Exhibit 99.1

 

 

 

Ayr Wellness Inc.

(Formerly Ayr Strategies Inc.)

 

UNAUDITED INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2021 AND 2020

 

(EXPRESSED IN UNITED STATES DOLLARS)

 

 

 

 

 

Ayr Wellness Inc.

(Formerly Ayr Strategies Inc.)

 

UNAUDITED INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

SEPTEMBER 30, 2021 AND 2020

 

Unaudited Interim Condensed Consolidated Financial Statements (“Interim Financial Statements”)

 

Unaudited Interim Condensed Consolidated   
Balance Sheets   
(“Interim Balance Sheets”)  1
    
Unaudited Interim Condensed Consolidated Statements of   
Operations and Comprehensive (Loss) Income   
(“Interim Statements of Operations and Comprehensive (Loss) Income”)  2
    
Unaudited Interim Condensed Consolidated Statements of   
Shareholders’ Equity   
(“Interim Statements of Shareholders’ Equity”)  3-4
    
Unaudited Interim Condensed Consolidated Statements of   
Cash Flows   
(“Interim Statements of Cash Flows”)  5
    
Notes to the Unaudited Interim Condensed Consolidated Financial Statements  6-53

 

 

 

 

Ayr Wellness Inc. (formerly Ayr Strategies Inc.)

Unaudited Interim Condensed Consolidated Balance Sheets

(Expressed in United States Dollars)

 

   As of 
   September 30, 2021   December 31, 2020 
ASSETS          
Current          
Cash  $94,402,438   $127,238,165 
Accounts receivable, net   9,246,803    3,464,401 
Due from related parties [Note 10]   -    135,000 
Inventory [Note 5]   80,480,693    22,919,605 
Prepaid expenses, deposits, and other current assets   9,444,220    5,270,381 
   $193,574,154   $159,027,552 
Non-current          
Property, plant, and equipment [Note 6]   229,410,215    69,104,080 
Intangible assets [Note 7]   884,096,067    252,357,677 
Right-of-use assets - operating [Note 8]   82,110,613    22,546,256 
Right-of-use assets - finance, net [Note 8]   13,995,000    877,310 
Goodwill [Notes 4 and 7]   231,123,969    57,963,360 
Equity investments [Note 9]   553,448    503,509 
Deposits and other assets   3,414,970    2,540,674 
Total assets  $1,638,278,436   $564,920,418 
           
LIABILITIES          
Current          
Trade payables  $23,096,809   $8,899,786 
Accrued liabilities   20,050,253    8,706,813 
Lease liabilities - operating - current portion [Note 8]   4,195,672    740,864 
Lease liabilities - finance - current portion [Note 8]   3,185,460    125,440 
Purchase consideration payable [Notes 4 and 13]   148,416    9,053,057 
Income tax payable [Note 18]   21,398,821    21,379,351 
Debts payable - current portion [Note 11]   7,732,508    8,644,633 
Accrued interest payable - current portion [Note 11]   4,214,966    - 
   $84,022,905   $57,549,944 
Non-current          
Deferred tax liabilities [Note 18]   76,287,771    14,677,991 
Lease liabilities - operating - non-current portion [Note 8]   80,621,059    23,474,726 
Lease liabilities - finance - non-current portion [Note 8]   7,402,531    446,585 
Contingent consideration [Notes 4 and 13]   199,428,011    22,961,411 
Debts payable - non-current portion [Note 11]   103,514,323    53,587,948 
Senior secured notes, net of debt issuance costs - non-current portion [Note 11]   104,745,717    103,652,963 
Accrued interest payable - non-current portion [Note 11]   3,166,381    3,301,155 
Total liabilities  $659,188,698   $279,652,723 
Commitments and contingencies          
           
SHAREHOLDERS’ EQUITY          
Multiple Voting Shares: no par value, unlimited authorized.
Issued and outstanding - 3,696,486 shares [Note 12]
   -    - 
Subordinate, Restricted, and Limited Voting Shares: no par value, unlimited authorized.
Issued and outstanding - 55,580,226 & 28,873,641 shares, respectively [Note 12]
   -    - 
Exchangeable Shares: no par value, unlimited authorized.
Issued and outstanding - 7,368,927 & 2,127,543 shares, respectively [Note 12]
   -    - 
Additional paid-in capital   1,265,679,907    530,808,494 
Treasury stock   (867,617)   (556,899)
Accumulated other comprehensive income   3,265,610    3,265,610 
Deficit   (288,988,162)   (248,249,510)
Total shareholders' equity  $979,089,738   $285,267,695 
Total liabilities and shareholders' equity  $1,638,278,436   $564,920,418 

 

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

 

 1 

 

 

Ayr Wellness Inc. (formerly Ayr Strategies Inc.)

Unaudited Interim Condensed Consolidated Statements of Operations and Comprehensive (Loss) Income

(Expressed in United States Dollars)

 

   Three Months Ended   Nine Months Ended 
   September 30, 2021   September 30, 2020   September 30, 2021   September 30, 2020 
Revenues, net of discounts  $96,189,359   $45,486,365   $245,839,290   $107,349,679 
                     
Cost of goods sold excluding fair value items   47,083,902    18,079,291    117,566,890    46,118,237 
Incremental costs to acquire cannabis inventory in a business combination [Note 5]   9,022,291    -    41,410,732    - 
Cost of goods sold  $56,106,193   $18,079,291   $158,977,622   $46,118,237 
                     
Gross profit  $40,083,166   $27,407,074   $86,861,668   $61,231,442 
                     
Operating expenses                    
General and administrative [Note 14]   30,365,072    9,834,051    72,099,023    28,596,451 
Sales and marketing   1,919,150    643,005    4,433,435    1,586,849 
Depreciation [Notes 6 and 8]   548,555    139,464    1,268,173    530,143 
Amortization [Note 7]   10,394,164    2,998,666    25,656,830    8,996,000 
Stock-based compensation [Note 15]   5,013,055    4,700,795    20,388,406    25,949,556 
Acquisition expense   742,779    557,457    5,164,361    1,054,766 
Total operating expenses  $48,982,775   $18,873,438   $129,010,228   $66,713,765 
                     
(Loss) Income from operations  $(8,899,609)  $8,533,636   $(42,148,560)  $(5,482,323)
                     
Other income (expense)                    
Share of loss on equity investments [Note 9]   (12,868)   (8,244)   (31,671)   (31,382)
Foreign exchange   (7,891)   (6,419)   (61,183)   (9,038)
Fair value gain (loss) on financial liabilities [Note 13]   19,266,690    (368,103)   30,811,752    (1,312,402)
Interest expense   (4,281,448)   (518,581)   (10,852,170)   (1,585,088)
Interest income   36,513    5,033    160,616    5,034 
Other, net   525,262    (141,079)   1,015,723    19,971 
Total other income (expense)  $15,526,258   $(1,037,393)  $21,043,067   $(2,912,905)
                     
Income (Loss) before income tax  $6,626,649   $7,496,243   $(21,105,493)  $(8,395,228)
                     
Current tax (provision) benefit [Note 18]   (14,166,631)   (6,786,311)   (29,986,046)   (14,989,700)
Deferred tax benefit (provision) [Note 18]   4,160,854    (89,559)   10,352,887    (268,679)
                     
Net (loss) income and comprehensive (loss) income  $(3,379,128)  $620,373   $(40,738,652)  $(23,653,607)
                     
Basic (loss) earnings per share  $(0.06)  $0.02   $(0.76)  $(0.87)
Diluted (loss) earnings per share  $(0.06)  $0.02   $(0.76)  $(0.87)
                     
Weighted average number of shares outstanding (basic)   59,566,341    27,909,251    53,951,612    27,247,047 
Weighted average number of shares outstanding (diluted)   59,566,341    30,000,149    53,951,612    27,247,047 

 

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

 

 2 

 

 

Ayr Wellness Inc. (formerly Ayr Strategies Inc.)

Unaudited Interim Condensed Consolidated Statements of Shareholders’ Equity

(Expressed in United States Dollars)

 

   Multiple
Voting 
   Subordinate,
Restricted, and
Limited Voting 
   Exchangeable    Additional    Treasury stock   Accumulated other
comprehensive 
         
   Shares   Shares   Shares   paid-in capital   Number   Amount   income   Deficit   Total 
     #      #      #      $      #      $      $      $     $ 
Balance, December 31, 2019   3,696,486    14,824,485    8,373,792    420,337,575    (29,500)   (245,469)   3,265,610    (223,644,060)   199,713,656 
                                              
Stock-based compensation [Note 15]   -    -    -    12,145,302    -    -    -    -    12,145,302 
                                              
Exercise of Rights [Note 12]   -    82,349    -    -    -    -    -    -    - 
                                              
Conversion of Exchangeable Shares [Note 12]   -    898,739    (898,739)   -    -    -    -    -    - 
                                              
Repurchase of Subordinate Shares [Note 12]   -    -    -    -    (33,800)   (307,442)   -    -    (307,442)
                                              
Net loss for the period   -    -    -    -    -    -    -    (14,312,075)   (14,312,075)
                                              
Balance, March 31, 2020   3,696,486    15,805,573    7,475,053    432,482,877    (63,300)   (552,911)   3,265,610    (237,956,135)   197,239,441 
                                              
Stock-based compensation [Note 15]   -    -    -    9,103,459    -    -    -    -    9,103,459 
                                              
Exercise of Rights [Note 12]   -    75,220    -    -    -    -    -    -    - 
                                              
Share issuance - make-whole [Note 4]   -    -    614,515    3,765,927    -    -    -    -    3,765,927 
                                              
Net loss for the period   -    -    -    -    -    -    -    (9,961,905)   (9,961,905)
                                              
Balance, June 30, 2020   3,696,486    15,880,793    8,089,568    445,352,263    (63,300)   (552,911)   3,265,610    (247,918,040)   200,146,922 
                                              
Stock-based compensation [Note 15]   -    -    -    4,700,795    -    -    -    -    4,700,795 
                                              
Exercise of Rights [Note 12]   -    4,810    -    -    -    -    -    -    - 
                                              
Exercise of Warrants [Note 12]   -    42,000    -    361,042    -    -    -    -    361,042 
                                              
Conversion of Exchangeable Shares [Note 12]   -    2,041,598    (2,041,598)   -    -    -    -    -    - 
                                              
Repurchase of Subordinate Shares [Note 12]   -    -    -    -    (500)   (3,988)   -    -    (3,988)
                                              
Net income for the period   -    -    -    -    -    -    -    620,373    620,373 
                                              
Balance, September 30, 2020   3,696,486    17,969,201    6,047,970    450,414,100    (63,800)   (556,899)   3,265,610    (247,297,667)   205,825,144 

 

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

 

 3 

 

 

Ayr Wellness Inc. (formerly Ayr Strategies Inc.)

