Inc.

Notes
to the Interim Financial Statements

For
the Three and Nine Months Ended September 30, 2020 and 2019

 

 

		3.	SUMMARY
OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

 

3.5
Inventory

 

Cannabis
inventory at retail, work-in-process and raw materials are initially valued at the weighted average cost and subsequently measured
at the lower of cost and net realizable value. Inventories of harvested cannabis are transferred from biological assets at their
fair value at the point of harvest, which becomes the initial deemed cost. Any subsequent post-harvest costs, including direct
costs such as materials, labor, and depreciation expense on equipment attributable to processing and related overheads, are capitalized
to inventory to the extent that cost is less than net realizable value. Net realizable value is the estimated selling price in
the ordinary course of business, less the estimated costs to sell. The Corporation reviews inventories for obsolete, redundant
and slow-moving goods and any such inventories identified are written down to net realizable value.

 

3.6
Biological assets 

 

The
Corporation’s biological assets consist of cannabis plants, from the date of initial cutting from mother plants, which are
not yet harvested. While the Corporations’ biological assets are within the scope of IAS 41 – Agriculture,
the direct and indirect costs of cultivating and producing biological assets are determined using an approach similar to the capitalization
criteria outlined in IAS 2 – Inventories. They include the direct cost of seeds and growing materials as well as
other direct costs such as utilities and supplies used in the growing process. Indirect labor for individuals involved in
the growing and quality control process is also included, as well as depreciation on production equipment, the building portion
associated with the growing space, and the right-of-use asset associated with the cultivation and production facilities. All direct
and indirect costs of cultivating and producing biological assets are capitalized as they are incurred, and they are subsequently
recorded on the interim statements of (loss) income and comprehensive (loss) income in the period that the related product is
sold. Unrealized fair value gain on growth of biological assets are recorded in a separate line on the face of the interim statements
of (loss) income and comprehensive (loss) income. Biological assets are measured at their fair values less costs to sell up to
the point of harvest in the interim statements of financial position, which becomes the initial cost of harvested cannabis.

 

Mother
plants grown for the purpose of taking cuttings in order to grow more quantities of the same plants. Mother plants are critical
to the success of the business and, once mature, are held solely to create cuttings for production over their useful lives. Costs
attributed to the growing of mother plants are included in the costs of biological assets.

 

3.7
Property, plant and equipment (“PPE”) 

 

PPE
are stated at cost less accumulated depreciation and accumulated impairment losses. The cost of an item of PPE consists of the
purchase price, any costs directly attributable to bringing the asset to the location and condition necessary for its intended
use and an initial estimate of the costs of dismantling and removing the item and restoring the site on which it is located.

 

    9 

     

    

 

Ayr
Strategies Inc.

Notes
to the Interim Financial Statements

For
the Three and Nine Months Ended September 30, 2020 and 2019

 

 

		3.	SUMMARY
OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

 

3.7
Property, plant and equipment (“PPE”) (continued)

 

Depreciation
is provided at rates calculated to write off the cost of PPE, less their estimated residual value, using the straight-line method
over the following expected useful lives:

 

		•	Land
 – not depreciated

		•	Buildings
 – 39 years

		•	Leasehold
improvements – the shorter of the useful life or life of the lease

		•	Furniture
and fixtures – 5 to 7 years

		•	Office
equipment – 3 to 5 years

		•	Machinery
and equipment – 5 to 15 years

		•	Auto
and trucks – 5 years

		•	Assets
under construction – not depreciated

 

An
item of PPE is derecognized upon disposal, when held for sale or when no future economic benefits are expected to arise from the
continued use of the asset. Any gain or loss arising on disposal of the asset, determined as the difference between the net disposal
proceeds and the carrying amount of the asset, is recognized in the interim statements of (loss) income and comprehensive (loss)
income.

 

Assets
under construction are transferred to the appropriate asset class when available for use and depreciation of the assets commences
at that point of time.

 

The
Corporation conducts an annual assessment of the residual balances, useful lives and depreciation methods being used for PPE and
any changes arising from the assessment are applied by the Corporation prospectively.

 

Where
an item of PPE comprises major components with different useful lives, the components are accounted for as separate items of PPE.
Expenditures incurred to replace a component of an item of PPE that is accounted for separately, including major inspection and
overhaul expenditures are capitalized.

 

3.8
Intangible assets 

 

(a)
     Goodwill

 

The
Corporation measures goodwill as the fair value of the consideration transferred, including the recognized amount of any non-controlling
interest in the acquiree, less the net recognized amount of the identifiable assets and liabilities assumed, all measured as of
the acquisition date. Goodwill is allocated to the Cash Generating Units (“CGU” or “CGUs”) which
are expected to benefit from the synergies of the combination. CGUs have been grouped for purposes of impairment testing. Impairment
losses recognized in respect of a CGU, being the excess over the CGUs carrying value allocated to the assets in the CGU, are first
allocated to the carrying value of goodwill and indefinite life intangibles and any excess is allocated to the carrying amount
of assets in the CGU. Impairment testing is performed annually by the Corporation or more frequently, if events or changes in
circumstances indicate that they might be impaired. Management makes estimates during impairment testing as judgment is required
to determine indicators of impairment and estimates are used to measure impairment losses. The recoverable amount, as defined
in Note 3.9, of goodwill is determined by using discounted future cash flows, which incorporates assumptions regarding future
events, growth rates and discount rates.

 

    10 

     

    

 

Ayr
Strategies Inc.

Notes
to the Interim Financial Statements

For
the Three and Nine Months Ended September 30, 2020 and 2019

 

  

		3.	SUMMARY
OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

 

3.8
Intangible assets (continued)

 

(b)   
Finite life intangible assets

 

Intangible
assets are recorded at cost, less accumulated amortization and impairment losses. Amortization is recorded on a straight-line
basis over their estimated useful lives, which do not exceed the contractual period, if any. Intangible assets, which include
licences, right-to-use licenses, host community agreements, and trade name/brand have useful lives of 15, 15, 15, and 5 years,
respectively. Such assets are tested annually for impairment, or more frequently, if events or changes in circumstances indicate
that they might be impaired. The estimated useful lives, residual values, and amortization methods are reviewed at each year-end,
and any changes in estimates are accounted for prospectively.

 

Development
activities involve a plan or design for the production of new or substantially improved products and processes. Development expenditures
are capitalized to the extent development costs can be measured reliably, the product or process is technically and commercially
feasible, future economic benefits are probable, and the Corporation intends to and has sufficient resources to complete development
and to use or sell the product or asset. Other development expenditures will be expensed as incurred. No development costs have
been capitalized to date.

 

3.9
Impairment of non-financial assets

 

At
each financial reporting date, the Corporation reviews the carrying amounts of its tangible assets to determine whether there
is an indication that those assets have suffered an impairment loss. If any such indication exists, or when annual impairment
testing for an asset is required, the recoverable amount of the asset is estimated in order to determine the extent of the impairment
loss (if any). Where it is not possible to estimate the recoverable amount of an individual asset, the Corporation estimates the
recoverable amount of the CGU to which the assets belong.

 

The
recoverable amount is the higher of fair value less the costs to sell and value in use. In assessing the 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. In determining fair value less costs of disposal (“FVLCD”),
recent market transactions are taken into account. If no such transactions can be identified, an appropriate valuation model is
used. These calculations are corroborated by valuation multiples, quoted share prices for publicly traded companies, discounted
cash flows, or other available fair value indicators.

 

If
the recoverable amount of an asset (or CGU) is estimated to be less than it’s carrying amount, the carrying amount of the
asset (or CGU) is reduced to its recoverable amount. An impairment loss is recognized at that time.

 

Where
an impairment loss subsequently reverses, the carrying amount of the asset (CGU) is increased to the revised estimate of its recoverable
amount, but so that the increased carrying amount does not exceed the carrying amount that would have been determined had no impairment
loss been recognized for the asset (or CGU) in prior years. A previously recognized impairment loss is reversed only if there
has been a change in the assumptions used to determine the asset’s recoverable amount since the last impairment loss was
recognized.

 

Goodwill
and intangible assets with indefinite useful lives are allocated to CGUs for purposes of impairment testing. An impairment test
is performed by determining the recoverable amount of the CGU to which the goodwill or intangible assets with indefinite useful
lives relates. The recoverable amount of a CGU or individual asset is the higher of its value in use and its FVLCD. Where the
recoverable amount is less than the carrying amount, an impairment loss is recognized in the interim statements of (loss) income
and comprehensive (loss) income. Impairment losses recognized on goodwill are not reversed in subsequent periods.

 

    11 

     

    

  

Ayr
Strategies Inc.

Notes
to the Interim Financial Statements

For
the Three and Nine Months Ended September 30, 2020 and 2019

 

 

		3.	SUMMARY
OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

 

3.9
Impairment of non-financial assets (continued)

 

Goodwill
is allocated to the CGUs, which are the lowest level that generate cash flows independent of another. The Corporation determined
its CGUs are separated by state and type of operation, including cultivation, production and retail. As the CGUs are expected
to benefit from synergies of a related business combination at the state level, goodwill will be grouped and tested at the state
level.

 

3.10
Leases

 

The
Corporation assesses whether a contract is or contains a lease, at inception of a contract. Leases are recognized as a right-of-use
asset and corresponding liability at the commencement date. Each lease payment included in the lease liability is apportioned
between the repayment of the liability and a finance cost. The finance cost is recognized in net finance costs in the interim
statements of (loss) income and comprehensive (loss) income over the lease period to produce a constant periodic rate of interest
on the remaining balance of the liability for each period. Lease liabilities include the net present value of fixed payments (including
in-substance fixed payments), variable lease payments that are based on an index or a rate or subject to a fair market value renewal,
amounts expected to be payable by the lessee under residual value guarantees, the exercise price of a purchase option if the lessee
is reasonably certain to exercise that option, and payments of penalties for terminating the lease, if the lease term reflects
the lessee exercising that option. The Corporation allocates the consideration in the contract to each lease component on the
basis of the relative standalone price of the lease component and the aggregate stand-alone price of the non-lease components.
The lease liability is net of lease incentives receivable. The lease payments are discounted using the interest rate implicit
in the lease or, if that rate cannot be determined, the lessee’s incremental borrowing rate. The period over which the lease
payments are discounted is the reasonably certain lease term, including renewal options that the Corporation is reasonably certain
to exercise. Renewal options are included in a number of leases across the Corporation.

 

Payments
associated with short-term leases and leases of low-value assets are recognized as an expense on a straight-line basis in the
interim statements of (loss) income and comprehensive (loss) income. Short-term leases are leases with a lease term of 12 months
or less. Variable lease payments that do not depend on an index or a rate or are not subject to a fair market value renewal are
expensed as incurred and recognized in interim statements of (loss) income and comprehensive (loss) income.

 

Right-of-use
assets are measured at cost which is calculated as the amount of the initial measurement of lease liability plus any lease payments
made at or before the commencement date, any initial direct costs and related restoration costs. The right-of-use assets are depreciated
on a straight-line basis over the shorter of the lease term or the useful life of the underlying asset. If a lease transfers ownership
of the underlying asset or the cost of the right-of-use asset reflects that the Corporation expects to exercise a purchase option,
the related right-of-use asset is depreciated over the useful life of the underlying asset. The depreciation starts at the commencement
date of the lease.

 

3.11
Equity investments

 

An
associate is an entity over which the Corporation exercises significant influence. Significant influence is the power to participate
in the financial and operating policy of the investee but without control or joint control over those policies. Interests in associates
are accounted for using the equity method and are initially recognized at cost. Subsequent to initial recognition, the carrying
value of the Corporation’s interest in an associate is adjusted for the Corporation’s share of income or loss and
distributions of the investee. The carrying value of associates is assessed for impairment at each statement of financial position
date. Significant influence is presumed if the Corporation holds between 20% and 50% of the voting rights, unless evidence exists
to the contrary.

 

    12 

     

    

  

Ayr
Strategies Inc.

Notes
to the Interim Financial Statements

For
the Three and Nine Months Ended September 30, 2020 and 2019

 

 

		3.	SUMMARY
OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

 

3.11
Equity investments (continued)

 

Joint
control is the contractually agreed sharing of control of an arrangement, which exists only when decisions about the relevant
activities require the unanimous consent of the parties sharing control. Investees in which the Corporation has joint control
and rights to the net assets thereof, are defined as joint ventures. Joint ventures are also accounted for under the equity method.

 

3.12
Non-controlling interests 

 

Equity
interests owned by parties that are not shareholders of the Corporation are considered non-controlling interests. The share of
net assets attributable to non-controlling interests are presented as a component of equity while the share of net income or loss
is recognized in equity. Changes in Ayr’s ownership interest that do not result in a loss of control are accounted for as
equity transactions. As of September 30, 2020, the Corporation does not have any non-controlling interests.

 

3.13
Borrowing costs

 

Borrowing
costs directly attributable to the acquisition or construction of a qualifying asset are capitalized. Qualifying assets are those
that require a minimum of twelve months to prepare for their intended use.

 

3.14
Derivatives 

 

The
Corporation evaluates all of its agreements to determine if such instruments have derivatives or contain features that qualify
as embedded derivatives. For derivative financial instruments that are accounted for as liabilities, the derivative instrument
is initially recorded at its fair value and is then revalued at each reporting date, with changes in the fair value reported in
the Corporation’s interim financial statements. In calculating the fair value of derivative liabilities, the Corporation
uses a valuation model when level 1 inputs are not available to estimate fair value at each reporting date (see Note 19). The
classification of derivative instruments, including whether such instruments should be recorded as liabilities or as equity, is
evaluated at the end of each reporting period. Derivative instrument liabilities are classified as current or non-current based
on whether or not net-cash settlement of the derivative instrument could be required within 12 months of the interim financial
statements date.

 

3.15
(Loss) earnings per share

 

The
basic (loss) earnings per share is computed by dividing the net (loss) income by the weighted average number of shares outstanding,
including Subordinate Voting Shares, multiple voting shares of the Corporation (“Multiple Voting Shares”), and Exchangeable
Shares (as defined below), during the period. The diluted (loss) earnings per share reflects the potential dilution of shares
by adjusting the weighted average number of shares outstanding to assume conversion of potentially dilutive shares, such as Warrants,
restricted stock units (RSUs), Rights, and contingent shares. The “treasury stock method” is used for the assumed
proceeds upon the exercise of the Exchangeable Shares and Warrants that are used to purchase Subordinate Voting Shares at the
average market price during the period. If the Corporation incurs a net loss during a reporting period, the calculation of fully
diluted loss per share will not include potentially dilutive equity instruments such as restricted Warrants, RSUs, Rights and
contingent shares, therefore, basic loss per share and diluted loss per share will be the same.

