Exhibit 99.1

  

 

 

 

Ayr Wellness Inc. 

UNAUDITED INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS 

FOR THE THREE MONTHS ENDED MARCH 31, 2023 AND 2022 

(EXPRESSED IN UNITED STATES DOLLARS)

 

  

 

 

  

Ayr Wellness Inc. 

UNAUDITED INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS 

March 31, 2023 AND 2022

 

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
(“Interim Statements of Operations”)
2
   
Unaudited Interim Condensed Consolidated Statements of Shareholders’ Equity
(“Interim Statements of Shareholders’ Equity”)
3
   
Unaudited Interim Condensed Consolidated Statements of Cash Flows
(“Interim Statements of Cash Flows”)
4
   
Notes to the Unaudited Interim Condensed Consolidated Financial Statements 5-23

  

 

 

 

Ayr Wellness Inc. 

Unaudited Interim Condensed Consolidated Balance Sheets 

(Expressed in United States Dollars, in thousands)

 

   As of 
   March 31, 2023   December 31, 2022 
       Note 4 
ASSETS          
Current          
Cash  $96,484   $76,827 
Accounts receivable, net   9,525    7,738 
Inventory   96,856    99,810 
Prepaid expenses, deposits, and other current assets   14,791    8,702 
Assets held-for-sale   -    260,625 
Total Current Assets   217,656    453,702 
Non-current          
Property, plant, and equipment, net   304,498    302,680 
Intangible assets, net   730,373    744,709 
Right-of-use assets - operating, net   120,067    121,340 
Right-of-use assets - finance, net   41,812    43,222 
Goodwill   94,108    94,108 
Deposits and other assets   8,655    8,009 
TOTAL ASSETS  $1,517,169   $1,767,770 
           
LIABILITIES AND SHAREHOLDERS' EQUITY          
Liabilities          
Current          
Trade payables  $20,331   $26,671 
Accrued liabilities   31,519    25,470 
Lease liabilities - operating - current portion   8,062    7,906 
Lease liabilities - finance - current portion   9,764    9,529 
Contingent consideration - current portion   38,654    63,429 
Purchase consideration payable   249    2,849 
Income tax payable   56,891    46,006 
Debts payable - current portion   40,030    40,523 
Liabilities held-for-sale   -    43,841 
Accrued interest payable - current portion   7,819    2,581 
Total Current Liabilities   213,319    268,805 
Non-current          
Deferred tax liabilities, net   72,413    72,413 
Lease liabilities - operating - non-current portion   117,298    118,086 
Lease liabilities - finance - non-current portion   21,724    24,016 
Construction finance liabilities   36,422    36,181 
Contingent consideration - non-current portion   23,839    26,661 
Debts payable - non-current portion   140,362    136,315 
Senior secured notes, net of debt issuance costs   244,500    244,682 
Accrued interest payable - non-current portion   5,088    4,763 
Other long term liabilities   273    524 
TOTAL LIABILITIES   875,238    932,446 
           
Commitments and contingencies          
           
Shareholders' equity          
Multiple Voting Shares - no par value, unlimited authorized. Issued and outstanding - 3,696,486 shares   -    - 
Subordinate, Restricted, and Limited Voting Shares - no par value, unlimited authorized. Issued and outstanding - 61,314,491 and 60,909,492 shares, respectively   -    - 
Exchangeable Shares: no par value, unlimited authorized. Issued and outstanding - 5,680,444 and 6,044,339 shares, respectively   -    - 
Additional paid-in capital   1,353,948    1,349,713 
Treasury stock - 645,300 shares   (8,987)   (8,987)
Accumulated other comprehensive income   3,266    3,266 
Accumulated deficit   (705,271)   (510,668)
Equity of Ayr Wellness Inc.   642,956    833,324 
Noncontrolling interest   (1,025)   2,000 
TOTAL SHAREHOLDERS' EQUITY   641,931    835,324 
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY  $1,517,169   $1,767,770 

 

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

 

1

 

  

Ayr Wellness Inc. 

Unaudited Interim Condensed Consolidated Statements of Operations 

(Expressed in United States Dollars, in thousands)

 

   Three Months Ended 
   March 31, 2023   March 31, 2022 
       Note 4 
Revenues, net of discounts  $117,665   $99,502 
           
Cost of goods sold excluding fair value items   69,383    56,657 
Incremental costs to acquire cannabis inventory in business combinations   -    2,518 
Cost of goods sold   69,383    59,175 
           
Gross profit   48,282    40,327 
           
Operating expenses          
Selling, general, and administrative   52,050    49,030 
Depreciation and amortization   15,614    10,882 
Acquisition expense   2,241    1,446 
Loss on sale of assets   58    - 
Total operating expenses   69,963    61,358 
           
Loss from operations   (21,681)   (21,031)
           
Other income (expense), net          
Fair value gain on financial liabilities   27,597    30,079 
Interest expense, net   (7,565)   (6,307)
Interest income   165    29 
Other, net   279    - 
Total other income, net   20,476    23,801 
           
Income (loss) from continuing operations before income taxes and noncontrolling interests   (1,205)   2,770 
           
Income taxes          
Current tax provision   (11,178)   (9,568)
Deferred tax provision   -    (394)
Total income taxes   (11,178)   (9,962)
           
Net loss from continuing operations   (12,383)   (7,192)
           
Discontinued operations          
Loss from discontinued operations, net of taxes (including loss on disposal of $180,753)   (185,245)   (2,001)
Loss from discontinued operations   (185,245)   (2,001)
           
Net loss   (197,628)   (9,193)
Net loss attributable to noncontrolling interest   (3,025)   (1,617)
Net loss attributable to Ayr Wellness Inc.  $(194,603)  $(7,576)
           
Basic and diluted net loss per share          
Continuing operations  $(0.13)  $(0.08)
Discontinued operations   (2.65)   (0.03)
Total basic and diluted net loss per share  $(2.78)  $(0.11)
           
Weighted average number of shares outstanding (basic and diluted)   70,008    67,585 

 

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

 

2

 

  

Ayr Wellness Inc. 