Unaudited Interim Condensed Consolidated Statements of Shareholders’ Equity

(Expressed in United States Dollars)

 

   Multiple
Voting
   Subordinate,
Restricted, and
Limited Voting
   Exchangeable   Additional   Treasury stock   Accumulated other
comprehensive
         
   Shares   Shares   Shares   paid-in capital   Number   Amount   income   Deficit   Total 
     #      #      #      $      #      $      $      $     $ 
Balance, December 31, 2020   3,696,486    28,873,641    2,127,543    530,808,494    (63,800)   (556,899)   3,265,610    (248,249,510)   285,267,695 
                                              
Stock-based compensation [Note 15]   -    -    -    8,223,545    -    -    -    -    8,223,545 
                                              
Exercise of Rights [Note 12]   -    92,722    -    -    -    -    -    -    - 
                                              
Exercise of Warrants [Note 12]   -    787,710    -    4,291,891    -    -    -    -    4,291,891 
                                              
Conversion of Exchangeable Shares [Note 12]   -    350,412    (350,412)   -    -    -    -    -    - 
                                              
Share issuance - business combinations [Note 4]   -    12,746,822    4,570,434    526,975,980    -    -    -    -    526,975,980 
                                              
Replacement options issued - business combinations [Notes 4 & 12]   -    -    -    4,452,917    -    -    -    -    4,452,917 
                                              
Equity offering [Note 12]   -    4,600,000    -    118,052,400    -    -    -    -    118,052,400 
                                              
Conversion of convertible debt [Note 11]   -    85,049    -    2,442,691    -    -    -    -    2,442,691 
                                              
Net loss for the period   -    -    -    -    -    -    -    (16,621,636)   (16,621,636)
                                              
Balance, March 31, 2021   3,696,486    47,536,356    6,347,565    1,195,247,918    (63,800)   (556,899)   3,265,610    (264,871,146)   933,085,483 
                                              
Stock-based compensation [Note 15]   -    1,906,125    -    7,151,806    -    -    -    -    7,151,806 
                                              
Tax withholding on stock-based compensation awards [Note 15]   -    (986,461)   -    (28,421,071)   -    -    -    -    (28,421,071)
                                              
Exercise of Rights [Note 12]   -    42,060    -    -    -    -    -    -    - 
                                              
Exercise of Warrants [Note 12]   -    113,700    -    1,053,603    -    -    -    -    1,053,603 
                                              
Conversion of Exchangeable Shares [Note 12]   -    334,271    (334,271)   -    -    -    -    -    - 
                                              
Exercise of options [Note 12]   -    16,976    -    86,246    -    -    -    -    86,246 
                                              
Conversion of convertible debt [Note 11]   -    147,210    -    4,986,698    -    -    -    -    4,986,698 
                                              
Net loss for the period   -    -    -    -    -    -    -    (20,737,888)   (20,737,888)
                                              
Balance, June 30, 2021   3,696,486    49,110,237    6,013,294    1,180,105,200    (63,800)   (556,899)   3,265,610    (285,609,034)   897,204,877 
                                              
Stock-based compensation [Note 15]   -    5,787    -    5,013,055    -    -    -    -    5,013,055 
                                              
Tax withholding on stock-based compensation awards [Note 15]   -    (2,694)   -    (89,750)   -    -    -    -    (89,750)
                                              
Exercise of Warrants [Note 12]   -    6,292,042    -    50,688,339    -    -    -    -    50,688,339 
                                              
Conversion of Exchangeable Shares [Note 12]   -    155,701    (155,701)   -    -    -    -    -    - 
                                              
Share issuance - business combinations [Note 4]   -    -    1,511,334    29,744,216    -    -    -    -    29,744,216 
                                              
Exercise of options [Note 12]   -    19,153    -    218,847    -    -    -    -    218,847 
                                              
Repurchase of Subordinate Shares [Note 12]   -    -    -    -    (13,100)   (310,718)   -    -    (310,718)
                                              
Net loss for the period   -    -    -    -    -    -    -    (3,379,128)   (3,379,128)
                                              
Balance, September 30, 2021   3,696,486    55,580,226    7,368,927    1,265,679,907    (76,900)   (867,617)   3,265,610    (288,988,162)   979,089,738 

 

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

 

 4 

 

 

Ayr Wellness Inc. (formerly Ayr Strategies Inc.)

Unaudited Interim Condensed Consolidated Statements of Cash Flows

(Expressed in United States Dollars)

 

   Nine Months Ended 
   September 30, 2021   September 30, 2020 
Operating activities          
Net loss  $(40,738,652)  $(23,653,607)
Adjustments for:          
Net fair value (gain) loss on financial liabilities   (30,811,752)   1,312,402 
Stock-based compensation   20,388,406    25,949,556 
Depreciation   5,296,317    1,896,150 
Amortization on intangible assets   32,528,350    10,136,000 
Share of loss on equity investments   31,671    31,382 
Gain on disposal of equity investments   (1,000,000)   - 
Incremental costs to acquire cannabis inventory in a business combination   41,410,732    - 
Loss on disposal of property, plant, and equipment   50,483    - 
Deferred tax (benefit) expense   (10,352,887)   268,679 
Amortization on financing costs   1,228,752    - 
Interest accrued   3,927,135    1,079,085 
Changes in operating assets and liabilities, net of business acquisition:          
Accounts receivable   (5,749,915)   (308,283)
Inventory   (37,743,165)   (5,627,037)
Prepaid expenses and other current assets   13,602    (1,693,308)
Trade payables   2,376,682    2,900,278 
Accrued liabilities   2,780,200    2,036,501 
Lease liabilities - operating   1,293,821    83,820 
Income tax payable   (7,115,530)   13,985,820 
Cash (used in) provided by operating activities   (22,185,750)   28,397,438 
           
Investing activities          
Purchase of property, plant, and equipment   (58,632,196)   (6,291,344)
Cash paid for business combinations and asset acquisitions, net of cash acquired   (59,971,979)   - 
Cash paid for business combinations and asset acquisitions, bridge financing   (22,750,176)   - 
Cash paid for business combinations and asset acquisitions, working capital   (4,025,139)   (603,092)
Payments for interests in equity accounted investments   (46,610)   (91,700)
Cash received in disposal of equity investment   1,000,000    - 
Advances to related corporation   135,000    - 
Cash paid for bridge financing   (1,200,000)   (3,000,000)
Deposits for business combinations   (571,810)   (400,000)
Cash used in investing activities   (146,062,910)   (10,386,136)
           
Financing activities          
Proceeds from exercise of Warrants   56,033,833    361,043 
Proceeds from exercise of options   305,093    - 
Proceeds from equity offering, net of expenses   118,052,400    - 
Payments of financing costs   (135,998)   - 
Tax withholding on stock-based compensation awards   (28,510,821)   - 
Repayments of debts payable   (6,280,119)   (3,282,737)
Repayments of lease liabilities - finance (principal portion)   (3,740,737)   (1,176)
Repurchase of Subordinate Shares   (310,718)   (311,430)
Cash provided by (used in) financing activities   135,412,933    (3,234,300)
           
Net (decrease) increase in cash   (32,835,727)   14,777,002 
Cash, beginning of the period   127,238,165    8,403,196 
Cash, end of the period   94,402,438    23,180,198 
           
Supplemental disclosure of cash flow information:          
Interest paid during the period   12,187,062    861,812 
Income taxes paid during the period   37,998,621    1,003,880 
Non-cash investing and financing activities:          
Recognition of right-of-use assets for operating leases   61,629,419    687,917 
Recognition of right-of-use assets for finance leases   13,364,616    16,993 
Issuance of Subordinate Shares related to business combinations and make-whole   556,720,196    3,765,927 
Issuance of Subordinate Shares related to equity component of debt   7,429,389    - 

 

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

 

 5 

 

 

Ayr Wellness Inc. (formerly Ayr Strategies Inc.)