 

    13 

     

    

 

Ayr
Strategies Inc.

Notes
to the Interim Financial Statements

For
the Three and Nine Months Ended September 30, 2020 and 2019

 

 

		3.	SUMMARY
OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

 

3.16
Stock-based payments

 

(a)
Stock-based payment transactions

 

Certain
employees (including directors and senior executives) of the Corporation receive a portion of their remuneration in the form of
stock-based payment transactions, whereby employees render services as consideration for equity instruments (“equity settled
transactions”).

 

Share-based
payments to non-employees are measured at the fair value of goods or services received or the fair value of the equity instruments
issued. In situations where equity instruments are issued to non-employees and some or all of the fair value of the good or service
received by the Corporation as consideration cannot be specifically identified, they are measured at fair value of the stock-based
payment.

 

The
costs of equity-settled transactions with employees are measured by reference to the fair value of the stock price at the date
on which they are granted, using an appropriate valuation model. The value of the transaction is expensed through the vesting
period.

 

The
costs of equity-settled transactions are recognized, together with a corresponding increase in equity, over the period in which
the performance and/or service conditions are fulfilled, ending on the date on which the relevant employees become fully entitled
to the award (the “vesting date”).

 

The
cumulative expense is recognized for equity-settled transactions at each reporting date until the vesting date reflects the Corporation’s
best estimate of the number of equity instruments that will ultimately vest. The income or loss for a period represents the movement
in cumulative expense recognized as of the beginning and end of that period and the corresponding amount is represented in contributed
surplus. At the end of each reporting period, the Corporation re-assesses its estimates of the number of awards that are expected
to vest and recognizes the impact of the revisions in the interim statements of (loss) income and comprehensive (loss) income.

 

No
expense is recognized for awards that do not ultimately vest, except for awards where vesting is conditional upon a market condition,
which are treated as vesting irrespective of whether or not the market condition is satisfied provided that all other performance
and/or service conditions are satisfied.

 

Where
the terms of an equity settled award are modified, the minimum expense recognized is the grant date fair value of the unmodified
award, provided the original terms of the award are met. An additional expense is recognized for any modification which increases
the total fair value of the stock-based payment arrangement or is otherwise beneficial to the employee as measured at the date
of modification. Where an award is cancelled by the Corporation or the counterparty, any remaining element of the fair value of
the award is derecognized at that time through the interim statements of (loss) income and comprehensive (loss) income.

 

The
dilutive effect of outstanding options is reflected as additional dilution in the computation of earnings per share.

 

(b)
Warrants

 

The
Corporation measures the fair value of Warrants issued using the quoted price as the Warrants are publicly traded. As the number
of shares to be issued by the Corporation upon exercise of the Warrants is not fixed and fail the “fixed-for-fixed”
criteria for equity classification, the Warrants have been classified as derivative liabilities to be measured at FVTPL.

 

    14 

     

    

  

Ayr
Strategies Inc.

Notes
to the Interim Financial Statements

For
the Three and Nine Months Ended September 30, 2020 and 2019

 

 

		3.	SUMMARY
OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

 

3.17
Provisions

 

Provisions
are recognized when the Corporation has a present obligation (legal or constructive) that has arisen as a result of a past event
and it is probable that a future outflow of resources will be required to settle the obligation, provided that a reliable estimate
can be made of the amount of the obligation. Provisions are measured at the present value of the expenditures expected to be required
to settle the obligation using a pre-tax rate that reflects current market assessments of the time value of money and the risk
specific to the obligation. The increase in the provision due to passage of time is recognized as interest expense.

 

3.18
Financial instruments

 

Recognition
and initial measurement

 

Financial
assets and financial liabilities, including derivatives, are recognized when the Corporation becomes a party to the contractual
provisions of a financial instrument or non-financial derivative contract. All financial instruments are measured at fair value
on initial recognition. Transaction costs that are directly attributable to the acquisition or issuance of financial assets and
financial liabilities, other than financial assets and financial liabilities classified as FVTPL (as defined below), are added
to or deducted from the fair value on initial recognition. Transaction costs directly attributable to the acquisition of financial
assets or financial liabilities classified as FVTPL are recognized immediately in the interim statements of (loss) income and
comprehensive (loss) income.

 

Classification
and subsequent measurement

 

The
Corporation classifies financial assets, at the time of initial recognition, according to the Corporation’s business model
for managing the financial assets and the contractual terms of the cash flows. Financial assets are classified in the following
measurement categories:

 

a)
amortized cost (“AC”);

b)
fair value through profit or loss (“FVTPL”); and

c)
fair value through other comprehensive income (“FVTOCI”).

 

Financial
assets are subsequently measured at amortized cost if both the following conditions are met and they are not designated as FVTPL:
a) the financial asset is held within a business model whose objective is to hold financial assets to collect contractual cash
flows; and b) the contractual terms of the financial asset give rise on specified dates to cash flows that are solely payments
of principal and interest on the principal amount outstanding.

 

These
assets are subsequently measured at amortized cost using the effective interest rate method, less any impairment, with gains and
losses recognized in the interim statements of (loss) income and comprehensive (loss) income in the period that the asset is derecognized
or impaired. All financial assets not classified as amortized cost as described above are measured at FVTPL or FVTOCI depending
on the business model and cash flow characteristics. The Corporation has no financial assets measured at FVTOCI.

 

Financial
liabilities are subsequently measured at amortized cost using the effective interest rate method with gains and losses recognized
in the interim statements of (loss) income and comprehensive (loss) income in the period that the liability is derecognized, except
for financial liabilities classified as FVTPL.

 

Refer
to Note 19 for the classification and fair value (“FV”) level of financial instruments.

 

    15 

     

    

  

Ayr
Strategies Inc.

Notes
to the Interim Financial Statements

For
the Three and Nine Months Ended September 30, 2020 and 2019

 

 

		3.	SUMMARY
OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

 

3.18
Financial instruments (continued)

 

Impairment
of financial instruments – Expected credit losses (“ECL”)

 

For
all financial assets recorded at amortized cost, the Corporation applies the simplified approach to provide expected credit losses
prescribed by IFRS 9, which requires the use of the lifetime expected loss provision for all accounts receivable based on the
Corporation’s historical default rates over the expected life of the accounts receivable and is adjusted for forward-looking
estimates. The methodologies and assumptions, including, but not limited to, any forecasts of future economic conditions, credit
ratings, and macro-economic factors, are reviewed regularly.

 

All
individually significant loans receivable are assessed for impairment. All individually significant loans receivable found not
to be specifically impaired are then collectively assessed for impairment. Loans receivables not individually significant are
collectively assessed for impairment by grouping together loans receivable with similar risk characteristics.

 

ECL
are calculated as the product of the probability of default, exposure at default and loss given default over the remaining expected
life of the receivables. No ECL has been recorded by the Corporation as all receivables are expected to be collected and
are not significant.

 

Derecognition

 

The
Corporation derecognizes financial assets only when the contractual rights to cash flows from the financial assets expire, or
when it transfers the financial assets and substantially all of the associated risks and rewards of ownership to another entity.
Gains and losses on derecognition are recognized in the interim statements of (loss) income and comprehensive (loss) income.

 

The
Corporation derecognizes financial liabilities only when its obligations under the financial liabilities are discharged, cancelled
or expired. Generally, the difference between the carrying amount of the financial liability derecognized and the consideration
paid and payable, including any non-cash assets transferred or liabilities assumed, is recognized in the interim statements of
(loss) income and comprehensive (loss) income.

 

3.19
Foreign currency transactions

 

Foreign
currency transactions are translated into the functional currency using the exchange rates prevailing at the dates of the transactions
or valuation where items are re-measured. Foreign exchange gains and losses resulting from the settlement of such transactions
and from the translation at year-end exchange rates of monetary assets and liabilities denominated in foreign currencies are recognized
in the interim statements of (loss) income and comprehensive (loss) income.

 

The
results and financial position of an entity that has a functional currency different from the presentation currency is translated
into the presentation currency as follows:

 

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

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

 

    16 

     

    

  

Ayr
Strategies Inc.

Notes
to the Interim Financial Statements

For
the Three and Nine Months Ended September 30, 2020 and 2019

 

 

		3.	SUMMARY
OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

 

3.19
Foreign currency transactions (continued)

 

Effect
of translation differences are accumulated and presented as a component of equity under accumulated other comprehensive income.

 

3.20
Taxation

 

The
current income tax expense is based on taxable income for the period. Income tax payable is based on the income tax expense from
the current and prior periods that has not been remitted. Taxable income differs from “(Loss) Income before income tax”
as reported in the interim statements of (loss) income and comprehensive (loss) income because of items of income or expenses
that are taxable or deductible in other years and items that are never taxable or deductible. Current income tax represents the
expected income taxes recoverable (or payable) on taxable income for the period using income tax rates enacted or substantively
enacted at the end of the reporting period and factors in any adjustments arising from prior years.

 

As
the Corporation operates in the cannabis industry, it is subject to the limits of IRC Section 280E under which the Corporation
is only allowed to deduct expenses included as cost of goods sold. This results in permanent book/tax differences for ordinary
and necessary business expenses deemed non-allowable under IRC Section 280E. Therefore, the effective tax rate can be highly variable
and may not necessarily correlate with pre-tax income or loss.

 

Deferred
taxes are accounted for using the liability method. Under this method, deferred tax assets and liabilities are recognized for
the estimated future tax consequences attributable to differences between the carrying amounts of existing assets and liabilities
in the interim financial statements and their respective tax bases. Deferred tax assets and liabilities are measured using enacted
or substantively enacted tax rates in effect for the period in which those differences are expected to be recovered or settled.

 

The
effect of a change in tax rates on deferred tax assets and liabilities is recognized in net (loss) income in the period that includes
the substantive enactment date. A deferred tax asset is recognized initially when it is probable that future taxable income will
be sufficient to use the related tax benefits and may be subsequently reduced, if necessary, to the extent that it is no longer
probable that future taxable profits will be available. A deferred tax expense or benefit is recognized in accumulated other comprehensive
income or otherwise directly in equity to the extent that it relates to items that are recognized in accumulated other comprehensive
income or directly in equity in the same or a different period.

 

Provisions
for taxes are made using the best estimate of the amount expected to be paid based on a qualitative assessment of all relevant
factors. The Corporation reviews the adequacy of these provisions at the end of the reporting period. However, it is possible
that at some future date an additional liability could result from audits by taxing authorities. Where the final outcome of these
tax related matters is different from the amounts that were initially recorded, such differences will affect the tax provisions
in the period in which such determination is made.

 

IFRIC
Interpretation 23, Uncertainty over Income Tax Treatments, provides guidance on the accounting for current and deferred
tax liabilities and assets in circumstances in which there is uncertainty over income tax treatments. As of September 30, 2020,
the Corporation assessed for circumstances in which there is uncertainty over income tax treatments and has not recorded any uncertain
tax positions.

 

    17 

     

    

 

Ayr
Strategies Inc.

Notes
to the Interim Financial Statements

For
the Three and Nine Months Ended September 30, 2020 and 2019

 

 

		3.	SUMMARY
OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

 

3.21
Significant accounting judgments and estimates

 

The
application of the Corporation’s accounting policies requires management to use estimates and judgments that can have a
significant effect on the revenues, expenses, assets and liabilities recognized, and disclosures made in the interim financial
statements.

 

Management’s
best estimates concerning the future are based on the facts and circumstances available at the time estimates are made. Management
uses historical experience, general economic conditions and assumptions regarding probable future outcomes as the basis for determining
estimates. Estimates and their underlying assumptions are reviewed periodically, and the effects of any changes are recognized
at that time. Actual results could differ from the estimates used.

 

The
global pandemic outbreak of the novel strain of coronavirus (“COVID-19”) has resulted in governments worldwide enacting
emergency measures to combat the spread of the virus. These measures, which include the implementation of travel bans, store closures,
self-imposed quarantine periods and social distancing, may cause material disruption to businesses globally resulting in an economic
slowdown. COVID-19 has cast uncertainty on the assumptions used by management in making its judgments and estimates. The full
extent of the impact that COVID-19, including government and/or regulatory responses to the outbreak, will have on the Corporation
is highly uncertain and difficult to predict at this time. Accordingly, there is a higher level of uncertainty with respect to
management’s judgments and estimates.

 

The
following areas require management’s critical estimates and judgments:

 

(a)
Business combination

 

A
business combination is a transaction or event in which an acquirer obtains control of one or more businesses and is accounted
for using the acquisition method. The total consideration paid for the acquisition is the aggregate of the fair values of assets
acquired, liabilities assumed, and equity instruments issued in exchange for control of the acquiree at the acquisition date.
The acquisition date is the date when the Corporation obtains control of the acquiree. The identifiable assets acquired and liabilities
assumed are recognized at their acquisition date fair values, except for deferred taxes and share-based payment awards, where
IFRS provides exceptions to recording the amounts at fair value.

 

Goodwill
represents the difference between total consideration paid and the fair value of the net identifiable assets acquired. Acquisition
costs incurred are expensed to total expenses. Contingent consideration is measured at its acquisition date fair value and is
included as part of the consideration transferred in a business combination, subject to the applicable terms and conditions.

 

Contingent
consideration that is classified as equity is not remeasured at subsequent reporting dates and its subsequent settlement is accounted
for within equity. Contingent consideration that is classified as an asset or a liability is remeasured at subsequent reporting
dates in accordance with IFRS 9 with the corresponding gain or loss recognized in net (loss) income.

 

Based
on the facts and circumstances that existed at the acquisition date, management will perform a valuation analysis to allocate
the purchase price based on the fair values of the identifiable assets acquired and liabilities assumed on the acquisition date.
Management has one year from the acquisition date to confirm and finalize the facts and circumstances that support the finalized
fair value analysis and related purchase price allocation. Until such time, these values are provisionally reported and are subject
to change. Changes to fair values and allocations are retrospectively adjusted in subsequent periods.

 

    18 

     

    

 

Ayr
Strategies Inc.