Unaudited Interim Condensed Consolidated Statements of Shareholders’ Equity 

(Expressed in United States Dollars, in thousands)

 

   Multiple
Voting
Shares
   Subordinate,
Restricted, and
Limited
Voting
Shares
 Number
   Exchangeable
Shares
   Additional
paid-in
capital
   Treasury stock   Accumulated
other
comprehensive
income
   Accumulated
Deficit
   Noncontrolling
interest
   Total 
   #   #   #   $   #   $   $   $   $   $ 
Balance, December 31, 2021   3,696    56,337    7,368    1,289,827    (568)   (7,828)   3,266    (265,202)   -    1,020,063 
Stock-based compensation   -    544    -    9,654    -    -    -    -    -    9,654 
Tax withholding on stock-based compensation awards   -    (252)   -    (3,891)   -    -    -    -    -    (3,891)
Share issuance - related party - consulting services   -    50    -    707    -    -    -    -    -    707 
Share issuance - business combinations   -    -    329    4,482    -    -    -    -    -    4,482 
Share issuance - earn-out consideration   -    1,029    -    11,748    -    -    -    -    -    11,748 
Consolidation of variable interest entity   -    -    -    -    -    -    -    -    12,019    12,019 
Exercise of options, net of options sold to cover income taxes   -    33    -    300    -    -    -    -    -    300 
Repurchase of Equity Shares   -    (5)   -    (78)   (77)   (1,159)   -    -    -    (1,237)
Net loss   -    -    -    -    -    -    -    (7,576)   (1,617)   (9,193)
Balance, March 31, 2022   3,696    57,736    7,697    1,312,749    (645)   (8,987)   3,266    (272,778)   10,402    1,044,652 

 

   Multiple
Voting
Shares
   Subordinate,
Restricted,
and Limited
Voting
Shares
   Exchangeable
Shares
   Additional
paid-in
capital
   Treasury stock   Accumulated
other
comprehensive
income
   Accumulated
Deficit
   Noncontrolling
interest
   Total 
   #   #   #   $   #   $   $   $   $   $ 
Balance, December 31, 2022   3,696    60,909    6,044    1,349,713    (645)   (8,987)   3,266    (510,668)   2,000    835,324 
Stock-based compensation   -    56    -    4,264    -    -    -    -    -    4,264 
Tax withholding on stock-based compensation awards   -    (15)   -    (29)   -    -    -    -    -    (29)
Conversion of Exchangeable Shares        364    (364)   -    -    -    -    -    -    - 
Net loss   -    -    -    -    -    -    -    (194,603)   (3,025)   (197,628)
Balance, March 31, 2023   3,696    61,314    5,680    1,353,948    (645)   (8,987)   3,266    (705,271)   (1,025)   641,931 

 

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

 

3

 

   

Ayr Wellness Inc. 

Unaudited Interim Condensed Consolidated Statements of Cash Flows 

(Expressed in United States Dollars, in thousands)

 

   Three Months Ended 
   March 31, 2023   March 31, 2022 
Operating activities          
Consolidated net loss  $(197,628)  $(9,193)
Less: Loss from discontinued operations (Note 4)   (4,492)   (2,001)
Net loss from continuing operations before noncontrolling interest   (193,136)   (7,192)
Adjustments for:          
Fair value gain on financial liabilities   (27,597)   (30,079)
Stock-based compensation   5,584    9,654 
Stock-based compensation - related parties   -    707 
Depreciation and amortization   10,701    3,151 
Amortization on intangible assets   14,336    13,982 
Incremental costs to acquire cannabis inventory in a business combination   -    2,518 
Deferred tax provision   -    394 
Amortization on financing costs   573    573 
Amortization on financing premium   (754)   (754)
Loss on disposal of property, plant, and equipment   58    - 
Loss on the sale of Arizona business   180,753    - 
Changes in operating assets and liabilities, net of business combinations:          
Accounts receivable   (2,087)   615 
Inventory   3,257    835 
Prepaid expenses, deposits, and other current assets   1,204    1,313 
Trade payables   (6,171)   1,263 
Accrued liabilities   5,640    (6,824)
Accrued interest payable   5,053    2,408 
Lease liabilities - operating   640    612 
Income tax payable   10,581    (11,980)
Cash provided by (used in) continuing operations   8,635    (18,804)
Cash provided by (used in) discontinued operations   1,621    (2,397)
Cash provided by (used in) operating activities   10,256    (21,200)
           
Investing activities          
Purchase of property, plant, and equipment   (7,187)   (27,950)
Capitalized interest   (3,589)   (3,684)
Cash paid for business combinations and asset acquisitions, net of cash acquired   -    (9,101)
Cash paid for business combinations and asset acquisitions, working capital   (2,600)   (812)
Deposits for business combinations, net of cash on hand   -    (2,825)
Advances to a related corporation   -    (2,678)
Cash used in investing activities from continuing operations   (13,376)   (47,050)
Proceeds from sale of Arizona - discontinued operation   18,084    - 
Cash provided by (used in) investing activities of discontinued operations   (44)   1,137 
Cash provided by (used in) investing activities   4,664    (45,913)
           
Financing activities          
Proceeds from exercise of options   -    300 
Proceeds from notes payable, net of financing costs   10,000    25,913 
Payment for settlement of contingent consideration   -    (10,000)
Deposits paid for financing lease and note payable   -    (8,353)
Tax withholding on stock-based compensation awards   (29)   (3,891)
Repayments of debts payable   (6,546)   (2,081)
Repayments of lease liabilities - finance (principal portion)   (2,378)   (1,909)
Repurchase of Equity Shares   -    (8,430)
Cash provided by (used in) financing activities by continuing operations   1,047    (8,451)
Cash used in financing activities from discontinued operations   (123)   (117)
Cash provided by (used in) financing activities   924    (8,568)
           