Notes to the Unaudited Interim Condensed Consolidated Financial Statements

For the Three and Nine Months Ended September 30, 2021 and 2020

 

1.NATURE OF OPERATIONS

 

Ayr Wellness Inc. (formerly Ayr Strategies Inc.) (“Ayr” or the “Company”) is a vertically integrated cannabis multi-state operator in the U.S., with cannabis operations in Massachusetts, Nevada, Pennsylvania, Florida, Arizona, New Jersey, and Ohio. Through its operating companies, Ayr is a leading cultivator, manufacturer, and retailer of cannabis products and branded cannabis packaged goods. The Company was previously a special purpose acquisition corporation (“SPAC”) which was incorporated for the purpose of effecting an acquisition of one or more businesses or assets, by way of a merger, amalgamation, arrangement, share exchange, asset acquisition, share purchase, reorganization, or any other similar business combination involving the Company, referred to as the Company’s “Qualifying Transaction”. The Company prepares its segment reporting on the same basis that its chief operating decision maker manages the business and makes operating decisions. The Company has one operating segment, cannabis sales. Operating segments will be further analyzed and are subject to future change.

 

The Company is a reporting issuer in the United States and Canada. The Company’s subordinate, restricted, and limited voting shares (“Subordinate Shares”) are trading on the Canadian Stock Exchange (the “CSE”), under the symbol “AYR.A”. The Company’s Subordinate Shares are also trading on the Over-the-Counter Market (“OTC”) in the United States under the symbol “AYRWF”. The Company originally traded on the OTC under the symbol “AYRSF”, however, that changed on December 4, 2020 to “AYRWF”. The Company’s warrants (“Warrants”) and rights (“Rights”) were trading on the CSE under the symbols “AYR.WT” and “AYR.RT”, however, they stopped trading on September 30, 2021 and May 24, 2021, respectively.

 

History of the Company

 

The Company 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 Company is located at 666 Burrard Street, Suite 1700, Vancouver, British Columbia V6C 2X8. The head office of the Company is located at 2601 South Bayshore Drive, Suite 900, Miami, FL, 33133.

 

On September 12, 2018, the Company incorporated a wholly-owned subsidiary in Nevada, United States, named CSAC Holdings Inc., to facilitate the proposed Qualifying Transaction. On September 17, 2018, CSAC Holdings Inc. incorporated a wholly-owned subsidiary in Nevada, United States, named CSAC Acquisition Inc. (“CSAC AcquisitionCo”).

 

On May 24, 2019, the Company completed its Qualifying Transaction 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”). The Company was deemed the accounting acquirer in the Qualifying Transaction.

 

 6 

 

 

Ayr Wellness Inc. (formerly Ayr Strategies Inc.)

Notes to the Unaudited Interim Condensed Consolidated Financial Statements

For the Three and Nine Months Ended September 30, 2021 and 2020

 

2.BASIS OF PRESENTATION

 

2.1 Statement of compliance

 

On March 1, 2021, the United States Securities and Exchange Commission (“SEC”) declared effective the Company’s Registration Statement (No. 333-253466) on Form F-10 (“the Registration Statement”) filed on February 24, 2021.  The Registration Statement was made by a foreign issuer that is permitted, under the U.S. / Canada Multijurisdictional Disclosure System (“MJDS”) adopted by the United States, to prepare the Registration Statement in accordance with the disclosure requirements of Canadian issuers. As such, these interim financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) for interim financial information and in accordance with the rules and regulations of Canadian securities regulators and, where applicable, the SEC. Certain information, footnotes and disclosures normally included in the financial statements prepared in accordance with GAAP have been condensed or omitted in accordance with SEC rules and regulations.

 

Results of unaudited interim periods should not be considered indicative of the results for the full year, or any future interim periods. These interim financial statements include estimates and assumptions, including all material adjustments, that in the opinion of management, affect the amounts reported in the interim financial statements. Actual results could differ from these estimates.

 

The interim financial statements are presented in United States dollars (“US$” or “$”) which, following the close of the Qualifying Transaction, became the Company’s presentation currency. The functional currency of each entity is determined separately in accordance with Accounting Standards Codification (ASC) 830 – Foreign Currency Matters 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$”) and for each of the United States subsidiaries is US$.

 

3.SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

 

3.1 Basis of consolidation

 

The interim financial statements for the three and nine months ended September 30, 2021 include the accounts of the Company, its wholly-owned subsidiaries, and entities over which the Company has a controlling interest. Entities over which the Company has control are presented on a consolidated basis from the date control commences until the date control ceases. Equity investments where the Company does not exert a controlling interest are not consolidated. All intercompany balances and transactions are eliminated on consolidation. The Company’s consolidated subsidiaries, many of which were created in connection with the business combinations described in Note 4 and elsewhere in these unaudited interim condensed consolidated financial statements, are listed below, and are owned 100% by the Company unless otherwise noted:

 

 7 

 

 

Ayr Wellness Inc. (formerly Ayr Strategies Inc.)

Notes to the Unaudited Interim Condensed Consolidated Financial Statements

For the Three and Nine Months Ended September 30, 2021 and 2020

 

3.SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

 

3.1 Basis of consolidation (continued)

 

Subsidiaries State of operation Purpose
Ayr Wellness Inc. British Columbia, CA Parent Company
Ayr Wellness Holdings LLC NV Corporate - Holding Company
CSAC Holdings Inc. NV Corporate - Holding Company
CSAC Acquisition Inc. (1) NV Corporate - Holding Company
CSAC Acquisition MA Corp NV Corporate - Holding Company
CSAC Acquisition FL Corp (2) NV Corporate - Holding Company
CSAC Ohio, LLC NV Production
Sira Naturals, Inc. (3) MA Cultivation, Production, and Retail
CannaPunch of Nevada LLC NV Branded Manufactured Products
LivFree Wellness, LLC (4) NV Retail
Tahoe-Reno Botanicals, LLC NV Cultivation
Tahoe-Reno Extractions, LLC NV Production
Kynd-Strainz, LLC NV Retail
Lemon Aide, LLC NV Retail
DocHouse, LLC PA Cultivation and Production
CannTech PA, LLC (5) PA Cultivation, Production, and Retail
242 Cannabis LLC (2) FL Real Estate, Cultivation, and Production
DJMMJ Investments LLC (2) FL Cultivation, Production, and Retail
Oasis AZ Cultivation, Production, and Retail
Greenlight Management, LLC OH Managed Services - Cultivation
Greenlight Holdings, LLC OH Real Estate
Ohio Medical Solutions, LLC OH Production
GSD NJ, LLC NJ Cultivation, Production, and Retail

 

1)CSAC Acquisition Inc. includes wholly-owned subsidiaries:

i.Holding entities – CSAC Acquisition MA II Corp, CSAC Acquisition PA Corp (“CSAC PA”), CSAC Acquisition PA II Corp (“CSAC PA II”), CSAC Acquisition AZ Corp (“CSAC AZ”), CSAC Acquisition NJ Corp, Ayr NJ LLC, CSAC LLC, CSAC Acquisition IL Corp, CSAC Acquisition NV Corp., LivFree, Washoe, Tahoe-Reno Botanicals, LLC, and Tahoe-Reno Extractions, LLC, DWC Investments, LLC. Kynd-Strainz, LLC, Lemon Aide, LLC, and GSD, LLC,

ii.CSAC AZ includes a wholly-owned subsidiary Blue Camo LLC doing business as (“dba”) Oasis (“Oasis”). Oasis includes wholly-owned subsidiaries Ocotillo Vista, Inc. Total Health & Wellness, Inc., and WillCox OC, LLC (“Willcox”), an entity owned 60% by the Company. CSAC AZ also includes a wholly-owned subsidiary Clear Choice Admin Services, LLC.

a.Entities - Mercer Strategies PA, LLC, Parker Solutions PA, LLC, Mercer Strategies FL, LLC, and Parker Solutions OH, LLC, and Klymb Project Management, Inc.

b.Entity - Parker RE MA, LLC.

2)CSAC Acquisition FL Corp. (“CSAC FL”) includes wholly-owned subsidiaries 242 Cannabis LLC and DFMMJ Investments LLC (dba Liberty Health Sciences Florida Ltd.) (collectively referred to as “Liberty”), and Parker Solutions FL LLC.

3)Sira Naturals, Inc includes wholly-owned subsidiaries Parker Solutions MA, LLC and Eskar Holdings, LLC (“Eskar”).

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

5)CSAC PA is the parent company of CannTech PA, LLC (“CannTech PA”).

 

 8 

 

 

Ayr Wellness Inc. (formerly Ayr Strategies Inc.)

Notes to the Unaudited Interim Condensed Consolidated Financial Statements

For the Three and Nine Months Ended September 30, 2021 and 2020

 

3.SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

 

3.2 Revenue

 

Accounting Standards Update (“ASU”) 2014-09 – Revenue from Contracts with Customers (“ASC 606”), which was codified in Accounting Standards Codification “ASC” Topic 606, specifies how and when revenue should be recognized based on a five-step model, which is applied to all contracts with customers. Through the application of the standard, the Company applies the following 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.

 

In some cases, judgment is required in determining whether the customer is a business or the end consumer. This evaluation is made based on 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 Company takes into consideration a) the Company’s right to payment for the goods or services; b) customer’s legal title; c) transfer of physical possession of the goods; and d) timing of acceptance of goods.

 

Revenue is recognized based on the sale of cannabis products and branded packaged goods for a fixed price when control is transferred. The amount recognized reflects the consideration that the Company expects to receive, taking into account any variation that is expected to result from rights of return and discounts. 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 Company considers the following to be cash: cash deposits in financial institutions and cash held in Company safe or lockbox at operational locations. The Company has banking relationships in all jurisdictions in which it operates. In addition, the Company has cash balances in excess of Federal Deposit Insurance Corporation (the “FDIC”) limits.

 

3.4 Accounts receivable

 

Accounts receivable are recorded net of an allowance for doubtful accounts. The Company estimates allowance for doubtful accounts based on various factors such as historical data and specific customer situations. As of September 30, 2021 and December 31, 2020, the Company had approximately $25,000 and nil, in allowance for doubtful accounts, respectively. For the nine months ended September 30, 2021 and 2020, the Company wrote off approximately $25,000 and $6,000, respectively.