Notes
to the Interim Financial Statements

For
the Three and Nine Months Ended September 30, 2020 and 2019

 

 

		3.	SUMMARY
OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

 

3.21
Significant accounting judgments and estimates (continued)

 

(a)
Business combination (continued)

 

In
determining the fair value of all identifiable assets acquired and liabilities assumed, the most significant estimates generally
relate to contingent consideration and intangible assets. Management exercises judgment in estimating the probability and timing
of when earn-outs are expected to be achieved, which is used as the basis for estimating fair value. Identified intangible assets
are fair valued using appropriate valuation techniques which are generally based on a forecast of the total expected future net
cash flows of the acquiree. Valuations are highly dependent on the inputs used and assumptions made by management regarding the
future performance of these assets and any changes in the discount rate applied.

 

(b)
Biological assets and inventory

 

In
calculating the value of the biological assets and inventory, management is required to make a number of estimates, including
estimating the stage of growth of the cannabis up to the point of harvest, harvesting costs, selling costs, average or expected
selling prices and list prices, expected yields for the cannabis plants, and oil conversion factors. In calculating final inventory
values, management compares the inventory costs to estimated net realizable value.

 

(c)
Estimated useful lives and depreciation of property, plant and equipment

 

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

 

(d)
Valuation, estimated life and impairment of intangible assets and goodwill

 

Management
uses significant judgment in determining the fair value of intangible assets and goodwill, estimating the useful lives and impairment.
Intangible assets that have indefinite useful lives are not subject to amortization and are tested annually for impairment, or
more frequently if events or changes in circumstances indicate that they might be impaired.

 

The
Corporation uses judgment in determining the grouping of assets by identifying CGUs for purposes of testing for impairment of
goodwill and intangible assets. The Corporation’s estimate of CGUs or a group of CGUs recoverable amount based on value
in use involves estimating future cash flows before taxes. Future cash flows are estimated based on multi-year extrapolation
of the most recent historical actual results and budgets are calculated by discounting the final year in perpetuity.

 

(e)
Goodwill impairment

 

When
determining the recoverable amount of the CGU or CGUs to which goodwill is allocated, the Corporation relies on a number of factors,
including historical results, business plans, forecasts and market data. Changes in the conditions for these judgments and estimates
can significantly affect the recoverable amount.

 

    19 

     

    

  

Ayr
Strategies Inc.

Notes
to the Interim Financial Statements

For
the Three and Nine Months Ended September 30, 2020 and 2019

 

 

		3.	SUMMARY
OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

 

3.21
Significant accounting judgments and estimates (continued)

 

(f)
Leases

 

Each
capitalized lease is evaluated to determine if the Corporation would exercise any of the renewal options offered. Several material
factors are considered in determining if the renewal options would be exercised, such as length of the renewal, renewal rate,
and ability to transfer locations. When measuring lease liabilities, the Corporation used discounted lease payments using a weighted-average
rate in the range of 9.8% to 11.6% per annum. The weighted-average rate is based on the internal borrowing rate, which relies
on judgments and estimates.

 

(g)
Provisions and contingent liabilities

 

When
the Corporation is more likely than not to incur an outflow of resources to settle an obligation and the amount can be reasonably
estimated, a contingent liability is recorded. The contingent liability is recorded at management’s best estimates of the
expenditure required to settle the obligation at period end, discounted to the present value, if material.

 

(h)
Financial instruments

 

To
determine the fair value of financial instruments, the Corporation develops assumptions and selects certain methods to perform
the fair value calculations. Various methods considered include but are not limited to: (a) assigning the value attributed to
the transaction at the time of origination; (b) re-measuring the instrument if it requires concurrent fair value measurement;
and (c) valuing the instrument at the issuance value less any amortized costs. As judgment is a factor in determining the value
and selecting a method, as well as, the inherent uncertainty in estimating the fair value, the valuation estimates may be different.

 

Application
of the option pricing model requires estimates in expected dividend yields, expected volatility in the underlying assets and the
expected life of the financial instruments. These estimates may ultimately be different from amounts subsequently realized, resulting
in an overstatement or understatement of net (loss) income and comprehensive (loss) income.

 

(i)
Expected credit loss

 

Management
determines ECL by evaluating individual receivable balances and considering customers’ financial condition and current economic
conditions. Accounts receivable are written off when deemed uncollectible. Recoveries of accounts receivable previously written
off are recorded as income when received. All receivables are expected to be collected within one year of the year end.

 

(j)
Income taxes

 

In
assessing the probability of realizing income tax assets, management makes estimates related to the expectation of future taxable
income, applicable tax planning opportunities, expected timing of reversals of existing temporary differences and the likelihood
that the tax positions taken will be sustained upon examination by applicable tax authorities.

 

    20 

     

    

 

Ayr
Strategies Inc.

Notes
to the Interim Financial Statements

For
the Three and Nine Months Ended September 30, 2020 and 2019

 

 

3.
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

 

3.22
Change in accounting policy

 

Pursuant
to completion of the Qualifying Transaction as explained in Note 1 to the interim financial statements, on May 24, 2019, the Corporation
elected to change the presentation currency of its interim financial statements from CDN$ to US$, effective with the interim financial
statements for the three and six months ended June 30, 2019.

 

The
Board of Directors believe that US$ financial reporting provides more relevant presentation of the Corporation’s financial
position, funding and treasury functions, financial performance and cash flows.

 

A
change in presentation currency represents a change in accounting policy in terms of IAS 8 – Accounting Policies,
Changes in Accounting Estimates and Errors, requiring the restatement of comparative information.

 

In
accordance with IAS 21 – The Effects of Changes in Foreign Exchange Rates, the methodology followed in restating
historical financial information from CDN$ to US$ is listed in Note 3.19.

 

The
closing rate used in translating the historical financial information from CDN$ to US$ as of December 31, 2018 was $0.7330.

 

    21 

     

    

 

Ayr
Strategies Inc.

Notes to the Interim Financial Statements

For the Three and Nine Months Ended September 30, 2020 and 2019

 

 

	3.	SUMMARY
                                         OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

 

3.23
Change in accounting standards

 

Adoption
of IFRS 16 – Leases (applied in 2019)

 

The
Corporation adopted IFRS 16 on January 1, 2019. IFRS 16 introduced a single on-balance sheet accounting model for lessees which
replaced IAS 17 - Leases (“IAS 17”). Leasing activity for the Corporation typically involves the leases of
land or buildings to operate cannabis dispensaries, processing or cultivation facilities or corporate offices.

 

The
Corporation previously classified leases as either operating or finance leases from the perspective of the lessee. Under IFRS
16, the Corporation recognizes right-of-use assets and lease liabilities for most leases. The Corporation adopted IFRS 16 using
the modified retrospective cumulative catch-up approach beginning on January 1, 2019. Under this approach, the Corporation did
not restate its comparative amounts and recognized a right-of-use asset equal to the present value of the future lease payments.
The Corporation elected to apply the practical expedient to only transition contracts which were previously identified as leases
under IAS 17, and also elected to not recognize right-of-use assets and lease liabilities for leases of low-value assets or short-term
leases.

 

Adoption
of IFRS 3 - Business combinations

 

The
Corporation adopted IFRS 3 on January 1, 2020. IFRS 3 provides clarification on the definition of a business. The amendments permit
a simplified assessment to determine whether a transaction should be accounted for as a business combination or as an asset acquisition.
There was no impact on the interim financial statements.

 

Adoption
of IAS 1 and 8 - Presentation of financial statements

 

The
Corporation adopted IAS 1 and 8 on January 1, 2020. IAS 1 and 8 provide clarification on the definition of materiality and how
it should be applied. The amendments also align the definition of material across International Financial Reporting Standards
and other publications. There was no impact on the interim financial statements.

 

Standards
and interpretations issued in the current period but not yet effective 

 

There
are no new standards issued but not yet effective as of January 1, 2020 that have a material impact to the Corporation’s
interim financial statements.

 

     22

     

    

 

Ayr
Strategies Inc.

Notes to the Interim Financial Statements

For the Three and Nine Months Ended September 30, 2020 and 2019

 

 

	4.	BUSINESS
                                         COMBINATION

 

As
explained in Note 1 to the interim financial statements, on May 24, 2019 (the “acquisition date”), the Corporation
completed its concurrent acquisitions of the target businesses of Washoe, Canopy, Sira, LivFree, and CannaPunch, which collectively
constituted its Qualifying Transaction. Any summary information of certain material terms from definitive agreements, as amended,
in respect of the acquisitions of Washoe, Canopy, Sira, LivFree, and CannaPunch (respectively, the “Washoe Agreement”,
the “Canopy Agreement”, the “Sira Agreement”, the “LivFree Agreement”, and the “CannaPunch
Agreement”, collectively the “Definitive Agreements”) is not exhaustive and is qualified in its entirety by
reference to the terms of the Definitive Agreements, which may be found on Ayr’s profile on SEDAR at www.sedar.com.

 

Each
of the acquisitions are subject to specific terms relating to the satisfaction of the purchase price by the Corporation and its
wholly-owned subsidiary, CSAC AcquisitionCo, and incorporates payments in cash, shares, and debt as well as certain contingent
considerations. The shares issued as consideration are non-voting exchangeable shares of CSAC AcquisitionCo (“Exchangeable
Shares”) that are exchangeable on a one-for-one basis into an equal number of Subordinate Voting Shares of the Corporation.
The Corporation treats the Exchangeable Shares as options with a value equal to a share of Subordinate Voting Shares, which represents
the holder’s claim on the equity of the Corporation. In order to comply with certain contractual requirements of the acquisition,
the Corporation and CSAC AcquisitionCo are required to maintain the economic equivalency of such Exchangeable Shares with the
publicly traded Subordinate Voting Shares of the Corporation. This means the Exchangeable Shares are required to share the same
economic benefits and retain the same proportionate ownership in the assets of the Corporation as the holders of the Corporation’s
publicly traded Subordinate Voting Shares. The Corporation has presented these Exchangeable Shares as a part of shareholders’
equity within these interim financial statements due to (i) the fact that they are economically equivalent to the Corporation’s
publicly traded Subordinate Voting Shares (ii) the holders of the Exchangeable Shares are subject to restrictions on transfer
under United States securities laws, but may dispose of the Exchangeable Shares without such restriction by exchanging them for
Subordinate Voting Shares of the Corporation. Changes in these assumptions would affect the presentation of the Exchangeable Shares
from shareholders’ equity to non-controlling interests; however, there would be no impact on (loss) earnings per share.

 

The
details of the purchase price consideration are summarized as follows:

	 	 	Cash 
 $	 	 	Debt Payable 
 $	 	 	Shares Issued 
 $	 	 	Other 
 $	 	 	Total 
 $	 
	Calculated Consideration	 		76,420,000	 	 		37,140,000	 	 		125,421,479	 	 		31,471,789	 	 		270,453,268	 

 

The
purchase consideration consists of cash, debt, Exchangeable Shares, and other consideration. The other consideration includes
a contingent cash payment based on certain milestones being met as detailed in the Sira Agreement, a payment for excess inventory
as outlined in the Sira Agreement, and make-whole provisions as outlined in the Canopy Agreement and the Washoe Agreement.

 

Ayr
obtained control, as defined in IFRS 10 for purposes of determining the consolidated basis of financial statement presentation,
of Washoe, Canopy, and LivFree through separate operational and service agreements. Each operational and service agreement provides
Ayr certain rights over the entities’ operations. Through these operational and service agreements, Ayr has the power to
control relevant activities which affect the returns Ayr receives. As a result of the control, as defined in IFRS 10 for purposes
of determining the consolidated basis of financial statement presentation, obtained through the operational and service agreements,
these entities are consolidated on Ayr’s interim financial statements. As of September 30, 2020, Washoe, Canopy, and LivFree
are awaiting state regulatory approval to transfer licenses to Ayr. See Note 3.1 for a breakout of the various management companies.

 

     23

     

    

 

Ayr
Strategies Inc.

Notes to the Interim Financial Statements

For the Three and Nine Months Ended September 30, 2020 and 2019

 

 

	4.	BUSINESS
                                         COMBINATION (Continued)

 

The
fair value of the identifiable assets acquired and liabilities assumed as of the acquisition date are as follows:

	US$	 	Livfree 
 $	 	 	Sira 
 $	 	 	Cannapunch 
 $	 	 	Washoe 
 $	 	 	Canopy 
 $	 	 	Total 
 $	 
	ASSETS ACQUIRED	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 
	Cash and cash equivalents	 	 	1,258,928	 	 	 	270,280	 	 	 	7,233	 	 	 	21,458	 	 	 	147,930	 	 	 	1,705,829	 
	Accounts receivable	 	 	-	 	 	 	600,151	 	 	 	625,143	 	 	 	87,617	 	 	 	-	 	 	 	1,312,911	 
	Inventory	 	 	2,670,057	 	 	 	9,671,814	 	 	 	552,040	 	 	 	4,500,213	 	 	 	1,618,639	 	 	 	19,012,763	 
	Biological assets	 	 	-	 	 	 	1,996,642	 	 	 	-	 	 	 	1,763,516	 	 	 	-	 	 	 	3,760,158	 
	Prepaid expenses and other assets	 	 	96,157	 	 	 	340,428	 	 	 	-	 	 	 	129,477	 	 	 	160,748	 	 	 	726,810	 
	Intangible assets	 	 	105,000,000	 	 	 	57,000,000	 	 	 	2,390,000	 	 	 	22,800,000	 	 	 	10,750,000	 	 	 	197,940,000	 
	Property, plant and equipment	 	 	1,640,418	 	 	 	9,090,090	 	 	 	486,100	 	 	 	9,070,645	 	 	 	1,217,736	 	 	 	21,504,989	 
	Right-of-use assets	 	 	2,894,076	 	 	 	5,239,201	 	 	 	1,119,826	 	 	 	-	 	 	 	2,057,681	 	 	 	11,310,784	 
	Due from related parties	 	 	-	 	 	 	-	 	 	 	-	 	 	 	-	 	 	 	784,733	 	 	 	784,733	 
	Deposits	 	 	90,147	 	 	 	149,251	 	 	 	-	 	 	 	91,574	 	 	 	9,983	 	 	 	340,955	 
	Total assets acquired at fair value	 	 	113,649,783	 	 	 	84,357,857	 	 	 	5,180,342	 	 	 	38,464,500	 	 	 	16,747,450	 	 	 	258,399,932	 
	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 
	LIABILITIES ASSUMED	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 
	Trade payables	 	 	387,500	 	 	 	475,193	 	 	 	251,829	 	 	 	506,073	 	 	 	-	 	 	 	1,620,595	 
	Accrued liabilities	 	 	1,176,088	 	 	 	970,418	 	 	 	46,972	 	 	 	100,412	 	 	 	520,453	 	 	 	2,814,343	 
	Deferred tax liabilities	 	 	25,796,726	 	 	 	13,611,222	 	 	 	567,507	 	 	 	2,153,131	 	 	 	2,841,746	 	 	 	44,970,332	 
	Advance from related parties	 	 	187,809	 	 	 	-	 	 	 	-	 	 	 	784,733	 	 	 	-	 	 	 	972,542	 
	Lease obligations	 	 	2,520,437	 	 	 	6,514,038	 	 	 	1,083,189	 	 	 	-	 	 	 	2,553,502	 	 	 	12,671,166	 
	Debts payable	 	 	120,000	 	 	 	13,054	 	 	 	-	 	 	 	9,180,808	 	 	 	421,128	 	 	 	9,734,990	 
	Total liabilities assumed at fair value	 	 	30,188,560	 	 	 	21,583,925	 	 	 	1,949,497	 	 	 	12,725,157	 	 	 	6,336,829	 	 	 	72,783,968	 
	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 
	Goodwill	 	 	39,779,584	 	 	 	16,399,143	 	 	 	13,971,953	 	 	 	8,121,569	 	 	 	6,565,055	 	 	 	84,837,304	 
	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 
	Calculated purchase price	 	 	123,240,807	 	 	 	79,173,075	 	 	 	17,202,798	 	 	 	33,860,912	 	 	 	16,975,676	 	 	 	270,453,268	 

 

The
goodwill recognized on acquisition is attributable mainly to the expected future growth potential and expanded customer base arising
as a result of the completion of the Qualifying Transaction as explained in Note 1 to the interim financial statements. Goodwill
has been allocated to the CGUs corresponding to each of the acquired businesses. None of the goodwill is expected to be deductible
for income tax purposes. The Corporation tests the recoverability of its goodwill annually, or more frequently, if events or changes
in circumstances indicate that they might be impaired. For further analysis on goodwill relating to the business combination,
see Note 8. 