Net increase (decrease) in cash   15,844    (75,681)
Cash, beginning of the period   76,827    154,342 
Cash included in assets held-for-sale   3,813    - 
Cash, end of the period  $96,484   $78,660 
           
Supplemental disclosure of cash flow information:          
Interest paid during the period, net  $5,311   $8,050 
Income taxes paid during the period   908    23,469 
Non-cash investing and financing activities:          
Recognition of right-of-use assets for operating leases   1,358    12,193 
Recognition of right-of-use assets for finance leases   468    8,057 
Issuance of Equity Shares related to business combinations and asset acquisitions   -    4,482 
Issuance of Equity Shares related to settlement of contingent consideration   -    11,748 
Issuance of promissory note related to settlement of contingent consideration   -    14,934 
Cancellation of Equity Shares   -    78 
Capital expenditure disbursements for cultivation facility   241    - 
Extinguishment of note payable related to sale of Arizona business   22,505    - 
Extinguishment of accrued interest payable related to sale of Arizona business   1,165    - 
Reduction of lease liabilities related to sale of Arizona business   16,734    - 
Reduction of right-of-use assets related to sale of Arizona business   16,739    - 

 

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

 

4

 

 

Ayr Wellness Inc. 

Notes to the Unaudited Interim Condensed Consolidated Financial Statements 

(Expressed in United States Dollars, in thousands, except where stated otherwise)

 

  

1.NATURE OF OPERATIONS

  

Ayr Wellness Inc. (“Ayr” or the “Company”) is a vertically integrated cannabis multi-state operator in the United States of America (“U.S.”); through its operating companies in various states throughout the U.S., Ayr is a leading cultivator, manufacturer, and retailer of cannabis products and branded cannabis packaged goods. 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. The Company’s segment analysis is reviewed regularly and will be re-evaluated when circumstances change.

 

The Company is a reporting issuer in the U.S. and Canada. The Company’s subordinate, restricted, and limited voting shares (“Equity Shares”) are trading on the Canadian Stock Exchange (the “CSE”), under the symbol “AYR.A”. The Company’s Equity Shares are also trading on the Over-the-Counter Market (“OTC”) in the U.S. under the symbol “AYRWF”. Ayr’s headquarter office is 2601 South Bayshore Drive, Suite 900, Miami, FL 33133.

 

2.BASIS OF PRESENTATION

 

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 the U.S. Securities and Exchange Commission (“SEC”). Accordingly, these interim statements are condensed and do not include all disclosures required for annual financial statements.

 

The financial data presented herein should be read in conjunction with the audited consolidated financial statements and accompanying notes for the year ended December 31, 2022, included in the Company’s Annual Report on the Form 40-F filed with the SEC on March 10, 2023. In the opinion of management, the financial data presented includes all adjustments, consisting primarily of normal recurring adjustments, necessary to present fairly the financial position, results of operations and cash flows for the periods presented. Certain previously reported amounts have been reclassified between line items to conform to the current period presentation, however, there was no impact on previously reported net loss. These unaudited interim financial statements include estimates and assumptions of management that affect the amounts reported. Actual results could differ from these estimates. The results of operations of unaudited interim periods are not necessarily indicative of the results to be expected for the entire year, or any other period. Due to the sale of the Arizona business, the Company has reflected the assets and liabilities of Arizona as held for sale on the balance sheet as of December 31, 2022 and the operations as discontinued operations on the statement of operations for the period January 1, 2022 through March 31, 2022, see Note 4.

 

3.SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

 

3.1 Basis of consolidation

 

The interim financial statements for the three months ended March 31, 2023 and 2022 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 involving controlled entities are eliminated on consolidation. The accompanying consolidated financial statements reflect the activity related to Arizona as discontinued operations, see Note 4.

 

5

 

  

Ayr Wellness Inc. 

Notes to the Unaudited Interim Condensed Consolidated Financial Statements 

(Expressed in United States Dollars, in thousands, except where stated otherwise)

  

 

3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

 

3.2 Earnings per share

 

The basic loss per share is computed by dividing the net loss by the weighted average number of shares outstanding, including Equity Shares, multiple voting shares of the Company and Exchangeable Shares, as defined below, during the period. The diluted loss 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”), and vested options of the Company (“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 Equity 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, and Vested Options, because their effect would be anti-dilutive, therefore, basic loss per share and diluted loss per share will be the same. For the three months ended March 31, 2023, and 2022, the potentially dilutive financial instruments excluded from the calculation of earnings per share included nil and 1,010 warrants, and 3,480 and 2,851 RSUs, totaling 3,480 and 3,861 shares of potentially dilutive securities, respectively.

 

3.3 Significant accounting judgments and estimates

 

Significant estimates made by management include, but are not limited to: economic lives of leased assets; expected credit losses of accounts receivable; provisions for inventory obsolescence; impairment assessment of goodwill and long-lived assets; depreciable lives of property, plant and equipment; useful lives of intangible assets; accruals for contingencies, including tax contingencies; valuation allowances for deferred income tax assets; contingent consideration obligations resulting from business combinations; estimates of fair value of derivative instruments; and estimates of the fair value of stock-based payment awards.

 

3.4 Discontinued Operations

 

Strategic changes in the Company’s operations can be considered a discontinued operation if both the operations and cash flows of the discontinued business have been (or will be) eliminated from the ongoing operations of the Company and the Company will not have any significant continuing involvement in the operations of the discontinued business after the disposal transaction. Under ASC Subtopic 205-20, “Presentation of Financial Statements – Discontinued Operations” (“ASC Subtopic 205-20”), a component of an entity that is classified as discontinued operations is presented separately from continuing operations in the Consolidated Statements of Operations and the Consolidated Statements of Cash Flows for all periods presented. All assets and liabilities related to such discontinued operations are classified as held for sale and presented separately in the Consolidated Balance Sheets for all periods prior to the disposal by sale. Accordingly, the presentation of prior period balances may not agree to prior issued financial statements. See Note 4 for additional information regarding the results of operations and major classes of assets and liabilities of discontinued operations.

