Document:

Exhibit
4.2

 

 

 

Ayr
Strategies Inc.

(Formerly
Cannabis Strategies Acquisition Corp.)

CONSOLIDATED
FINANCIAL STATEMENTS

FOR
THE YEARS ENDED DECEMBER 31, 2019 AND 2018

(EXPRESSED
IN UNITED STATES DOLLARS)

 

 

 

    

     

    

 

Ayr
Strategies Inc.

(formerly,
Cannabis Strategies Acquisition Corp.)

Consolidated
Financial Statements

 

December
31, 2019 and 2018

 

	Management’s
    Responsibility for Financial Reporting	1
	 	 
	Independent
    Auditor’s Report	 
	 	 
	Consolidated
    Financial Statements	 
	 	 
	Consolidated
    Statements of Financial Position	4
	 	 
	Consolidated
    Statements of Loss and Comprehensive Loss	5
	 	 
	Consolidated
    Statements of Changes in Shareholders’ Equity (Deficiency)	6
	 	 
	Consolidated
    Statements of Cash Flows	7
	 	 
	Notes
    to the Consolidated Financial Statements	8
    - 53

 

    

     

    

 

MANAGEMENT’S
RESPONSIBILITY FOR 

FINANCIAL
REPORTING

 

Management’s
Responsibility

 

To
the Shareholders of Ayr Strategies Inc. (formerly, Cannabis Strategies Acquisition Corp.):

 

The
accompanying consolidated financial statements and accompanying notes in this report were prepared by management of Ayr Strategies
Inc., reviewed by the Audit Committee and approved by the Board of Directors.

 

Management
is responsible for the preparation of the consolidated financial statements and believes that they fairly present the Corporation’s
financial condition and results of operation in conformity with International Financial Reporting Standards. Management has included
in the Corporation’s consolidated financial statements amounts based on estimates and judgments that it believes are reasonable,
under the circumstances.

 

March
20, 2020

 

	“Jonathan
    Sandelman” (signed)	 	“Charles
    Miles” (signed)
	Director	 	Director

  

    1

     

    

 

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

Consolidated
Statements of Financial Position

(Expressed
in United States Dollars)

 

	 	 	As
    at	 
	 	 		 	 	December
    31, 2018	 
	 	 	December
    31, 2019	 	 	Restated
    (Note 3.23)	 
	 	 	$	 	 	$	 
	ASSETS	 	 	 	 	 	 
	Current	 	 	 	 	 	 
	Cash
    and cash equivalents	 	 	8,403,196	 	 	 	109,952	 
	Accounts
    receivable	 	 	2,621,239	 	 	 	-	 
	Due
    from related parties [Note 13]	 	 	85,000	 	 	 	-	 
	Inventory
    [Note 6]	 	 	13,718,840	 	 	 	-	 
	Biological
    assets [Note 7]	 	 	2,935,144	 	 	 	-	 
	Prepaid
    expenses and other assets	 	 	2,163,329	 	 	 	274,886	 
	 	 	 	29,926,748	 	 	 	384,838	 
	Non-current	 	 	 	 	 	 	 	 
	Restricted
    cash and short-term investments held in escrow [Note 8]	 	 	-	 	 	 	99,684,243	 
	Property,
    plant and equipment [Note 9]	 	 	37,152,861	 	 	 	-	 
	Intangible
    assets [Note 10]	 	 	189,802,136	 	 	 	-	 
	Right-of-use
    assets [Note 11]	 	 	12,315,417	 	 	 	-	 
	Goodwill
    [Note 5]	 	 	84,837,304	 	 	 	-	 
	Equity
    investments [Note 12]	 	 	427,399	 	 	 	-	 
	Other
    assets	 	 	638,394	 	 	 	-	 
	Total
    assets	 	 	355,100,259	 	 	 	100,069,081	 
	 	 	 	 	 	 	 	 	 
	LIABILITIES	 	 	 	 	 	 	 	 
	Current	 	 	 	 	 	 	 	 
	Trade
    payables	 	 	6,806,053	 	 	 	-	 
	Accrued
    liabilities	 	 	5,123,865	 	 	 	2,489,096	 
	Advances
    from related parties [Note 13]	 	 	-	 	 	 	536,382	 
	Lease
    obligations - current portion [Note 11]	 	 	1,087,835	 	 	 	-	 
	Purchase
    consideration payable [Note 5]	 	 	9,831,700	 	 	 	-	 
	Income
    tax payable [Note 23]	 	 	5,202,943	 	 	 	-	 
	Debts
    payable - current portion [Note 14]	 	 	6,628,843	 	 	 	-	 
	 	 	 	34,681,239	 	 	 	3,025,478	 
	Non-current	 	 	 	 	 	 	 	 
	Deferred
    underwriters commission	 	 	-	 	 	 	3,457,154	 
	Deferred
    tax liabilities [Note 23]	 	 	41,077,761	 	 	 	-	 
	Class
    A Restricted Voting Shares subject to redemption	 	 	-	 	 	 	145,694,363	 
	Warrant
    liability [Note 16]	 	 	36,874,124	 	 	 	23,983,372	 
	Lease
    obligations - non-current portion [Note 11]	 	 	13,033,310	 	 	 	-	 
	Contingent
    consideration [Notes 5 and 16]	 	 	22,656,980	 	 	 	-	 
	Debts
    payable - non-current portion [Note 14]	 	 	37,366,818	 	 	 	-	 
	Accrued
    interest payable	 	 	815,662	 	 	 	-	 
	Total
    liabilities	 	 	186,505,894	 	 	 	176,160,367	 
	 	 	 	 	 	 	 	 	 
	SHAREHOLDERS’
    EQUITY (DEFICIENCY)	 	 	 	 	 	 	 	 
	Share
    capital [Note 15]	 	 	382,210,006	 	 	 	1,821,997	 
	Treasury
    stock	 	 	(245,469	)	 	 	-	 
	Contributed
    surplus	 	 	28,879,225	 	 	 	-	 
	Accumulated
    other comprehensive income	 	 	3,265,610	 	 	 	3,422,120	 
	Deficit	 	 	(245,515,007	)	 	 	(81,335,403	)
	Total
    shareholders’ equity (deficiency)	 	 	168,594,365	 	 	 	(76,091,286	)
	Total
    liabilities and shareholders’ equity	 	 	355,100,259	 	 	 	100,069,081	 

 

Nature
of operations [Note 1]

Commitments
and Contingencies [Note 21]

Subsequent
events [Note 24]

 

Approved
on behalf of the Board:

 

	“Jonathan
    Sandelman” (signed)	 	“Charles
    Miles” (signed)
	Director	 	Director

 

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

 

    4

     

    

 

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

Consolidated
Statements of Loss and Comprehensive loss

(Expressed
in United States Dollars)

 

	 	 	Year
    Ended	 
	 	 		 	 	December
    31, 2018	 
	 	 	December
    31, 2019	 	 	Restated
    (Note 3.23)	 
	 	 	$	 	 	$	 
	 	 	 	 	 	 	 
	Revenues,
    net of discounts	 	 	75,195,556	 	 	 	-	 
	 	 	 	 	 	 	 	 	 
	Cost
    of goods sold excluding fair value items	 	 	37,009,909	 	 	 	-	 
	Incremental
    costs to acquire cannabis inventory in a business combination [Note 5]	 	 	3,764,678	 	 	 	-	 
	Cost
    of goods sold	 	 	40,774,587	 	 	 	-	 
	 	 	 	 	 	 	 	 	 
	Gross
    profit before fair value adjustments	 	 	34,420,969	 	 	 	-	 
	 	 	 	 	 	 	 	 	 
	Fair
    value adjustment on sale of cultivated inventory	 	 	(18,272,212	)	 	 	-	 
	Unrealized
    gain on biological asset transformation [Note 7]	 	 	10,108,105	 	 	 	-	 
	 	 	 	 	 	 	 	 	 
	Gross
    profit	 	 	26,256,862	 	 	 	-	 
	 	 	 	 	 	 	 	 	 
	Expenses	 	 	 	 	 	 	 	 
	General
    and administrative [Note 18]	 	 	19,036,452	 	 	 	3,241,993	 
	Sales
    and marketing	 	 	1,345,009	 	 	 	-	 
	Depreciation
    [Notes 9 and 11]	 	 	1,392,994	 	 	 	-	 
	Amortization
    [Note 10]	 	 	7,222,595	 	 	 	-	 
	Stock-based
    compensation [Note 20]	 	 	28,879,225	 	 	 	-	 
	Acquisition
    expense [Note 5]	 	 	5,847,800	 	 	 	-	 
	Total
    expenses	 	 	63,724,075	 	 	 	3,241,993	 
	 	 	 	 	 	 	 	 	 
	Loss
    from operations	 	 	(37,467,213	)	 	 	(3,241,993	)
	 	 	 	 	 	 	 	 	 
	Other
    (expense) income	 	 	 	 	 	 	 	 
	Share
    of loss on equity investments [Note 12]	 	 	(72,600	)	 	 	-	 
	Transaction
    costs	 	 	-	 	 	 	(454,288	)
	Foreign
    exchange	 	 	(141,106	)	 	 	-	 
	Unrealized
    loss - changes to fair value of financial liabilities [Note 16]	 	 	(119,235,147	)	 	 	(72,351,356	)
	Interest
    expense	 	 	(3,035,492	)	 	 	-	 
	Interest
    income	 	 	404,835	 	 	 	932,867	 
	Other	 	 	202,610	 	 	 	-	 
	Total
    other expense	 	 	(121,876,900	)	 	 	(71,872,777	)
	 	 	 	 	 	 	 	 	 
	Loss
    before income tax	 	 	(159,344,113	)	 	 	(75,114,770	)
	 	 	 	 	 	 	 	 	 
	Current
    tax [Note 23]	 	 	(8,728,061	)	 	 	-	 
	Deferred
    tax [Note 23]	 	 	3,892,570	 	 	 	-	 
	 	 	 	 	 	 	 	 	 
	Net
    loss	 	 	(164,179,604	)	 	 	(75,114,770	)
	 	 	 	 	 	 	 	 	 
	Foreign
    currency translation adjustment	 	 	(156,510	)	 	 	3,504,595	 
	 	 	 	 	 	 	 	 	 
	Net
    loss and comprehensive loss	 	 	(164,336,114	)	 	 	(71,610,175	)
	 	 	 	 	 	 	 	 	 
	Basic
    and diluted net loss per share [Note 19]	 	 	(9.43	)	 	 	(20.26	)
	 	 	 	 	 	 	 	 	 
	 	 	 	 	 	 	 	 	 
	Weighted
    average number of shares outstanding (basic and diluted) [Note 19]	 	 	17,404,742	 	 	 	3,707,710	 

 

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

 

    5

     

    

 

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

Consolidated
Statements of Changes in Shareholders’ Equity (Deficiency)

(Expressed
in United States Dollars)

 

	 	 	Share
    Capital	 	Treasury
    Stock	 	 	 	Accumulated
    	 	Deficit	 	Total
	 	 	Class
    B shares	 	Multiple
    Voting Shares	 	Subordinate
    Voting Shares	 	Exchangeable
    Shares	 	 	 	 	 	Contributed	 	other

    comprehensive	 	 	 	 
	 	 	Number	 	Amount	 	Number	 	Amount	 	Number	 	Amount	 	Number	 	Amount	 	Number	 	Amount	 	surplus	 	income
    (loss)	 	 	 	 
	 	 	#	 	$	 	#	 	$	 	#	 	$	 	#	 	$	 	#	 	$	 	$	 	$	 	$	 	$
	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 
	Balance,
    December 31, 2018 - Restated (Note 3.23)	 	3,696,486	 	1,821,997	 	-	 	-	 	-	 	-	 	-	 	-	 	-	 	-	 	-	 	3,422,120	 	(81,335,403)	 	(76,091,286)
	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 
	Share
    exchange - Qualifying Transaction [Notes 1 and 5]	 	(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 5]	 	-	 	-	 	-	 	-	 	-	 	-	 	7,983,887	 	125,421,479	 	-	 	-	 	-	 	-	 	-	 	125,421,479
	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 
	Stock-based
    compensation [Note 20]	 	-	 	-	 	-	 	-	 	-	 	-	 	-	 	-	 	-	 	-	 	28,879,225	 	-	 	-	 	28,879,225
	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 
	Exercise
    of Rights [Note 1]	 	-	 	-	 	-	 	-	 	1,059,685	 	-	 	-	 	-	 	-	 	-	 	-	 	-	 	-	 	-
	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 
	Exercise
    of Warrants [Note 1]	 	-	 	-	 	-	 	-	 	298,200	 	3,376,539	 	-	 	-	 	-	 	-	 	-	 	-	 	-	 	3,376,539
	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 
	Share
    issuance - make-whole [Note 16]	 	-	 	-	 	-	 	-	 	-	 	-	 	389,905	 	3,245,180	 	-	 	-	 	-	 	-	 	-	 	3,245,180
	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 
	Repurchase
    of Subordinate Voting Shares [Note 1]	 	-	 	-	 	-	 	-	 	(7,400)	 	(66,205)	 	-	 	-	 	(29,500)	 	(245,469)	 	-	 	-	 	-	 	(311,674)
	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 
	Net
    loss for the year	 	-	 	-	 	-	 	-	 	-	 	-	 	-	 	-	 	-	 	-	 	-	 	-	 	(164,179,604)	 	(164,179,604)
	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 
	Foreign
    currency translation adjustment	 	-	 	-	 	-	 	-	 	-	 	-	 	-	 	-	 	-	 	-	 	-	 	(156,510)	 	-	 	(156,510)
	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 
	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
	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 
	Balance,
    December 31, 2017 - Restated (Note 3.23)	 	3,912,110	 	1,738,590	 	-	 	-	 	-	 	-	 	-	 	-	 	-	 	-	 	-	 	(82,475)	 	(6,220,633)	 	(4,564,518)
	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 
	Issuance
    of Class B units to Sponsor	 	12,188	 	95,399	 	-	 	-	 	-	 	-	 	-	 	-	 	-	 	-	 	-	 	-	 	-	 	95,399
	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 
	Allocation
    of proceeds received pursuant to the offering, over-allotment
    option and attributed to warrants	 	-	 	(7,155)	 	-	 	-	 	-	 	-	 	-	 	-	 	-	 	-	 	-	 	-	 	-	 	(7,155)
	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 
	Transaction
    costs	 	-	 	(4,837)	 	-	 	-	 	-	 	-	 	-	 	-	 	-	 	-	 	-	 	-	 	-	 	(4,837)
	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 
	Forfeiture
    of founders Class B shares	 	(227,812)	 	-	 	-	 	-	 	-	 	-	 	-	 	-	 	-	 	-	 	-	 	-	 	-	 	-
	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 
	Net
    loss for the year	 	-	 	-	 	-	 	-	 	-	 	-	 	-	 	-	 	-	 	-	 	-	 	-	 	(75,114,770)	 	(75,114,770)
	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 
	Foreign
    currency translation adjustment	 	-	 	-	 	-	 	-	 	-	 	-	 	-	 	-	 	-	 	-	 	-	 	3,504,595	 	-	 	3,504,595
	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 
	Balance,
    December 31, 2018 - Restated (Note 3.23)	 	3,696,486	 	1,821,997	 	-	 	-	 	-	 	-	 	-	 	-	 	-	 	-	 	-	 	3,422,120	 	(81,335,403)	 	(76,091,286)

 

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

 

    6

     

    

 

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

Consolidated
Statements of Cash Flows

(Expressed
in United States Dollars)

 