     24

     

    

 

 

Ayr
Strategies Inc.

Notes to the Interim Financial Statements

For the Three and Nine Months Ended September 30, 2020 and 2019

 

 

	4.	BUSINESS
                                         COMBINATION (Continued)

 

Sira
Acquisition

 

Sira
is a vertically-integrated cannabis company with cultivation, extraction, production, manufacturing, distribution and retail dispensary
operations in Massachusetts. Sira operates its dispensaries in the medical market in Massachusetts.

 

Purchase
consideration was comprised of the following:

	 	 	 	 	Shares	 	 	Value	 
	Cash	 	i	 	 	 	 	 	$	17,500,000	 
	Debt Payable	 	ii	 	 	 	 	 	 	5,000,000	 
	Shares Issued	 	iii	 	 	1,885,606	 	 	 	29,165,138	 
	Contingent Consideration	 	iv	 	 	 	 	 	 	21,820,132	 
	Inventory Payment	 	v	 	 	 	 	 	 	6,091,357	 
	Working Capital Receivable	 	vi	 	 	 	 	 	 	(403,552	)
	Total	 	 	 	 	1,885,606	 	 	 	79,173,075	 

 

Pursuant
to the terms of the Sira Agreement, Ayr satisfied the purchase price of $79.2 million for Sira through the following:

 

		i.	$17.5
                                         million of the Sira purchase price in the form of cash consideration;

 

		ii.	$5.0
                                         million of the Sira purchase price in the form of a promissory note payable;

 

		iii.	$29.2
                                         million of the Sira purchase price in the form of 1,885,606 Exchangeable Shares that
                                         are exchangeable on a one-for-one basis into an equal number of Subordinate Voting Shares
                                         of the Corporation. These shares have restrictions on their ability to be sold for twelve
                                         months (the “Sira Lock-Up Provision”);

 

		iv.	A
                                         portion of the Sira purchase price is derived from an earn-out provision that may entitle
                                         the sellers to earn additional consideration, if certain milestones are achieved at Sira’s
                                         planned final cultivation facilities in Milford, MA over its first full year of operation;

 

		v.	An
                                         amount equal to the fair market value of Sira’s inventory above a target level
                                         set at $800,000 (the “Inventory Payment”), pursuant to a formula specified
                                         in the Sira Agreement; and

 

		vi.	Settlement
                                         following the final working capital adjustment.

 

One-third
of the Inventory Payment, subject to a cap of $2,500,000, was paid on the Closing Date and is included in the cash consideration
listed above. The remaining two-thirds is part of the current portion of purchase consideration payable as set out on the interim
statements of financial position. As of August 31, 2020, the outstanding balance of $6,091,357 was further amended to adopt a
monthly payment schedule ranging from 10-25 months based on certain milestones.

 

     25

     

    

 

Ayr
Strategies Inc.

Notes to the Interim Financial Statements

For the Three and Nine Months Ended September 30, 2020 and 2019

 

 

	4.	BUSINESS
                                         COMBINATION (Continued)

 

Canopy
Acquisition

 

Canopy
is an owner and operator of cannabis dispensaries in Nevada, with an established footprint in Reno, Nevada. Canopy operates its
dispensaries in both the medical and adult-use markets.

 

Purchase
consideration was comprised of the following: 

	 	 	 	 	Shares	 	 	Value	 
	Cash	 	i	 	 	 	 	 	$	7,000,000	 
	Debt Payable	 	ii	 	 	 	 	 	 	4,500,000	 
	Shares Issued	 	iii, iv	 	 	265,360	 	 	 	4,349,003	 
	Make-Whole Provision	 	v	 	 	 	 	 	 	1,389,182	 
	Working Capital Receivable	 	vi	 	 	 	 	 	 	(262,509	)
	Total	 	 	 	 	265,360	 	 	 	16,975,676	 

 

Pursuant
to the terms of the Canopy Agreement, Ayr satisfied the purchase price of $17.0 million for Canopy through the following:

 

		i.	$7.0
                                         million of the Canopy purchase price in the form of cash consideration;

 

		ii.	$4.5
                                         million of the Canopy purchase price in the form of a promissory note payable;

 

		iii.	$4.3
                                         million of the Canopy purchase price in the form of 250,000 Exchangeable Shares that
                                         are exchangeable on a one-for-one basis into an equal number of Subordinate Voting Shares
                                         of the Corporation. These shares have restrictions on their ability to be sold for six
                                         to twelve months (the “Canopy Lock-Up Provision”);

 

		iv.	An
                                         additional 15,360 Exchangeable Shares to Canopy pursuant to certain make-whole provisions
                                         (the “Canopy Make-Whole Provisions”);

 

		v.	An
                                         additional 432,940 Exchangeable Shares to the Canopy sellers under the Canopy Make-Whole
                                         Provisions based on a formula specified therein relating to the market price of the Subordinate
                                         Voting Shares on certain specified dates; and

 

		vi.	Settlement
                                         of the final working capital adjustment.

 

     26

     

    

 

Ayr
Strategies Inc.

Notes to the Interim Financial Statements

For the Three and Nine Months Ended September 30, 2020 and 2019

 

 

	4.	BUSINESS
                                         COMBINATION (Continued)

 

Washoe
Acquisition

 

Washoe
is a Nevada-based cannabis company with cultivation, extraction, processing, manufacturing and distribution capabilities. Washoe
operates in both the medical and adult-use segments of the Nevada cannabis market.

 

Purchase
consideration was comprised of the following: 

	 	 	 	 	Shares	 	 	Value	 
	Cash	 	i	 	 	 	 	 	$	21,670,000	 
	Debt Payable	 	ii	 	 	 	 	 	 	5,640,000	 
	Shares Issued	 	iii, iv	 	 	270,000	 	 	 	4,260,775	 
	Make-Whole Provision	 	v	 	 	 	 	 	 	1,424,536	 
	Working Capital Payable	 	vi	 	 	 	 	 	 	865,601	 
	Total	 	 	 	 	270,000	 	 	 	33,860,912	 

 

Pursuant
to the terms of the Washoe Agreement, Ayr satisfied the purchase price of $33.9 million for Washoe through the following:

 

		i.	$21.7
                                         million of the Washoe purchase price in the form of cash consideration;

 

		ii.	$5.6
                                         million of the Washoe purchase price in the form of a promissory note payable;

 

		iii.	$4.3
                                         million of the Washoe purchase price in the form of 256,364 Exchangeable Shares that
                                         are exchangeable on a one-for-one basis into an equal number of Subordinate Voting Shares
                                         of the Corporation. These shares have restrictions on their ability to be sold for six
                                         to twelve months (the “Washoe Lock-Up Provision”);

 

		iv.	Pursuant
                                         to the terms of the Washoe Agreement, 13,636 Exchangeable Shares to a Washoe lender;

 

		v.	An
                                         additional 571,479 Exchangeable Shares to the Washoe sellers pursuant to certain make-whole
                                         provisions (the “Washoe Make-Whole Provisions”) in the Washoe Agreement based
                                         on a formula specified therein relating to the market price of the Subordinate Voting
                                         Shares on certain specified dates; and

 

		vi.	Settlement
                                         of the final working capital adjustment.

 

CSAC
AcquisitionCo agreed to fund a bonus payment in the amount of $5,000,000 to various employees and consultants of Washoe; this
amount is included in the cash consideration above.

 

     27

     

    

 

Ayr
Strategies Inc.

Notes to the Interim Financial Statements

For the Three and Nine Months Ended September 30, 2020 and 2019

 

 

	4.	BUSINESS
                                         COMBINATION (Continued)

 

LivFree
Acquisition

 

LivFree
is a leading Nevada-based cannabis company with retail dispensary operations in Las Vegas and Reno, Nevada. LivFree operates in
both the medical and adult-use segments of the Nevada cannabis market. LivFree operates three retail dispensaries where it sells
products purchased in the wholesale market. LivFree has licenses to operate medical marijuana dispensary, cultivation, and production
facilities, and adult-use marijuana retail dispensary and production facilities.

 

Purchase
consideration was comprised of the following:

	 	 	 	 	Shares	 	 	Value	 
	Cash	 	i	 	 	 	 	 	$	29,500,000	 
	Debt Payable	 	ii	 	 	 	 	 	 	20,000,000	 
	Shares Issued	 	iii, iv	 	 	4,664,182	 	 	 	73,525,577	 
	Working Capital Payable	 	v	 	 	 	 	 	 	215,230	 
	Total	 	 	 	 	4,664,182	 	 	 	123,240,807	 

 

Pursuant
to the terms of the LivFree Agreement, Ayr satisfied the purchase price of $123.2 million for LivFree through the following:

 

		i.	$29.5
                                         million of the LivFree purchase price in the form of cash consideration;

 

		ii.	$20.0
                                         million of the LivFree purchase price in the form of a promissory note payable;

 

		iii.	$69.1
                                         million of the LivFree purchase price in the form of 4,342,432 Exchangeable Shares that
                                         are exchangeable on a one-for-one basis into an equal number of Subordinate Voting Shares
                                         of the Corporation. These shares have restrictions on their ability to be sold for six
                                         to twelve months (the “LivFree Lock-Up Provision”);

 

		iv.	$4.4
                                         million of the LivFree purchase price, pursuant to an amendment to the definitive agreement
                                         in respect of the LivFree Acquisition, in the form of an additional 321,750 Exchangeable
                                         Shares to the LivFree sellers; and

 

		v.	Settlement
                                         of the final working capital adjustment.

 

     28

     

    

 

Ayr
Strategies Inc.

Notes to the Interim Financial Statements

For the Three and Nine Months Ended September 30, 2020 and 2019

 

 

	4.	BUSINESS
                                         COMBINATION (Continued)

 

CannaPunch
Acquisition

 

CannaPunch
possesses trade name and brand value and extracts raw cannabis plant material through a license agreement to create processed
cannabis oil for use in vaporizer cartridges and pens or as an input into other infused products, as well as manufactures a variety
of cannabis-infused products, including beverages, gummies, chocolates, CBD cream, and vaporizer pens.

 

Purchase
consideration was comprised of the following:

	 	 	 	 	Shares	 	 	Value	 
	Cash	 	i	 	 	 	 	 	$	750,000	 
	Debt Payable	 	ii	 	 	 	 	 	 	2,000,000	 
	Shares Issued	 	iii, iv	 	 	898,739	 	 	 	14,120,986	 
	Working Capital Payable	 	v	 	 	 	 	 	 	331,812	 
	Total	 	 	 	 	898,739	 	 	 	17,202,798	 

 

Pursuant
to the terms of the CannaPunch Agreement, Ayr satisfied the purchase price of $17.2 million for CannaPunch through the following:

 

		i.	$0.8
                                         million of the CannaPunch purchase price in the form of cash consideration;

 

		ii.	$2.0
                                         million of the CannaPunch purchase price in the form of a promissory note payable;

 

		iii.	$13.7
                                         million of the CannaPunch purchase price in the form of 866,668 Exchangeable Shares that
                                         are exchangeable on a one-for-one basis into an equal number of Subordinate Voting Shares
                                         of the Corporation. These shares have restrictions on their ability to be sold for six
                                         to twelve months (the “CannaPunch Lock-Up Provision”, and collectively with
                                         the Sira Lock-Up Provision, Canopy Lock-Up Provision, Washoe Lock-Up Provision and LivFree
                                         Lock-Up Provision, the “Lock-Up Provisions”, and each, a “Lock-Up Provision”);

 

		iv.	$0.4
                                         million of the CannaPunch purchase price, pursuant to an amendment to the definitive
                                         agreement in respect of the CannaPunch acquisition, in the form of an additional 32,071
                                         Exchangeable Shares to the CannaPunch sellers; and

 

		v.	Settlement
                                         of the final working capital adjustment.

 

Fair
Value Considerations

 

The
consideration has been allocated to the assets acquired and liabilities assumed based on their estimated fair values at the date
of acquisition. The purchases have been accounted for by the acquisition method, with the results included in the Corporation’s
net earnings from the date of acquisition.

 

The
consideration that is subject to a Lock-Up Provision or that is payable under a make-whole provision is measured at fair value
based on unobservable inputs and is considered a Level 3 measurement. The fair value was determined by the Corporation’s
share price at the acquisition date and other inputs based on other observable market data. The earn-out provision in the Sira
purchase agreement has been measured at fair value by taking a probability-weighted average of possible outcomes, as estimated
by management, and discounting the payment to the acquisition date. Refer to Note 14 for the make-whole provision and contingent
consideration fair value treatment subsequent to the acquisition.