 

6

 

 

Ayr Wellness Inc. 

Notes to the Unaudited Interim Condensed Consolidated Financial Statements 

(Expressed in United States Dollars, in thousands, except where stated otherwise)

 

 

3.5 Change in accounting standards

 

The Company is treated as an “emerging growth company” as defined under the Jumpstart Our Business Start-ups Act of 2012, as amended (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 and Adopted Accounting Standards

 

In June 2016, the Financial Accounting Standards Board (“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, ASU 2020-03, and ASU 2022-02 (“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 the Company’s fiscal year beginning after December 15, 2022, and interim periods therein. For accounts receivable only, the Company applies the simplified approach as permitted by ASU 2016-13. The simplified approach to the recognition of expected losses does not require the Company to track the changes in credit risk; rather, the Company recognizes a loss allowance based on lifetime expected credit losses at each reporting date from the date of the trade receivable. Expected credit losses are measured as the difference in the present value of the contractual cash flows that are due to the Company under the contract, and the cash flows that the Company expects to receive. 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 expected credit losses associated with its assets carried at amortized cost. The Company measures expected credit loss by considering the risk of default over the contract period and incorporates forward-looking information into its measurement. The adoption of ASU 2016-13 did not have a material impact on the Company’s financial statements and there was no cumulative effect at the adoption of the standard.

 

In June 2022, the FASB issued ASU No. 2022-03 Topic 820 – Fair Value Measurement – Fair Value Measurement of Equity Securities Subject to Contractual Sale Restrictions (“ASU 2022-03”), (1) to clarify the guidance in Topic 820, Fair Value Measurement, when measuring the fair value of an equity security subject to contractual restrictions that prohibit the sale of an equity security, (2) to amend a related illustrative example, and (3) to introduce new disclosure requirements for equity securities subject to contractual sale restrictions that are measured at fair value in accordance with Topic 820. ASU 2022-03 is effective for fiscal years beginning after December 15, 2023, and interim periods within those fiscal years. The Company is currently evaluating the impact the adoption of ASU 2022-03 will have on the Company's financial statements.

 

In September 2022, the FASB issued ASU No. 2022-04 Topic 405 – Liabilities – Supplier Finance Programs (“ASU 2022-04”), which is intended to enhance transparency with supplier finance programs. ASU 2022-04 is effective for fiscal years beginning after December 15, 2022, including interim periods within those fiscal years. Adoption is applied on a retrospective approach. The adoption of this ASU did not have a material impact on the Company’s financial statements.

 

On March 27, 2023, the FASB issued ASU No. 2023-01 Topic 842 – Leases – Common Control Arrangements (“ASU 2023-01”), in response to private company stakeholder concerns about applying Topic 842 to related party arrangements between entities under common control. ASU 2023-01 is effective for fiscal years beginning after December 15, 2023, including interim periods within those fiscal years. The Company is currently evaluating the impact the adoption of ASU 2023-01 will have on the Company's financial statements.

 

7

 

   

Ayr Wellness Inc. 

Notes to the Unaudited Interim Condensed Consolidated Financial Statements 

(Expressed in United States Dollars, in thousands, except where stated otherwise)

 

 

4. DISCONTINUED OPERATIONS

 

On March 27, 2023, the Company closed under a definitive agreement the sale of Blue Camo, LLC (“Blue Camo”) which comprises the Company’s Arizona business which includes two licensed entities operating three Oasis-branded dispensaries in the greater Phoenix area, a cultivation and processing facility in Chandler, a cultivation facility in Phoenix, and the Company’s majority interest in Willcox OC, LLC, a joint venture developing an outdoor cultivation facility. Total consideration consists of $20,000 in cash before working capital adjustments and the assumption of lease obligations eliminating approximately $16,734 in long-term lease liabilities. In a separate agreement, all debt outstanding and potential earn-out contingent consideration, related to the 2021 acquisition of Blue Camo, has been eliminated, reducing the Company’s long-term debt by $22,505 and potential earn-out contingent consideration to $nil.

 

The Company accounted for this sale as a disposal under ASC Subtopic 360-10, “Impairment or Disposal of Long-Lived Assets”. The Company has reclassified the operations of Arizona as discontinued operations for all periods presented prior to the sale as the disposal represents a strategic shift that will have a major effect on the Company’s operations and financial results. The Company determined the business to be held for sale as the criteria established under ASC 205-20-45-1E had been satisfied due to the sale occurring during the three months ended March 31, 2023. During the year ended December 31, 2022, the Company determined under ASC 855-10-55, the transaction did not meet the criteria as held for sale, as such, no reclassification was made on the balance sheet and statement of operations in the Company’s Annual Report on the Form 40-F. In accordance with ASC 205-20-50-1(a) the Company has reflected the reclassification of assets and liabilities of these entities as held for sale on the balance sheet as of December 31, 2022 and the operations as discontinued operations on the statement of operations for the period January 1, 2022 through March 31, 2022, and excluded from the accompanying notes.

 

As of December 31, 2022, the major classes of assets and liabilities held for sale included the following:

 

   December 31, 2022 
Current assets held-for-sale     
Inventory and other current assets  $20,910 
Property, plant, and equipment, net   24,239 
Intangible assets, net   194,018 
Right-of-use assets   17,568 
Deferred tax asset, net   3,890 
Total assets held-for-sale  $260,625 
      
Current liabilities held-for-sale     
Trade payables and other current liabilities  $2,629 
Lease liabilities   18,097 
Debt payable   22,505 
Accrued interest payable   610 
Total liabilities held-for-sale  $43,841 

 

8

 

  

Ayr Wellness Inc. 