	 	 	Year
    Ended
	 	 		 	 	December
    31, 2018	 
	 	 	 December
    31, 2019	 	 	Restated
    (Note 3.23)	 
	 	 	$	 	 	$	 
	Operating
    activities	 	 	 	 	 	 
	Net
    loss	 	 	(164,179,604	)	 	 	(75,114,770	)
	Adjustments
    for:	 	 	 	 	 	 	 	 
	Acquisition
    costs associated with financing activities	 	 	129,235	 	 	 	454,288	 
	Net
    unrealized loss on changes in the fair value of financial liabilities	 	 	119,235,147	 	 	 	72,351,356	 
	Stock-based
    compensation	 	 	28,879,225	 	 	 	-	 
	Depreciation	 	 	2,172,373	 	 	 	-	 
	Amortization
    on intangible assets	 	 	8,137,864	 	 	 	-	 
	Share
    of loss on equity investments	 	 	72,600	 	 	 	-	 
	Incremental
    costs to acquire cannabis inventory in a business combination	 	 	3,764,678	 	 	 	-	 
	Fair
    value adjustment on sale of cultivated inventory	 	 	18,272,212	 	 	 	-	 
	Unrealized
    gain on biological asset transformation	 	 	(10,108,105	)	 	 	-	 
	Deferred
    tax benefit	 	 	(3,892,570	)	 	 	-	 
	Interest
    accretion	 	 	1,652,510	 	 	 	-	 
	Interest
    income	 	 	-	 	 	 	(932,867	)
	Changes
    in non-cash operations, net of business acquisition:	 	 	 	 	 	 	 	 
	Accounts
    receivable	 	 	(1,308,328	)	 	 	-	 
	Inventory
    and biological assets	 	 	(5,809,848	)	 	 	-	 
	Prepaid
    expenses and other assets	 	 	(1,459,072	)	 	 	(272,021	)
	Trade
    payables	 	 	2,992,073	 	 	 	-	 
	Accrued
    liabilities	 	 	(179,574	)	 	 	2,195,529	 
	Income
    tax payable	 	 	5,202,943	 	 	 	-	 
	Cash
    provided by (used in) operating activities	 	 	3,573,759	 	 	 	(1,318,485	)
	 	 	 	 	 	 	 	 	 
	Investing
    activities	 	 	 	 	 	 	 	 
	Transfer
    of (Investment in) restricted cash and short term investments held in escrow and interest income	 	 	99,684,243	 	 	 	(7,526,058	)
	Purchase
    of property, plant and equipment	 	 	(14,417,635	)	 	 	-	 
	Deferred
    underwriters commission paid	 	 	(3,457,154	)	 	 	263,415	 
	Cash
    paid for business combinations, net of cash acquired	 	 	(74,714,171	)	 	 	-	 
	Cash
    paid for business combinations, working capital	 	 	(547,042	)	 	 	-	 
	Payments
    for interests in equity accounted investments	 	 	(500,000	)	 	 	-	 
	Advances
    (to) from related corporation	 	 	(809,191	)	 	 	120,105	 
	Cash
    provided by (used in) investing activities	 	 	5,239,050	 	 	 	(7,142,538	)
	 	 	 	 	 	 	 	 	 
	Financing
    activities	 	 	 	 	 	 	 	 
	Proceeds
    from issuance of Class A Restricted Voting Shares and Class B shares	 	 	-	 	 	 	8,328,708	 
	Proceeds
    from exercise of Warrants	 	 	2,460,150	 	 	 	-	 
	Redemption
    of Class A Restricted Voting Shares	 	 	(7,519	)	 	 	-	 
	Repayments
    of debts payable	 	 	(2,879,329	)	 	 	-	 
	Repayments
    of lease obligations (principal portion)	 	 	(763,878	)	 	 	-	 
	Repurchase
    of Subordinate Voting Shares	 	 	(311,674	)	 	 	-	 
	Cash
    (used in) provided by financing activities	 	 	(1,502,250	)	 	 	8,328,708	 
	 	 	 	 	 	 	 	 	 
	Net
    increase (decrease) in cash	 	 	7,310,559	 	 	 	(132,315	)
	Effect
    of foreign currency translation	 	 	982,685	 	 	 	(1,180,907	)
	Cash
    and cash equivalents, beginning of the year	 	 	109,952	 	 	 	1,423,174	 
	Cash
    and cash equivalents, end of the year	 	 	8,403,196	 	 	 	109,952	 
	 	 	 	 	 	 	 	 	 
	Supplemental
    disclosure of cash flow information:	 	 	 	 	 	 	 	 
	Interest
    paid during the year	 	 	1,679,612	 	 	 	-	 
	Taxes
    paid during the year	 	 	3,525,118	 	 	 	-	 

 

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

 

    7

     

    

 

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

Notes to the Consolidated Financial Statements

For the Year Ended December 31, 2019 and 2018

 

 

		1.	NATURE
OF OPERATIONS (EXPRESSED IN USD UNLESS OTHERWISE INDICATED)

 

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 an initial anchor 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. 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 Corporation 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 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”). 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”) in the U.S. and traded under the symbol “CBAQF”.
On July 5, 2019, the Corporation was approved to change its OTC symbol to “AYRSF”.

 

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
December 31, 2018, the Corporation changed its financial year end to December 31 to better synchronize its financial reporting
with that of its proposed target 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.”.

 

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.

 

    8

     

    

 

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

Notes to the Consolidated Financial Statements

For the Year Ended December 31, 2019 and 2018

 

 

		1.	NATURE
OF OPERATIONS (EXPRESSED IN USD UNLESS OTHERWISE INDICATED) (Continued)

 

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).

 

Each
Class A Restricted Voting Unit commenced trading on December 21, 2017 on the NEO Exchange under the symbol “CSA.UN”,
and separated into its underlying Class A Restricted Voting Share, Warrant and Right following the close of business on January
30, 2018, (40 days following the closing of the Offering). Until closing of the Qualifying Transaction, the Class A Restricted
Voting Units, the Warrants (including the Founders’ Warrants (as defined below) and the Warrants underlying the Class B
Units (as defined below)) and the Rights traded under the symbols “CSA.A”, “CSA.WT” and “CSA.RT”,
respectively. The Class B Shares issued to the Founders (as defined below) and the Class B Units issued to the Sponsor (as defined
below) were not listed on the NEO Exchange.

 

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
were 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.

 

The
proceeds of CDN$134,750,000 from the Offering (including the partial exercise of the Over-Allotment Option) were held by Odyssey
Trust Corporation, acting as escrow agent, in an escrow account (the “Escrow Account”) at a Canadian chartered bank
or subsidiary thereof, in accordance with the escrow agreement. Subject to applicable law and payment of certain taxes, permitted
redemptions and certain expenses, as further described herein, none of the funds held in the Escrow Account were permitted to
be released to the Corporation prior to the closing of the Qualifying Transaction. The escrowed funds were held to enable the
Corporation to: (i) satisfy redemptions made by holders of Class A Restricted Voting Shares; (ii) fund the Qualifying Transaction
with the net proceeds following payment of any such redemptions and deferred underwriting commissions, and/or (iii) pay taxes
on amounts earned on the escrowed funds and certain permitted expenses. Such escrowed funds and all amounts earned, subject to
such obligations and applicable law, were assets of the Corporation. The deferred underwriting commissions were paid through the
escrow account on completion of the Qualifying Transaction.

 

    9

     

    

 

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

Notes to the Consolidated Financial Statements

For the Year Ended December 31, 2019 and 2018

 

 

		1.	NATURE
OF OPERATIONS (EXPRESSED IN USD UNLESS OTHERWISE INDICATED) (Continued)

 

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”).

 

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 (on July 28, 2019) and will expire on the day that is five years after the completion of the Qualifying Transaction
(being May 24, 2024), and will (except in the case of certain Warrants held by the Sponsor) 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).

 

In
addition to regulatory approvals, consummation of the Qualifying Transaction required approval by (i) a majority of the directors
unrelated to the Qualifying Transaction, and (ii) a majority of the holders of the Class A Restricted Voting Shares and Class
B Shares, voting together as if they were a single class of shares. Approval was obtained at a shareholders meeting to consider
the Qualifying Transaction, held on March 18, 2019.

 

Irrespective
of whether they voted for or against, or did not vote on the proposed Qualifying Transaction, holders of Class A Restricted Voting
Shares were entitled to elect to redeem all or a portion of their Class A Restricted Voting Shares at a per share price, payable
in cash, equal to the pro rata portion per Class A Restricted Voting Share of: (A) the escrowed funds available in the Escrow
Account at the time of the shareholders meeting, including interest and other amounts earned thereon; less (B) an amount equal
to the total of (i) applicable taxes payable by the Corporation on such interest and other amounts earned in the Escrow Account
and (ii) actual and expected direct expenses related to the redemption, each as reasonably determined by the Corporation, subject
to certain limitations. Each holder of Class A Restricted Voting Shares, together with any affiliate of such holder or any other
person with whom such holder or affiliate is acting jointly or in concert, were subject to a redemption limitation of an aggregate
15% of the number of Class A Restricted Voting Shares issued and outstanding. Class B Shares were not redeemable in connection
with the Qualifying Transaction. In connection with the Qualifying Transaction, 1,000 Class A Restricted Voting Shares were redeemed
at a redemption price of CDN$10.11 per share.

 

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.

 

    10

     

    

 

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

Notes to the Consolidated Financial Statements

For the Year Ended December 31, 2019 and 2018

 

 

		2.	BASIS
OF PRESENTATION

 

2.1
Statement of compliance

 

These
consolidated financial statements for the year ended December 31, 2019 (and comparative results for the year ended December 31,
2018) have been 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”)
and in effect as at December 31, 2019.

 

These
consolidated financial statements were approved and authorized for issuance by the Board of Directors of the Corporation on March
20, 2020.

 

2.2
Basis of presentation and measurement

 

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

 

The
consolidated financial statements are presented in United States dollars which, following the close of the qualifying transaction
became the Corporation’s presentational currency. The Corporation’s previous presentational currency was CAD. See
Note 3.23 for change in accounting policy related to the change in presentational 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 Canadian dollars (CDN$) and for each of the United States subsidiaries
is United States dollars (US$ or $).

 

    11

     

    

 

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

                                         Notes to the Consolidated Financial Statements

                                         For the Year Ended December 31, 2019 and 2018

 

 

		3.	SUMMARY
OF SIGNIFICANT ACCOUNTING POLICIES

 

3.1
Basis of consolidation

 

The
consolidated financial statements for the year ended December 31, 2019 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 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 over the entity. All of the consolidated entities were under control 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 acquisitions). 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	NV	Management
    Company
	CSAC-The
    Canopy NV LLC	NV	Management
    Company
	CannaPunch
    of Nevada LLC	NV	Production
	LivFree
    Wellness, LLC (1)(3)	NV	Retail
	Washoe
    Wellness, LLC (1)(4)	NV	Cultivation
    and Production
	Kynd-Strainz,
    LLC (1)(5)	NV	Retail
	Lemon
    Aide, LLC (1)(5)	NV	Retail

		(1)	Entered
                                         into an Equity Purchase Agreement with CSAC Acquisition, Inc. pending license transfers
                                         by the Nevada Department of Taxation Marijuana Enforcement Division. The Corporation
                                         has control through a management agreement. All intercompany balances and transactions
                                         are eliminated for consolidation.

		(2)	Entities
                                         that are inactive as at December 31, 2019.

		(3)	LivFree
                                         includes wholly-owned subsidiaries BP Solutions LLC; BillCo Holdings LLC; and DWC Investments,
                                         LLC.

		(4)	Washoe
                                         includes wholly-owned subsidiaries Tahoe-Reno Botanicals, LLC and Tahoe-Reno Extractions,
                                         LLC.

		(5)	Canopy
                                         is the parent company of Kynd-Strainz, LLC and Lemon Aide, 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. There were no adjustments recognized on the adoption of IFRS 15 in the year ended December 31, 2018.
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.

 

    12

     

    

 

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

                                         Notes to the Consolidated Financial Statements

                                         For the Year Ended December 31, 2019 and 2018

 

 

		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) customers 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
Restricted cash 

 

Restricted
cash meets the definition of cash but is not available for use by the Corporation.

 

3.5
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 at 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 consolidated statements of loss and comprehensive loss.

 

    13

     

    

 

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

                                         Notes to the Consolidated Financial Statements

                                         For the Year Ended December 31, 2019 and 2018

 

 

		3.	SUMMARY
OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

 

3.6
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.

 

3.7
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 consolidated statements of loss and comprehensive loss in the period that the related product is sold. Unrealized
fair value gains/losses on growth of biological assets are recorded in a separate line on the face of the consolidated statements
of loss and comprehensive loss. Biological assets are measured at their fair values less costs to sell up to the point of harvest
in the consolidated statements of financial position, which becomes the initial cost of harvested cannabis.

 

Plants
grown for the purpose of taking cuttings in order to grow more quantities of the same plants. 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.

 

3.8
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.

 

    14

     

    

 

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

                                         Notes to the Consolidated Financial Statements

                                         For the Year Ended December 31, 2019 and 2018

 

 

		3.	SUMMARY
OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

 

3.8
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 consolidated statements of loss and comprehensive loss.

 

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.

 

3.9
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 at
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. 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 3.10, of goodwill is determined by using discounted future cash flows, which incorporates
assumptions regarding future events, growth rates and discount rates.

 

    15

     

    

 

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

                                         Notes to the Consolidated Financial Statements

                                         For the Year Ended December 31, 2019 and 2018

 

 

		3.	SUMMARY
OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

 

3.9
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.

 

3.10
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.

 

    16

     

    

 

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

                                         Notes to the Consolidated Financial Statements

                                         For the Year Ended December 31, 2019 and 2018

 

 

		3.	SUMMARY
OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

 

3.10
Impairment of non-financial assets (continued)

 

Goodwill
and intangible assets with indefinite useful lives are tested annually for impairment and carried at cost less accumulated impairment
losses. 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 consolidated statements
of loss and comprehensive loss. Impairment losses recognized on goodwill are not reversed in subsequent periods.

 

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.

 

3.11
Leases

 

Policy
applicable as of January 1, 2019 – adoption of IFRS 16, also refer to Note 4

 

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 consolidated
statements of loss and comprehensive loss 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
consolidated statements of loss and comprehensive loss. 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 consolidated statements of loss and comprehensive loss.

 

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.

 

    17

     

    

 

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

                                         Notes to the Consolidated Financial Statements

                                         For the Year Ended December 31, 2019 and 2018

 

 

		3.	SUMMARY
OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

 

3.12
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 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.

 

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.

 

3.13
Non-controlling interests 

 

Equity
interests owned by parties that are not shareholders of Ayr 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 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 at December 31, 2019, the Corporation does not have any non-controlling interests.

 

3.14
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.

 

3.15
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 consolidated 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 22). 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 consolidated financial
statements date.

 

    18

     

    

 

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

                                         Notes to the Consolidated Financial Statements

                                         For the Year Ended December 31, 2019 and 2018

 

 

		3.	SUMMARY
OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

 

3.16
Loss per share

 

The
basic loss per share is computed by dividing the net loss by the weighted average number of shares outstanding, including Subordinate
Voting Shares and Multiple Voting Shares, during the period. The “treasury stock method” is used for the assumed proceeds
upon the exercise of the restricted Exchangeable Share units and Warrants that are used to purchase Subordinate Voting Shares
at the average market price during the period. During the year ended December 31, 2019 and December 31, 2018, all the outstanding
Warrants were antidilutive. 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 Exchangeable Share units and stock options
therefore basic loss per share and diluted loss per share will be the same.

 

3.17
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 goods or services 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 charge or credit for a period
represents the movement in cumulative expense recognized as at 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 consolidated statements of loss and comprehensive
loss.

 

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.

 

    19

     

    

 

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

                                         Notes to the Consolidated Financial Statements

                                         For the Year Ended December 31, 2019 and 2018

 

 

		3.	SUMMARY
OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

 

3.17
Stock-based payments (continued)

 

(a)
Stock-based payment transactions (continued)

 

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 consolidated statements of loss and comprehensive loss.

 

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 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.

 

3.18
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.

 

3.19
Financial instruments

 

Recognition
and initial measurement

 

The
Corporation adopted IFRS 9 – Financial Instruments on January 1, 2018 resulting in no impact on the consolidated financial
statements. 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 consolidated statements of
loss and comprehensive loss.

 

    20

     

    

 

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

                                         Notes to the Consolidated Financial Statements

                                         For the Year Ended December 31, 2019 and 2018

 

 

		3.	SUMMARY
OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

 

3.19
Financial instruments (continued)

 

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 consolidated statements of loss and comprehensive loss 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 consolidated statements of loss and comprehensive loss in the period that the liability is derecognized, except for financial
liabilities classified as FVTPL.

 

Refer
to Note 22 for the classification and fair value (“FV”) level of financial instruments.

 

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.