 

     29

     

    

 

Ayr
Strategies Inc.

Notes to the Interim Financial Statements

For the Three and Nine Months Ended September 30, 2020 and 2019

 

 

	4.	BUSINESS
                                         COMBINATION (Continued)

 

Goodwill
and Intangibles 

 

The
goodwill balance reflects the benefits of an assembled workforce, expected earnings and future market development. These benefits
were not recognized separately from goodwill because they do not meet the recognition criteria for identifiable intangible assets.
Goodwill will not be amortized and will be reviewed for impairment on an annual basis. As of September 30, 2020, there are no
such indicators that would necessitate a formal impairment assessment.

 

	5.	INVENTORY

 

The
Corporation’s inventory includes the following:

	 	 	September 30, 2020	 	 	December 31, 2019	 
	 	 	$	 	 	$	 
	Work in process	 	 	22,820,985	 	 	 	6,226,109	 
	Finished goods	 	 	3,057,009	 	 	 	257,399	 
	Total cultivation and production inventory	 	 	25,877,994	 	 	 	6,483,508	 
	 	 	 	 	 	 	 	 	 
	Cannabis inventory at retail	 	 	4,865,071	 	 	 	5,245,010	 
	Supplies and others	 	 	2,245,948	 	 	 	1,990,322	 
	Total inventory	 	 	32,989,013	 	 	 	13,718,840	 

 

Amount
of inventory included in cost of goods sold during the three and nine months ended September 30, 2020 and 2019 was $16,742,622
and $42,754,698, and $11,495,177 and $15,286,066, respectively. There were no inventory write-downs taken during the periods ended.

 

	6.	BIOLOGICAL
                                         ASSETS

 

The
continuity of biological assets is as follows:

	 	 	September 30, 2020	 	 	December 31, 2019	 
	 	 	$	 	 	$	 
	Balance, at beginning of the period	 	 	2,935,144	 	 	 	-	 
	Acquired on completion of Qualifying Transaction [Notes 1 & 4]	 	 	-	 	 	 	3,760,158	 
	Changes in fair value less costs to sell due to biological transformation	 	 	44,574,730	 	 	 	10,108,105	 
	Transferred to inventory upon harvest	 	 	(34,819,211	)	 	 	(10,933,119	)
	Balance, at end of the period	 	 	12,690,663	 	 	 	2,935,144	 

 

The
fair value of biological assets is categorized within Level 3 on the fair value hierarchy. The inputs and assumptions used in
determining the fair value of biological assets as of September 30, 2020 and December 31, 2019 include:

		•	The
                                         average number of weeks in the growing cycles were 18 weeks from propagation to harvest;

		•	The
                                         average harvest yields from each cannabis plant were 192 and 233, respectively, grams
                                         per plant;

		•	The
                                         biological assets were on average 57% and 53%, respectively, complete;

		•	The
                                         average selling price of dry cannabis was $5.13 and $5.00, respectively per gram; and

		•	The
                                         average costs to complete the cannabis process post-harvest and the costs to sell were
                                         $0.59 and $1.54, respectively, per gram.

 

     30

     

    

 

Ayr
Strategies Inc.

Notes to the Interim Financial Statements

For the Three and Nine Months Ended September 30, 2020 and 2019

 

 

	6.	BIOLOGICAL
                                         ASSETS (Continued)

 

Significant
unobservable assumptions used in the valuation of biological assets, including the sensitivities on changes in the key assumptions
and their effect on the fair value of biological assets, are as follows:

	Significant inputs or assumptions	 	Weighted average input	 	 	Sensitivity	 	Effect on fair value	 
	 	 	September 30, 2020	 	December 31, 2019	 	 	 	 	September 30, 2020	 	 	December 31, 2019	 
	 	 	 	 	 	 	 	 	 	 	 	 	$	 	 	 	$	 
	Wholesale selling price of dry cannabis	 		$5.13	 		$5.00	 	 	Increase or decrease of 5%	 	 	774,547	 	 	 	209,858	 
	Average yield per plant	 	 	192 Grams	 	 	233 Grams	 	 	Increase or decrease of 5%	 	 	678,687	 	 	 	157,663	 

 

The
Corporation’s estimates are, by their nature, subject to change and differences from the anticipated yield will be reflected
in the gain or loss on biological assets in future periods.

 

During
the nine months ended September 30, 2020 and 2019, the Corporation’s biological assets produced 9,344,006 and 2,097,708
grams of dried cannabis, respectively.

 

	7.	PROPERTY,
                                         PLANT AND EQUIPMENT

 

	 	 	Furniture and 
 fixtures	 	 	Office 
 equipment	 	 	Machinery and 
 equipment	 	 	Auto and 
 trucks	 	 	Buildings and leasehold 
 improvements	 	 	Total	 
	 	 	 	$	 	 	 	$	 	 	 	$	 	 	 	$	 	 	 	$	 	 	 	$	 
	Cost	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 
	As of December 31, 2019	 	 	923,391	 	 	 	312,486	 	 	 	1,871,195	 	 	 	130,298	 	 	 	34,878,639	 	 	 	38,116,009	 
	Additions	 	 	60,555	 	 	 	102,616	 	 	 	167,019	 	 	 	59,253	 	 	 	3,708,693	 	 	 	4,098,136	 
	As of September 30, 2020	 	 	983,946	 	 	 	415,102	 	 	 	2,038,214	 	 	 	189,551	 	 	 	38,587,332	 	 	 	42,214,145	 
	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 
	Depreciation	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 
	As of December 31, 2019	 	 	94,140	 	 	 	41,736	 	 	 	118,375	 	 	 	13,978	 	 	 	694,919	 	 	 	963,148	 
	Depreciation	 	 	135,951	 	 	 	73,192	 	 	 	178,309	 	 	 	29,201	 	 	 	1,479,362	 	 	 	1,896,015	 
	As of September 30, 2020	 	 	230,091	 	 	 	114,928	 	 	 	296,684	 	 	 	43,179	 	 	 	2,174,281	 	 	 	2,859,163	 
	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 
	Net book value	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 
	As of December 31, 2019	 	 	829,251	 	 	 	270,750	 	 	 	1,752,820	 	 	 	116,320	 	 	 	34,183,720	 	 	 	37,152,861	 
	As of September 30, 2020	 	 	753,855	 	 	 	300,174	 	 	 	1,741,530	 	 	 	146,372	 	 	 	36,413,051	 	 	 	39,354,982	 
	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 
	Cost	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 
	As of December 31, 2018	 	 	-	 	 	 	-	 	 	 	-	 	 	 	-	 	 	 	-	 	 	 	-	 
	Acquired on completion of Qualifying Transaction [Notes 1 & 5]	 	 	722,346	 	 	 	255,127	 	 	 	1,472,366	 	 	 	64,137	 	 	 	18,991,013	 	 	 	21,504,989	 
	Additions	 	 	201,045	 	 	 	57,359	 	 	 	398,829	 	 	 	66,161	 	 	 	15,887,626	 	 	 	16,611,020	 
	As of December 31, 2019	 	 	923,391	 	 	 	312,486	 	 	 	1,871,195	 	 	 	130,298	 	 	 	34,878,639	 	 	 	38,116,009	 
	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 
	Depreciation	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 
	As of December 31, 2018	 	 	-	 	 	 	-	 	 	 	-	 	 	 	-	 	 	 	-	 	 	 	-	 
	Depreciation	 	 	94,140	 	 	 	41,736	 	 	 	118,375	 	 	 	13,978	 	 	 	694,919	 	 	 	963,148	 
	As of December 31, 2019	 	 	94,140	 	 	 	41,736	 	 	 	118,375	 	 	 	13,978	 	 	 	694,919	 	 	 	963,148	 
	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 
	Net book value	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 
	As of December 31, 2018	 	 	-	 	 	 	-	 	 	 	-	 	 	 	-	 	 	 	-	 	 	 	-	 
	As of December 31, 2019	 	 	829,251	 	 	 	270,750	 	 	 	1,752,820	 	 	 	116,320	 	 	 	34,183,720	 	 	 	37,152,861	 

 

As
of September 30, 2020 and December 31, 2019, buildings and leasehold improvements include assets under construction of $1,689,808,
and $17,146,625, respectively.

 

     31

     

    

 

Ayr
Strategies Inc.

Notes to the Interim Financial Statements

For the Three and Nine Months Ended September 30, 2020 and 2019

 

 

	7.	PROPERTY,
                                         PLANT AND EQUIPMENT (Continued)

 

Depreciation
expense relating to PPE for the three and nine months ended September 30, 2020 and 2019:

 

	 	 	Three Months Ended	 	 	Nine Months Ended	 
	 	 	September 30, 2020	 	 	September 30, 2019	 	 	September 30, 2020	 	 	September
    30, 2019	 
	 	 	 	$	 	 	 	$	 	 	 	$	 	 	 	$	 
	Cost of goods sold	 	 	654,251	 	 	 	356,248	 	 	 	1,365,873	 	 	 	474,845	 
	Expenses	 	 	139,464	 	 	 	98,381	 	 	 	530,143	 	 	 	136,066	 
	Total depreciation relating to PPE	 	 	793,715	 	 	 	454,629	 	 	 	1,896,016	 	 	 	610,911	 

 

	8.	GOODWILL
                                         AND INTANGIBLE ASSETS

 

Goodwill

 

As
explained in Note 1 and Note 4, the Corporation recognized goodwill of $84,837,304 when the Corporation completed the Qualifying
Transaction on the Acquisition Date. This goodwill represents the excess purchase price paid by the Corporation over the fair
value of net tangible and intangible assets identified in the calculated purchase price. The Corporation tests the recoverability
of its goodwill annually, or more frequently if events or changes in circumstances indicate that they might be impaired. Goodwill
recoverability is tested based on the higher of FVLCD and the value in use model. The FVLCD analysis is performed by using the
income method which involves discounting expected future cash flows. Impairment testing involves determining the recoverable amount
of the CGU group to which goodwill is allocated and comparing this to the carrying value of the CGU groups. The Corporation grouped
CGUs for testing at the state level based on the CGUs expected to benefit from synergies of the business combination.

 

Intangible
Assets 

 

Amortization
expense is in cost of goods sold and total expenses. The amount in cost of goods sold for the three and nine months ended September
30, 2020 and 2019 was $380,000 and $1,140,000 and $Nil and $Nil, respectively. The following table represents intangible assets:

	 	 	Useful Life 
 # (Years)	 	 	September 30, 2020
 $	 	 	December 31, 2019
 $	 
	Cost	 	 	 	 	 	 	 	 	 	 	 	 
	Licenses	 	 	15	 	 	 	22,000,000	 	 	 	22,000,000	 
	Right-to-use licenses	 	 	15	 	 	 	138,950,000	 	 	 	138,550,000	 
	Host community agreements	 	 	15	 	 	 	35,000,000	 	 	 	35,000,000	 
	Trade name / brand	 	 	5	 	 	 	2,390,000	 	 	 	2,390,000	 
	 	 	 	 	 	 	 	198,340,000	 	 	 	197,940,000	 
	Accumulated amortization	 	 	 	 	 	 	 	 	 	 	 	 
	Licenses	 	 	15	 	 	 	1,983,154	 	 	 	883,154	 
	Right-to-use licenses	 	 	15	 	 	 	12,489,364	 	 	 	5,561,864	 
	Host community agreements	 	 	15	 	 	 	3,155,018	 	 	 	1,405,018	 
	Trade name / brand	 	 	5	 	 	 	646,328	 	 	 	287,828	 
	 	 	 	 	 	 	 	18,273,864	 	 	 	8,137,864	 
	Net book value	 	 	 	 	 	 	 	 	 	 	 	 
	Licenses	 	 	15	 	 	 	20,016,846	 	 	 	21,116,846	 
	Right-to-use licenses	 	 	15	 	 	 	126,460,636	 	 	 	132,988,136	 
	Host community agreements	 	 	15	 	 	 	31,844,982	 	 	 	33,594,982	 
	Trade name / brand	 	 	5	 	 	 	1,743,672	 	 	 	2,102,172	 
	Total net book value as of	 	 	 	 	 	 	180,066,136	 	 	 	189,802,136	 

 

     32

     

    

 

Ayr
Strategies Inc.

Notes to the Interim Financial Statements

For the Three and Nine Months Ended September 30, 2020 and 2019

 

 

	9.	RIGHT-OF-USE
                                         ASSETS AND LEASE OBLIGATIONS

 

	 	 	Right-of-use assets	 	 	Lease obligations	 
	 	 	$	 	 	$	 
	As of December 31, 2019	 	 	12,315,417	 	 	 	14,121,145	 
	New leases and re-valuation	 	 	867,549	 	 	 	867,726	 
	Less: depreciation and repayment	 	 	(1,387,367	)	 	 	(893,731	)
	Net book value as of September 30, 2020	 	 	11,795,599	 	 	 	14,095,140	 

 

Interest
expense relating to lease obligations for the three and nine months ended September 30, 2020 and 2019:  

	 	 	Three
    Months Ended	 	 	Nine
    Months Ended	 
	 	 	September
    30, 2020	 	 	September
    30, 2019	 	 	September
    30, 2020	 	 	September
    30, 2019	 
	 	 	 	$	 	 	 	$	 	 	 	$	 	 	 	$	 
	Cost of goods sold	 	 	146,667	 	 	 	-	 	 	 	372,622	 	 	 	-	 
	Other
    income (expense)	 	 	210,889	 	 	 	323,991	 	 	 	663,959	 	 	 	424,571	 
	Total
    interest expense relating to lease obligations	 	 	357,556	 	 	 	323,991	 	 	 	1,036,581	 	 	 	424,571	 

 

Depreciation
relating to right-of-use assets for the three and nine months ended September 30, 2020 and 2019:

	 	 	Three Months Ended	 	 	Nine Months Ended	 
	 	 	September 30, 2020	 	 	September 30, 2019	 	 	September 30, 2020	 	 	September 30, 2019	 
	 	 	 	$	 	 	 	$	 	 	 	$	 	 	 	$	 
	Cost of goods sold	 	 	87,838	 	 	 	119,666	 	 	 	268,217	 	 	 	159,555	 
	Expenses	 	 	383,847	 	 	 	184,626	 	 	 	1,119,150	 	 	 	239,729	 
	Total depreciation relating to right-of-use assets	 	 	471,685	 	 	 	304,292	 	 	 	1,387,367	 	 	 	399,284	 

 

As
of September 30, 2020 and December 31, 2019, the current and long-term lease obligations were $1,117,605 and $12,977,535, and
$1,087,835 and $13,033,310, respectively. Also refer to Note 3.23 (Adoption of IFRS 16 – “Leases”).