Notes to the Unaudited Interim Condensed Consolidated Financial Statements 

(Expressed in United States Dollars, in thousands, except where stated otherwise)

 

 

4. DISCONTINUED OPERATIONS (Continued)

 

The following table details the components comprising net loss from our discontinued operations:

 

   Three Months Ended 
   March 31, 2023   March 31, 2022 
Revenues from discontinued operations, net of discounts  $10,260   $11,723 
Cost of goods sold   9,074    6,531 
Gross profit   1,186    5,192 
           
Operating expenses from discontinued operations:          
Selling, general, and administrative   2,115    2,526 
Depreciation and amortization   2,675    2,761 
Total operating expenses from discontinued operations   4,790    5,287 
           
Loss from operations   (3,604)   (95)
           
Other expense          
Interest Expense   (581)   (561)
           
Income taxes   (307)   (1,345)
           
Loss from discontinued operations          
Loss from discontinued operations, net of taxes   (4,492)   (2,001)
Loss on disposal of discontinued operations   (180,753)   - 
Loss from discontinued operations  $(185,245)  $(2,001)

 

The loss on disposal of discontinued operations of approximately $180,753 was derived from the gross proceeds of $51,606, made up of $20,000 of cash consideration and a $7,936 working capital adjustment and the elimination of $23,670 of debt outstanding from the sale of Arizona, less the carrying value of Arizona of approximately $232,359. Final loss on the disposal is preliminary and subject to change based on the settlement of the final working capital adjustment which can extend past six months of the closing date.

 

5. VARIABLE INTEREST ENTITIES (“VIE”)

 

As of March 31, 2023, the Company has the ability to direct the activities of two entities, Tahoe Hydroponics Company, LLC and NV Green, Inc., collectively (“TH/NVG”), through a management services and equity purchase agreement, consummated in February 2022, thereby classifying the entities as VIEs, until certain conditions are met, at which time the Company will evaluate business combination accounting. The assets of TH/NVG can only be used to settle its liabilities and under the applicable agreements TH/NVG retains ultimate legal responsibilities for its operations.

 

9

 

  

Ayr Wellness Inc. 

Notes to the Unaudited Interim Condensed Consolidated Financial Statements 

(Expressed in United States Dollars, in thousands, except where stated otherwise)

  

 

5. VARIABLE INTEREST ENTITIES (“VIE”) (Continued)

 

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”). The Company determined that it possesses the power to direct activities of Parma through the management agreement, thereby classifying the entity as a VIE.

 

The following tables present the summarized financial information about the Company’s consolidated VIEs which are included in the unaudited balance sheet as of March 31, 2023 and December 31, 2022 and statement of operations for the three months ended March 31, 2023 and 2022. All of these entities were determined to be VIEs as the Company possesses the power to direct activities and obligation to absorb losses through management services agreements (“MSAs”).

 

   As of 
   March 31, 2023   December 31, 2022 
   TH/NVG   Parma   TH/NVG   Parma 
Current assets  $4,003   $10,324   $5,248   $10,751 
Non-current assets   10,697    14,248    6,582    14,634 
Total assets   14,700    24,572    11,830    25,385 
                     
Current liabilities   1,245    16,900    1,033    14,092 
Non-current liabilities   835    1,781    898    1,952 
Total liabilities   2,080    18,681    1,931    16,044 
                     
Noncontrolling interest   7,285    (8,310)   7,528    (5,528)
Equity attributable to Ayr Wellness Inc.   5,335    14,201    2,371    14,869 
Total liabilities and equity  $14,700   $24,572   $11,830   $25,385 

 

   Three Months Ended 
   March 31, 2023   March 31, 2022 
   TH/NVG   Parma   TH/NVG   Parma 
Revenues, net of discounts  $538   $-   $538   $- 
Net loss attributable to noncontrolling interest   (243)   (2,782)   (1,617)     
Net loss attributable to Ayr Wellness Inc.   -    -    -    - 
Net loss  $(243)  $(2,782)  $(1,617)   - 

 

   TH/NVG   Parma 
Noncontrolling interest at January 1, 2022  $-   $- 
Total purchase consideration   16,868    - 
Working capital adjustment presented as consideration payable   (4,849)   - 
Net loss during the period   (4,491)   (5,528)
Noncontrolling interest at December 31, 2022  $7,528   $(5,528)
Net loss during the period   (243)   (2,782)
Noncontrolling interest at March 31, 2023  $7,285   $(8,310)

 

10

 

  

Ayr Wellness Inc. 

Notes to the Unaudited Interim Condensed Consolidated Financial Statements 

(Expressed in United States Dollars, in thousands, except where stated otherwise)

 

 

6. INVENTORY

 

The Company’s inventory includes the following:

 

   March 31, 2023   December 31, 2022 
Materials, supplies, and packaging  $10,569   $9,770 
Work in process   61,138    65,807 
Finished goods   25,149    24,233 
Total inventory  $96,856   $99,810 

 

The amount of inventory included in cost of goods sold during the three months ended March 31, 2023, and 2022, was $59,208 and $49,943 respectively. The Company reviews inventory on hand for estimated obsolescence or unmarketable items, as compared to future demand requirements and the shelf life of the various products. Based on the review, the Company records inventory write-downs, when necessary, when costs exceed expected net realizable value.

 

For the three months ended March 31, 2023, and 2022, $nil and $2,518 respectively, of expenses relating to the incremental costs to acquire cannabis inventory in business combinations are recognized in cost of goods sold on the statements of operations. This relates to the one-time adjustment of cannabis inventory from acquiree historical cost to fair value as part of the purchase price allocation.