 

    21

     

    

 

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

                                         Notes to the Consolidated Financial Statements

                                         For the Year Ended December 31, 2019 and 2018

 

 

		3.	SUMMARY
OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

 

3.19
Financial instruments (continued)

 

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 consolidated statements of loss and comprehensive loss.

 

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 consolidated statements
of loss and comprehensive loss.

 

3.20
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 consolidated statements of loss and comprehensive loss.

 

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;

		•	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
                                         at the rate on the dates of the transactions); and

		•	all
                                         resulting exchange differences are recognized as a separate component of comprehensive
                                         loss.

 

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

 

3.21
Taxation

 

The
income tax payable is based on taxable income for the period. Taxable income differs from “Loss before income tax”
as reported in the consolidated statements of loss and comprehensive loss 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 directly related to the cost of goods sold. This results in permanent book/tax differences
for ordinary and necessary business expenses deemed non-allowable under IRC Section 280E.

 

    22

     

    

 

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

                                         Notes to the Consolidated Financial Statements

                                         For the Year Ended December 31, 2019 and 2018

 

 

		3.	SUMMARY
OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

 

3.21
Taxation (continued)

 

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 consolidated 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 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 (loss) or otherwise directly in equity to the extent that it relates to items that are recognized in accumulated other
comprehensive income (loss) 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 at December 31, 2019, the Corporation
assessed for circumstances in which there is uncertainty over income tax treatments and has not recorded any uncertain tax positions.

 

3.22
Significant accounting judgments and 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.

 

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.

 

    23

     

    

 

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

                                         Notes to the Consolidated Financial Statements

                                         For the Year Ended December 31, 2019 and 2018

 

 

		3.	SUMMARY
OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

 

3.22
Significant accounting judgments and estimates (continued)

 

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.

 

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.

 

(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.

 

    24

     

    

 

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

                                         Notes to the Consolidated Financial Statements

                                         For the Year Ended December 31, 2019 and 2018

 

 

		3.	SUMMARY
OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

 

3.22
Significant accounting judgments and estimates (continued)

 

(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.

 

(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 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.

 

(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.

 

    25

     

    

 

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

                                         Notes to the Consolidated Financial Statements

                                         For the Year Ended December 31, 2019 and 2018

 

 

		3.	SUMMARY
OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

 

3.22
Significant accounting judgments and estimates (continued)

 

(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 loss and comprehensive loss.

 

(i)
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.

 

(j)
Expected credit loss

 

Management
determines expected credit loss 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.

 

(k)
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.

 

3.23
Change in accounting policy

 

Pursuant
to completion of the Qualifying Transaction as explained in Note 1 to the consolidated financial statements, on May 24, 2019,
the Corporation elected to change the presentation currency of its consolidated financial statements from CDN$ to US$, effective
with the unaudited condensed interim consolidated 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.

 

    26

     

    

 

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

                                         Notes to the Consolidated Financial Statements

                                         For the Year Ended December 31, 2019 and 2018

 

 

		3.	SUMMARY
OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

 

3.23
Change in accounting policy (continued)

 

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 3.20.

 

The
average and closing rates used in translating the historical financial information from CDN$ to US$ for the various periods were
as follows:

 

		•	The
                                         closing rate used as at December 31, 2017 was $0.7971; as at December 31, 2018 was $0.7330.

		•	The
                                         average rate used for the six months ended June 30, 2018 was $0.7827; for the nine months
                                         ended September 30, 2018 was $0.7769; and for the three months ended December 31, 2018
                                         was $0.7575.

 

		4.	CHANGES
IN ACCOUNTING STANDARDS

 

Changes
in accounting standards adopted

 

Adoption
of IFRS 16 – Leases

 

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.

 

As
at December 31, 2018, the Corporation had one lease. The impact on the Corporation’s consolidated financial statements would
have been to recognize a right-of-use asset and opening lease liability of $741,930, of which $408,691 would have been classified
as a current liability. The following table provides a reconciliation of the lease obligations as at December 31, 2018 to the
Corporation’s lease liabilities on initial application of IFRS 16 as at January 1, 2019:

 

	Lease
    commitments as at December 31, 2018	 	809,025  
	Impact
    of discounting	 	(67,095) 
	Lease
    liabilities as at January 1, 2019	 	741,930  

 

    27

     

    

 

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

                                         Notes to the Consolidated Financial Statements

                                         For the Year Ended December 31, 2019 and 2018

 

 

		4.	CHANGES
IN ACCOUNTING STANDARDS (Continued)

 

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

 

The
Corporation has not yet applied the following new standard, interpretations and amendments to standards that have been issued
as at December 2019 but are not yet effective. Unless otherwise stated, the Corporation does not plan to early adopt any of these
new or amended standards and interpretations.

 

IFRS
3 Business combinations

 

Amendments
to IFRS 3, issued in October 2018, provide 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. 

 

The
amendments are effective for transactions for which the acquisition date is on or after the beginning of the first annual reporting
period beginning on or after January 1, 2020. Under the new standard the Corporation expects a more likely probability that future
transactions will be accounted for as asset acquisitions.

 

IAS
1 Presentation of financial statements

 

Amendments
to IAS 1, issued in October 2018, provide clarification on the definition of material and how it should be applied. The amendments
also align the definition of material across International Financial Reporting Standards and other publications.

 

The
amendments are effective for annual periods beginning on or after January 1, 2020 and are required to be applied prospectively.
The Corporation does not expect these amendments to have a significant impact on its financial statements.

 

IAS
8 Accounting policies, changes in accounting estimates and errors

 

Amendments
to IAS 8, issued in October 2018, provide clarification on the definition of material and how it should be applied. The amendments
also align the definition of material across International Financial Reporting Standards and other publications.

 

The
amendments are effective for annual periods beginning on or after January 1, 2020 and are required to be applied prospectively.
The Corporation does not expect these amendments to have a significant impact on its financial statements.

 

    28

     

    

 

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

                                         Notes to the Consolidated Financial Statements

                                         For the Year Ended December 31, 2019 and 2018

 

 

		5.	BUSINESS
COMBINATION

 

As
explained in Note 1 to the consolidated 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 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.

 

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.

 

    29

     

    

 

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

                                         Notes to the Consolidated Financial Statements

                                         For the Year Ended December 31, 2019 and 2018

 

 

		5.	BUSINESS
COMBINATION (Continued)

 

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 the completion of the Qualifying Transaction as explained in Note 1 to the consolidated 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 10.

 

During
the year ended December 31, 2019, the Corporation incurred acquisition costs of $5,847,800, as reflected in the consolidated statements
of loss and comprehensive loss.

 

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 consolidated statements of loss and comprehensive loss. This relates to the one-time adjustment
of cannabis inventory from cost to fair value as part of the purchase price allocation.

 

    30

     

    

 

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

                                         Notes to the Consolidated Financial Statements

                                         For the Year Ended December 31, 2019 and 2018

 

 

		5.	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 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 consolidated
statements of financial position.

 

    31

     

    

 

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

Notes to the Consolidated Financial Statements

For the Year Ended December 31, 2019 and 2018

 

 

		5.	BUSINESS
COMBINATION (Continued)

 

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.

 

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.

 

    32

     

    

 

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

                                         Notes to the Consolidated Financial Statements

                                         For the Year Ended December 31, 2019 and 2018

 

 

		5.	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 was paid in the form of cash consideration;

 

		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.

 

    33

     

    

 

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

                                         Notes to the Consolidated Financial Statements

                                         For the Year Ended December 31, 2019 and 2018

 

 

		5.	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/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

 

		v.	 	Settlement
                                         of the final working capital adjustment.

 

    34

     

    

 

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

Notes to the Consolidated Financial Statements

For the Year Ended December 31, 2019 and 2018

 

 

		5.	BUSINESS
COMBINATION (Continued)

 

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
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 16 for the make-whole provision and contingent
consideration fair value treatment subsequent to the acquisition. 

 

    35

     

    

 

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

                                         Notes to the Consolidated Financial Statements

                                         For the Year Ended December 31, 2019 and 2018

 

 

		5.	BUSINESS
COMBINATION (Continued)

 

Fair
Value Considerations (continued)

 

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.

 

		6.	INVENTORY

 

The
Corporation’s inventory includes the following:

 

	 	 	December 31, 2019	 	 	December 31, 2018	 
	 	 	$	 	 	$	 
	Work
    in process	 	 	6,226,109	 	 	 	-	 
	Finished
    goods	 	 	257,399	 	 	 	-	 
	Total
    cultivation and production inventory	 	 	6,483,508	 	 	 	-	 
	 	 	 	 	 	 	 	 	 
	Cannabis
    inventory at retail	 	 	5,245,010	 	 	 	-	 
	Supplies
    and others	 	 	1,990,322	 	 	 	-	 
	Total
    inventory	 	 	13,718,840	 	 	 	-	 

 

Direct
materials expensed as cost of goods sold during the year ended December 31, 2019 was $36,136,990, and for the year ended December
31, 2018 was $Nil. There was no inventory write down taken during the year ended December 31, 2019.

 

    36

     

    

 

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

                                         Notes to the Consolidated Financial Statements

                                         For the Year Ended December 31, 2019 and 2018

 

 

		7.	BIOLOGICAL
ASSETS

 

The
continuity of biological assets is as follows:

	 	 	December 31, 2019	 	 	December 31, 2018	 
	 	 	$	 	 	$	 
	Acquired
    on completion of Qualifying Transaction [Notes 1 & 5]	 	 	3,760,158	 	 	 	-	 
	Changes
    in fair value less costs to sell due to biological transformation	 	 	10,108,105	 	 	 	-	 
	Transferred
    to inventory upon harvest	 	 	(10,933,119	)	 	 	-	 
	Balance,
    at end	 	 	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 include:

 

		•	The
                                         average number of weeks in the growing cycle is 18 weeks from propagation to harvest;

		•	The
                                         average harvest yield from each cannabis plant is 233 grams per plant;

		•	The
                                         average fair value less cost to complete and cost to sell is $3.46 per gram; and

		•	The
                                         average cost to complete the cannabis production process post-harvest and the cost to
                                         sell is $2.65 per gram.

 

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	 	Sensitivity	 	Effect
    on fair value	 
	 	 	input	 	 	 	December 31, 2019	 	 	December 31, 2018	 
	 	 	 	 	 	 	 	 	$	 	 	 	$	 
	Wholesale
    selling price of dry cannabis	 	$	5.00	 	Increase
    or decrease of 5	% 	 	209,858	 	 	 	-	 
	Average
    yield per plant	 	 	233
                                         grams	 	Increase
    or decrease of 5	% 	 	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.

 

As
at December 31, 2019, the biological assets were on average 53% complete and the average number of weeks in the growing cycle
was 18 weeks. During the year ended December 31, 2019, the Corporation’s biological assets produced 3,360,263 grams of dried
cannabis.

 

		8.	RESTRICTED
CASH AND SHORT-TERM INVESTMENTS HELD IN ESCROW

 

	 	 	December 31, 2019	 	 	December 31, 2018	 
	 	 	$	 	 	$	 
	Restricted
    cash*	 	 	-	 	 	 	92,476,045	 
	Investments
    in Flexible Guaranteed Investment Certificate	 	 	-	 	 	 	7,147,046	 
	Accrued
    interest	 	 	-	 	 	 	61,152	 
	Restricted
    cash and short term investments held in escrow	 	 	-	 	 	 	99,684,243	 

 

*
Restricted cash was transferred to cash and cash equivalents as a result of the completion of the Qualifying Transaction as explained
in Note 1.

 

    37

     

    

 

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

                                         Notes to the Consolidated Financial Statements

                                         For the Year Ended December 31, 2019 and 2018

 

 

		9.	PROPERTY,
PLANT AND EQUIPMENT

 

	 	 	Furniture
    and 
 fixtures	 	 	Office

    equipment	 	 	Machinery
    and
 equipment	 	 	Auto
    and
 trucks	 	 	Buildings
    and leasehold
 improvements	 	 	Total	 
	 	 	$	 	 	$	 	 	$	 	 	$	 	 	$	 	 	$	 
	Cost	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 
	As
    at 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
    at December 31, 2019	 	 	923,391	 	 	 	312,486	 	 	 	1,871,195	 	 	 	130,298	 	 	 	34,878,639	 	 	 	38,116,009	 
	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 
	Depreciation	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 
	As
    at December 31, 2018	 	 	-	 	 	 	-	 	 	 	-	 	 	 	-	 	 	 	-	 	 	 	-	 
	Depreciation	 	 	94,140	 	 	 	41,736	 	 	 	118,375	 	 	 	13,978	 	 	 	694,919	 	 	 	963,148	 
	As
    at December 31, 2019	 	 	94,140	 	 	 	41,736	 	 	 	118,375	 	 	 	13,978	 	 	 	694,919	 	 	 	963,148	 
	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 
	Net
    book value	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 
	As
    at December 31, 2018	 	 	-	 	 	 	-	 	 	 	-	 	 	 	-	 	 	 	-	 	 	 	-	 
	As
    at December 31, 2019	 	 	829,251	 	 	 	270,750	 	 	 	1,752,820	 	 	 	116,320	 	 	 	34,183,720	 	 	 	37,152,861	 

 

As
at December 31, 2019, buildings and leasehold improvements include assets under construction of $17,146,625. No depreciation
has been charged on these assets.

 

Depreciation
expense relating to PPE for the years ended December 31, 2019 and 2018 was $963,148 (consisting of $599,654 in cost of goods sold
and $363,494 in total expenses) and $Nil, respectively.

 

		10.	GOODWILL
AND INTANGIBLE ASSETS

 

Goodwill

 

As
explained in Note 1 and Note 5, when the Corporation completed the Qualifying Transaction on the Acquisition Date, the Corporation
recognized goodwill of $84,837,304. 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. Annual 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 has grouped CGUs for testing at the state level based on the CGUs expected to benefit from synergies
of the business combination.

 

Management
performed its annual impairment tests on the goodwill acquired and calculated that the goodwill recoverable amounts were higher
than the carrying amounts as at December 31, 2019, therefore, no impairment was recognized. The carrying amount of goodwill tested
was $16,399,143 and $68,438,161 for Massachusetts and Nevada, respectively. The key assumptions include a three-year forecast
period and a perpetual growth rate of 3% thereafter. These assumptions were based on historical data from internal sources as
well as industry and market trends. The range of post-tax discount rates were from 10.5% to 34.9%. As the recoverable amount was
higher than the carrying amount as at December 31, 2019, no impairment was recognized.

 

Ayr
performed a sensitivity analysis and, based on that analysis, concluded that 5% changes in the discount rate should not cause
the recoverable amount to decrease below the carrying value for any of the groups of CGUs.

 

    38

     

    

 

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

                                         Notes to the Consolidated Financial Statements

                                         For the Year Ended December 31, 2019 and 2018

 

 

		10.	GOODWILL
AND INTANGIBLE ASSETS (Continued)

 

Intangible
Assets 

 

Amortization
expense in cost of goods sold for the years ended December 31, 2019 and 2018 were $915,269 and $Nil. The
following table represents intangible assets:

	 	 	Useful
    Life	 	 	December 31, 2019	 	 	December 31, 2018	 
	 	 	#
    (Years)	 	 	$	 	 	$	 
	Acquired
    on completion of Qualifying Transaction [Notes 1 & 5]	 	 	 	 	 	 	 	 	 
	Licenses	 	 	15	 	 	 	22,000,000	 	 	 	-	 
	Right-to-use
    licenses	 	 	15	 	 	 	138,550,000	 	 	 	-	 
	Host
    community agreements	 	 	15	 	 	 	35,000,000	 	 	 	-	 
	Trade
    name / brand	 	 	5	 	 	 	2,390,000	 	 	 	-	 
	 	 	 	 	 	 	 	197,940,000	 	 	 	-	 
	Amortization	 	 	 	 	 	 	 	 	 	 	 	 
	Licenses	 	 	15	 	 	 	883,154	 	 	 	-	 
	Right-to-use
    licenses	 	 	15	 	 	 	5,561,864	 	 	 	-	 
	Host
    community agreements	 	 	15	 	 	 	1,405,018	 	 	 	-	 
	Trade
    name / brand	 	 	5	 	 	 	287,828	 	 	 	-	 
	 	 	 	 	 	 	 	8,137,864	 	 	 	-	 
	Net
    book value	 	 	 	 	 	 	 	 	 	 	 	 
	Licenses	 	 	15	 	 	 	21,116,846	 	 	 	-	 
	Right-to-use
    licenses	 	 	15	 	 	 	132,988,136	 	 	 	-	 
	Host
    community agreements	 	 	15	 	 	 	33,594,982	 	 	 	-	 
	Trade
    name / brand	 	 	5	 	 	 	2,102,172	 	 	 	-	 
	Total
    net book value as at	 	 	 	 	 	 	189,802,136	 	 	 	-	 

 

		11.	RIGHT-OF-USE
ASSETS AND LEASE OBLIGATIONS

 

	 	 	Right-of-use
    assets	 	 	Lease
    obligations	 
	 	 	$	 	 	$	 
	As
    at January 1, 2019 [Note 4]	 	 	741,930	 	 	 	741,930	 
	Acquired
    on completion of Qualifying Transaction [Notes 1 & 5]	 	 	11,310,784	 	 	 	12,671,166	 
	New
    leases and re-valuation	 	 	1,471,927	 	 	 	1,471,927	 
	Less:
    depreciation and repayment	 	 	(1,209,224	)	 	 	(763,878	)
	Net
    book value at December 31, 2019	 	 	12,315,417	 	 	 	14,121,145	 

 

Right-of-use
assets and liabilities were acquired on completion of the Qualifying Transaction as explained in Notes 1 and 5 with no net impact
on deficit.