 

 9 

 

 

Ayr Wellness Inc. (formerly Ayr Strategies Inc.)

Notes to the Unaudited Interim Condensed Consolidated Financial Statements

For the Three and Nine Months Ended September 30, 2021 and 2020

 

3.SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

 

3.5 Business combinations

 

Acquisitions of subsidiaries and businesses are accounted for using the acquisition method in accordance with ASC 805 – Business Combination (“ASC 805”). The Company performs an assessment whether the acquisition is a business combination or asset acquisition based on the conditions surrounding the event using guidance from ASC 805. If the acquisition is determined to be a business combination, the Company 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 acquired and liabilities assumed, all measured as of the acquisition date.

 

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

 

The acquisition date is the date when the Company 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 ASC 450 – Contingencies, as appropriate with corresponding gain or loss recorded in the interim statements of operations and comprehensive (loss) income, see Note 13.

 

3.6 Inventory

 

Inventories are primarily comprised of finished goods, work-in-process, raw materials, and supplies. Inventory is valued at the lower of cost or net realizable value. Net realizable value is determined as the estimated selling price in the ordinary course of business less the estimated costs of completion and the estimated costs necessary to make the sale. Raw materials and work-in-process are stated at the lower of cost or net realizable value, with cost being determined using the weighted average cost method. Finished goods inventory is stated at the lower of cost or net realizable value, with cost being determined on the first-in, first-out (“FIFO”) accounting method.

 

Costs incurred during the growing process are capitalized as incurred to the extent that cost is less than net realizable value. Any subsequent post-harvest costs, including direct costs such as materials, labor, related overhead, and depreciation expense on equipment attributable to processing, are capitalized to inventory to the extent that cost is less than net realizable value. Inventories of purchased finished goods and packing materials, other than inventory acquired through business combinations, are initially valued at cost and subsequently at the lower of cost or net realizable value. The Company reviews inventories for obsolete, redundant, and slow-moving goods and any such inventories identified are written down to net realizable value. Inventory acquired in a business combination is valued at fair value less selling costs.

 

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

 

PPE is stated at cost less accumulated depreciation and accumulated impairment losses, if any. 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. PPE acquired in a business combination is initially recorded at fair value.

 

 10 

 

 

Ayr Wellness Inc. (formerly Ayr Strategies Inc.)

Notes to the Unaudited Interim Condensed Consolidated Financial Statements

For the Three and Nine Months Ended September 30, 2021 and 2020

 

3.SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

 

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

 

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

 

·Land – not depreciated

·Buildings – 39 years

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

·Furniture and fixtures – 5 to 7 years

·Office equipment – 3 to 5 years

·Machinery and equipment – 5 to 15 years

·Auto and trucks – 5 years

·Construction in progress – not depreciated until placed in service

 

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

 

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

 

The Company 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 Company 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.

 

The Company capitalizes interest on debt in projects under construction. Upon the asset becoming available for use, capitalized interest costs, as a portion of the total cost of the asset, are depreciated over the estimated useful life of the related asset.

 

3.8 Intangible assets

 

Intangible assets are recorded at cost less accumulated amortization and impairment losses, if any. Intangible assets, separately identifiable according to ASC 805 – Business Combinations, acquired in a business combination are initially measured at fair value as of the acquisition date. Amortization periods of assets with finite lives are based on management’s estimates at the date of acquisition and are amortized over their estimated useful lives. 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.

 

 11 

 

 

Ayr Wellness Inc. (formerly Ayr Strategies Inc.)

Notes to the Unaudited Interim Condensed Consolidated Financial Statements

For the Three and Nine Months Ended September 30, 2021 and 2020

 

3.SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

 

3.8 Intangible assets (continued)

 

(a)  Goodwill

 

The Company measures goodwill as the fair value of the consideration transferred, including the recognized amount of any non-controlling interest in the acquiree, less the net recognized amount of the identifiable assets and liabilities assumed, all measured as of the acquisition date. Goodwill is allocated to a specific reporting unit or allocated between reporting units based on the relative fair value of each reporting unit. The Company’s policy is to first perform a qualitative assessment to determine if it was more-likely-than-not that the reporting unit’s carrying value is less than the fair value, indicating the potential for goodwill impairment. The amount of goodwill impairment is determined as the excess of the carrying value of the reporting unit’s goodwill over the fair value of that reporting unit. Impairment testing is performed annually by the Company or more frequently, if events or changes in circumstances indicate that goodwill might be impaired. Management makes estimates during impairment testing as judgment is required to determine indicators of impairment and estimates are used to measure impairment losses. The Company assesses the fair values of its intangible assets, and its reporting unit for goodwill testing purposes, as necessary, using an income-based approach. Under the income approach, fair value is based on the present value of estimated future cash flows.

 

(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/permits, 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 for impairment 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.

 

(c)  Impairment of long-lived assets

 

Long-lived assets such as PPE and definite-lived intangible assets are grouped with other assets and liabilities at the lowest level for which identifiable independent cash flows are available (“asset group”). The Company reviews long-lived assets for impairment whenever events or changes in circumstances indicate that the carrying value of an asset may not be recoverable. In order to determine if assets have been impaired, the impairment test is a two-step approach wherein the recoverability test is performed first to determine whether the long-lived asset is recoverable. The recoverability test (Step 1) compares the carrying amount of the asset to the sum of its future undiscounted cash flows using entity specific assumptions generated through the asset’s use and eventual disposition. If the carrying amount of the asset is less than the cash flows, the asset is recoverable and an impairment is not recorded. If the carrying amount of the asset is greater than the cash flows, the asset is not recoverable and an impairment loss calculation (Step 2) is required. The measurement of the impairment loss to be recognized is based on the difference between the fair value and the carrying value of the asset group. Fair value can be determined using a market approach, income approach, or cost approach. The cash flow projection and fair value represents management’s best estimate, using appropriate and customary assumptions, projections, and methodologies, at the date of evaluation. The reversal of impairment losses is prohibited.

 

 12 

 

 

Ayr Wellness Inc. (formerly Ayr Strategies Inc.)

Notes to the Unaudited Interim Condensed Consolidated Financial Statements

For the Three and Nine Months Ended September 30, 2021 and 2020

 

3.SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

 

3.9 Leases

 

The Company applies the accounting guidance in ASC 842 – Leases and assesses whether a contract is or contains a lease, at inception of a contract. Leases are recognized as a right-of-use asset (“ROU”) and corresponding liability at the commencement date based on the present value of the future minimum lease payments over the lease term. Operating leases are included in ROU – operating and lease liabilities – operating on the interim balance sheets. For operating leases, the Company records operating lease expense. Finance leases are included in ROU – finance, net and lease liabilities – finance are included in other current liabilities and other non-current liabilities on the interim balance sheets based on their payment dates. For finance leases, the Company records interest expense on the lease liability in addition to amortizing the right-of-use asset (generally straight-line) over the shorter of the lease term or the useful life of the right-of-use asset. The Company primarily leases space for corporate offices, retail, cultivation, and manufacturing under non-cancellable operating leases. ROU assets represent the right to use an underlying asset for the lease term and lease liabilities represent the obligation to make lease payments arising from the lease.

 

Lease liabilities include the net present value of fixed payments (including in-substance fixed payments), variable lease payments that are not 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 Company 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 payments are discounted using the interest rate implicit in the lease or, if that rate cannot be determined, the Company’s incremental borrowing rate. The period over which the lease payments are discounted is the reasonably certain lease term, including renewal options that the Company is reasonably certain to exercise. Renewal options are included in a number of leases across the Company.

 

Payments associated with short-term leases are recognized as an expense on a straight-line basis in the interim statements of operations and comprehensive (loss) income. Short-term leases are leases with a lease term of 12 months or less. Variable lease payments that depend on an index or a rate or are subject to a fair market value renewal are expensed as incurred and recognized in the interim statements of operations and comprehensive (loss) income.

 

3.10 Equity investments

 

An associate is an entity over which the Company 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 Company’s interest in an associate is adjusted for the Company’s share of income or loss and distributions of the investee. The carrying value of associates is assessed for impairment at each balance sheet date. Significant influence is presumed if the Company 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 Company 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.

 

13

 

 

Ayr Wellness Inc. (formerly Ayr Strategies Inc.)

Notes to the Unaudited Interim Condensed Consolidated Financial Statements

For the Three and Nine Months Ended September 30, 2021 and 2020

 

3.SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

 

3.11 Non-controlling interests

 

Equity interests owned by parties that are not shareholders of the Company in consolidated subsidiaries are considered non-controlling interests. The share of net assets attributable to non-controlling interests are presented as a component of equity while the share of net income or loss is recognized in the statements of operations and comprehensive (loss) income. Changes in Ayr’s ownership interest that do not result in a loss of control are accounted for as equity transactions. The Company does not have any non-controlling interests.

 

3.12 Derivatives

 

The Company 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 Company’s interim financial statements. In calculating the fair value of derivative liabilities, the Company uses a valuation model when Level 1 inputs are not available to estimate fair value at each reporting date (see Note 17).

 

The classification of derivative instruments, including whether such instruments should be recognized 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 net-cash settlement of the derivative instrument could be required within 12 months of the interim financial statements date.