 

7. PROPERTY, PLANT, AND EQUIPMENT

 

As of March 31, 2023, and December 31, 2022, property, plant, and equipment, net consisted of the following:

 

   March 31, 2023   December 31, 2022 
Furniture and equipment  $50,888   $53,070 
Auto and trucks   1,664    1,626 
Buildings   92,492    91,233 
Leasehold improvements   162,372    154,774 
Land   13,878    13,879 
Construction in progress   9,125    9,581 
Total   330,419    324,163 
Less: Accumulated depreciation and amortization   25,921    21,483 
Total property, plant and equipment, net  $304,498   $302,680 

 

Capitalized interest for the three months ended March 31, 2023, and 2022, totaled $3,589 and $3,684, respectively. Depreciation and amortization expense for the three months ended March 31, 2023, and 2022, totaled $8,970 and $2,538, respectively, of which $3,859 and $1,733 respectively, is included in cost of goods sold.

  

11

 

 

Ayr Wellness Inc. 

Notes to the Unaudited Interim Condensed Consolidated Financial Statements 

(Expressed in United States Dollars, in thousands, except where stated otherwise)

 

 

8. INTANGIBLE ASSETS

 

During the year ended December 31, 2022 an entity co-owned by the Company was awarded a provisional Disproportionately Impacted Area cultivator license in Connecticut. The Company recorded an intangible asset of $3,000 in connection with the cash payment for the cost of the provisional license.

 

Amortization expense is recorded within cost of goods sold and total operating expenses. The amount in cost of goods sold for the three months March 31, 2023, and 2022, was $3,881 and $3,948, respectively.

 

The following table represents intangible assets, net accumulated amortization:

 

   Useful life (# of years)  March 31, 2023   December 31, 2022 
Licenses/permits  15  $680,437   $693,714 
Right-to-use licenses  15   17,497    17,717 
Host community agreements  15   28,859    29,494 
Trade name / brand  5   3,580    3,784 
Total     $730,373   $744,709 

 

   Amortization Expense 
2023  $43,435 
2024   57,483 
2025   57,293 
2026   57,293 
2027   57,293 
2028 and beyond   454,576 
Total  $727,373 

 

12

 

 

Ayr Wellness Inc. 

Notes to the Unaudited Interim Condensed Consolidated Financial Statements 

(Expressed in United States Dollars, in thousands, except where stated otherwise)

 

 

9. RIGHT-OF-USE ASSETS & LEASE LIABILITIES

 

Information related to operating and finance leases is as follows:

 

   March 31, 2023   March 31, 2022 
   Operating Leases   Finance Leases   Operating Leases   Finance Leases 
Incremental borrowing rate (weighted average)   11.76%   9.73%   12.06%   9.70%
Weighted average remaining lease term   12.89 yrs    4.87 yrs    13.42 yrs    2.67 yrs 

 

The maturities of the contractual lease liabilities as of March 31, 2023, are as follows:

 

   Operating Leases   Finance Leases   Total 
2023  $19,792   $9,155   $28,947 
2024   26,125    10,928    37,053 
2025   25,633    5,440    31,073 
2026   24,910    3,467    28,377 
2027   23,562    2,383    25,945 
2028 and beyond   213,028    8,370    221,398 
Total undiscounted lease liabilities   333,050    39,743    372,793 
Impact of discounting   (207,690)   (8,255)   (215,945)
Total present value of minimum lease payments  $125,360   $31,488   $156,848 

 

Payments related to capitalized leases during the three months ended March 31, 2023 and 2022, are as follows:

 

   Three Months Ended 
   March 31, 2023   March 31, 2022 
Lease liabilities - operating          
Lease liabilities - operating expense, COGS  $2,207   $1,178 
Lease liabilities - operating expense, G&A   3,900    2,893 
Lease liabilities - finance          
Amortization of right-of-use assets, COGS   1,683    570 
Amortization of right-of-use assets, G&A   48    43 
Interest on lease liabilities - finance, COGS   752    322 
Interest on lease liabilities - finance, G&A   12    14 
Total lease expense  $8,602   $5,020 

 

13

 

 

Ayr Wellness Inc. 

Notes to the Unaudited Interim Condensed Consolidated Financial Statements 

(Expressed in United States Dollars, in thousands, except where stated otherwise)

 

 

10. RELATED PARTY TRANSACTIONS AND BALANCES

 

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

 

Mercer Park, L.P., a company owned by an executive of Ayr, entered into a management agreement with the Company dated May 24, 2019. The management fee is paid monthly and varies based on actual costs incurred by the related entity when providing the Company administrative support, management services, office space, and utilities. In addition, the management fees paid to the related party also reimbursed them for other corporate or centralized expenses based on actual cost, including but not limited to legal and professional fees, software, and insurance. The agreement is a month-to-month arrangement.

 

As of March 31, 2023, and December 31, 2022, $86 and $698 was included in prepaid expenses, a majority of which is for a letter of credit for an operating lease during 2022. Lease fees included in the operating lease expense during the three months ended March 31, 2023 and 2022, were $213 and $215. During the three months ended March 31, 2023 and 2022, included in general and administrative expenses are management fees of $nil and $1,787.

 

During the three months ended March 31, 2023 and 2022, the Company incurred fees from a company partially owned by a board member of Ayr. The total incurred fees were $14 and $14 of office expenses, $24 and $175 of development fees, $231 and $227 of rental fees, and $28 and $48 of interest expense, respectively, for the three months ended March 31, 2023, and 2022.

 

Refer below to the debts payable and senior secured notes and share capital notes for additional information regarding the debts payable to related parties and non-cash stock-based compensation plan, respectively, for the three months ended March 31, 2023 and 2022.

 

14

 

 

Ayr Wellness Inc. 