 

The
following table presents the contractual undiscounted cash flows for lease obligations as of September 30, 2020:

	 	 	$	 
	2020	 	 	695,372	 
	2021	 	 	2,435,091	 
	2022	 	 	2,337,060	 
	2023	 	 	2,386,671	 
	2024	 	 	2,379,337	 
	2025	 	 	2,091,594	 
	2026 and beyond	 	 	14,111,173	 
	Total undiscounted lease obligations	 	 	26,436,298	 
	Impact of discounting	 	 	(12,341,158	)
	Total lease obligations	 	 	14,095,140	 

 

     33

     

    

 

Ayr
Strategies Inc.

Notes to the Interim Financial Statements

For the Three and Nine Months Ended September 30, 2020 and 2019

 

 

	10.	EQUITY
                                         INVESTMENTS

 

The
Corporation has a 40% interest in Green Garden, LLC (“Green Garden”) and a 49% interest in Land of Lincoln Dispensary
LLC (“Lincoln”). Management has concluded that the current interests do not provide control to the Corporation. Accordingly,
the Green Garden and Lincoln investments have been accounted for using the equity method. The Lincoln acquisition occurred on
December 29, 2019 and has had no operating activity for the three and nine months ended September 30, 2020. The following table
relates to the Corporation’s investment in Green Garden as of September 30, 2020 and December 31, 2019:

 

	 	 	September 30, 2020	 	 	December 31, 2019	 
	 	 	$	 	 	$	 
	Balance at the beginning of the period	 	 	427,399	 	 	 	-	 
	Investment	 	 	91,700	 	 	 	500,000	 
	Share of loss	 	 	(31,382	)	 	 	(72,601	)
	Net book value, as of	 	 	487,717	 	 	 	427,399	 

 

The
following table presents a summary of the statements of financial position and operations of Green Garden:

	 	 	September 30, 2020	 	 	December 31, 2019	 
	 	 	$	 	 	$	 
	Current assets	 	 	2,763	 	 	 	27,218	 
	Non-current assets	 	 	-	 	 	 	-	 
	Current liabilities	 	 	-	 	 	 	-	 
	Revenue	 	 	-	 	 	 	-	 
	Loss	 	 	(78,456	)	 	 	(181,501	)

 

	11.	RELATED
                                         PARTY TRANSACTIONS AND BALANCES

 

Related
parties are defined as management and members of the Corporation and/or members of their immediate family and/or other companies
and/or entities in which a board member or senior officer is a principal owner or senior executive. Other than disclosed elsewhere
in the interim financial statements, related party transactions and balances are as follows:

 

Mercer
Park, L.P. entered into a management agreement with the Corporation dated May 24, 2019. As of September 30, 2020 and December
31, 2019, $58,083 and $48,008 was included in prepaid expenses as an advance for these services. Included in expenses for the
three and nine months ended September 30, 2020, are management fees of $1,157,679 and $3,479,939 that are included in general
and administrative expenses and embedded lease fees of $111,009 and $304,504 that are included in depreciation and interest expense,
respectively. The management fee is paid monthly and varies based on actual costs incurred by the related entity when providing
the Corporation administrative support, management services, office space, and utilities. In addition, the management fees pay
other corporate or centralized expenses based on actual cost, including but not limited to legal and professional fees, software,
and insurance. The agreement is a month-to-month arrangement.

 

As
of September 30, 2020 and December 31, 2019, Mercer Park Brand Acquisition Corp. (“Brand”), a SPAC that has limited
services shared with the Corporation, owed to Ayr $85,000. This amount is included in due from related parties.

 

During
the three and nine months ended September 30, 2020, the Corporation incurred fees from Panther Residential Management, LLC (“Panther”),
a company partially owned by a board member of Ayr. The total incurred fees were $25,500 and $76,500 of office expenses, $112,500
and $337,500 of rental fees, and $1,062 and $3,557 of interest expense and $5,332 and $15,996 of depreciation related to an office
lease, respectively.

 

During
the three and nine months ended September 30, 2020, the Corporation incurred fees from JOCHCO Investments, LLC (JOCHCO), a company
owned by certain former owners of Washoe. The total incurred fees are $34,719 and $106,399 of interest expense and $23,773 and
$71,319 of depreciation related to a dispensary lease, respectively.

 

     34

     

    

 

Ayr
Strategies Inc.

Notes to the Interim Financial Statements

For the Three and Nine Months Ended September 30, 2020 and 2019

 

 

11. RELATED
PARTY TRANSACTIONS AND BALANCES (Continued)

 

Directors
and officers of the Corporation are considered key members of management. Compensation for the directors and officers in the respective
periods were comprised of:

	 	 	Three Months Ended	 	 	Nine Months Ended	 
	 	 	September 30, 2020	 	 	September 30, 2019	 	 	September 30, 2020	 	 	September 30, 2019	 
	 	 	$	 	 	$	 	 	$	 	 	$	 
	Compensation and benefits, included in management fee	 	 	656,250	 	 	 	369,148	 	 	 	1,655,000	 	 	 	471,504	 
	Stock-based compensation, non-cash	 	 	4,700,795	 	 	 	11,062,444	 	 	 	25,949,556	 	 	 	15,582,582	 
	Total compensation	 	 	5,357,045	 	 	 	11,431,592	 	 	 	27,604,556	 	 	 	16,054,086	 

 

Refer
to Note 12 and 17 for additional information around the debts payable and non-cash stock-based compensation plan and calculation,
respectively, for the three and nine months ended September 30, 2020 and 2019.

 

12.
DEBTS PAYABLE

 

	 	 	Debts payable 
 $	 
	As of December 31, 2019	 	 	43,995,661	 
	Incurred	 	 	-	 
	Less: repayment	 	 	(3,282,737	)
	Total debts payable as of September 30, 2020	 	 	40,712,924	 
	Total accrued interest payable related to debts payable as of September 30, 2020	 	 	1,894,747	 

 

The
details of debts payable were as follows:

	 	 	September 30, 2020	 
	 	 	Related party debt	 	 	Non-related party debt	 	 	Total debt	 
	 	 	$	 	 	$	 	 	$	 
	Principal payments	 	 	37,929,745	 	 	 	2,783,179	 	 	 	40,712,924	 
	Less: current portion	 	 	8,465,496	 	 	 	443,324	 	 	 	8,908,820	 
	Total non-current debt	 	 	29,464,249	 	 	 	2,339,855	 	 	 	31,804,104	 

 

The
following table presents the future debt obligation as of September 30, 2020:

	Future debt obligations (per year)	 	 		$	 
	2020	 	 	 	2,589,809	 
	2021	 	 	 	8,387,312	 
	2022	 	 	 	5,611,722	 
	2023	 	 	 	1,511,532	 
	2024	 	 	 	22,612,549	 
	Total debt obligations	 	 	 	40,712,924	 

 

As
part of the Qualifying Transaction, the Corporation issued and assumed notes with related and non-related parties. The related
party notes are considered part of the purchase price to the former shareholders of the acquired businesses. As a result of the
Qualifying Transaction, several of these individual shareholders are now considered related parties of the Corporation across
various roles including directors, officers, and shareholders.

 

Pursuant
to the Sira Agreement, the Corporation issued a related-party promissory note in the amount of $5,000,000 to a lender of Sira
that is secured by a first-priority security interest over all the assets of Sira. The note matures five years from the closing
date with a 6% annual interest rate. In addition, the Corporation agreed to assume a non-related party loan of $29,393 that matures
on November 10, 2020 with a 5.49% annual interest rate. Total balance assumed was $13,053.

 

     35

     

    

 

Ayr
Strategies Inc.

Notes to the Interim Financial Statements

For the Three and Nine Months Ended September 30, 2020 and 2019

 

 

12.
DEBTS PAYABLE (Continued)

 

Pursuant
to the Canopy Agreement, the Corporation issued a related-party promissory note in the amount of $4,500,000 to Canopy that is
secured by a first-priority security interest over all the assets of Canopy. The note matures five years from the closing date
with a 6% annual interest rate. In addition, the Corporation agreed to assume a non-related party loan of $421,128 that matures
on October 1, 2020 with a 7% annual interest rate. The assumed loan was amended in June 2020 to mature on February 1, 2021 with
a 10% annual interest rate.

 

Pursuant
to the Washoe Agreement, the Corporation issued a related-party promissory note in the amount of $5,640,000 to the former members
of Washoe that is secured by a first-priority security interest over all the assets of Washoe. The note matures three years from
the closing date with a 6% annual interest rate. In addition, the Corporation agreed to assume a related-party member loan that
has $6,561,818 remaining, secured by an all-assets security interest over all assets of Washoe that matures three years from the
closing date with a 6% interest rate. The note was amended in March 2020 to increase the interest rate to 7% in exchange for a
three month deferral of principal. The Corporation also agreed to assume non-related party notes of $2,525,000 and $190,000 that
mature on September 1, 2022 and July 23, 2023 with 5% and 6% annual interest rates, respectively; both are secured by real property
owned by Washoe or its subsidiaries. Total balances assumed were $2,397,152 and $190,000, respectively.

 

Pursuant
to the LivFree Agreement, the Corporation issued a related-party promissory note in the amount of $20,000,000 to the former members
of LivFree that is secured by a first-priority security interest over all the assets of LivFree. The note matures five years from
the closing date with a 6% annual interest rate.

 

Pursuant
to the CannaPunch Agreement, the Corporation issued a related-party promissory note in the amount of $2,000,000 to the former
members of CannaPunch that is secured by a first-priority security interest over all the assets of CannaPunch. The note matures
five years from the closing date with a 6% annual interest rate.

 

Interest
expense associated with related party debt payable for the three and nine months ended September 30, 2020 and 2019, was $594,387
and $1,816,778, and $649,792 and $915,594, respectively.

 

13.
SHARE CAPITAL

 

The
authorized share capital of the Corporation is comprised of the following:

 

Unlimited
number of Subordinate Voting Shares

 

		•	1
                                         vote per share.

		•	Class
                                         A Restricted Voting Shares were automatically converted into Subordinate Voting Shares
                                         on the date of the Qualifying Transaction.

		•	Trading
                                         on the CSE under the symbol “AYR.A” and the OTC under the symbol “AYRSF”.

 

     36

     

    

 

Ayr
Strategies Inc.

Notes to the Interim Financial Statements

For the Three and Nine Months Ended September 30, 2020 and 2019

 

 

13.
SHARE CAPITAL (Continued)

 

Unlimited
Number of Multiple Voting Shares

 

		•	25
                                         votes per share.

		•	Convertible
                                         into Subordinate Voting Shares on a one-for-one basis. The shares are mandatorily converted
                                         into Subordinate Voting Shares at the earlier of: (i) the date on which the aggregate
                                         number of Multiple Voting Shares has been reduced to less than 33 1/3% of those issued
                                         and outstanding on the first date of issuance thereof, and (ii) the date that is five
                                         years from the date of closing of the Qualifying Transaction.

		•	Class
                                         B Shares were automatically converted into Multiple Voting Shares on the date of the
                                         Qualifying Transaction.

		•	Not
                                         traded on the CSE.

 

A
summary of the outstanding share capital of the Corporation as of September 30, 2020 is comprised of the activity below. Refer
to Note 4 for additional information regarding the total shares outstanding as of September 30, 2020. For additional shares reserved
for issuance refer to Note 14 for disclosures on the Warrants and make-whole provision as well as Note 17 for stock-based compensation.

 

Initial
Public Offering

 

On
December 21, 2017, the Corporation completed its Offering and issued the following:

 

		•	12,500,000
                                         Class A Restricted Voting Units, along with 975,000 Class A Restricted Voting Units granted
                                         to the Underwriter, totaling 13,475,000 Class A Restricted Voting Units.

		•	3,696,486
                                         Class B Shares to the Sponsor net of transaction costs and forfeitures.

 

Qualifying
Transaction 

 

On
May 24, 2019, the Corporation completed its Qualifying Transaction. As a result,

 

		•	13,475,000
                                         Class A Restricted Voting Shares, which were previously classified as liabilities, were
                                         converted into Subordinate Voting Shares unless redeemed. 1,000 of the Class A Restricted
                                         Voting shares were redeemed, reducing the unredeemed Class A Restricted Voting Shares
                                         from 13,475,000 to 13,474,000.

		•	3,696,486
                                         Class B Shares were converted into Multiple Voting Shares.

		•	7,983,887
                                         non-voting Exchangeable Shares of CSAC AcquisitionCo were issued as part of the purchase
                                         consideration of the Qualifying Transaction.

 

     37

     

    
 

Ayr
Strategies Inc.

Notes
to the Interim Financial Statements

For
the Three and Nine Months Ended September 30, 2020 and 2019

 

 

13.
SHARE CAPITAL (Continued)

 

Post
Qualifying Transaction

 

The
following activity occurred subsequent to the Qualifying Transaction:

 

		•	340,200
                                         Subordinate Voting Shares were issued in connection with the exercise of Warrants.

		•	389,905
                                         non-voting Exchangeable Shares were issued as part of the make-whole provision liability
                                         as of November 20, 2019 and 614,515 non-voting Exchangeable Shares were issued as part
                                         of the make-whole provision liability on May 18, 2020.

		•	1,222,064
                                         Subordinate Voting Shares were issued in connection with the conversion of 12,220,640
                                         Rights, which were each redeemed for one tenth (1/10) of one Subordinate Voting Share
                                         as of September 30, 2020.

		•	On
                                         October 1, 2019, the Corporation commenced a stock repurchase program to purchase up
                                         to 5% of the total issued and outstanding Subordinate Voting Shares during each twelve-month
                                         period through the facilities of the CSE and other marketplaces. 7,400 Subordinate Voting
                                         Shares were repurchased and cancelled, and 63,800 Subordinate Voting Shares were repurchased
                                         and are held by the Corporation as treasury shares, under the stock repurchase program
                                         as of September 30, 2020.

		•	2,940,337
                                         Exchangeable Shares were converted into Subordinate Voting Shares as of September 30,
                                         2020.