 

3.13 (Loss) earnings per share

 

The basic (loss) earnings per share is computed by dividing the net (loss) income by the weighted average number of shares outstanding, including Subordinate Shares, multiple voting shares of the Company (“Multiple Voting Shares”), and Exchangeable Shares (as defined in Note 4), during the period. The diluted (loss) earnings per share reflects the potential dilution of shares by adjusting the weighted average number of shares outstanding to assume conversion of potentially dilutive shares, such as Warrants, restricted stock units (“RSUs”), shares related to contingent consideration (“contingent shares”), and vested options. The “treasury stock method” is used for the assumed proceeds upon the exercise of the Exchangeable Shares, Warrants, and vested options that are used to purchase Subordinate Shares at the average market price during the period. If the Company 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 Warrants, RSUs, contingent shares, and vested options, therefore, basic loss per share and diluted loss per share will be the same.

 

   Three Months Ended   Nine Months Ended 
Potential Diluted Shares Breakout  September 30, 2021   September 30, 2020   September 30, 2021   September 30, 2020 
Warrants   1,895,189    -    1,957,097    2,942,466 
Rights   -    151,655    -    151,655 
Options   90,422    -    89,133    - 
RSUs   2,012,903    1,939,243    1,645,635    1,477,332 
Total   3,998,514    2,090,898    3,691,865    4,571,453 

 

14

 

 

Ayr Wellness Inc. (formerly Ayr Strategies Inc.)

Notes to the Unaudited Interim Condensed Consolidated Financial Statements

For the Three and Nine Months Ended September 30, 2021 and 2020

 

3.SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

 

3.14 Stock-based payments

 

(a) Stock-based payment transactions

 

Certain employees (including directors and senior executives) of the Company 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”).

 

Stock-based payments to non-employees are measured at the fair value of goods or services received or the fair value of the equity instruments issued. In situations where equity instruments are issued to non-employees and some or all of the fair value of the good or service received by the Company as consideration cannot be specifically identified, they are measured at fair value of the stock-based payment. Stock-based payment transactions are primarily for individuals whose compensation has been classified as part of general and administrative expenses in the interim statement of operations and comprehensive (loss) income.

 

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 Company’s best estimate of the number of equity instruments that will ultimately vest. The income or loss for a period represents the movement in cumulative expense recognized as of the beginning and end of that period and the corresponding amount is represented in additional paid-in capital. At the end of each reporting period, the Company re-assesses its estimates of the number of awards that are expected to vest and recognizes the impact of the revisions in the interim statements of operations and comprehensive (loss) income.

 

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

 

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

 

RSUs are issued on the vesting dates, sometimes net of the applicable statutory tax withholding to be paid by the Company on behalf of the employees. In those instances, lower shares are issued than the number of RSUs vested and the tax withholding is recorded as a reduction to paid-in capital. The payment of tax withholding on stock-based payment qualifies as an equity classification under ASU 2016-09 – Compensation – Stock.

 

15

 

 

Ayr Wellness Inc. (formerly Ayr Strategies Inc.)

Notes to the Unaudited Interim Condensed Consolidated Financial Statements

For the Three and Nine Months Ended September 30, 2021 and 2020

 

3.SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

 

3.14 Stock-based payments (continued)

 

(b) Warrants

 

The Company determines the accounting classification of warrants, as either liability or equity, by assessing ASC 480 – Distinguishing Liabilities from Equity and ASC 815 – Derivatives and Hedging. Under ASC 480, warrants are considered a liability if the warrants are mandatorily redeemable, obligate the Company to settle the warrants or the underlying shares by paying cash or other assets, or warrants that must or may require settlement by issuing a variable number of shares. Under ASC 815, warrants are considered liabilities if contracts require or may require the issuer to net settle the contract for cash. Such derivatives are recorded as a liability at fair value, irrespective of the likelihood of the transaction occurring that triggers the net cash settlement feature.

 

After all relevant assessments, the Company concludes whether the warrants are classified as liability or equity. Liability classified warrants require fair value accounting at issuance and subsequent to initial issuance with all changes in fair value after the issuance date recorded in the statements of operations and comprehensive (loss) income. Equity classified warrants only require fair value accounting at issuance with no changes recognized subsequent to the issuance date.

 

The Company determined the warrants are freestanding instruments which do not meet the characteristics of a liability and therefore are classified as equity.

 

3.15 Loss contingencies

 

Loss contingencies are recognized when the Company 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. Loss contingencies 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.

 

3.16 Financial instruments

 

Recognition and initial measurement

 

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

 

16

 

 

Ayr Wellness Inc. (formerly Ayr Strategies Inc.)

Notes to the Unaudited Interim Condensed Consolidated Financial Statements

For the Three and Nine Months Ended September 30, 2021 and 2020

 

3.SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

 

3.16 Financial instruments (continued)

 

Classification and subsequent measurement

 

The Company classifies financial assets, at the time of initial recognition, according to the Company’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 of the following conditions are met and they are not designated as FVTPL: a) the financial asset is held within a business model whose objective is to hold financial assets to collect contractual cash flows; and b) the contractual terms of the financial asset give rise on specified dates to cash flows that are solely payments of principal and interest on the principal amount outstanding.

 

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

 

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

 

Refer to Note 17 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 Company applies the simplified approach to provide expected credit losses, which requires the use of the lifetime expected loss provision for all accounts receivable based on the Company’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. The Company assesses all information available, including past due status, credit ratings, the existence of third-party insurance, and forward-looking macro-economic factors in the measurement of the ECLs associated with its assets carried at amortized cost. No ECL has been recorded by the Company as all receivables are expected to be collected.

 

17

 

 

Ayr Wellness Inc. (formerly Ayr Strategies Inc.)

Notes to the Unaudited Interim Condensed Consolidated Financial Statements

For the Three and Nine Months Ended September 30, 2021 and 2020

 

3.SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

 

3.16 Financial instruments (continued)

 

Derecognition

 

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

 

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

 

3.17 Foreign currency transactions

 

Foreign currency transactions are translated into the functional currency of the entity 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, such as remeasurement of local currency into functional currency, are recognized in the interim statements of operations and comprehensive (loss) income.

 

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

 

assets and liabilities for each balance sheet presented are translated at the closing rate at the date of the balance sheet; and
income and expenses for each statement of operations and comprehensive (loss) income are translated at average exchange rates (unless this average is not a reasonable approximation of the cumulative effect of the rates prevailing on the transaction dates, in which case income and expenses are translated as the rate on the dates of the transactions).
  

Effect of translation differences, such as translation of foreign currency into reporting currency, are accumulated and presented as a component of equity under accumulated other comprehensive income.

 

3.18 Taxation

 

Income taxes for interim periods are determined based on the estimated annual effective tax rate based on the full year forecast of ordinary income, impacted for discrete items. Provision for income taxes is calculated using the asset and liability method. Deferred income tax assets and liabilities are determined based on enacted tax rates and laws for the years in which the differences are expected to reverse. Deferred tax assets are reduced by a valuation allowance when, in the opinion of management, it is more likely than not that some portion or all of the deferred tax assets will not be realized. Management has evaluated and concluded that there were no material uncertain tax positions requiring recognition in the Company's financial statements. The Company does not expect any significant changes in the unrecognized tax benefits within twelve months of the reporting date. The Company classifies interest expense and any related penalties related to income tax uncertainties as a component of income tax expense. No interest or penalties have been recognized during the nine months ended September 30, 2021 and 2020.

 

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

 

18

 

 

Ayr Wellness Inc. (formerly Ayr Strategies Inc.)

Notes to the Unaudited Interim Condensed Consolidated Financial Statements

For the Three and Nine Months Ended September 30, 2021 and 2020

 

3.SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

 

3.19 Significant accounting judgments and estimates

 

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

 

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

 

The global pandemic outbreak of the novel strain of coronavirus (“COVID-19”) has resulted in governments worldwide enacting emergency measures to combat the spread of the virus. These measures, which include the implementation of travel bans, store closures, self-imposed quarantine periods and social distancing, may cause material disruption to businesses globally resulting in an economic slowdown. COVID-19 has cast uncertainty on the assumptions used by management in making its judgments and estimates. Management has not observed any indicators of impairment to assets or a significant change in the fair value of assets due to COVID-19. The Company implemented new safety procedures in accordance with the guidance from the CDC at all locations to better protect the health and safety of both employees and customers. The Company is re-assessing its response to the COVID-19 pandemic on an ongoing basis.

 

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

 

(a) Business combinations

 

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 Company obtains control of the acquiree.

 

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 a liability is remeasured at subsequent reporting dates in accordance with the criteria and guidance provided under ASC 805 – Business Combinations.

 

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 is required to finalize its allocation on the earlier of the date that information becomes known, or one year from the acquisition date. 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.

 

19

 

 

Ayr Wellness Inc. (formerly Ayr Strategies Inc.)

Notes to the Unaudited Interim Condensed Consolidated Financial Statements

For the Three and Nine Months Ended September 30, 2021 and 2020

 

3.SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

  

3.19 Significant accounting judgments and estimates (continued)

 

(a) Business combinations (continued)

 

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

 

Judgment is applied in determining whether a transaction is a business combination or an asset acquisition by considering the nature of the assets acquired and the processes applied to those assets, or if the integrated set of assets and activities is capable of being conducted and managed for the purpose of providing a return to investors or other owners.

 

(b) Inventory

 

In calculating the value of 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, expected yields for the cannabis plants, harvesting costs, net realizable value, selling costs, average or expected selling prices, and impairment factors. In calculating final inventory values, management compares the inventory costs to estimated net realizable value as well as investigates slow moving inventory, if applicable. The estimates are judgmental in nature and are made at a point in time, using available information, such as expected business plans and expected market conditions. Periodic reviews are performed on the inventory balance with the changes in inventory reserves reflected in cost of goods sold.