 

As
at December 31, 2019, the current and long-term lease obligations were $1,087,835 and $13,033,310, respectively. Also refer to
Note 4 (Adoption of IFRS 16 – “Leases”).

 

Interest
expense relating to right-of-use assets for the years ended December 31, 2019 and 2018 were $836,132 (consisting of $258,698 in
cost of goods sold and $577,434 in other (expense) income) and $Nil, respectively. Depreciation relating to right-of-use assets
for the years ended December 31, 2019 and 2018 were $1,209,224 (consisting of $179,725 in cost of goods sold and $1,029,500 in
total expenses) and $Nil, respectively.

 

    39

     

    

 

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

                                         Notes to the Consolidated Financial Statements

                                         For the Year Ended December 31, 2019 and 2018

 

 

		11.	RIGHT-OF-USE
ASSETS AND LEASE OBLIGATIONS (Continued)

 

The
following table presents the contractual undiscounted cash flows for lease obligations as at December 31, 2019:

 

	Undiscounted
    lease obligations (per year):	 	$	 
	2020	 	 	2,473,739	 
	2021	 	 	2,276,925	 
	2022	 	 	2,214,915	 
	2023	 	 	2,261,501	 
	2024	 	 	2,189,639	 
	2025	 	 	1,908,867	 
	2026
    and beyond	 	 	14,111,173	 
	Total
    undiscounted lease obligations	 	 	27,436,759	 
	Impact
    of discounting	 	 	(13,315,614	)
	Total
    lease obligations	 	 	14,121,145	 

 

		12.	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. As the Lincoln acquisition occurred
on December 29, 2019, Lincoln has no operating activity for the year ended December 31, 2019. The following table relates to the
Corporation’s investment in Green Garden for the year ended December 31, 2019.

 

	 	 	December
    31, 2019	 	 	December
    31, 2018	 
	 	 	$	 	 	$	 
	Acquired
    on completion of Qualifying Transaction [Notes 1 & 5]	 	 	-	 	 	 	-	 
	Investment	 	 	500,000	 	 	 	-	 
	Share
    of loss	 	 	(72,600	)	 	 	-	 
	Net
    book value, as at	 	 	427,400	 	 	 	-	 

 

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

 

	 	 	December
    31, 2019	 	 	December
    31, 2018	 
	 	 	$	 	 	$	 
	Current
    assets	 	 	27,218	 	 	 	-	 
	Non-current
    assets	 	 	-	 	 	 	-	 
	Current
    liabilities	 	 	-	 	 	 	-	 
	Revenue	 	 	-	 	 	 	-	 
	Income	 	 	(181,501	)	 	 	-	 

 

    40

     

    

 

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

                                         Notes to the Consolidated Financial Statements

                                         For the Year Ended December 31, 2019 and 2018

 

 

13.
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 consolidated 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 that are included in general and administrative expenses
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 consolidated 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 consolidated
financial statements.

 

As
at December 31, 2019, the Corporation incurred fees from Panther Residential Management, LLC (“Panther”), a company
partially owned by 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.

 

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.

 

    41

     

    

 

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

                                         Notes to the Consolidated Financial Statements

                                         For the Year Ended December 31, 2019 and 2018

 

 

13.
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
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	 	 	 	-	 

 

Refer
to Note 20 for additional information around the non-cash stock-based compensation plan and calculation for the year ended December
31, 2019.

 

14.
DEBTS PAYABLE

 

	 	 	Debts
    payable	 
	 	 	$	 
	As
    at December 31, 2018	 	 	-	 
	Acquired
    and incurred on completion of Qualifying Transaction [Notes 1 & 5]	 	 	46,874,990	 
	Less:
    repayment	 	 	(2,879,329	)
	Total
    debts payable as at December 31, 2019	 	 	43,995,661	 
	Total
    accrued interest payable related to debts payable as at December 31, 2019	 	 	815,662	 

 

The
details of debts payable were as follows:

 

	 	 	December
    31, 2019
	 	 	Related
    Party Debt	 	 	Non-Related
    Party Debt	 	 	Total
    Debt	 
	 	 	$	 	 	$	 	 	$	 
	Principal
    payments	 	 	41,084,256	 	 	 	2,911,405	 	 	 	43,995,661	 
	Less:
    current portion	 	 	6,149,692	 	 	 	479,151	 	 	 	6,628,843	 
	Total
    non-current debt	 	 	34,934,564	 	 	 	2,432,254	 	 	 	37,366,818	 

 

The
following table presents the future debt obligation as at December 31, 2019:

	Future
    debt obligations (per year)	 	$	 
	2020	 	 	6,628,843	 
	2021	 	 	7,480,631	 
	2022	 	 	5,762,108	 
	2023	 	 	1,511,532	 
	2024	 	 	22,612,547	 
	Total
    debt obligations	 	 	43,995,661	 

 

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.

 

    42

     

    

 

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

                                         Notes to the Consolidated Financial Statements

                                         For the Year Ended December 31, 2019 and 2018

 

 

14.
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.

 

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 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 year ended December 31, 2019, was $1,548,359. There were no such expenses
during the prior year.

 

15.
SHARE CAPITAL

 

A
summary of the outstanding share capital of the Corporation as at December 31, 2019 is comprised of the activity below. The
Corporation is currently authorized to issue an unlimited number of Subordinate Voting Shares and Multiple Voting Shares. Refer
to Note 1 and Note 5 for additional information regarding the total shares outstanding as at December 31, 2019. For additional
shares reserved for issuance refer to Note 16 for disclosures on the Warrants and make-whole provision as well as Note 20 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.

  

    43

     

    

 

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

                                         Notes to the Consolidated Financial Statements

                                         For the Year Ended December 31, 2019 and 2018

 

 

15.
SHARE CAPITAL (Continued)

 

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 outstanding amount 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.

 

Post
Qualifying Transaction

 

The
following activity occurred subsequent to the Qualifying Transaction:

 

		•	298,200
                                         Warrants were exercised to purchase one Subordinate Voting Share during the Early Exercise
                                         Period commencing on July 15, 2019 until July 26, 2019.

		•	389,905
                                         non-voting Exchangeable Shares were issued as part of the make-whole provision liability
                                         as at November 20, 2019.

		•	1,059,685
                                         Subordinate Voting Shares were issued in connection with the conversion of 10,596,685
                                         Rights, which were redeemed for one tenth (1/10) of one Subordinate Voting Share as at
                                         December 31, 2019.

		•	36,900
                                         Subordinate Voting Shares were repurchased under the stock repurchase program, of which
                                         7,400 have been cancelled as at December 31, 2019 and the balance are held by the Corporation
                                         as treasury shares.

  

16.
DERIVATIVE LIABILITIES

 

Fair
value of Warrants

 

As
at December 31, 2019, the Corporation had 16,060,858 Warrants issued and outstanding.

 

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.

 

As
the number of Subordinate Voting 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. The fair value of a financial instrument that is traded in active markets at each reporting date is determined
by reference to its quoted market price.

 

    44

     

    

 

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

                                         Notes to the Consolidated Financial Statements

                                         For the Year Ended December 31, 2019 and 2018

 

 

16.
DERIVATIVE LIABILITIES (Continued)

 

Warrants
- Issued and Outstanding

 

	 	 	Number	 	 	Amount	 
	 	 	#	 	 	$	 
	Balance
    as at December 31, 2017	 	 	16,359,058	 	 	 	9,117,178	 
	Fair
    Value Adjustment	 	 	 	 	 	 	14,866,194	 
	Balance
    as at December 31, 2018	 	 	16,359,058	 	 	 	23,983,372	 
	 	 	 	 	 	 	 	 	 
	Exercise
    of Warrants	 	 	(298,200	)	 	 	(916,389	)
	Fair
    value adjustment	 	 	 	 	 	 	13,807,141	 
	Balance
    as at December 31, 2019	 	 	16,060,858	 	 	 	36,874,124	 

 

The
Corporation’s Warrant liability increased from its original value to $36,874,124 as the Warrant’s bid price on December
31, 2019 decreased to $2.30 (CDN$3.00).

 

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 portion of the make-whole, a total of 389,905 Exchangeable Shares for a value of $3,245,180. As
at December 31, 2019, the Corporation revalued the make-whole provision for a value of $3,540,803,
which is included in purchase consideration payable on the consolidated 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 at December 31, 2019, the fair value of the contingent consideration increased
to $22,656,981.

 

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

 

	 	 	Year
    Ended
	 	 	December
    31, 2019	 	 	December
    31, 2018	 
	 	 	$	 	 	$	 
	Loss
    from FV adjustment on Warrants	 	 	(13,807,141	)	 	 	(14,866,194	)
	Loss
    from FV adjustment on Class A Restricted Voting Shares	 	 	(101,455,740	)	 	 	(57,485,162	)
	Loss
    from FV adjustment on make-whole provision	 	 	(3,972,266	)	 	 	-	 
	Total	 	 	(119,235,147	)	 	 	(72,351,356	)

 

Class
A Restricted Voting Shares are measured at fair value and any fluctuation in the carrying value is recognized as an unrealized
gain or loss. The shares were valued as a liability in the amount of $145,694,363 as at December 31, 2018, and converted (1,000
were redeemed) on May 24, 2019, the date of the Qualifying Transaction, to equity as Subordinate Voting Shares in the amount of
$248,411,016.

 

    45

     

    

 

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

                                         Notes to the Consolidated Financial Statements

                                         For the Year Ended December 31, 2019 and 2018

 

 

17.
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.

 

18.
GENERAL AND ADMINISTRATIVE

 

General
and administrative expenses were comprised of:

 

	 	 	Year
    Ended	 
	 	 	December
    31, 2019	 	 	December
    31, 2018	 
	 	 	$	 	 	$	 
	Public
    company filing and listing costs	 	 	59,438	 	 	 	69,248	 
	Compensation
    and benefits	 	 	8,063,400	 	 	 	-	 
	Rent
    and utilities	 	 	549,898	 	 	 	-	 
	Taxes
    and licenses	 	 	1,681,599	 	 	 	-	 
	Professional
    and consulting fees	 	 	2,759,669	 	 	 	3,015,115	 
	Office
    expenses	 	 	601,775	 	 	 	157,630	 
	Computer
    expenses	 	 	390,910	 	 	 	-	 
	Bank
    charges and fees	 	 	228,384	 	 	 	-	 
	Insurance	 	 	1,199,130	 	 	 	-	 
	Security	 	 	729,922	 	 	 	-	 
	Management
    fee	 	 	1,368,855	 	 	 	-	 
	Travel,
    meals, and entertainment	 	 	455,204	 	 	 	-	 
	Other	 	 	948,268	 	 	 	-	 
	Total	 	 	19,036,452	 	 	 	3,241,993	 

 

    46

     

    

 

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

                                         Notes to the Consolidated Financial Statements

                                         For the Year Ended December 31, 2019 and 2018

 

 

19.
NET LOSS PER SHARE

 

Basic
and Diluted

 

Basic
and diluted net loss per share is calculated by dividing the loss attributable to shareholders of the Corporation by the weighted
average number of shares outstanding, made up of Multiple Voting Shares and Subordinate Voting Shares outstanding excluding treasury
stock, during the applicable years. As all the classes of shares are subject to the same distribution rights, the Corporation
performs the net loss per share calculations as if all shares are a single class. The calculation of diluted net loss for the
years excludes exercised Warrants, restricted stock units (RSUs), and contingent shares because their effect is anti-dilutive.

 

	 	 	Year
    Ended
	 	 	December
    31, 2019	 	 	December
    31, 2018	 
	 	 	$	 	 	$	 
	Net
    loss attributable to shareholders of the Corporation	 	 	(164,179,604	)	 	 	(75,114,770	)
	Weighted
    average number of shares outstanding during the year	 	 	17,404,742	 	 	 	3,707,710	 
	Basic
    and diluted net loss per share	 	 	(9.43	)	 	 	(20.26	)

 

20.
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 shares from the Plan as at 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 year ended December 31, 2019, the Corporation recognized stock-based compensation expense of $28,879,225 from the issuance
of 3,837,150 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 one to three year period. During the period ended December
31, 2019, there were no forfeitures of Exchangeable Shares. There was no additional activity during the current year and there
was no comparable activity in the prior year.

 

21.
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 at December 31, 2019, 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.

 

    47

     

    

 

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

                                         Notes to the Consolidated Financial Statements

                                         For the Year Ended December 31, 2019 and 2018

 

 

21.
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. At December 31, 2019, 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.

 

22.
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.

 

All
assets and liabilities for which fair value is measured or disclosed in the 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

 

    48

     

    

 

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

                                         Notes to the Consolidated Financial Statements

                                         For the Year Ended December 31, 2019 and 2018

 

 

22.
FINANCIAL RISK FACTORS (Continued)

 

(a)
Fair Value (continued)

 

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	 	 	 	 	 	 	 	 	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:

 

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

 

    49

     

    

 

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

                                         Notes to the Consolidated Financial Statements

                                         For the Year Ended December 31, 2019 and 2018

 

 

22.
FINANCIAL RISK FACTORS (Continued)

 

(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 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	 

 

(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 at December 31, 2019, all trade payables and accrued liabilities are due within
a year. Refer to Notes 11 and 14 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, 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.

 

(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.

 

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: 

 

		 	Value
    at year end 

Dr (Cr.)	 	 		 	 		 	Effect
    on fair value 

as at December 31, 2019	 
	Balance
    sheet account	 	CDN
    $	 	 	Conversion
    rate	 	 	Sensitivity	 	$	 
	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	)

 

    50

     

    

 

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

                                         Notes to the Consolidated Financial Statements

                                         For the Year Ended December 31, 2019 and 2018

 

 

23.
TAXATION

 

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

 

The
Company 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 Company 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.

 

In
relation to the acquisitions, explained in Notes 1 and 5, 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
recovery during the year ended December 31, 2019 and year ended December 31, 2018, were $3,892,570 and $Nil, respectively, resulting
in a deferred tax liability of $41,077,761 and $Nil as at December 31, 2019 and December 31, 2018.