 

As
of September 30, 2020, the Corporation had 1,516,548 Rights outstanding which can each be redeemed for one tenth (1/10) of one
Subordinate Voting Share, for no additional consideration. During the nine months ended September 30, 2020, the Corporation had
1,623,790 Rights redeemed.

 

14.
DERIVATIVE LIABILITIES

 

Fair
value of Warrants

 

As
of September 30, 2020 and December 31, 2019, the Corporation had 16,018,858 and 16,060,858, respectively, Warrants issued and
outstanding, which are each exercisable, on a one-for-one basis, into Subordinate Voting Shares.

 

Each
Warrant became exercisable for one Subordinate Voting Share, at a price of CDN$11.50 per share, commencing 65 days after the completion
of the Qualifying Transaction (subject to adjustments, as further described below), and will expire on the day that is five years
after the completion of the Qualifying Transaction (being May 24, 2024), or may expire earlier if the expiry date of the Warrants
is accelerated.

 

Warrants
- Issued and Outstanding

	 	 	Number	 	 	Amount	 
	 	 	 	#	 	 	 	$	 
	Balance as of December 31, 2018	 	 	16,359,058	 	 	 	23,983,372	 
	Exercise of Warrants	 	 	(298,200	)	 	 	(916,389	)
	Fair value and foreign currency adjustments	 	 	 	 	 	 	13,807,141	 
	Balance as of December 31, 2019	 	 	16,060,858	 	 	 	36,874,124	 
	 	 	 	 	 	 	 	 	 
	Exercise of Warrants	 	 	(42,000	)	 	 	(68,224	)
	Fair value and foreign currency adjustments	 	 	 	 	 	 	28,324,470	 
	Balance as of September 30, 2020	 	 	16,018,858	 	 	 	65,130,370	 

 

The
Warrants’ bid price as of September 30, 2020 and December 31, 2019 was $4.07 (CDN$5.44) and $2.30 (CDN$3.00), respectively.

 

    38 

     

    

 

Ayr
Strategies Inc.

Notes
to the Interim Financial Statements

For
the Three and Nine Months Ended September 30, 2020 and 2019

 

 

14.
DERIVATIVE LIABILITIES (Continued)

 

Make-Whole
Provision and Contingent Consideration

 

As
part of the purchase price of the Qualifying Transaction, the Corporation entered into make-whole provisions relating to the Exchangeable
Shares issued. The Corporation uses a Monte-Carlo simulation model to estimate the fair value of the make-whole provision liability.
Upon initial recognition, the Corporation recorded a derivative liability of $2,813,718. On November 20, 2019, the Corporation
issued a total of 389,905 Exchangeable Shares with a value of $3,245,180 as a partial settlement of the make-whole liability.
On May 18, 2020, the Corporation issued the remaining shares related to the make-whole liability, a total of 614,515 Exchangeable
Shares with a value of $3,765,927. As of September 30, 2020 and December 31, 2019, the Corporation revalued the make-whole provision
for a value of $nil and $3,540,803, respectively, which is included in purchase consideration payable on the interim statements
of financial position.

 

The
earn-out provision related to the acquisition of Sira is measured at fair value by taking a probability-weighted average of possible
outcomes, as estimated by management, and discounting the payment to a present value. Upon initial recognition, the fair value
of the liability was recorded as $21,821,132. As of September 30, 2020 and December 31, 2019, the fair value of the contingent
consideration was $23,744,258 and $22,656,980, respectively.

 

The
fair value adjustment relating to derivative liabilities has been reflected in the interim financial statements under “Unrealized
(loss) gain - changes to fair value of financial liabilities” as detailed below: 

	 	 	Three Months Ended	 	 	Nine Months Ended	 
	 	 	September 30, 2020	 	 	September 30, 2019	 	 	September 30, 2020	 	 	September 30, 2019	 
	 	 	 	$	 	 	 	$	 	 	 	$	 	 	 	$	 
	(Loss) Gain from FV adjustment on Warrants	 	 	(37,842,107	)	 	 	43,886,295	 	 	 	(28,008,959	)	 	 	(17,092,093	)
	Loss from FV adjustment on Class A Restricted Voting Shares	 	 	-	 	 	 	(3,458,987	)	 	 	-	 	 	 	(101,455,740	)
	Loss from FV adjustment on make-whole provision	 	 	-	 	 	 	-	 	 	 	(225,125	)	 	 	(3,458,987	)
	Loss from FV adjustment on contingent consideration	 	 	(368,102	)	 	 	-	 	 	 	(1,087,276	)	 	 	-	 
	Total	 	 	(38,210,209	)	 	 	40,427,308	 	 	 	(29,321,360	)	 	 	(122,006,820	)

 

15.
CAPITAL MANAGEMENT

 

The
Corporation’s objectives when managing capital are to ensure sufficient liquidity to support its financial obligations and
to execute its operating and strategic plans, managing healthy liquidity reserves and access to capital.

 

The
Corporation manages its capital structure and makes adjustments to it based on the funds available to the Corporation in order
to support business development. The directors do not establish quantitative return on capital criteria for management, but rather
rely on the expertise of the Corporation’s management to sustain future development of the business. In order to carry out
the planned business development and pay for administrative costs, the Corporation will spend its existing working capital and
seek to raise additional amounts, as needed. There were no changes in the Corporation’s approach to capital management during
the periods ended September 30, 2020 and December 31, 2019. The Corporation is not subject to externally imposed capital requirements
apart from the need to maintain its listing in accordance with stock exchange requirements.

 

The
Corporation raises capital, as necessary, to meet its needs and take advantage of perceived opportunities and, therefore, does
not have a numeric target for its capital structure. Management reviews its capital management approach on an ongoing basis and
believes that this approach, given the relative size of the Corporation, is reasonable. The Corporation plans to use existing
funds, as well as funds from the future sale of products, to fund operations and expansion activities. However, the Corporation
may attempt to issue new shares or issue new debt for acquisitions. There can be no assurance that the Corporation will be able
to continue raising capital in this manner.

 

    39 

     

    

 

Ayr
Strategies Inc.

Notes
to the Interim Financial Statements

For
the Three and Nine Months Ended September 30, 2020 and 2019

 

 

16.
GENERAL AND ADMINISTRATIVE

 

General
and administrative expenses were comprised of: 

	 	 	Three Months Ended	 	 	Nine Months Ended	 
	 	 	September 30, 2020	 	 	September 30, 2019	 	 	September 30, 2020	 	 	September 30, 2019	 
	 	 	 	$	 	 	 	$	 	 	 	$	 	 	 	$	 
	Public company filing and listing costs	 	 	105,058	 	 	 	27,272	 	 	 	196,191	 	 	 	26,112	 
	Compensation and benefits	 	 	3,945,958	 	 	 	3,553,444	 	 	 	11,771,087	 	 	 	4,855,012	 
	Rent and utilities	 	 	165,876	 	 	 	292,516	 	 	 	726,749	 	 	 	354,027	 
	Taxes and licenses	 	 	1,048,704	 	 	 	683,251	 	 	 	2,714,958	 	 	 	887,045	 
	Professional and consulting fees	 	 	899,899	 	 	 	1,515,436	 	 	 	2,627,306	 	 	 	1,835,176	 
	Office expenses	 	 	435,471	 	 	 	420,481	 	 	 	1,045,870	 	 	 	675,808	 
	Computer, software, and internet expenses	 	 	177,709	 	 	 	113,792	 	 	 	568,847	 	 	 	139,198	 
	Bank charges and fees	 	 	144,416	 	 	 	76,418	 	 	 	393,608	 	 	 	106,395	 
	Insurance	 	 	637,812	 	 	 	528,229	 	 	 	1,565,882	 	 	 	681,810	 
	Security	 	 	414,764	 	 	 	281,019	 	 	 	1,108,355	 	 	 	394,093	 
	Management fee	 	 	1,157,679	 	 	 	905,334	 	 	 	3,479,939	 	 	 	996,697	 
	Travel, meals, and entertainment	 	 	87,577	 	 	 	-	 	 	 	220,483	 	 	 	-	 
	Other	 	 	98,994	 	 	 	439,742	 	 	 	665,582	 	 	 	836,809	 
	Total	 	 	9,319,917	 	 	 	8,836,934	 	 	 	27,084,857	 	 	 	11,788,182	 

 

17.
STOCK-BASED COMPENSATION

 

In
connection with the Qualifying Transaction the Corporation has adopted an Equity Incentive Plan (“the Plan”), which
allows the Corporation to compensate qualifying plan participants through stock-based arrangements and provide them with opportunities
for stock ownership in the Corporation, thereby aligning the interests of such persons with the Corporation’s shareholders.
Under the Plan the Corporation may grant stock options, restricted stock units, performance compensation awards, and unrestricted
stock bonuses or purchases. There were no issuances of vested shares from the Plan as of September 30, 2020 and December 31, 2019.

 

In
addition, CSAC AcquisitionCo established a Restricted Stock Plan (the “AcquisitionCo Plan”) to facilitate the granting
of restricted Exchangeable Shares. Any shares issued under the AcquisitionCo Plan will reduce the number of Subordinate Voting
Shares that may be awarded under the Equity Incentive Plan on a one-for-one basis.

 

During
the three and nine months ended September 30, 2020, the Corporation recognized stock-based compensation expense of $4,700,795
and $25,949,556 relating to the 2019 issuance of 3,837,150 and 2020 issuance of 400,000 restricted Exchangeable Shares. During
the three and nine months ended September 30, 2019, the Corporation recognized a stock-based compensation expense of $11,062,444
and $15,582,582 relating to the 2019 issuance of restricted Exchangeable Shares. The stock-based compensation expense is based
on the Corporation’s share price on the date of the grant. The restricted Exchangeable Shares vest over a two to three year
period. During the three and nine months ended September 30, 2020, there were no forfeitures of Exchangeable Shares. 

 

18.
COMMITMENTS AND CONTINGENCIES

 

Contingencies

 

The
Corporation’s operations are subject to a variety of local and state regulations. Failure to comply with one or more of
those regulations could result in fines, restrictions on its operations, or losses of permits and/or licenses that could result
in the Corporation ceasing operations. While management of the Corporation believes that the Corporation is in compliance, in
all material respects, with applicable local and state regulations as of September 30, 2020, cannabis regulations continue to
evolve and are subject to differing interpretations. As a result, the Corporation may be subject to regulatory fines, penalties,
or restrictions in the future.

 

    40 

     

    

 

Ayr
Strategies Inc.

Notes
to the Interim Financial Statements

For
the Three and Nine Months Ended September 30, 2020 and 2019

 

 

18.
COMMITMENTS AND CONTINGENCIES (Continued)

 

Claims
and Litigation

 

From
time to time, the Corporation may be involved in litigation relating to claims arising out of operations in the normal course
of business. As of September 30, 2020, there were no material pending or threatened lawsuits that could reasonably be expected
to have a material effect on the results of the Corporation’s operations. There are also no proceedings in which any of
the Corporation’s directors, officers or affiliates are an adverse party or have a material interest adverse to the Corporation’s
interest.

 

Acquisitions
 – Definitive Agreements and Term Sheets 

 

Massachusetts

 

On
February 26, 2020, the Corporation entered a binding term sheet with Eskar Holdings, LLC, to acquire 100% of the membership interests
in Eskar Holdings LLC. Subsequent to the signing of the term sheet, the Corporation entered both a definitive membership interest
purchase agreement and purchase and sale agreement. Pursuant to the agreements, the Corporation will be acquiring rights to legally
open and operate a adult-use cannabis licensed retail store along with the purchase of the property located in the Town of Watertown,
Massachusetts. The Corporation has agreed to pay a purchase price consisting of $1 million cash and 4% non-voting interest in
the net profits of Eskar Holdings, LLC. In addition, for the purchase of the property the Corporation has agreed to pay a purchase
price of $5 million cash. The closing of the acquisition is subject to, among other things, issuance of the Host Community Agreement
and regulatory approval.

 

Pennsylvania

 

On
August 25, 2020, the Corporation entered a binding term sheet to acquire 100% of the membership interests in CannTech PA, LLC.
Pursuant to the term sheet, the Corporation will be acquiring rights to legally operate six retail dispensaries along with a 143,000
square foot cultivation and production facility. CannTech PA, LLC operates in the medical cannabis market in Pennsylvania. The
Corporation has agreed to pay a purchase price consisting of cash, debt, Exchangeable Shares, and other consideration totaling
an aggregate value of approximately $57 million. The purchase price is inclusive of $2.4 million of bridge financing and a $600,000
deposit the Corporation has provided to the target company during the three months ended September 30, 2020. The term sheet is
a binding agreement with respect to the terms and conditions and intended to serve as an outline of the proposed principal terms
and conditions to be included in the final membership interest purchase agreement documents. In addition, the Corporation will
on closing receive an option to acquire certain real estate at its fair market value.

 

On
September 30, 2020, the Corporation entered a definitive purchase agreement to acquire 100% of the membership interests in DocHouse
LLC. Pursuant to the membership interest purchase agreement, the Corporation will be acquiring rights to operate a grower and
processer permit in the medical cannabis market in Pennsylvania. In addition, the real property where the partially completed
38,400 square foot licensed facility is to be operated will be assigned to DocHouse LLC immediately after closing by a related
party of DocHouse LLC. The Corporation has agreed to pay a purchase price of cash, deferred cash, debt and Subordinate Voting
Shares totaling an aggregate value of approximately $21 million, which includes the transfer of real property. The purchase price
is inclusive of bridge financing up to $3 million that the Corporation will provide to the target company.

 

    41 

     

    

 

Ayr
Strategies Inc.

Notes
to the Interim Financial Statements

For
the Three and Nine Months Ended September 30, 2020 and 2019

 

 

18.
COMMITMENTS AND CONTINGENCIES (Continued)

 

Acquisitions
 – Definitive Agreements and Term Sheets (continued)

 

Ohio

 

On
September 20, 2020, the Corporation entered a non-binding term sheet with Copperstate Farms, LLC to acquire 100% of the membership
interests in Greenlight Management, LLC. Pursuant to the term sheet, the Corporation will be acquiring rights to exclusively manage
the operations of Parma Wellness Center LLC, a recipient of a Tier 1 Cultivator Provisional License in the medical cannabis market
in Ohio.