 

(c) Estimated useful lives and depreciation of PPE

 

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.

 

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

 

Management uses significant judgment in 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. Impairment tests rely on judgments and estimates related to growth rates, discount rates, and estimated margins.

 

(e) Goodwill impairment

 

Goodwill is tested for impairment annually and whenever events or changes in circumstances indicate that the carrying amount of goodwill may have been impaired. In order to determine that the value of goodwill may have been impaired, the Company performs a qualitative assessment to determine that it was more-likely-than-not if the reporting unit’s carrying value is less than the fair value, indicating the potential for goodwill impairment. A number of factors, including historical results, business plans, forecasts, and market data are used to determine the fair value of the reporting unit. Changes in the conditions for these judgments and estimates can significantly affect the assessed value of goodwill.

 

20

 

 

Ayr Wellness Inc. (formerly Ayr Strategies Inc.)

Notes to the Unaudited Interim Condensed Consolidated Financial Statements

For the Three and Nine Months Ended September 30, 2021 and 2020

 

3.SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

 

3.19 Significant accounting judgments and estimates (continued)

 

(f) Leases

 

Each capitalized lease is evaluated to determine if the Company 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 Company used discounted lease payments using a weighted-average rate in the range of 9.8% to 15.0% per annum. The weighted-average rate is based on the Company’s incremental borrowing rate, which relies on judgments and estimates.

 

(g) Provisions and contingent liabilities

 

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

 

(h) Financial instruments

 

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

 

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

 

(i) Expected credit loss

 

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

 

21

 

 

Ayr Wellness Inc. (formerly Ayr Strategies Inc.)

Notes to the Unaudited Interim Condensed Consolidated Financial Statements

For the Three and Nine Months Ended September 30, 2021 and 2020

 

3.SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

 

3.20 Change in accounting standards

 

The Company is treated as an “emerging growth company” per the definition under the Jumpstart Our Business Startups Act (the “JOBS Act”). Under the JOBS Act, emerging growth companies may delay adopting new or revised accounting standards until the standards apply to private companies.

 

Recently Issued Accounting Standards

 

In June 2016, the FASB issued ASU 2016-13 Topic 326 Financial Instruments - Credit Losses: Measurement of Credit Losses on Financial Instruments, which was subsequently revised by ASU 2018-19, ASU 2019-04, ASU 2019-05, ASU 2019-11, ASU 2020-02 and ASU 2020-03 (“ASU 2016-13”), which introduces a new model for assessing impairment on most financial assets. Entities will be required to use a forward-looking expected loss model, which will replace the current incurred loss model, which will result in earlier recognition of allowance for losses. ASU 2016-13 is effective for fiscal years beginning after December 15, 2022, and interim periods therein. The Company is evaluating the adoption date and impact, if any, adoption will have on its interim financial statements.

 

In December 2019, the FASB issued ASU 2019-12 Topic 740 – Simplifying the Accounting for Income Taxes (“ASU 2019-12”), which eliminates certain exceptions related to the approach for intraperiod tax allocation, the methodology for calculating income taxes in an interim period and the recognition of deferred tax liabilities for outside basis differences. It also clarifies and simplifies other aspects of the accounting for income taxes. ASU 2019-12 is effective for fiscal years beginning after December 15, 2021, and interim periods therein. The Company is evaluating the adoption date and impact, if any, adoption will have on its interim financial statements.

 

In January 2020, the FASB issued ASU 2020-01 Topic 321 – Investments – Equity Securities, Topic 323 – Investments – Equity Method and Joint Ventures, and Topic 815 – Derivatives and Hedging (collectively “ASU 2020-01”), which is intended to clarify the interaction of the accounting for equity securities under Topic 321 and investments accounted for under the equity method of accounting in Topic 323 and the accounting for certain forward contracts and purchased options accounted for under Topic 815. ASU 2020-01 is effective for fiscal years beginning after December 15, 2021, and interim periods therein. The Company is evaluating the adoption date and impact, if any, adoption will have on its interim financial statements.

 

In August 2020, the FASB issued ASU No. 2020-06 Subtopic 470-20 – Debt—Debt with Conversion and Other Options and Subtopic 815-40 Derivatives and Hedging—Contracts in Entity’s Own Equity: Accounting for Convertible Instruments and Contracts in an Entity’s Own Equity, to improve financial reporting associated with accounting for convertible instruments and contracts in an entity’s own equity. The amendments in this Update are effective for fiscal years beginning after December 15, 2021, including interim periods within those fiscal years. The Company is evaluating the adoption date and impact, if any, adoption will have on its interim financial statements.

 

In January 2017, the FASB issued ASU 2017-04 Topic 350, Intangibles - Goodwill and Other, Simplifying the Accounting for Goodwill Impairment ("ASU 2017-04"). ASU 2017-04 removes the requirement to perform a hypothetical purchase price allocation to measure goodwill impairment. A goodwill impairment will now be the amount by which a reporting unit's carrying value exceeds its fair value, not to exceed the carrying amount of goodwill. ASU 2017-04 was effective for the Company’s fiscal year beginning December 15, 2022. The Company is evaluating the adoption date and impact, if any, adoption will have on its interim financial statements.

 

22

 

 

Ayr Wellness Inc. (formerly Ayr Strategies Inc.) 

Notes to the Unaudited Interim Condensed Consolidated Financial Statements

For the Three and Nine Months Ended September 30, 2021 and 2020

 

4.BUSINESS COMBINATIONS AND ASSET ACQUISITIONS

 

Each of the acquisitions are subject to specific terms relating to the satisfaction of the purchase price by the Company and its wholly-owned subsidiaries, and incorporates payments in cash, shares, and debt as well as certain contingent considerations. The shares issued as consideration are either Subordinate Shares or non-voting exchangeable shares of the Company’s subsidiaries (“Exchangeable Shares”) that are exchangeable on a one-for-one basis into an equal number of Subordinate Shares of the Company. The Company treats the Exchangeable Shares as options with a value equal to a share of Subordinate Shares, which represents the holder’s claim on the equity of the Company. The Company has presented these Exchangeable Shares as a part of shareholders’ equity within these interim financial statements due to (i) the fact that they are economically equivalent to the Company’s publicly traded Subordinate Shares (ii) the holders of the Exchangeable Shares are subject to restrictions on transfer under United States securities laws, but may dispose of the Exchangeable Shares through the CSE by exchanging them for Subordinate Shares of the Company. Changes in these assumptions would affect the presentation of the Exchangeable Shares from shareholders’ equity to non-controlling interests; however, there would be no impact on (loss) earnings per share.

 

The goodwill recognized on acquisitions is attributable mainly to the expected future growth potential and expanded customer base arising as a result of the completion of the respective acquisition. Goodwill has been allocated to the reporting units corresponding to the states of the acquired businesses. None of the goodwill is expected to be deductible for income tax purposes. For further analysis on goodwill relating to business combinations, see Note 7. All the acquisitions noted below were accounted for in accordance with ASC 805.

 

23

 

 

Ayr Wellness Inc. (formerly Ayr Strategies Inc.)

Notes to the Unaudited Interim Condensed Consolidated Financial Statements

For the Three and Nine Months Ended September 30, 2021 and 2020

 

4.BUSINESS COMBINATIONS AND ASSET ACQUISITIONS (Continued)

 

2021 Third Quarter Acquisitions

 

Business combination

 

On September 15, 2021, the Company completed its acquisition of GSD NJ LLC (“Garden State Dispensary” or “GSD”) through a membership interest purchase agreement.

 

Asset Acquisition

 

On July 1, 2021, the Company completed its acquisitions of Eskar Holdings, LLC, (“Eskar”) through a membership interest purchase agreement. Collectively, the GSD and Eskar acquisitions are referred to as the “Q3 2021 Acquisitions”.

 

The details of the purchase consideration consist of cash, debt, Exchangeable Shares, and contingent consideration.

 

Final valuations of the assets acquired and liabilities assumed are not yet complete due to the inherent complexity associated with valuations and the short period of time between the acquisition date and the period end. Therefore, the purchase price allocation is preliminary and subject to adjustment on completion of the valuation process and analysis of resulting tax effects. Further changes may still be required as management works to finalize the valuation of assets acquired and liabilities assumed. Differences between these provisional estimates and the final acquisition accounting may occur and these differences could have a material impact.

 

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

 

   GSD   Eskar   Total 
   $   $   $ 
ASSETS ACQUIRED               
Cash   579,560    -    579,560 
Inventory   3,106,338    -    3,106,338 
Prepaid expenses and other assets   67,449    -    67,449 
Intangible assets   160,000,000    1,000,000    161,000,000 
Property, plant, and equipment   30,699,183    -    30,699,183 
Right-of-use assets - operating   13,234,034    -    13,234,034 
Deposits   515,202    -    515,202 
Total assets acquired at fair value   208,201,766    1,000,000    209,201,766 
                
LIABILITIES ASSUMED               
Trade payables   1,658,180    -    1,658,180 
Accrued liabilities   444,784    -    444,784 
Advance from related parties   22,750,176    -    22,750,176 
Deferred tax liabilities   -    -    - 
Lease liabilities - operating   13,025,508    -    13,025,508 
Debts payable   3,000,000    -    3,000,000 
Total liabilities assumed at fair value   40,878,648    -    40,878,648 
                
Goodwill   23,247,358    -    23,247,358 
                
Consideration transferred   190,570,476    1,000,000    191,570,476 

 

24

 

 

Ayr Wellness Inc. (formerly Ayr Strategies Inc.)