 

Provision
for income taxes consists of the following for the years ended December 31, 2019 and 2018:

 

	 	 	Year
    Ended December 31,	 
	 	 	2019	 	 	2018	 
	 	 	$	 	 	$	 
	Current
    expense:	 	 	 	 	 	 
	Federal	 	 	7,706,952	 	 	 	-	 
	State	 	 	1,021,109	 	 	 	-	 
	Total
    current expense:	 	 	8,728,061	 	 	 	-	 
	 	 	 	 	 	 	 	 	 
	Deferred
    benefit:	 	 	 	 	 	 	 	 
	Federal	 	 	(3,442,568	)	 	 	-	 
	State	 	 	(450,002	)	 	 	-	 
	Total
    deferred benefit:	 	 	(3,892,570	)	 	 	-	 
	 	 	 	 	 	 	 	 	 
	Total
    provision for income taxes	 	 	4,835,491	 	 	 	-	 

 

As at December 31, 2019, and 2018, the components of deferred tax assets and liabilities were as
follows:

 

	 	 	Year
    Ended December 31,	 
	 	 	2019	 	 	2018	 
	 	 	$	 	 	$	 
	Property,
    plant and equipment	 	 	(777,780	)	 	 	-	 
	Intangible
    assets	 	 	(41,992,664	)	 	 	-	 
	Partnerships	 	 	136,836	 	 	 	-	 
	Biological
    assets	 	 	1,198,574	 	 	 	-	 
	Inventory	 	 	79,869	 	 	 	-	 
	Start-up
    expenses	 	 	277,404	 	 	 	-	 
	Net
    deferred tax liability	 	 	(41,077,761	)	 	 	-	 

 

    51

     

    

 

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

                                         Notes to the Consolidated Financial Statements

                                         For the Year Ended December 31, 2019 and 2018

 

 

23.
TAXATION (Continued)

 

Deferred
tax assets have not been recognized in respect of the following temporary differences:

 

	 	 	As
    at December 31,	 
	 	 	2019	 	 	2018	 
	 	 	$	 	 	$	 
	Share
    issue costs	 	 	5,659,149	 	 	 	2,516,418	 
	Non-capital
    losses carried forward - Canada	 	 	9,520,242	 	 	 	3,060,126	 
	Deferred
    underwriters’ commission	 	 	-	 	 	 	3,457,154	 
	Other
    temporary differences	 	 	15,269	 	 	 	-	 
	Total	 	 	15,194,660	 	 	 	9,033,698	 

 

As
at December 31, 2019, and 2018, the reconciliation between the effective tax rate on income from continuing operations and the
statutory tax rate is as follows:

 

	 	 	Year
    Ended December 31,	 
	 	 	2019	 	 	2018	 
	 	 	$	 	 	$	 
	Loss
    before taxes	 	 	(159,344,113	)	 	 	(75,114,770	)
	 	 	 	 	 	 	 	 	 
	Expected
    income tax (recovery) expense	 	 	(43,022,911	)	 	 	(21,538,642	)
	Difference
    in foreign tax rates	 	 	569,917	 	 	 	-	 
	Tax
    rate changes and other adjustments	 	 	36,969	 	 	 	-	 
	Stock-based
    compensation	 	 	7,966,090	 	 	 	-	 
	Unrealized
    change in fair value of financial liabilities	 	 	32,922,160	 	 	 	19,044,441	 
	Non-deductible
    items	 	 	4,091,370	 	 	 	4,889	 
	Benefit
    of tax loss not recognized	 	 	1,708,628	 	 	 	-	 
	State
    Tax	 	 	563,268	 	 	 	-	 
	Share
    issue costs booked through equity	 	 	-	 	 	 	(33,481	)
	Change
    in unrecognized temporary differences	 	 	-	 	 	 	2,522,793	 
	 	 	 	 	 	 	 	 	 
	Reported
    Income Tax Expense (Recovery)	 	 	4,835,491	 	 	 	-	 
	 	 	 	 	 	 	 	 	 
	Effective
    Tax Rate	 	 	-3.03	%	 	 	0.00	%

 

The
Canadian 2019 statutory tax rate of 27% differs from the 2018 statutory tax rate of 26.5% as a result of the corporate continuance
into British Colombia from Ontario in 2019.

 

At
December 31, 2019, the Company has approximately $9.5 million of unclaimed Canadian non-capital losses which expire in the tax
years 2037 through 2039.

 

    52

     

    

 

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

Notes to the Consolidated Financial Statements

For the Year Ended December 31, 2019 and 2018

 

 

24.
SUBSEQUENT EVENTS

 

The
Corporation’s management has evaluated subsequent events up to March 20, 2020, the date the consolidated financial statements
were issued.

 

		A)	On
                                         February 26, 2020, the Corporation entered a binding term sheet to acquire 100% of the
                                         membership interests in a Massachusetts LLC. Pursuant to the term sheet, the Corporation
                                         will be acquiring rights to legally open and operate a recreational cannabis license
                                         in the state of Massachusetts. The Corporation has agreed to pay a purchase price consisting
                                         of cash and non-voting interest in the net profits of the Massachusetts LLC. 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.

 

		B)	Subsequent
                                         to year-end, in March 2020, global financial markets have experienced a disruption as
                                         a result of the novel coronavirus (COVID-19) pandemic. The impact on the Corporation
                                         is not currently determinable. Management is actively monitoring and responding to these
                                         developments in financial markets.

 

    53Exhibit 4.3

 

 

CANNABIS STRATEGIES ACQUISITION CORP.

 

CONSOLIDATED FINANCIAL STATEMENTS

 

PERIOD ENDED DECEMBER 31, 2018

 

AND FOR THE

 

YEAR ENDED SEPTEMBER 30, 2018

 

(EXPRESSED IN CANADIAN DOLLARS)

 

 

    	 	 	 

    	 	 	 

    

 

Independent Auditor's Report

 

To the Shareholders of Cannabis Strategies Acquisition
Corp.:

 

Opinion

 

We have audited the consolidated
financial statements of Cannabis Strategies Acquisition Corp. and its subsidiaries (the "Corporation"), which comprise
the consolidated statements of financial position as at December 31, 2018 and September 30, 2018, and the consolidated
statements of operations and comprehensive loss, changes in shareholders' deficiency and cash flows for the period and year then
ended, and notes to the consolidated financial statements, including a summary of significant accounting policies.

 

In our opinion, the accompanying
consolidated financial statements present fairly, in all material respects, the consolidated financial position of the Corporation
as at December 31, 2018 and September 30, 2018, and its consolidated financial performance and its consolidated cash
flows for the period and year then ended in accordance with International Financial Reporting Standards.

 

Basis for Opinion

 

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

 

Other Information

 

Management is responsible for
the other information. The other information comprises Management's Discussion and Analysis.

 

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

 

In connection with our audits
of the consolidated financial statements, our responsibility is to read the other information and, in doing so, consider whether
the other information is materially inconsistent with the consolidated financial statements or our knowledge obtained in the audits
or otherwise appears to be materially misstated. We obtained Management’s Discussion and Analysis prior to the date of this
auditor’s report. If, based on the work we have performed on this other information, we conclude that there is a material
misstatement of this other information, we are required to report that fact. We have nothing to report in this regard.

 

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

 

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

 

In preparing the consolidated
financial statements, management is responsible for assessing the Corporation’s ability to continue as a going concern, disclosing,
as applicable, matters related to going concern and using the going concern basis of accounting unless management either intends
to liquidate the Corporation or to cease operations, or has no realistic alternative but to do so.

 

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

 

 

    	 	 	 

    	 	 	 

    

 

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

 

Our objectives are to obtain
reasonable assurance about whether the consolidated financial statements as a whole are free from material misstatement, whether
due to fraud or error, and to issue an auditor's report that includes our opinion. Reasonable assurance is a high level of assurance
but is not a guarantee that an audit conducted in accordance with Canadian generally accepted auditing standards will always detect
a material misstatement when it exists. Misstatements can arise from fraud or error and are considered material if, individually
or in the aggregate, they could reasonably be expected to influence the economic decisions of users taken on the basis of these
consolidated financial statements.

 

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

 

		·	Identify and assess the risks of material
misstatement of the consolidated financial statements, whether due to fraud or error, design and perform audit procedures responsive
to those risks, and obtain audit evidence that is sufficient and appropriate to provide a basis for our opinion. The risk of not
detecting a material misstatement resulting from fraud is higher than for one resulting from error, as fraud may involve collusion,
forgery, intentional omissions, misrepresentations, or the override of internal control.

 

		·	Obtain an understanding of internal control relevant to the audit
in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion
on the effectiveness of the Corporation’s internal control.

 

		·	Evaluate the appropriateness of accounting policies used and the reasonableness
of accounting estimates and related disclosures made by management.

 

		·	Conclude on the appropriateness of management's
use of the going concern basis of accounting and, based on the audit evidence obtained, whether a material uncertainty exists related
to events or conditions that may cast significant doubt on the Corporation’s ability to continue as a going concern. If we
conclude that a material uncertainty exists, we are required to draw attention in our auditor's report to the related disclosures
in the consolidated financial statements or, if such disclosures are inadequate, to modify our opinion. Our conclusions are based
on the audit evidence obtained up to the date of our auditor's report. However, future events or conditions may cause the Corporation
to cease to continue as a going concern.

 

		·	Evaluate the overall presentation, structure
and content of the consolidated financial statements, including the disclosures, and whether the consolidated financial statements
represent the underlying transactions and events in a manner that achieves fair presentation.

 

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

 

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

 

The engagement partner on the
audit resulting in this independent auditor's report is Pierrette Dosanjh.

 

	 	
	 	 
	Toronto, Ontario	Chartered Professional Accountants
	March 22, 2019	Licensed Public Accountants

 

 

    	 	 	 

    	 	 	 

    

 

Cannabis Strategies
Acquisition Corp.

	
        Consolidated Statements of Financial Position

        (Expressed in Canadian Dollars)
	

 

	 	 	As at December 31,	 	 	As at September 30,	 
	 	 	2018	 	 	2018	 
	ASSETS	 	 	 	 	 	 	 	 
	 	 	 	 	 	 	 	 	 
	Current	 	 	 	 	 	 	 	 
	Cash	 	$	149,996	 	 	$	703,237	 
	Prepaid expenses	 	 	-	 	 	 	4,375	 
	Deposit	 	 	375,000	 	 	 	300,000	 
	 	 	 	524,996	 	 	 	1,007,612	 
	Restricted cash and short-term investments held in escrow (note 5)	 	 	135,989,244	 	 	 	135,683,564	 
	Total assets	 	$	136,514,240	 	 	$	136,691,176	 
	 	 	 	 	 	 	 	 	 
	LIABILITIES AND SHAREHOLDERS' DEFICIENCY	 	 	 	 	 	 	 	 
	 	 	 	 	 	 	 	 	 
	Current	 	 	 	 	 	 	 	 
	Accounts payable and accrued liabilities	 	$	3,395,625	 	 	$	718,288	 
	Due to related parties (note 11)	 	 	731,732	 	 	 	773,776	 
	 	 	 	4,127,357	 	 	 	1,492,064	 
	Deferred underwriters' commission (note 9)	 	 	4,716,250	 	 	 	4,716,250	 
	Class A Restricted Voting Shares subject to redemption (note 6)	 	 	198,756,250	 	 	 	159,005,000	 
	Warrant liability (note 7)	 	 	32,718,116	 	 	 	16,359,058	 
	Total liabilities	 	 	240,317,973	 	 	 	181,572,372	 
	 	 	 	 	 	 	 	 	 
	Shareholders' deficiency	 	 	 	 	 	 	 	 
	Share capital (note 8(a))	 	 	2,287,620	 	 	 	2,287,620	 
	Deficit	 	 	(106,091,353	)	 	 	(47,168,816	)
	Total shareholders' deficiency	 	 	(103,803,733	)	 	 	(44,881,196	)
	Total liabilities and shareholders' deficiency	 	$	136,514,240	 	 	$	136,691,176	 

 

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

 

Organization and nature of operations (note 1)

 

Approved on behalf of the Board:

 

	"Jonathan Sandelman", Director	 
	 	 
	"Kamaldeep Thindal", Director	 

 

    - 1 -

     

    

 

Cannabis Strategies
Acquisition Corp.

	
        Consolidated Statements of Operations and Comprehensive loss

        (Expressed in Canadian Dollars)
	 	 

 	 	 	Period Ended	 	 	Year Ended	 
	 	 	December 31,	 	 	September 30,	 
	 	 	2018	 	 	2018	 
	Revenue	 	 	 	 	 	 	 	 
	Interest income	 	$	305,680	 	 	$	933,564	 
	 	 	 	 	 	 	 	 	 
	Expenses	 	 	 	 	 	 	 	 
	Transaction costs (note 9)	 	 	-	 	 	 	9,130,817	 
	General and administrative (note 10)	 	 	3,091,226	 	 	 	1,176,016	 
	Foreign exchange	 	 	26,683	 	 	 	-	 
	Net unrealized loss on changes in the fair value of financial liabilities (notes 6 and 7)	 	 	56,110,308	 	 	 	37,795,547	 
	 	 	 	59,228,217	 	 	 	48,102,380	 
	Net loss and comprehensive loss for the period/year	 	$	(58,922,537	)	 	$	(47,168,816	)
	 	 	 	 	 	 	 	 	 
	Basic and diluted net loss per Class B share	 	$	(15.94	)	 	$	(15.97	)
	Weighted average number of Class B Shares outstanding (basic and diluted)	 	 	3,696,486	 	 	 	2,953,407	 

 

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

 

    - 2 -

     

    

 

Cannabis Strategies
Acquisition Corp.

	
        Consolidated Statements of Cash Flows

        (Expressed in Canadian Dollars)
	 	 

 	 	 	Period Ended	 	 	Year Ended	 
	 	 	December 31,	 	 	September 30,	 
	 	 	2018	 	 	2018	 
	Operating activities	 	 	 	 	 	 	 	 
	Net loss and comprehensive loss for the year/period	 	$	(58,922,537	)	 	$	(47,168,816	)
	Non-cash items included in net loss and other adjustments:	 	 	 	 	 	 	 	 
	Interest income	 	 	(305,680	)	 	 	(933,564	)
	Transaction costs associated with financing activities (note 9)	 	 	-	 	 	 	9,130,817	 
	Net unrealized loss on changes in the fair value of financial liabilities	 	 	56,110,308	 	 	 	37,795,547	 
	Changes in working capital items:	 	 	 	 	 	 	 	 
	Prepaid expenses	 	 	4,375	 	 	 	(4,375	)
	Deposit	 	 	(75,000	)	 	 	(300,000	)
	Accounts payable and accrued liabilities	 	 	2,677,337	 	 	 	718,288	 
	Due to related parties	 	 	(42,044	)	 	 	773,776	 
	Net cash (used in) provided by operating activities	 	 	(553,241	)	 	 	11,673	 
	 	 	 	 	 	 	 	 	 
	Investing activities	 	 	 	 	 	 	 	 
	Investment in restricted cash and short-term investments held in escrow (note 5)	 	 	-	 	 	 	(134,750,000	)
	Net cash used in investing activities	 	 	-	 	 	 	(134,750,000	)
	 	 	 	 	 	 	 	 	 
	Financing activities	 	 	 	 	 	 	 	 
	Proceeds from issuance of Class B Shares to Founders (note 8)	 	 	-	 	 	 	25,000	 
	Proceeds from issuance of Class B Units (note 8)	 	 	-	 	 	 	2,621,880	 
	Proceeds from issuance of Warrants to Founders (note 7)	 	 	-	 	 	 	2,621,870	 
	Proceeds from issuance of Class A Restricted Voting Units (notes 6 and 7)	 	 	-	 	 	 	134,750,000	 
	Transaction costs (note 9)	 	 	-	 	 	 	(4,577,196	)
	Net cash provided by financing activities	 	 	-	 	 	 	135,441,554	 
	 	 	 	 	 	 	 	 	 
	Net change in cash during the period/year	 	 	(553,241	)	 	 	703,227	 
	Cash, beginning of period/year	 	 	703,237	 	 	 	10	 
	Cash, end of period/year	 	$	149,996	 	 	$	703,237	 

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

 

    - 3 -

     

    

 

Cannabis
Strategies Acquisition Corp.