Notes to the Unaudited Interim Condensed Consolidated Financial Statements 

(Expressed in United States Dollars, in thousands, except where stated otherwise)

 

 

11. DEBTS PAYABLE AND SENIOR SECURED NOTES

 

Senior Secured Notes

 

On November 12, 2021, the Company completed a private placement offering of approximately $133,250 aggregate principal amount of secured promissory notes at a premium price, resulting in approximately $147,000 of proceeds due December 2024, with a resulting yield-to-maturity of 9.8%. The notes were considered additional notes under the indenture governing the Company’s existing notes which were entered into on December 10, 2020 (“December 2020 Notes”).

 

As of March 31, 2023 and December 31, 2022, the Company’s senior secured notes consisted of the following:

 

   Senior secured notes 
As of January 1, 2022  $245,408 
Debt issuance costs amortized   2,292 
Senior secured notes premium amortized   (3,018)
As of December 31, 2022  $244,682 
Debt issuance costs amortized   572 
Senior secured notes premium amortized   (754)
Total senior secured notes classified as non-current payable as of March 31, 2023  $244,500 
Total accrued interest payable related to senior secured notes as of March 31, 2023  $7,602 

 

Debt Payable

 

As of March 31, 2023, and December 31, 2022, debt payable other than senior secured notes consisted of the following:

 

   Debts payable 
As of January 1, 2022  $133,858 
Discounted as of December 31, 2021   951 
Incurred through earn-out provision   14,934 
Debt Issued   68,000 
Construction financing   36,303 
Less: repayment   (17,924)
Less: discounted to fair value   (598)
As of December 31, 2022   235,524 
Discounted as of December 31, 2022   598 
Debt issued   10,000 
Construction financing   241 
Less: extinguishment related to sale of Arizona business   (22,505)
Less: repayment   (6,546)
Total debts payable, undiscounted as of March 31, 2023   217,312 
Less: discounted to fair value   (498)
Total debts payable as of March 31, 2023  $216,814 
Total accrued interest payable related to debts payable as of March 31, 2023  $5,305 

 

15

 

 

Ayr Wellness Inc. 

Notes to the Unaudited Interim Condensed Consolidated Financial Statements 

(Expressed in United States Dollars, in thousands, except where stated otherwise)

 

 

11. DEBTS PAYABLE AND SENIOR SECURED NOTES (Continued)

 

The details of debts payable were as follows:

 

   March 31, 2023 
   Related
party debt
   Non-related
party debt
   Total debt 
Total debts payable, undiscounted  $1,793   $215,519   $217,312 
Less: current portion   1,545    38,485    40,030 
Total non-current debt, undiscounted   248    177,034    177,282 
Less: discount to fair value   -    (498)   (498)
Total non-current debt  $248   $176,536   $176,784 

 

The following table presents the future debt obligations other than senior secured notes as of March 31, 2023:

 

Future debt obligations (per year)     
2023  $34,055 
2024   94,566 
2025   10,940 
2026   2,051 
2027   7,498 
2028 and beyond   68,202 
Total debt obligations  $217,312 

 

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

 

On March 17, 2022, the Company entered into a loan agreement with a community bank for total proceeds of $26,200, net of financing costs of $287, with a 4.625% annual interest rate payable monthly. The loan is secured with a first mortgage lien on certain real property in Massachusetts and matures five years from the date of the agreement, with an option to extend for an additional five years. On March 24, 2023, the Company amended the loan agreement and received additional total proceeds of $10,000, net of financing costs of $100, with an 8% annual interest rate payable monthly for the incremental proceeds.

 

In connection with the sale of Arizona, on March 27, 2023, the outstanding principal balance of $22,505 and accrued interest of $1,165 was eliminated. Refer to Note 4 for further details on the sale of Arizona.

 

Interest expense associated with related party debt payable for the three months ended March 31, 2023, and 2022, was $28 and $391, respectively.

 

16

 

 

Ayr Wellness Inc. 

Notes to the Unaudited Interim Condensed Consolidated Financial Statements 

(Expressed in United States Dollars, in thousands, except where stated otherwise)

 

 

12. SHARE CAPITAL

 

The following activity occurred during the three months ended March 31, 2022:

 

·5 Equity Shares were repurchased and cancelled, and 77 Equity Shares were repurchased and held as a result of the Company’s stock repurchase program.
·In relation to the exercise of 544 RSUs, 292 Equity Shares were issued due to net settlement.

oThrough the three months ended March 31, 2022, 20 shares were forfeited.

·33 Equity Shares were issued in connection with options exercised.
·1,029 Equity Shares were issued in connection with the earn-out provision related to the acquisition of PA Naturals.
·329 Exchangeable Shares were issued in connection with the Q1 2022 Acquisition.
·50 Equity Shares were issued to a related party, refer to Note 10.

 

The following activity occurred during the three months ended March 31, 2023:

 

·In relation to the vesting of 56 RSUs, 41 Equity Shares were issued due to net settlement.

o55 shares were forfeited during the period.

·1 Exchangeable Share was exchanged for 1 Equity Share related to the Q1 2022 acquisition of Levia.
·353 Exchangeable Shares were exchanged for 353 Equity Shares related to the Q2 2022 acquisition of Herbal Remedies.
·10 Exchangeable Shares were converted into Equity Shares as of March 31, 2023.

 

Warrants

 

The average remaining life of Warrants is 1.1 years in 2023 (2022: 2.2 years) with an aggregate intrinsic value of $nil in 2023 (2022: $12,438). The Warrants have an exercise price of $9.07US. The number of Warrants outstanding as of March 31, 2023, and 2022, is:

 

Number of warrants outstanding  Number   Weighted
Average
Fair Value
 
Balance as of January 1, 2022   2,874   $1,786 
No activity   -    - 
Balance as of December 31, 2022   2,874    1,786 
No activity   -    - 
Balance as of March 31, 2023   2,874   $1,786 

 

17

 

 

Ayr Wellness Inc. 