Notes to the Unaudited Interim Condensed Consolidated Financial Statements

For the Three and Nine Months Ended September 30, 2021 and 2020

 

4.BUSINESS COMBINATIONS AND ASSET ACQUISITIONS (Continued)

 

GSD Business Combination

 

GSD has three open dispensaries, the maximum allowed under its permit, at highway locations throughout the central region of the state, as well as approximately 30,000 sq. ft. of operational cultivation and production facilities. An additional 75,000 sq. ft. of cultivation is under construction.

 

Purchase consideration was comprised of the following:

 

       Shares   Fair Value 
Cash    i         $41,774,630 
Debt Payable    ii          29,490,630 
Shares Issued    iii     1,511,334    29,744,216 
Contingent Consideration    iv          89,561,000 
                
Total        1,511,334   $190,570,476 

 

Pursuant to the terms of the Definitive Agreement (“GSD Agreement”), Ayr satisfied the purchase price of $190.6 million for GSD through the following:

 

i.$41.8 million of the GSD purchase price in the form of cash consideration;

 

ii.$29.5 million of the GSD purchase price in the form of a promissory note payable.

 

iii.$29.7 million of the GSD purchase price in the form of 1,511,334 Exchangeable Shares, these shares have contractual restrictions on their ability to be sold for four to twelve months (the “GSD Lock-Up Provision”).

 

iv.A portion of the GSD purchase price is derived from an earn-out provision, consisting of cash, a promissory note, and Exchangeable Shares, valued through a Monte-Carlo simulation, that may entitle the sellers to earn additional consideration if certain milestones are achieved, see Note 13 for more information.

 

25

 

 

Ayr Wellness Inc. (formerly Ayr Strategies Inc.) 

Notes to the Unaudited Interim Condensed Consolidated Financial Statements

For the Three and Nine Months Ended September 30, 2021 and 2020

 

4.BUSINESS COMBINATIONS AND ASSET ACQUISITIONS (Continued)

 

Eskar Asset Acquisition

 

Pursuant to the agreements, the Company acquired rights to legally open and operate an adult-use cannabis licensed retail store along with the purchase of the property located in the Town of Watertown, Massachusetts.

 

As the Eskar acquisition did not meet the definition of a business according to ASC 805 and as such, it was recorded as an asset acquisition.

 

Purchase consideration for the acquisition was $1,000,000, paid in cash.

 

26

 

 

Ayr Wellness Inc. (formerly Ayr Strategies Inc.)

Notes to the Unaudited Interim Condensed Consolidated Financial Statements

For the Three and Nine Months Ended September 30, 2021 and 2020

 

4.BUSINESS COMBINATIONS AND ASSET ACQUISITIONS (Continued)

 

2021 First Quarter Acquisitions

 

Business combinations

 

On February 26, 2021, the Company completed its acquisition of Liberty in a stock-for-stock combination. On March 23, 2021, the Company completed its acquisition of Oasis through a membership interest purchase agreement. On March 31, 2021, the Company completed its acquisition of Ohio Medical Solutions, LLC (“Ohio Medical”) through an asset purchase agreement.

 

Asset acquisition

 

On March 30, 2021, the Company completed its acquisition of Greenlight Management, LLC (“Greenlight Management”) and Greenlight Holdings, LLC (“Greenlight Holdings”) through a membership purchase agreement. Greenlight Management has a management agreement with Parma Wellness, Center, LLC (“Parma”). Collectively, the Liberty, Oasis, Ohio Medical, and Parma acquisitions are referred to as the “Q1 2021 Acquisitions”.

 

The details of the purchase consideration consist of cash, debt, Subordinate Shares, Exchangeable Shares, contingent consideration, purchase consideration payable, and replacement options issued.

 

Final valuations of the assets acquired and liabilities assumed are not yet complete due to the inherent complexity associated with valuations and the short period of time between the acquisition date and the period end. Therefore, the purchase price allocation is preliminary and subject to adjustment on completion of the valuation process and analysis of resulting tax effects. During the quarter, the Company revised the previously disclosed provisional amounts reflected in the interim financial statements for the three months ended June 30, 2021. Further changes may still be required as management works to finalize the valuation of assets acquired and liabilities assumed. Differences between these provisional estimates and the final acquisition accounting may occur and these differences could have a material impact.

 

 27 

 

 

Ayr Wellness Inc. (formerly Ayr Strategies Inc.)

Notes to the Unaudited Interim Condensed Consolidated Financial Statements

For the Three and Nine Months Ended September 30, 2021 and 2020

 

4.BUSINESS COMBINATIONS AND ASSET ACQUISITIONS (Continued)

 

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

 

   Liberty   Oasis   Parma   Ohio Medical   Total 
   $   $   $   $   $ 
ASSETS ACQUIRED                         
Cash   6,650,137    8,237,240    -    -    14,887,377 
Accounts receivable   -    26,125    -    6,362    32,487 
Inventory   47,420,390    10,388,851    -    313,076    58,122,317 
Prepaid expenses and other assets   817,824    463,825    -    85,474    1,367,123 
Intangible assets   270,000,000    220,000,000    13,255,000    11,739    503,266,739 
Property, plant, and equipment   56,745,883    10,898,530    3,910,000    493,239    72,047,652 
Right-of-use assets - operating   11,750,150    15,824,407    -    3,488,670    31,063,227 
Right-of-use assets - finance, net   378,992    13,095    -    -    392,087 
Deposits   619,377    166,200    -    252,000    1,037,577 
Total assets acquired at fair value   394,382,753    266,018,273    17,165,000    4,650,560    682,216,586 
                          
LIABILITIES ASSUMED                         
Trade payables   3,274,256    2,901,326    -    -    6,175,582 
Accrued liabilities   5,383,075    2,720,381    -    15,000    8,118,456 
Income tax payable   7,135,000    -    -    -    7,135,000 
Deferred tax liabilities   71,962,667    -    -    -    71,962,667 
Lease liabilities - operating   11,693,248    15,824,408    -    3,497,060    31,014,716 
Lease liabilities - finance   378,992    13,095    -    -    392,087 
Debts payable   7,479,389    -    -    -    7,479,389 
Accrued interest   153,057    -    -    -    153,057 
Total liabilities assumed at fair value   107,459,684    21,459,210    -    3,512,060    132,430,954 
                          
Goodwill   119,420,931    30,480,820    -    11,500    149,913,251 
                          
Consideration transferred   406,344,000    275,039,883    17,165,000    1,150,000    699,698,883 

 

 28 

 

 

Ayr Wellness Inc. (formerly Ayr Strategies Inc.)

Notes to the Unaudited Interim Condensed Consolidated Financial Statements

For the Three and Nine Months Ended September 30, 2021 and 2020

 

4.BUSINESS COMBINATIONS AND ASSET ACQUISITIONS (Continued)

 

Liberty Business Combination

 

Liberty is a vertically integrated cannabis company with cultivation, processor, transporter, and retail dispensary operations in Florida. Liberty owns a 387-acre cultivation campus in Gainesville, Florida with over 300,000 square feet of production facilities and operates dispensaries in the medical market.

 

Purchase consideration was comprised of the following:

 

      Shares   Fair Value 
Share Capital   i   12,670,958   $399,499,188 
Purchase Consideration Payable   ii   75,864   $2,391,895 
Replacement Options Issued   iii   248,412   $4,452,917 
              
Total      12,995,234   $406,344,000 

 

Pursuant to the terms of the Definitive Agreement (“Liberty Agreement”), Ayr satisfied the purchase price of $406.3 million for Liberty through the following:

 

i.$399.5 million of the Liberty purchase price in the form of 12,670,958 Subordinate Shares of the Company in a stock-for-stock combination. Liberty shareholders received 0.03683 Ayr shares for each Liberty share held;

 

ii.$2.4 million of the Liberty purchase price in the form of 75,864 Subordinate Shares were issued to dissenting Liberty shareholders who subsequently withdrew their dissent notices. On April 1, 2021, the dissenting Liberty shareholders received 0.03683 Ayr Subordinate Shares for each share held and the Company recognized a gain from fair value adjustment of $102,351, see Note 13; and

 

iii.$4.5 million of the Liberty purchase price in the form of 248,412 replacement options issued that were fully vested.

 

 29 

 

 

Ayr Wellness Inc. (formerly Ayr Strategies Inc.)

Notes to the Unaudited Interim Condensed Consolidated Financial Statements

For the Three and Nine Months Ended September 30, 2021 and 2020

 

4.BUSINESS COMBINATIONS AND ASSET ACQUISITIONS (Continued)

 

Oasis Business Combination

 

Oasis is a vertically integrated cannabis company with a cultivation, processing, and retail dispensary operations in Arizona. Oasis operates a 10,000 square foot cultivation and processing facility and has an 80,000 square foot cultivation facility under development. Oasis operates three dispensaries in both the adult-use and medical markets.

 

Purchase consideration was comprised of the following:

 

      Shares   Fair Value 
Cash   i       $9,732,751 
Debt Payable   ii        22,504,885 
Shares Issued   iii   4,570,434    125,187,247 
Contingent Consideration   iv        117,615,000 
              
Total      4,570,434   $275,039,883 

 

Pursuant to the terms of the Definitive Agreement (“Oasis Agreement”), Ayr satisfied the purchase price of $275.0 million for Oasis through the following:

 

i.$9.7 million of the Oasis purchase price in the form of cash consideration;

 

ii.$22.5 million of the Oasis purchase price in the form of promissory notes payable. The note is subjected to adjustment based on a final working capital adjustment;

 

iii.$125.2 million of the Oasis purchase price in the form of 4,570,434 Exchangeable Shares, that are exchangeable on a one-for-one basis into an equal number of Subordinate Shares of the Company. Two million of the Exchangeable Shares are held in escrow and may be payable upon the achievement of established cultivation targets at the facility under development. These shares have restrictions on their ability to be sold for six to eighteen months (the “Oasis Lock-Up Provision”); and

 

iv.A portion of the Oasis purchase price is derived from an earn-out provision, consisting of cash and Exchangeable Shares, valued through a Monte-Carlo simulation, that may entitle the sellers to earn additional consideration if certain milestones are achieved, see Note 13 for more information.