Consolidated Statements of Changes in Shareholders' Deficiency

(Expressed in Canadian Dollars) 

 

	 	 	Class B Shares	 	 	 	 	 	 	 
	 	 	Number	 	 	Amount	 	 	Deficit	 	 	Total	 
	Balance, September 30, 2017	 	 	1	 	 	$	10	 	 	$	-	 	 	$	10	 
	Issuance of Class B Shares to Founders (note 1 and note 8(a))	 	 	3,662,109	 	 	 	25,000	 	 	 	-	 	 	 	25,000	 
	Issuance of Class B Units to Sponsor (note 1 and note 8(a))	 	 	262,188	 	 	 	2,621,880	 	 	 	-	 	 	 	2,621,880	 
	Allocation of proceeds received pursuant to the Offering, over-allotment option and attributed to Warrants (note 1 and note 8(a))	 	 	-	 	 	 	(196,641	)	 	 	-	 	 	 	(196,641	)
	Transaction costs (note 9)	 	 	 	 	 	 	(162,629	)	 	 	-	 	 	 	(162,629	)
	Forfeiture of Founders Class B Shares (note 1)	 	 	(227,812	)	 	 	-	 	 	 	-	 	 	 	-	 
	Net loss and comprehensive loss for the year	 	 	-	 	 	 	-	 	 	 	(47,168,816	)	 	 	(47,168,816	)
	Balance, September 30, 2018	 	 	3,696,486	 	 	 	2,287,620	 	 	 	(47,168,816	)	 	 	(44,881,196	)
	Net loss and comprehensive loss for the period	 	 	-	 	 	 	-	 	 	 	(58,922,537	)	 	 	(58,922,537	)
	Balance, December 31, 2018	 		3,696,486	 	 	$	2,287,620	 	 	$	(106,091,353	)	 	$	(103,803,733	)

 

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

 

    - 4 -

     

    

 

Cannabis
Strategies Acquisition Corp.

Notes to Consolidated
Financial Statements December 31, 2018

(Expressed in Canadian
Dollars)

 

	1.	Organization
and nature of operations

 

Cannabis Strategies Acquisition Corp. (“Cannabis
Strategies” or the “Corporation”) is 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 (a “Qualifying
Transaction”). The Corporation’s business activities are carried out in a single business segment.

 

The Corporation changed its financial year-end
to December 31 to better synchronize its financial reporting with that of its proposed target businesses in connection with
its proposed Qualifying Transaction.

 

The Corporation was incorporated on July 31,
2017 under the Business Corporations Act (Ontario) and is domiciled in Canada. The registered office of the Corporation is located
at 199 Bay Street, Suite 5300, Commerce Court West, Toronto, Ontario, M5L 1B9. The head office of the Corporation is located
at 590 Madison Avenue, 26th Floor, New York, New York, 10022.

 

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

 

On December 21, 2017, the Corporation
completed its initial public offering (the “Offering”) of 12,500,000 Class A Restricted Voting Units at $10.00
per Class A Restricted Voting Unit. Each Class A Restricted Voting Unit consisted of one Class A restricted voting
share (“Class A Restricted Voting Share”) of the Corporation, one share purchase warrant (each, a “Warrant”)
and one right (each, a “Right”). Each Class A Restricted Voting Share, unless previously redeemed, will be automatically
converted into one Class B Share following the closing of a Qualifying Transaction. All Warrants will become exercisable at
a price of $11.50 per share, commencing 65 days after the completion of a Qualifying Transaction and will expire on the day that
is five years after the completion of a Qualifying Transaction or may expire earlier if a Qualifying Transaction does not occur
within the permitted timeline of 18 months (“Permitted Timeline”) (subject to extension, as further described herein)
from the closing of the Offering or if the expiry date is accelerated. Each Warrant is exercisable to purchase one Class A
Restricted Voting Share (which, following the closing of the Qualifying Transaction, will become one Class B Share of Cannabis
Strategies and each Right would represent the entitlement to automatically receive, for no additional consideration, one-tenth
(1/10) of one Class A Restricted Voting Share (following the closing of a Qualifying Transaction, which at such time will
be one-tenth (1/10) of a Class B Share). At the option of the warrant holder, the Warrants may be exercised through cashless
exercise.

 

In connection with the Offering, the Corporation
granted the underwriter a 30-day non-transferable option to purchase up to an additional 1,875,000 Class A Restricted Voting
Units, at a price of $10.00 per Class A Restricted Voting Unit, to cover over-allotments, if any, and for market stabilization
purposes.

 

Concurrent with the completion of the Offering,
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 3,662,109 Class B Shares ("Founders' Shares"), consisting of 3,642,109 Class B Shares purchased by the Sponsor,
10,000 Class B Shares purchased by Kamaldeep Thindal, and 10,000 Class B Shares purchased by Charles Miles, in each case
assuming that the over- allotment option was exercised in full for total proceeds of $25,000. In addition, the Sponsor purchased
an aggregate of 250,000 Class B Units (the “Class B Units”) at $10.00 per Class B Unit and 2,500,000
Warrants (“Founders’ Warrants”) at $1.00 per Founders’ Warrant. Each Class B Unit consists of one
Class B Share, one Warrant and one Right. The Founders’ Warrants will be 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 will be subject to the same terms and conditions as the Rights underlying the Class A Restricted Voting Units.

 

    - 5 -

     

    

 

Cannabis
Strategies Acquisition Corp.

Notes to Consolidated
Financial Statements December 31, 2018

(Expressed in Canadian
Dollars)

 

	1.	Organization and nature of operations (continued)

 

On January 19, 2018, the underwriter exercised its over-allotment
option to purchase an additional 975,000 Class A Restricted Voting Units for aggregate proceeds of $9,750,000 and the Sponsor
subscribed for an additional 121,870 Founders' Warrants (for an aggregate purchase price of $121,870) and 12,188 Class B
Units (for an aggregate purchase price of $121,880) for aggregate proceeds of $243,750. As a result of the exercise of the over-allotment
option, an aggregate of 13,475,000 Class A Restricted Voting Units of the Corporation were issued for aggregate proceeds
of $134,750,000. Due to the partial exercise of the over-allotment option, an aggregate of 227,812 Class B Shares (also known
as Founders’ Shares) were forfeited without compensation by the Founders on January 19, 2018. As a result, following
the exercise of the over-allotment option and forfeiture of the 227,812 Founders’ Shares, the Founders own an aggregate
of 3,434,297 Class B Shares, 262,188 Class B Units and 2,621,870 Founders’ Warrants.

 

Each Class A Restricted Voting Unit
commenced trading on December 21, 2017 on the NEO Exchange Inc., formerly the Aequitas NEO Exchange Inc. (the “Exchange”)
under the symbol “CSA.UN”, and were separated into Class A Restricted Voting Shares, Warrants and Rights following
the close of business on January 30, 2018, being 40 days following the closing of the Offering, which trade under the symbols
 “CSA.A”, “CSA.WT” and “CSA.RT”, respectively. The Class B Shares issued to the Founders
and the Class B Units issued to the Sponsor are not listed.

 

The proceeds of $134,750,000 from the Offering
and over-allotment are held by Odyssey Trust Company, as Escrow Agent, in an escrow account (the “Escrow Account”)
at a Canadian chartered bank or subsidiary thereof, in accordance with the escrow agreement. Subject to applicable law and payment
of certain taxes, permitted redemptions and certain expenses, as further described herein, none of the funds held in the Escrow
Account will be released to the Corporation prior to the closing of a Qualifying Transaction. The escrowed funds will be held to
enable the Corporation to (i) satisfy redemptions made by holders of Class A Restricted Voting Shares (including in the
event of a Qualifying Transaction or an extension to the Permitted Timeline of up to 36 months with shareholder approval from the
holders of Class A Restricted Shares and the Corporation’s board of directors, or in the event a Qualifying Transaction
does not occur within the Permitted Timeline), (ii) fund a Qualifying Transaction with the net proceeds following payment
of any such redemptions and deferred underwriting commissions, and/or (iii) pay taxes on amounts earned on the escrowed funds
and certain permitted expenses. Such escrowed funds and all amounts earned, subject to such obligations and applicable law, will
be assets of the Corporation. These escrowed funds will also be used to pay the deferred underwriting commissions in the amount
of $4,716,250, 50% of which will be payable to the Underwriter and the remaining 50% will be payable by the Corporation at its
discretion.

 

In connection with consummating a Qualifying
Transaction, the Corporation will require (i) approval by a majority of the directors unrelated to the Qualifying Transaction,
and (ii) approval by a majority of the holders of the Class A Restricted Voting Shares and Class B Shares, voting
together as if they were a single class of shares, at a shareholders meeting held to consider the Qualifying Transaction, if required
by the Exchange's rules at the time of the Qualifying Transaction. Irrespective of whether they vote for or against, or do
not vote on, the proposed Qualifying Transaction, holders of Class A Restricted Voting Shares may elect to redeem all or a
portion of their Class A Restricted Voting Shares at a per share price, payable in cash, equal to the pro-rata portion per
Class A Restricted Voting Share of: (A) the escrowed funds available in the Escrow Account at the time of the shareholders
meeting (if required by the rules of the Exchange at the time of the Qualifying Transaction, or if no such shareholders’
meeting is required, at the time immediately prior to the redemption deposit timeline), including interest and other amounts earned
thereon; less (B) an amount equal to the total of (i) applicable taxes payable by the Corporation on such interest and
other amounts earned in the Escrow Account and (ii) actual and expected direct expenses related to the redemption, each as
reasonably determined by the Corporation, subject to certain limitations. Each holder of Class A Restricted Voting Shares,
together with any affiliate of such holder or any other person with whom such holder or affiliate is acting jointly or in concert,
will be subject to a redemption limitation of an aggregate 15% of the number of Class A Restricted Voting Shares issued and
outstanding. Class B Shares will not be redeemable in connection with a Qualifying Transaction or an extension to the Permitted
Timeline and holders of Class B Shares shall not be entitled to access the Escrow Account should a Qualifying Transaction
not occur within the Permitted Timeline.

 

    - 6 -

     

    

 

Cannabis
Strategies Acquisition Corp.

Notes to Consolidated
Financial Statements December 31, 2018

(Expressed in Canadian
Dollars)

 

	1.	Organization and nature of operations (continued)

 

If the Corporation is unable to complete
its Qualifying Transaction within the Permitted Timeline (or an extension of the Permitted Timeline), all of the Class A Restricted
Voting Shares will be automatically redeemed and each holder of a Class A Restricted Voting Share will receive an amount,
payable in cash, equal to the pro-rata portion per Class A Restricted Voting Share of: (A) the Escrow Account, including
any interest and other amounts earned; less (B) an amount equal to the total of (i) any applicable taxes payable by the
Corporation on such interest and other amounts earned in the Escrow Account, (ii) any taxes of the Corporation arising in
connection with the redemption of the Class A Restricted Voting Shares, and (iii) up to a maximum of $50,000 of interest
and other amounts earned to pay actual and expected expenses related to the dissolution and certain other related costs as reasonably
determined by the Corporation. The underwriter will have no right to the deferred underwriting commissions held in the Escrow Account
in such circumstances.

 

	2.	Basis of presentation

 

These financial statements of the Corporation
as at December 31, 2018 and for the period ended December 31, 2018 (the “December 2018 Financial Statements”)
have been prepared in accordance with International Financial Reporting Standards ("IFRS") as issued by the International
Accounting Standards Board, and with interpretations of the International Financial Reporting Interpretations Committee which the
Canadian Accounting Standards Board has approved for incorporation into Part 1 of the Chartered Professional Accountants of
Canada Handbook – Accounting. The December 2018 Financial Statements were authorized for issuance by the Board of Directors
on March 22, 2019.

 

The significant accounting policies and
methods of application adopted by the Corporation in the preparation of the December 31, 2018 Financial Statements are provided
in note 3.

 

	3.	Summary of significant accounting policies

 

The significant accounting policies adopted
by the Corporation in the preparation of its financial statements are set out below.

 

Basis of presentation

 

These financial statements have been prepared
under the historical cost convention, except for the carrying value of Class A Restricted Voting Shares subject to redemption
and Warrant liability, which are measured at fair value as determined at each reporting date. The Corporation's functional and
presentation currency is the Canadian dollar.

 

Basis of consolidation

 

These consolidated financial statements
include the financial statements of the Corporation and its wholly owned subsidiaries. All significant intercompany balances and
transactions have been eliminated on consolidation.

 

Financial instruments

 

Recognition

 

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

 

    - 7 -

     

    

 

Cannabis
Strategies Acquisition Corp.

Notes to Consolidated
Financial Statements December 31, 2018

(Expressed in Canadian
Dollars)

 

	3.	Summary of significant accounting policies (continued)
Financial instruments (continued)

 

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

 

Classification and Measurement

 

Effective October 1, 2018, the Corporation adopted IFRS
9, Financial Instruments. The adoption of IFRS 9 did not have a material impact on the Corporation's financial statements.

 

The Corporation determines the classification of its financial
instruments at initial recognition as a result of adopting IFRS 9. Financial assets and financial liabilities are classified according
to the following measurement categories:

 

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

		·	those to be measured subsequently at amortized cost.

 

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

 

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

 

		·	amortized cost;

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

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

 

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

 

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

 

The Corporation’s financial asset
consists of cash and restricted cash, which is classified and subsequently measured at FVTPL. The Corporation’s financial
liabilities consist of accounts payable and accrued liabilities, due to related parties and deferred underwriters' commission,
which are classified and subsequently measured at amortized cost using the effective interest method. In addition, the Corporation’s
financial liabilities also include Class A Restricted Voting Shares subject to redemption and warrant liability which are
classified and subsequently measured at FVTPL.

 

    - 8 -

     

    

 

 

	Cannabis Strategies Acquisition Corp. 
	Notes to Consolidated Financial Statements
	December 31,
2018 
	(Expressed in Canadian Dollars)

 

		3.	Summary of significant accounting policies (continued)

 

Financial instruments (continued)

 

Classification and Measurement (continued)

 

All financial instruments recognized at fair value in the statements
of financial position are classified into one of three levels in the fair value hierarchy as follows:

 

		·	Level
                                         1 – Valuation based on quoted prices (unadjusted) observed in active markets for
                                         identical assets or liabilities.

 

		·	Level
                                         2 – Valuation techniques based on inputs that are quoted prices of similar instruments
                                         in active markets; quoted prices for identical or similar instruments in markets that
                                         are not active; inputs other than quoted prices used in a valuation model that are observable
                                         for that instrument; and inputs that are derived from or corroborated by observable market
                                         data by correlation or other means.

 

		·	Level
                                         3 – Valuation techniques with significant unobservable market inputs.

 

Impairment

 

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

 

Income taxes

 

The Corporation follows the balance sheet
liability method to provide for income taxes on all transactions recorded in its financial statements. The balance sheet liability
method requires that income taxes reflect the expected future tax consequences of temporary differences between the carrying amounts
of assets and liabilities and their tax bases. Deferred income tax assets and liabilities are determined for each temporary difference
and for unused tax losses and unused tax credits, as applicable, at rates expected to be in effect when the asset is realized
or the liability is settled.

 

The effect on deferred income tax assets
and liabilities of a change in tax rates is recognized in net income or loss in the period that includes the substantive enactment
date. Deferred income tax assets are recognized to the extent that it is probable that the assets can be recovered.

 

Deferred income tax assets, including
those arising from unutilized tax losses, require management to assess the likelihood that the Corporation will generate taxable
income in future periods in order to utilize recognized deferred tax assets. Estimates of future taxable income are based on forecasted
cash flows from operations and the application of existing laws in each applicable jurisdiction. Future taxable income is also
significantly dependent upon the Corporation completing a Qualifying Transaction, the underlying structure of a Qualifying Transaction,
and the resulting nature of operations. To the extent that future cash flows and/or the probability, structure and timing, and
the nature of operations of a future Qualifying Transaction differ significantly from estimates made, the ability of the Corporation
to realize a deferred income tax asset could be materially impacted.

 

    - 9 -

     

    

 

	Cannabis Strategies Acquisition Corp. 
	Notes to Consolidated Financial Statements
	December 31,
2018 
	(Expressed in Canadian Dollars)

 

		3.	Summary of significant accounting policies (continued)

 

Earnings (loss) per share

 

Basic earnings or loss per share is computed
by dividing the net earnings or loss attributable to shareholders by the weighted average number of shares outstanding during
the period, excluding Class A Restricted Voting Shares subject to redemption. Diluted earnings or loss per share, where applicable,
is calculated by adjusting the weighted average number of shares outstanding for dilutive instruments by applying the treasury
stock method.

 

New accounting standards adopted

 

IFRS 15 Revenue from Contracts with
Customers

 

IFRS 15 Revenue from Contracts with Customers
(“IFRS 15”) was effective for the Corporation on October 1, 2018. The standard contains a single model that applies
to contracts with customers and two approaches to recognizing revenue: at a point in time or over time. The model features a contract-based
five-step analysis of transactions to determine whether, how much and when revenue is recognized. New estimates and judgmental
thresholds have been introduced, which may affect the amount and/or timing of revenue recognized. The new standard applies to
contracts with customers. It does not apply to insurance contracts, financial instruments or lease contracts, which fall in the
scope of other IFRSs. The adoption of IFRS 15 did not have a material impact on the Corporation's financial statements.