 

In
addition, the Corporation will be acquiring 100% of the membership interests in Greenlight Holdings, LLC which owns the land and
building where the 58,000 square foot facility in which the licensed entity operates. The Corporation has agreed to pay a purchase
price consisting of cash, an escrow deposit and convertible secured promissory note totaling an aggregate value of $17 million.
The escrow deposit of $500,000 was paid subsequent to the signing of the term sheet.

 

On
September 30, 2020, the Corporation entered an asset purchase agreement with Vireo Health International, Inc. and its affiliated
company, Ohio Medical Solutions, LLC, to acquire a 9,000 square foot medical marijuana processor facility that is licensed as
part of the Ohio medical cannabis program. The aggregate purchase price for the assets is approximately $1.2 million of cash.

 

The
closing for all acquisitions is subject to, among other things, regulatory approval and due diligence. As of September 30, 2020,
the acquisitions have not closed.

 

19.
FINANCIAL RISK FACTORS

 

(a)
Fair Value

 

Fair
value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market
participants at the measurement date. The fair value measurement is based on the presumption that the transaction to sell the
asset or transfer the liability takes place either in the principal market for the asset or liability or, in the absence of a
principal market, in the most advantageous market for the asset or liability. The principal or the most advantageous market must
be accessible by the Corporation.

 

The
fair value of an asset or a liability is measured using the assumptions that market participants would use when pricing the asset
or liability, assuming that market participants act in their economic best interest. A fair value measurement of a non-financial
asset takes into account a market participant's ability to generate economic benefits from the asset’s highest and best
use or by selling it to another market participant that would utilize the asset in its highest and best use.

 

The
Corporation uses valuation techniques that are considered to be appropriate in the circumstances and for which there is sufficient
data with unobservable inputs.

 

    42 

     

    

 

Ayr
Strategies Inc. 

Notes
to the Interim Financial Statements 

For
the Three and Nine Months Ended September 30, 2020 and 2019

 

 

19.
FINANCIAL RISK FACTORS (Continued)

 

(a)
Fair Value (continued)

 

All
assets and liabilities for which fair value is measured or disclosed in the interim financial statements are categorized within
the fair value hierarchy. This is described, as follows, based on the lowest level input that is significant to the fair value
measurement as a whole:

 

•
Level 1 inputs are quoted prices in active markets for identical assets or liabilities at the measurement date.

 

•
Level 2 inputs are observable inputs other than quoted prices included within Level 1, such as quoted prices for similar assets
or liabilities in active markets, quoted prices for identical assets or liabilities in markets that are not active, or other inputs
that are observable directly or indirectly.

 

•
Level 3 inputs are unobservable inputs for the asset or liability that reflect the reporting entity’s own assumptions and
are not based on observable market data.

 

The
hierarchy used to fair value the financial instruments as of September 30, 2020 and December 31, 2019 were as follows:

 

		•	Level
                                         1: Cash and cash equivalents, deposits, and warrant liability

		•	Level
                                         2: None

		•	Level
                                         3: Make-whole provisions and contingent consideration issued as purchase consideration
                                         relating to business combinations

 

There
were no transfers between levels in the hierarchy. For financial assets and liabilities not measured at fair value, their carrying
value is considered to approximate fair value due to their market terms.

 

	 	 	Carrying values	 
	Financial assets	 	FVTPL	 	 	AC	 	 	Total	 
	September 30, 2020	 	$	 	 	$	 	 	$	 
	Cash and cash equivalents	 	 	23,180,198	 	 	 	-	 	 	 	23,180,198	 
	Deposits	 	 	1,158,367	 	 	 	-	 	 	 	1,158,367	 
	Accounts receivable	 	 	-	 	 	 	2,929,522	 	 	 	2,929,522	 
	Notes receivable	 	 	-	 	 	 	3,000,000	 	 	 	3,000,000	 
	 	 	 	24,338,565	 	 	 	5,929,522	 	 	 	30,268,087	 
	 	 	 	 	 	 	 	 	 	 	 	 	 
	December 31, 2019	 	 	 	 	 	 	 	 	 	 	 	 
	Cash and cash equivalents	 	 	8,403,196	 	 	 	-	 	 	 	8,403,196	 
	Deposits	 	 	740,666	 	 	 	-	 	 	 	740,666	 
	Accounts receivable	 	 	-	 	 	 	2,621,239	 	 	 	2,621,239	 
	 	 	 	9,143,862	 	 	 	2,621,239	 	 	 	11,765,101	 

 

    43 

     

    

 

Ayr
Strategies Inc.

Notes
to the Interim Financial Statements

For
the Three and Nine Months Ended September 30, 2020 and 2019

 

 

19.
FINANCIAL RISK FACTORS (Continued)

 

(a)
Fair Value (continued)

 

	 	 	 	Carrying values	 
	Financial liabilities	 	 	FVTPL	 	 	 	AC	 	 	 	Total	 
	September 30, 2020	 	 	$	 	 	 	$	 	 	 	$	 
	Warrant liability	 	 	65,130,370	 	 	 	-	 	 	 	65,130,370	 
	Contingent consideration	 	 	23,744,258	 	 	 	-	 	 	 	23,744,258	 
	Trade payables	 	 	-	 	 	 	7,512,946	 	 	 	7,512,946	 
	Accrued liabilities	 	 	-	 	 	 	7,160,365	 	 	 	7,160,365	 
	Accrued interest payable	 	 	-	 	 	 	1,894,747	 	 	 	1,894,747	 
	Debts payable	 	 	-	 	 	 	40,712,924	 	 	 	40,712,924	 
	 	 	 	88,874,628	 	 	 	57,280,982	 	 	 	146,155,610	 
	 	 	 	 	 	 	 	 	 	 	 	 	 
	December 31, 2019	 	 	 	 	 	 	 	 	 	 	 	 
	Warrant liability	 	 	36,874,124	 	 	 	-	 	 	 	36,874,124	 
	Contingent consideration	 	 	22,656,980	 	 	 	-	 	 	 	22,656,980	 
	Make-whole provision	 	 	3,540,803	 	 	 	-	 	 	 	3,540,803	 
	Trade payables	 	 	-	 	 	 	6,806,053	 	 	 	6,806,053	 
	Accrued liabilities	 	 	-	 	 	 	5,123,865	 	 	 	5,123,865	 
	Accrued interest payable	 	 	-	 	 	 	815,662	 	 	 	815,662	 
	Debts payable	 	 	-	 	 	 	43,995,661	 	 	 	43,995,661	 
	 	 	 	63,071,907	 	 	 	56,741,241	 	 	 	119,813,148	 

 

The
Corporation is exposed to credit risk, liquidity risk and interest rate risk. The Corporation’s management oversees the
management of these risks. The Corporation`s management is supported by the members of the Board of Directors that advise on financial
risks and the appropriate financial risk governance framework for the Corporation. The Corporation’s financial risk activities
are governed by policies and procedures and financial risks are identified, measured and managed in accordance with the Corporation’s
policies and the Corporation’s risk appetite.

 

The
Corporation quantified the sensitivity of inputs in relation to the contingent consideration as of September 30, 2020 and December
31, 2019, and would expect the following effect on fair value in the event of changes to the discount rate:

 

	Significant assumption	 	 	Inputs	 	 	 	Sensitivity	 	 	Value at period end 	 
	 	 	 	 	 	 	 	 	 	 	 	September 30,

 2020	 	 	 	December 31,

 2019	 
	 	 	 	 	 	 	 	 	 	 	 	$	 	 	 	$	 
	 	 	 	 	 	 	 	Increase 1%	 	 	 	23,407,146	 	 	 	22,169,349	 
	Discount rate	 	 	6.3	%	 	 	 	 	 	 	 	 	 	 	 	 
	 	 	 	 	 	 	 	Decrease 1%	 	 	 	24,092,304	 	 	 	23,161,325	 

 

(b)
Credit Risk

 

Credit
risk is the risk of unexpected loss if a customer or third party to a financial instrument fails to meet its contractual obligations.
Financial instruments which potentially subject the Corporation to concentrations of credit risk consist of cash and cash equivalents,
deposits and accounts receivable. To address its credit risk arising from cash and cash equivalents and deposits, the Corporation
ensures to keep these balances with reputable financial institutions. The Corporation has not recorded an ECL as all amounts are
considered to be recoverable and are immaterial. The Corporation is not significantly exposed to its accounts receivable due to
its diversified customer base and a stringent collection policy. No ECL has been recorded by the Corporation as all receivables
are expected to be collected and are not significant. As of September 30, 2020 and December 31, 2019, the maximum amount exposed
to credit risks was $29,109,720 and $11,024,435, respectively. The components of accounts receivable as of September 30, 2020
and December 31, 2019 were: 

 

	 	 	 	(In $)	 	 	0-30 days	 	 	31-90 days	 	 	Over 90 days	 	 	Total	 
	Balance, as at September 30, 2020	 	 	 		 	 	 	2,775,181	 	 	 	127,391	 	 	 	26,950	 	 	 	2,929,522	 
	Balance, as at December 31, 2019	 	 	 	 	 	 	 	2,456,226	 	 	 	115,808	 	 	 	49,205	 	 	 	2,621,239	 

 

    44 

     

    

 

Ayr
Strategies Inc.

Notes
to the Interim Financial Statements

For
the Three and Nine Months Ended September 30, 2020 and 2019

 

 

19.
FINANCIAL RISK FACTORS (Continued)

 

(c)
Liquidity Risk

 

Liquidity
risk is the risk that the Corporation is unable to generate or obtain sufficient cash in a cost-effective manner to fund its obligations
as they come due. The Corporation’s approach to managing liquidity risk is to ensure that it will have sufficient liquidity
to meet liabilities when due. The Corporation manages liquidity risk through maintaining sufficient funds on hand and continuously
monitoring forecast and actual cash flows. As of September 30, 2020 and December 31, 2019, all trade payables and accrued liabilities
are due within a year. Refer to Notes 9 and 12 for future lease and debt commitments.

 

(d)
Interest Rate Risk

 

Interest
rate risk is the risk that the fair value or future cash flows of a financial instrument will fluctuate because of changes in
market interest rates. The Corporation is exposed to interest rate risk on its cash and cash equivalents and long-term debts.
Cash and cash equivalents and deposits bear interest at market rates. The Corporation’s debts have fixed rates of interest.
The Corporation does not use any derivative instruments to hedge against interest rate risk and believes that the change in interest
rates will not have a significant impact on its financial results.

 

(e)
Currency Risk

 

The
operating results and financial position of the Corporation are reported in United States dollars. As the Corporation operates
in an international environment, some of the Corporation’s financial instruments and transactions are denominated in currencies
other than the United States dollar. The results of the Corporation’s operations are subject to currency transaction and
translation risks.

 

As
of September 30, 2020 and December 31, 2019, the Corporation had no hedging agreements in place with respect to foreign exchange
rates. The Corporation has not entered into any agreements or purchased any instruments to hedge possible currency risks at this
time. The Corporation believes that a change in exchange rates will not have a significant impact on financial results. The Corporation
performed a sensitivity analysis on the conversion rate applied to Canadian balances: 

	Balance sheet account	 	Value at year end	 	 	Conversion rate	 	 	Sensitivity	 	Effect on fair value, as at	 
	 	 	Dr (Cr.)	 	 	 	 	 	 	 	September 30, 2020	 
	 	 	CDN $	 	 	 	 	 	 	 	$	 
	Cash and cash equivalents	 	 	1,283,828	 	 	 	0.7474	 	 	Increase / Decrease 1%	 	 	9,595	 
	Warrants	 	 	(87,142,588	)	 	 	0.7474	 	 	Increase / Decrease 1%	 	 	(651,304	)

 

    45 

     

    

 

Ayr
Strategies Inc.

Notes
to the Interim Financial Statements

For
the Three and Nine Months Ended September 30, 2020 and 2019

 

 

20.
TAXATION

 

The
Corporation is treated as a United States corporation under section 7874 of the Internal Revenue Code and is expected to be subject
to United States federal income tax. However, the Corporation is expected, regardless of any application of section 7874 of the
U.S. Tax Code, to be treated as a Canadian resident company for Canadian income tax purposes. As a result, the Corporation will
be subject to taxation both in Canada and the United States. The Corporation is also subject to state income taxation in Massachusetts.

 

The
Corporation’s deferred tax liability as of September 30, 2020 and December 31, 2019 was $45,471,419 and $41,077,761, respectively.
The Corporation has recognized deferred tax liabilities on the acquisition date of $44,970,332 largely due to the recognition
of acquired intangible assets, biological assets and PPE. The deferred tax (expense) recovery during the nine months ended September
30, 2020 and 2019 was ($4,393,657) and $2,676,022, respectively.

 

The
Corporation incurred current income tax of $14,941,568 and $4,932,991, respectively, for the nine months ended September 30, 2020
and 2019.

 

21.
SUBSEQUENT EVENTS

 

The
Corporation’s management has evaluated subsequent events up to November 18, 2020, the date the interim financial statements
were issued:

 

		A)	Subsequent
                                         to September 30, 2020, the Corporation entered a binding term sheet to acquire 100% of
                                         the membership interests in Blue Camo, LLC, a vertically integrated cannabis business
                                         in the state of Arizona (operating under the trade name “Oasis”). Pursuant
                                         to the term sheet, the Corporation will be acquiring rights to legally operate three
                                         retail dispensaries along with a 10,000 square feet licensed cultivation and processing
                                         facility as well as an 80,000 square foot cultivation facility currently under development.
                                         The Corporation has agreed to pay upfront consideration of $81 million consisting of
                                         cash, debt and Exchangeable Shares. An additional 2 million Exchangeable Shares may be
                                         payable upon the achievement of established cultivation targets. Furthermore, additional
                                         earn-out consideration in 2021 and 2022 may be paid in Exchangeable Shares, and is contingent
                                         on exceeding financial hurdles in each year, calculated based on a set discount of market
                                         multiples (including non-IFRS measures) at the time of the earn out. The term sheet is
                                         a binding agreement with respect to the terms and conditions and intended to serve as
                                         an outline of the proposed principal terms and conditions to be included in the final
                                         membership interest purchase agreement documents. The closing of the acquisition will
                                         be subject to, among other things, regulatory approval, customary closing conditions
                                         including definitive documentation and the Corporation being satisfied with its due diligence
                                         investigations.

 

		B)	Subsequent
                                         to September 30, 2020, 1,140,315 Warrants were exercised on a one-for-one basis for Subordinate
                                         Voting Shares, at a price of CDN$11.50 per share, for total cash proceeds of CDN$13.1
                                         million.

 

    46

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