 

 30 

 

 

Ayr Wellness Inc. (formerly Ayr Strategies Inc.)

Notes to the Unaudited Interim Condensed Consolidated Financial Statements

For the Three and Nine Months Ended September 30, 2021 and 2020

 

4.BUSINESS COMBINATIONS AND ASSET ACQUISITIONS (Continued)

 

Parma Asset Acquisition

 

Greenlight Management operates on a 58,000 square foot facility in Parma, Ohio under a management agreement with Parma. Parma is a recipient of a Tier 1 Cultivator Provisional License in the medical cannabis market in Ohio. The land and building where the facility is located are owned by Greenlight Holdings.

 

As the Parma acquisition did not meet the definition of a business according to ASC 805, and as such, it was recorded as an asset acquisition. Purchase consideration for the acquisition was $17,165,000, paid in cash.

 

Ohio Medical Business Combination

 

Ohio Medical is a cannabis processor and manufacturer in the Ohio medical market with a 9,000 square foot medical marijuana processing facility that is licensed as part of the Ohio medical cannabis program.

 

Purchase consideration for the combination was $1,150,000, paid in cash.

 

 31 

 

 

Ayr Wellness Inc. (formerly Ayr Strategies Inc.)

Notes to the Unaudited Interim Condensed Consolidated Financial Statements

For the Three and Nine Months Ended September 30, 2021 and 2020

 

4.BUSINESS COMBINATION AND ASSET ACQUISITIONS (Continued)

 

2020 Fourth Quarter Acquisitions

 

On November 18, 2020, CSAC AcquisitionCo completed its acquisition of DocHouse, LLC (“DocHouse”) through a membership interest purchase agreement. On December 23, 2020, CSAC PA, a wholly-owned subsidiary in Nevada, United States, completed its acquisition of CannTech PA through a membership interest purchase agreement. Collectively, the DocHouse and CannTech PA acquisitions are referred to as the “Q4 2020 Acquisitions”.

 

The details of the purchase price consideration consist of cash, debt, Subordinate Shares, and Exchangeable Shares.

 

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

 

   DocHouse   CannTech PA   Total 
   $   $   $ 
ASSETS ACQUIRED               
Cash   -    2,383,373    2,383,373 
Inventory   -    254,342    254,342 
Prepaid expenses, deposits, and other current assets   -    525,989    525,989 
Intangible assets   13,072,485    62,099,558    75,172,043 
Property, plant, and equipment   11,063,908    10,596,301    21,660,209 
Right-of-use assets - operating   -    11,131,990    11,131,990 
Deposits and other assets   -    204,132    204,132 
Total assets acquired at fair value   24,136,393    87,195,685    111,332,078 
                
LIABILITIES ASSUMED               
Trade payables   290,512    715,912    1,006,424 
Accrued liabilities   46,330    262,130    308,460 
Advance from related parties   2,303,349    5,737,455    8,040,804 
Lease liabilities - operating   -    11,170,076    11,170,076 
Debts payable   -    8,271,432    8,271,432 
Total liabilities assumed at fair value   2,640,191    26,157,005    28,797,196 
                
Goodwill   -    3,015,000    3,015,000 
                
Consideration transferred   21,496,202    64,053,680    85,549,882 

 

 32 

 

 

Ayr Wellness Inc. (formerly Ayr Strategies Inc.)

Notes to the Unaudited Interim Condensed Consolidated Financial Statements

For the Three and Nine Months Ended September 30, 2021 and 2020

 

4.BUSINESS COMBINATION AND ASSET ACQUISITIONS (Continued)

 

DocHouse Asset Acquisition

 

DocHouse owns real property with a grower/processor permit in the Pennsylvania medical cannabis market.

 

As DocHouse did not meet the definition of a business according to ASC 805, it was recorded as an asset acquisition. Purchase consideration was comprised of the following:

 

      Shares   Fair Value 
Cash   i       $17,477,788 
Debt Payable   ii        1,934,964 
Shares Issued   iii   128,265    2,083,450 
              
Total      128,265   $21,496,202 

 

Pursuant to the terms of the Definitive Agreement (“DocHouse Agreement”), Ayr satisfied the purchase price of $21.5 million for DocHouse through the following:

 

i.$17.5 million of the DocHouse purchase price in the form of cash consideration, of which $12.4 million was paid on closing, $3.0 million was paid within three months, and $2.1 million was paid within six months of closing;

 

ii.$1.9 million of the DocHouse purchase price in the form of promissory notes payables; and

 

iii.$2.1 million of the DocHouse purchase price in the form of 128,265 Subordinate Shares of the Company. These shares have restrictions on their ability to be sold for six to twelve months (the “DocHouse Lock-Up Provision”).

 

 33 

 

 

Ayr Wellness Inc. (formerly Ayr Strategies Inc.)

Notes to the Unaudited Interim Condensed Consolidated Financial Statements

For the Three and Nine Months Ended September 30, 2021 and 2020

 

4.BUSINESS COMBINATION AND ASSET ACQUISITIONS (Continued)

 

CannTech PA Business Combination

 

CannTech PA is a vertically integrated cannabis company with a grower/processor and dispensary permit in the Pennsylvania medical market. CannTech PA has a permit to operate six retail dispensaries and a cultivation and processing facility.

 

The purchase consideration was comprised of the following:

 

      Shares   Fair Value 
Cash   i       $25,160,864 
Debt Payable   ii        13,917,181 
Shares Issued   iii   1,310,041    24,975,635 
              
Total      1,310,041   $64,053,680 

 

Pursuant to the terms of the Definitive Agreement (“CannTech PA Agreement”), Ayr satisfied the purchase price of $64.1 million for CannTech PA through the following:

 

i.$25.2 million of the CannTech PA purchase price in the form of cash consideration, settlement of the final working capital, which is deemed immaterial;

 

ii.$15.2 million of the CannTech PA purchase price in the form of promissory notes payable. The fair value of the notes on the acquisition date was $13.9 million; and

 

iii.$25.0 million of the CannTech PA purchase price in the form of 1,310,041 Exchangeable Shares that are exchangeable on a one-for-one basis into an equal number of Subordinate Shares of the Company. These shares have restrictions on their ability to be sold for four to twelve months (the “CannTech PA Lock-Up Provision”).

 

 34 

 

 

Ayr Wellness Inc. (formerly Ayr Strategies Inc.)

Notes to the Unaudited Interim Condensed Consolidated Financial Statements

For the Three and Nine Months Ended September 30, 2021 and 2020

 

4.BUSINESS COMBINATION AND ASSET ACQUISITIONS (Continued)

 

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. Transactions accounted for as business combinations have been accounted for in accordance with ASC 805, with the results included in the Company’s net (loss) earnings from the date of acquisition.

 

The consideration that is subject to a Lock-Up Provision is measured at fair value based on unobservable inputs and is considered a Level 3 measurement. The fair value was determined by the Company’s share price at the acquisition date and other inputs based on other observable market data. The earn-out provisions in the Oasis and GSD Agreements have been measured at fair value by using a Monte-Carlo simulation model. Refer to Note 13 for the contingent consideration fair value treatment subsequent to the acquisition.

 

5. INVENTORY

 

The Company’s inventory includes the following:

 

   September 30, 2021   December 31, 2020 
   Raw materials  $16,342,374   $1,705,150 
   Work in process   36,676,028    10,454,491 
   Finished goods   17,830,915    8,934,839 
   Supplies and others   7,772,450    1,825,125 
   Incremental costs to acquire cannabis inventory in a business combination   1,858,926    - 
Total inventory  $80,480,693   $22,919,605 

 

Amount of inventory included in cost of goods sold during the three and nine months ended September 30, 2021 and 2020, was $41,801,290 and $105,745,948, and $16,928,786 and $43,255,874, respectively. There were no inventory write-downs taken during the periods ended.

 

For the three and nine months ended September 30, 2021 and 2020, $9,022,291 and $41,410,732, and $nil and $nil, respectively, of expenses relating to the incremental costs to acquire cannabis inventory in a business combination is included on the interim statements of operations and comprehensive (loss) income. This relates to the one-time adjustment of cannabis inventory from cost to fair value as part of the purchase price allocation.

 

 35 

 

 

Ayr Wellness Inc. (formerly Ayr Strategies Inc.)

Notes to the Unaudited Interim Condensed Consolidated Financial Statements

For the Three and Nine Months Ended September 30, 2021 and 2020

 

6.PROPERTY, PLANT, AND EQUIPMENT

 

   Furniture and
fixtures
   Office
equipment
   Machinery and
equipment
   Auto and
trucks
   Buildings, leasehold
improvements, and land
   Construction in
Progress
   Total 
Cost                                   
As of January 1, 2020  $923,391   $312,486   $1,871,195   $130,298   $17,732,014   $17,146,625   $38,116,009 
Acquired through combinations and acquisitions [Note 4]   66,915    49,519    4,544,221    -    2,707,898    14,291,656    21,660,209 
Additions   85,610    147,350    317,723    59,253    12,476,063    -    13,085,999 
Disposals   -    -    -    -    (112,558)   -    (112,558)
Placed in service   -    -