 

		4.	Critical accounting judgments, estimates and assumptions

 

The preparation of these financial statements
requires the Corporation to make judgments in applying its accounting policies and estimates and assumptions about the future.
These judgments, estimates and assumptions affect the Corporation’s reported amounts of assets, liabilities, and items in
net income or loss, and the related disclosure of contingent assets and liabilities, if any. The Corporation evaluates its estimates
on an ongoing basis. Such estimates are based on various assumptions that the Corporation believes are reasonable under the circumstances,
and these estimates form the basis for making judgments about the carrying value of assets and liabilities and the reported amounts
of items in net income or loss that are not readily apparent from other sources. Actual results may differ from these estimates
under different assumptions or conditions. The following discusses the most significant accounting judgments, estimates and assumptions
that the Corporation has made in the preparation of its December 31, 2018 Financial Statements.

 

Fair Value of Financial Instruments

 

Certain financial instruments are recorded
in the Corporation’s statements of financial position at values that are representative of or approximate their fair value.
The fair value of a financial instrument that is traded in active markets at each reporting date is determined by reference to
its quoted market price. If the financial instrument does not trade on an active market, the Corporation will use an option-pricing
model to measure the fair value of the financial instrument. 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 instrument. Changes in the
underlying trading value or estimates may significantly affect the amount of net income or loss for a particular period. Furthermore,
the quoted market price or option price of a financial liability may not be equal to the amount that the Corporation may have
to pay in settlement of the underlying obligation, should such obligation become immediately payable. The Corporation reviews
assumptions relating to financial instruments on an ongoing basis to ensure that the basis for determination of fair value is
appropriate.

 

    - 10 -

     

    

 

	Cannabis Strategies Acquisition Corp. 
	Notes to Consolidated Financial Statements
	December 31,
2018 
	(Expressed in Canadian Dollars)

 

		4.	Critical accounting judgments, estimates and assumptions
(continued) 

 

Warrant Valuations

 

Pursuant to the Corporation’s Offering of Class A
Restricted Voting Units, the Corporation issued Warrants. The Company also issued Warrants as part of the Class B Units issued
to Founders and has also issued the Founders Warrants. Estimating the fair value of warrants requires determining the most appropriate
valuation model that is dependent on the terms and conditions of the Warrant. To the extent that a quoted market value is not
available, the Corporation applies an option-pricing model to measure the fair value of the Warrants issued. Application of the
option- pricing model requires estimates in expected dividend yields, expected volatility in the underlying assets and the expected
life of the Warrant. These estimates may ultimately be different from amounts subsequently realized, resulting in an overstatement
or understatement of net income or loss.

 

Income tax

 

The determination
of the Corporation’s income taxes and other tax assets and liabilities requires interpretation of complex laws and regulations.
Judgment is required in determining whether deferred income tax assets should be recognized on the statements of financial position.
Deferred income tax assets, including those arising from unutilized tax losses, require management to assess the likelihood that
the Corporation will generate taxable income in future periods in order to utilize recognized deferred tax assets. Estimates of
future taxable income are based on forecasted cash flows from operations and the application of existing laws in each applicable
jurisdiction. Future taxable income is also significantly dependent upon the Corporation completing a Qualifying Transaction,
the underlying structure of a Qualifying Transaction, and the resulting nature of operations. To the extent that future cash flows
and/or the probability, structure and timing, and the nature of operations of a future Qualifying Transaction differ significantly
from estimates made, the ability of the Corporation to realize a deferred tax asset could be materially impacted.

 

		5.	Restricted cash and short-term investments held in
                                         escrow

 

	December 31, 2018	 	 	 
	Restricted cash	 	$	126,155,821	 
	Investments in Flexible Guaranteed Investment Certificate due January 21, 2019	 	 	9,750,000	 
	Accrued interest	 	 	83,423	 
	Restricted cash and short-term investments held in escrow	 	$	135,989,244	 

 

	September 30, 2018	 	 	 
	Investments in Flexible Guaranteed Investment Certificate due December 21, 2018	 	$	125,000,000	 
	Investments in Flexible Guaranteed Investment Certificate due January 21, 2019	 	 	9,750,000	 
	Accrued interest	 	 	933,564	 
	Restricted cash and short-term investments held in escrow	 	$	135,683,564	 

 

    - 11 -

     

    

 

	Cannabis Strategies Acquisition Corp. 
	Notes to Consolidated Financial Statements
	December 31,
2018 
	(Expressed in Canadian Dollars)

 

		6.	Class A restricted voting shares subject to redemption 

 

Authorized

 

The Corporation is authorized to issue
an unlimited number of Class A Restricted Voting Shares. The holders of Class A Restricted Voting Shares have no pre-emptive
rights or other subscription rights and there are no sinking fund provisions applicable to these shares.

 

Voting rights

 

Prior to the consummation of a Qualifying
Transaction, holders of Class A Restricted Voting Shares are not entitled to vote at, or receive notice of or meeting materials
in respect of customary annual general meeting matters, including the election and removal of directors and auditors. The holders
of Class A Restricted Voting Shares would, however, be entitled to vote on and receive notice of meeting materials on all
other matters requiring shareholder approval, including approval of an extension of the Permitted Timeline and of a proposed Qualifying
Transaction and in the latter case, the holders of the Class A Restricted Voting Shares would vote together with the Class B
Shares as if they were a single class of shares.

 

Redemption rights

 

The holders of Class A Restricted
Voting Shares are entitled to redeem their shares, subject to certain conditions, and are entitled to receive the escrow proceeds,
net of applicable taxes and other permitted deductions, from the Escrow Account: (i) in the event that the Corporation does
not complete a Qualifying Transaction within the Permitted Timeline (in which case the redemption is automatic); (ii) in
the event of a Qualifying Transaction; and (iii) in the event of an extension to the Permitted Timeline. Upon such redemption,
the rights of holders of Class A Restricted Voting Shares as shareholders will be completely extinguished.

 

Fair value of Class A restricted
voting shares subject to redemption

 

The redemption rights embedded in the
terms of the Corporation’s Class A Restricted Voting Shares are considered by the Corporation to be outside of the
Corporation’s control and subject to uncertain future events. Accordingly, the Corporation has classified its “Class A
Restricted Voting Shares subject to redemption” as financial liabilities at FVTPL.

 

Fair value of Class A restricted
voting shares subject to redemption-issued and outstanding

 

	 	 	Number	 	 	Amount	 
	From incorporation on July 31, 2017	 	 	-	 	 	$	-	 
	Issuance of Class A Restricted Voting Shares pursuant to the Offering	 	 	12,500,000	 	 	 	115,625,000	 
	Issuance of Class A Restricted Voting Shares pursuant to the over-allotment option	 	 	975,000	 	 	 	9,018,750	 
	 	 	 	13,475,000	 	 	 	124,643,750	 
	Adjusted for:	 	 	 	 	 	 	 	 
	Fair value adjustment	 	 	-	 	 	 	74,112,500	 
	Balance, December 31, 2018	 	 	13,475,000	 	 	$	198,756,250	 

 

The fair value of the Company’s
Class A restricted voting shares increased to $198,756,250 as the Class A Restricted Voting Shares bid price on December 31,
2018 was $14.75.

 

    - 12 -

     

    

 

	Cannabis Strategies Acquisition Corp. 
	Notes to Consolidated Financial Statements
	December 31,
2018 
	(Expressed in Canadian Dollars)

 

		6.	Class A restricted voting shares subject to redemption
                                         (continued)

 

	 	 	Number	 	 	Amount	 
	From incorporation on July 31, 2017	 	 	-	 	 	$	-	 
	Issuance of Class A Restricted Voting Shares pursuant to the Offering	 	 	12,500,000	 	 	 	115,625,000	 
	Issuance of Class A Restricted Voting Shares pursuant to the over-allotment option	 	 	975,000	 	 	 	9,018,750	 
	 	 	 	13,475,000	 	 	 	124,643,750	 
	Adjusted for:	 	 	 	 	 	 	 	 
	Fair value adjustment	 	 	-	 	 	 	34,361,250	 
	Balance, September 30, 2018	 	 	13,475,000	 	 	$	159,005,000	 

 

		7.	Warrant liability

 

As at December 31, 2018 and September 30,
2018, the Corporation had 16,359,058 Warrants issued and outstanding, comprised of 13,475,000 Warrants forming part of the Class A
Restricted Voting Units, 2,621,870 Founders’ Warrants, and 262,188 Warrants forming part of the Class B Units.

 

All Warrants will become exercisable only
commencing 65 days after the completion of our Qualifying Transaction. Each Warrant is exercisable to purchase one Class A
Restricted Voting Share (which, following the closing of the Qualifying Transaction, will become one Class B Share) at a
price of $11.50 per share, subject to the following adjustments. The Warrant Agreement will provide that the exercise price and
number of Class B Shares issuable on exercise of the Warrants may be adjusted in certain circumstances, including in the
event of a stock dividend, Extraordinary Dividend or a recapitalization, reorganization, merger or consolidation. The Warrants
will not, however, be adjusted for issuances of Class B Shares at a price below their exercise price. Once the Warrants become
exercisable, the Corporation may accelerate the expiry date of the outstanding Warrants (excluding the Founders’ Warrants
but only to the extent still held by the Sponsor at the date of public announcement of such acceleration and not transferred prior
to the accelerated expiry date, due to the anticipated knowledge by the Sponsor of material undisclosed information which could
limit their flexibility) by providing 30 days’ notice if, and only if, the closing share price of the Class B Shares
equals or exceeds $18.00 per Class B Share (as adjusted for stock splits or combinations, stock dividends, Extraordinary
Dividends, reorganizations and recapitalizations and the like) for any 20 trading days within a 30-trading day period, in which
case the expiry date shall be the date which is 30 days following the date on which such notice if provided.

 

The Warrant holders will not be entitled
to the proceeds from the Escrow Account. The Warrant holders do not have the rights or privileges of holders of shares and any
voting rights until they exercise their Warrants and receive corresponding Class B Shares of the Corporation. After the issuance
of corresponding Class B Shares upon exercise of the Warrants, each holder is expected to be entitled to one vote for each
Class B Share held of record on all matters to be voted on by shareholders.

 

Restrictions on Transfer of Founders’
Warrants

 

With certain exemptions, the Founders
have agreed not to transfer any of their Founders’ Warrants until after the closing of the Qualifying Transaction, except
for transfers required due to the structuring of the Qualifying Transaction, in which case such restriction will apply to the
securities received in connection with the Qualifying Transaction. Following completion of the Corporation’s Qualifying
Transaction, the Founders’ Warrants, including Class B Shares issuable on exercise of the Founders’ Warrants,
may be subject to certain sale or transfer restrictions in accordance with applicable securities laws.

 

    - 13 -

     

    

  

	Cannabis Strategies Acquisition Corp.
	Notes to Consolidated Financial Statements
	December 31, 2018
	(Expressed in Canadian
    Dollars)

 

		7.	Warrant
liability (continued)

 

Fair value of Warrants

 

As the number of Class B 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. The Corporation applies
an option-pricing model to measure the fair value of the Warrants when issued. Application of the option-pricing model requires
estimates in expected dividend yields, expected volatility in the underlying assets and the expected life of the Warrants. These
estimates may ultimately be different from amounts subsequently realized, resulting in an overstatement or understatement of net
income or loss.

 

Warrants - Issued and Outstanding

 

	 	 	Number	 	 	Amount	 
	From incorporation on July 31, 2017	 	 	-	 	 	$	-	 
	Warrants issued in connection with:	 	 	 	 	 	 	 	 
	Issuance to Founders	 	 	2,621,870	 	 	 	2,621,870	 
	Issuance of Class A Restricted Voting Units pursuant to the Offering	 	 	12,500,000	 	 	 	9,375,000	 
	Issuance of Class A Restricted Voting Units pursuant to the over-allotment option	 	 	975,000	 	 	 	731,250	 
	Issuance of Class B Units to Sponsor	 	 	262,188	 	 	 	196,641	 
	 	 	 	16,359,058	 	 	 	12,924,761	 
	Adjusted for:	 	 	 	 	 	 	 	 
	Fair value adjustment	 	 	-	 	 	 	19,793,355	 
	Balance, December 31, 2018	 	 	16,359,058	 	 	$	32,718,116	 

 

The fair value of the Company’s
Warrants increased to $32,718,116 as the Warrant's bid price on December 31, 2018 was $2.00.

 

	 	 	Number	 	 	Amount	 
	From incorporation on July 31, 2017	 	 	-	 	 	$	-	 
	Warrants issued in connection with:	 	 	 	 	 	 	 	 
	Issuance to Founders	 	 	2,621,870	 	 	 	2,621,870	 
	Issuance of Class A Restricted Voting Units pursuant to the Offering	 	 	12,500,000	 	 	 	9,375,000	 
	Issuance of Class A Restricted Voting Units pursuant to the over-allotment option	 	 	975,000	 	 	 	731,250	 
	Issuance of Class B Units to Sponsor	 	 	262,188	 	 	 	196,641	 
	 	 	 	16,359,058	 	 	 	12,924,761	 
	Adjusted for:	 	 	 	 	 	 	 	 
	Fair value adjustment	 	 	-	 	 	 	3,434,297	 
	Balance, September 30, 2018	 	 	16,359,058	 	 	$	16,359,058	 

 

		8.	Shareholders' deficiency

 

a) Class B Shares

 

Authorized

 

The Corporation is authorized to issue
an unlimited number of Class B Shares without nominal or par value. The holders of Class B Shares have no pre-emptive
rights or other subscription rights and there are no sinking fund provisions applicable to these shares.

 

    - 14 -

     

    

 

	Cannabis Strategies Acquisition Corp.
	Notes to Consolidated Financial Statements
	December 31, 2018
	(Expressed in Canadian
    Dollars)

 

		8.	Shareholders' deficiency (continued)

 

a) Class B
Shares (continued)

 

Voting rights

 

Holders of Class B Shares are entitled
to vote at all meetings of shareholders and on all matters requiring a shareholder vote, with the exception of a vote to approve
an extension of the Permitted Timeline within which the Corporation is required to complete its Qualifying Transaction, which
will only be voted upon by holders of Class A Restricted Voting Shares.

 

Redemption rights

 

Holders of Class B Shares do not
have any redemption rights with respect to its Class B Shares, or rights to distributions from the Escrow Account if the
Corporation fails to complete a Qualifying Transaction within the Permitted Timeline.

 

Restrictions on transfer, assignment
or sale of Founders' Shares

 

With certain exceptions, the holders of
the Founders’ Shares have agreed not to transfer, assign or sell any of their Founders’ Shares prior to completion
of the Corporation’s Qualifying Transaction, and following completion of a Qualifying Transaction, they have agreed not
to sell or transfer any of their Founders’ Shares until the earlier of: (A) one year following completion of the Qualifying
Transaction, and (B) the date on which the closing share price of the Class B Shares equals or exceeds $12.00 per share
(as adjusted for share splits, share capitalizations, reorganizations, Extraordinary Dividends, reorganizations and recapitalizations
and the like) for any 20 trading days within a 30-trading day period at any time following the closing of the Qualifying Transaction.

 

In addition
to the foregoing transfer restrictions, 25% of the Founders' Shares will be subject to forfeiture on the fifth anniversary of
the Qualifying Transaction unless the closing share price of the Class B Shares exceeds $13.00 (as adjusted for stock splits
or combinations, stock dividends, Extraordinary Dividends, reorganizations, recapitalizations and the like) for any 20 trading
days within a 30-trading day period at any time following the closing of the Qualifying Transaction.

 

Following completion of the Corporation’s
Qualifying Transaction, the Founders’ Shares, including the Class B Shares into which the Founders’ Shares are
convertible, may be subject to certain sale or transfer restrictions in accordance with applicable securities laws.

 

	Class B Shares - Issued and Outstanding

                                                                                 
	 	Number	 	 	Amount	 
	From incorporation on July 31, 2017	 	 	-	 	 	$	-	 
	Issuance of Class B Shares in connection with organization of the Corporation	 	 	1	 	 	 	10	 
	Issuance of Class B Shares to Founders	 	 	3,662,109	 	 	 	25,000	 
	Issuance of Class B Shares to Sponsor pursuant to Class B Units	 	 	262,188	 	 	 	2,425,239	 
	 	 	 	3,924,298	 	 	 	2,450,249	 
	Adjusted for:	 	 	 	 	 	 	 	 
	Transaction costs	 	 	-	 	 	 	(162,629	)
	Forfeiture of Founders Class B Shares (note 1)	 	 	(227,812	)	 	 	-	 
	Balance, September 30, 2018 and December 31, 2018	 	 	3,696,486	 	 	$	2,287,620	 

 

    - 15 -

     

    

 

	Cannabis Strategies Acquisition Corp.
	Notes to Consolidated Financial Statements
	December 31, 2018
	(Expressed in Canadian
    Dollars)

 

		8.	Shareholders' deficiency (continued)

 

		b)	Rights

 

As at December 31, 2018 and September 30,
2018, the Corporation had 13,737,188 Rights issued and outstanding, comprised of 13,475,000 Rights forming part of the Class A
Restricted Voting Units, and 262,188 Rights forming part of the Class B Units.

 

Each Right will entitle the holder to
receive one-tenth (1/10) of a Class A Restricted Voting Share following the closing of the Qualifying Transaction (which
at such time will represent one-tenth (1/10) of a Class B Share, subject to adjustment under the terms of the Qualifying
Transaction).

 

The Rights will expire if a Qualifying
Transaction does not occur within the Permitted Timeline. The Rights will not have any access to, or benefit from, the proceeds
in the Escrow Account, and will not possess any redemption or distribution rights. The Rights will expire worthless if a Qualifying
Transaction is not consummated within the Permitted Timeline. Any Right that has not been converted within two (2) years
after the completion of our Qualifying Transaction shall be null and void.

 

Restrictions on Transfer of Founders’
Rights

 

With certain exceptions, the Founders
have agreed not to transfer any of their Rights until after the closing of the Qualifying Transaction, except for transfers required
due to the structuring of the Qualifying Transaction, in which case such restriction will apply to the securities received in
connection with the Qualifying Transaction. Following completion of the Corporation’s Qualifying Transaction, the Founders’
Rights, including Class B Shares issuable on exercise of the Founders’ Rights, may be subject to certain sale or transfer
restrictions in accordance with applicable securities laws.

 

		9.	Transaction costs

 

Transaction costs consist principally
of legal, accounting and underwriting costs incurred through to the date of the statements of financial position that are directly
related to the Offering.

 

Transaction costs incurred amounted
to $9,293,446 (including $8,085,000 in underwriters’ commission of which $4,716,250 is deferred and payable only upon
completion of a Qualifying Transaction). Transaction costs were expensed to the statements of operations as incurred, except
for $162,629 of transaction costs that were allocated to shareholders’ deficiency as they were determined to be in
respect of the issuance of Class B Shares.

 

Transaction costs incurred from commencement
of operations on July 31, 2017 to September 30, 2018 were allocated as follows:

 

	 	 	Class B
    

Shares	 	 	Statement Shareholders' 

of
    Operations Deficiency	 
	Underwriter's commission	 	$	58,951	 	 	$	3,309,799	 	 	$	3,368,750	 
	Deferred underwriter's commission	 	 	82,531	 	 	 	4,633,719	 	 	 	4,716,250	 
	Professional fees (legal, accounting, etc.)	 	 	11,693	 	 	 	656,510	 	 	 	668,203	 
	Underwriter's out-of-pocket expenditures	 	 	2,625	 	 	 	147,375	 	 	 	150,000	 
	Management out-of pocket expenses	 	 	6,829	 	 	 	383,414	 	 	 	390,243	 
	 	 	$	162,629	 	 	$	9,130,817	 	 	$	9,293,446	 

 

There were $nil transaction costs from October 1, 2018
to December 31, 2018.

 

    - 16 -

     

    

 

	Cannabis Strategies Acquisition Corp.
	Notes to Consolidated Financial Statements
	December 31, 2018
	(Expressed in Canadian
    Dollars)

 

		9.	Transaction costs (continued) 

 

Underwriter's commission

 

In consideration for its services in connection
with the Offering, the Corporation has agreed to pay the underwriter a commission equal to 6.0% of the gross proceeds of the Class A
Restricted Voting Units issued under the Offering. The Corporation paid $3,368,750, representing $0.25 per Class A Restricted
Voting Unit to the underwriter upon closing of the Offering. Upon completion of a Qualifying Transaction, the remaining $4,716,250
(representing $0.35 per Class A Restricted Voting Unit), 50% of which will be payable to the Underwriter and the remaining
50% will be payable by the Corporation at its discretion.

 

		10.	General and administrative expenses

 

	 	 	Period Ended 
 December 31,
 2018	 	 	Year Ended  
 September 30,
 2018	 
	Public company filing and listing costs	 	$	57,528	 	 	$	34,739	 
	Professional fees	 	 	2,926,136	 	 	 	1,027,926	 
	General office expenses	 	 	107,562	 	 	 	113,351	 
	 	 	$	3,091,226	 	 	$	1,176,016	 

 

		11.	Related party
                                         transactions

 

The Corporation has entered into an administrative
services agreement with the Sponsor for an initial term of 18 months, subject to 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 has agreed to pay $10,000 per month,
plus applicable taxes for such services. As at December 31, 2018 and September 30, 2018, the Corporation accrued $122,314
and $92,314, respectively, in respect of these services.

 

As at December 31, 2018 and September 30,
2018, the amount due to the Sponsor was $nil and $185,896, respectively, for out-of-pocket expenses paid by the Sponsor on behalf
of the Corporation and the terms of the administrative services agreement. As at December 31, 2018 and September 30,
2018, the amount payable to the Corporation's Chief Executive Officer was $609,418 and $495,564, 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 are unsecured, non-interest bearing and are payable no earlier than the date of the consummation
of a 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 approximates their carrying amount.

 

The Sponsor has executed a make whole
agreement and undertaking in favour of the Corporation, whereby the Sponsor has agreed to indemnify the Corporation in certain
limited circumstances where the funds held in the Escrow Account are reduced to below $10.00 per Class A Restricted Voting
Share.

 

    - 17 -

     

    

 

 

Cannabis Strategies Acquisition Corp.

Notes to Consolidated Financial Statements December 31,
2018

(Expressed in Canadian
Dollars)

 

		11.	Related party transactions (continued)

 

During the period ended December 31,
2018 and the year ended September 30, 2018, the Corporation paid professional fees of $8,840 and $29,968, respectively to
Marrelli Support Services Inc. (“Marrelli Support”), an organization of which the Corporation's 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, 2018 and September 30, 2018, Marrelli Support was owed $5,836 and $2,932, respectively, these amounts
are included in accounts payable and accrued liabilities on the Corporation's consolidated statements of financial position.

 

		12.	Income taxes

 

The income tax recovery amount on pre-tax
losses differs from the income tax recovery amount that would arise using the combined Canadian federal and provincial statutory
income tax rate of 26.5%, as a result of the following items:

 

	 	 	Period Ended 

December 31,	 	 	Year Ended 

September 30,	 
	 	 	2018	 	 	2018	 
	Loss before tax at statutory rate of 26.5%	 	$	(58,922,537	)	 	$	(47,168,816	)
	Effect on taxes of: Expected income tax recovery	 	 	(15,614,472	)	 	 	(12,499,736	)
	Unrealized change in fair value of financial liabilities	 	 	14,869,232	 	 	 	10,015,820	 
	Non-deductible expenses	 	 	6,454	 	 	 	-	 
	Share issue costs booked through equity	 	 	-	 	 	 	(43,097	)
	Change in unrecognized temporary differences	 	 	738,786	 	 	 	2,527,013	 
	Income tax recovery	 	$	-	 	 	$	-	 

 

	Unrecognized deferred tax assets	 	 

 

Deferred income tax assets are only given
recognition in the Corporation's financial statements if management has determined that is probable that such deferred income tax
assets may be recovered. The recoverability of deferred income tax assets is partially dependent on the nature, terms and conditions
of a Qualifying Transaction that is to be completed in the future, causing uncertainty in the ability of the Corporation to benefit
from deferred income tax assets. As such, management believes that the following deductible temporary differences do not currently
meet the criteria for recognition:

 

	 	 	As at 

December 31,	 	As at 

September 30,	 
	 	 	2018	 	2018	 
	Tax loss carry forwards	 	$	4,174,624	 	 	$	1,157,891	 
	Deferred underwriters' commission	 	 	4,716,250	 	 	 	4,716,250	 
	Share issue costs	 	 	3,432,897	 	 	 	3,661,757	 
	 	 	$	12,323,771	 	 	$	9,535,898	 

 

At December 31, 2018 and September 30, 2018, the
Corporation has non-capital losses of $4,174,624 and $1,157,891, respectively, that may be carried forward to reduce taxable
income derived in future years. These non- capital losses will expire in 2038.

 

    - 18 -

     

    

 

Cannabis Strategies Acquisition Corp.

Notes to Consolidated Financial Statements December 31,
2018

(Expressed in Canadian
Dollars)

 

		12.	Income taxes (continued)

 

Transaction costs paid by the Corporation
in respect of the issuance of shares, including the issuance of Class A Restricted Voting Shares, are deductible for income
tax purposes on a straight line basis over a five-year period.

 

		13.	Financial instruments

 

Fair value measurements

 

The following table summarizes those assets
and liabilities that are included at their fair values in the Corporation’s statements of financial position as at December 31,
2018, or those assets and liabilities for which fair value is otherwise disclosed in the accompanying notes to the December 31,
2018 consolidated financial statements. These assets and liabilities have been categorized into hierarchical levels, according
to the significance of the inputs used in determining fair value measurements.

 

	 	 	Carrying value 
 as at	 	 	Fair value as at December 31, 2018	 
	 	 	December 31, 2018	 	 	Level 1	 	 	Level 2	 	 	Level 3	 
	 	 	($)	 	 	($)	 	 	($)	 	 	($)	 
	Financial assets	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 
	Cash	 	 	149,996	 	 	 	149,996	 	 	 	-	 	 	 	-	 
	Restricted cash and short-term

investments held in escrow	 	 	135,989,244	 	 	 	135,989,244	 	 	 	-	 	 	 	-	 
	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 
	Financial liabilities	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 
	Class A Restricted Voting Shares

subject to redemption	 

  	 

  	 

198,756,250	 

  	 

  	 

  	 

198,756,250	 

  	 

  	 

  	 

-	 

  	 

  	 

  	 

-	 

  
	Warrant liability	 	 	32,718,116	 	 	 	32,718,116	 	 	 	-	 	 	 	-	 

 

The Corporation is exposed to financial
risks due to the nature of its business and the financial assets and liabilities that it holds. The Corporation’s overall
risk management strategy seeks to minimize potential adverse effects of the Corporation’s financial performance.

 

During the year ended September 30,
2018, the Class A Restricted Voting Shares subject to redemption and the warrant liability were transferred from Level 2 to
Level 1. No activity occurred during the period ended December 31, 2018.

 

Market risk

 

Market risk is the risk that a material
loss may arise from fluctuations in the fair value of a financial instrument. For purposes of this disclosure, the Corporation
segregates market risk into three categories: fair value risk, interest rate risk and currency risk.

 

    - 19 -

     

    

 

Cannabis Strategies Acquisition Corp.

Notes to Consolidated Financial Statements December 31,
2018

(Expressed in Canadian
Dollars)

 

		13.	Financial instruments (continued)

 

Fair value risk

 

Fair value risk is the potential for
loss from an adverse movement, excluding movements relating to changes in interest rates and foreign exchange rates, because
of changes in market prices. The Corporation is exposed to fair value risk in respect of its Class A Restricted Voting
Shares subject to redemption and Warrant liability, which are carried in the Corporation’s financial statements at
their fair value. A 1% increase in the fair value of Class A Restricted Voting Shares and Warrant liability would result
in an increase in net loss for the period ended December 31, 2018 of $2,314,744. A 1% decrease in the fair value of
Class A Restricted Voting Shares and Warrant liability would result in a decrease in net loss for the period ended
December 31, 2018 of $2,314,744.

 

Interest rate risk

 

Interest rate risk relates to the risk
that the fair value or future cash flows of a financial instrument will fluctuate because of changes in market interest rates.
Due to the fixed interest rate on the Corporation's restricted cash and short-term balance held in escrow, its exposure to interest
rate risk is nominal.

 

Currency risk

 

Currency
risk relates to the risk that the fair value or future cash flows of a financial instrument will fluctuate because of changes
in foreign exchange rates relative to the Corporation’s presentation currency of the Canadian dollar. The Corporation
does not have any significant exposure to currency risk given the majority of transactions are in Canadian dollars.

 

		14.	Capital management

 

(a) The
Corporation defines the capital that it manages as its shareholders’ deficiency, net of its Class A Restricted Voting
Shares subject to redemption and Warrant liability. The following table summarizes the carrying value of the Corporation’s
capital as at December 31, 2018 and September 30, 2018:

 

	Shareholders' deficiency	 	$	(103,803,733	)
	Class A Restricted Voting Shares subject to redemption	 	 	198,756,250	 
	Warrant liability	 	 	32,718,116	 
	Balance, December 31, 2018	 	$	127,670,633	 

 

	Shareholders' deficiency	 	$	(44,881,196	)
	Class A Restricted Voting Shares subject to redemption	 	 	159,005,000	 
	Warrant liability	 	 	16,359,058	 
	Balance, September 30, 2018	 	$	130,482,862	 

 

The Corporation’s primary objective
in managing capital is to ensure capital preservation in order to benefit from acquisition opportunities as they arise.

 

    - 20 -

     

    

 

Cannabis Strategies Acquisition Corp.

Notes to Consolidated Financial Statements December 31,
2018

(Expressed in Canadian
Dollars)

 

		14.	Capital management (continued)

 

		(b)	Liquidity

 

As at December 31, 2018, the Corporation
had $149,996 (September 30, 2018 - $703,237) in cash. The Corporation expects to incur significant costs in pursuit of its
acquisition plans.

 

To the extent that the Corporation may
require additional funding for general ongoing expenses or in connection with sourcing a proposed Qualifying Transaction, the Corporation
may obtain such funding by way of unsecured loans from the Sponsor and/or its affiliates, subject to consent of the Exchange, which
loans would, unless approved otherwise by the Exchange, bear interest at no more than the prime rate plus 1%. The Sponsor would
not have recourse under such loans against the Escrow Account, and thus the loans would not reduce the value of such Escrow Account.
Such loans would collectively be subject to a maximum principal amount of $1,000,000 in the aggregate, and may be repayable in
cash following the closing of a Qualifying Transaction and may only be convertible into Class B Shares and/or Warrants in
connection with the closing of a Qualifying Transaction, subject to Exchange consent.

 

Otherwise, and subject to any relief granted
by the Exchange, the Corporation may seek to raise additional funds through a rights offering in respect of shares available to
its shareholders, in accordance with the requirements of applicable securities legislation, and subject to placing the required
funds raised in the Escrow Account in accordance with applicable Exchange rules.

 

		15.	Qualifying Transaction

 

The shareholders of the Corporation have
approved the concurrent acquisition of the target businesses of Washoe Wellness, LLC, The Canopy NV, LLC, Sira Naturals, Inc.,
LivFree Wellness, LLC and CannaPunch of Nevada LLC (the "Transaction") at the special meeting of the Corporation held
on March 18, 2019. The Transaction is intended to constitute the Corporation’s Qualifying Transaction. In connection
with the Transaction, the Corporation intends to grant to the Founders the right, immediately prior to the closing of the Transaction,
to have a one-time option to convert their existing Class B Shares on a one-for-one basis into new multiple voting shares
of the Corporation (the “Multiple Voting Shares”) carrying 25 votes per Multiple Voting Share, the Class B Shares
would then have their terms amended and be re-named as subordinate voting shares of the Corporation (the “Subordinated Voting
Shares”), and any non- redeemed Class A Restricted Voting Shares would be converted into Subordinate Voting Shares at
the closing of the Transaction. The Qualifying Transaction is subject to regulatory approvals.

 

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 for further information on the Transaction, including risk factors associated thereto.

 

    - 21 -

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