Notes to the Unaudited Interim Condensed Consolidated Financial Statements 

(Expressed in United States Dollars, in thousands, except where stated otherwise)

 

 

13. DERIVATIVE LIABILITIES

 

Purchase Consideration and Contingent Consideration

 

The earn-out provision related to the acquisition of Sira Naturals Inc. (“Sira”) is measured at fair value by taking a probability weighted average of possible outcomes, as estimated by management, and discounting the payment to a present value. As of March 31, 2023 and December 31, 2022, the fair value was $23,840 and $26,652, respectively.

 

The earn-out provisions related to the acquisitions of GSD NJ, LLC (“GSD”) and Cultivauna, LLC (“Cultivauna”) are measured at fair value based on unobservable inputs and are considered a Level 3 measurement. The provision uses a Monte-Carlo simulation to estimate the fair value through the end of the earn-out period based on the Company’s share price at the acquisition date and other inputs based on other observable market data. Refer to Note 16 for assumptions used.

 

As of March 31, 2023, the fair value of the GSD, and Cultivauna earn-out provisions were $38,654, and $nil, respectively. As of December 31, 2022, the fair value of the GSD and Cultivauna earn-out provisions were $63,429 and $9, respectively.

 

The fair value adjustment relating to derivative liabilities has been included in the statements of operations under “Fair value gain on financial liabilities” as detailed below:

 

   Three Months Ended 
   March 31, 2023   March 31, 2022 
Gain from FV adjustment on contingent consideration  $27,597   $26,893 
Gain from settlement of contingent consideration   -    3,186 
Total  $27,597   $30,079 

 

18

 

 

Ayr Wellness Inc. 

Notes to the Unaudited Interim Condensed Consolidated Financial Statements 

(Expressed in United States Dollars, in thousands, except where stated otherwise)

 

 

14. STOCK-BASED COMPENSATION

 

The Company has adopted an equity incentive plan, as amended on May 2, 2021 (“The Plan”), which allows the Company to compensate qualifying Plan participants through stock-based arrangements and provide them with opportunities for stock ownership in the Company, thereby seeking to align the interests of such persons with the Company’s shareholders. Under the Plan, the Company may grant stock options, RSUs, performance compensation awards, and unrestricted stock bonuses or purchases. The maximum number of Equity Shares that may be issued under the Plan and any other security-based compensation agreements shall not exceed 12% of the total number of fully diluted shares issued and outstanding from time to time.

 

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

 

The stock-based compensation expense is based on either the Company’s share price for service-based conditions or the Company’s share price fair value on the date of the grant. The RSUs vest over a one to four-year period, based on service, market, and/or performance conditions. During the three months ended March 31, 2023, there were 650 of both market and performance based RSUs outstanding, totaling 1,300. During the three months ended March 31, 2023, and 2022, the Company recognized stock-based compensation relating to the granting of RSUs in the current and prior periods, except for the market and performance based RSUs as they did not meet the probable threshold. Any cumulative adjustment prior to vesting is recognized in the current period with no adjustment to prior periods for expense previously recognized. During the three months ended March 31, 2023, and 2022, there were 55 and 20 forfeitures of nonvested RSUs, respectively.

 

During the three months ended March 31, 2023, 56 Equity Shares vested, of which 41 were issued due to net settlement. During the three months ended March 31, 2023, the result of the net settlement was 15 Equity Shares were withheld with a total value of $10. As of March 31, 2023, the average remaining life of unvested RSUs is one year and nine months with an expected expense over the next 12 months of $12,738 with an aggregate intrinsic value of $13,157 using the stock price as of March 31, 2023.

 

   Number of
Shares
   Weighted Average
Grant Date Fair
Value
 
RSUs outstanding and nonvested, as of January 1, 2022   8,100   $18.83 
Granted   741    6.45 
Vested   (2,135)   18.58 
Forfeited   (78)   15.90 
RSUs outstanding and nonvested, as of December 31, 2022   6,628   $17.56 
Granted   -    - 
Vested   (56)   12.86 
Forfeited   (55)   11.05 
RSUs outstanding and nonvested, as of  March 31, 20231   6,517   $17.66 

 

1 Includes Ayr granted but unvested service based RSUs (PSUs) totalling 1,300

19

 

 

Ayr Wellness Inc. 

Notes to the Unaudited Interim Condensed Consolidated Financial Statements 

(Expressed in United States Dollars, in thousands, except where stated otherwise)

 

 

14. STOCK-BASED COMPENSATION (Continued)

 

Options

 

Other than as described below, no options have been granted during either of the three months ended March 31, 2023, and 2022.

 

As part of the Liberty acquisition, the Company issued replacement options to certain employees of Liberty who became employees of the Company which were fully vested as of the date of acquisition. The range of exercise price is between $8.47 and $23.66. As of March 31, 2023 and 2022, the weighted average remaining life of the options is under seven months and one year, respectively, with an aggregate intrinsic value of $nil and $313, respectively.

 

   Number of Options   Weighted Average
Fair Value
 
Balance as of January 1, 2022   198   $17.93 
Options exercised   (33)   17.93 
Balance as of December 31, 2022   165   $17.93 
Options exercised   (6)   17.93 
Balance as of March 31, 2023   159    17.93 

 

15. COMMITMENTS AND CONTINGENCIES

 

Contingencies

 

The Company’s operations are subject to a variety of local and state governmental regulations. Failure to comply with one or more of those regulations could result in fines, restrictions on its operations, or losses of permits and/or licenses that could result in the Company ceasing operations. While management of the Company believes that the Company is in compliance, in all material respects, with applicable local and state governmental regulations as of March 31, 2023, cannabis regulations continue to evolve and are subject to differing interpretations. As a result, the Company may be subject to regulatory fines, penalties, or restrictions in the future.

 

Claims and Litigation

 

From time to time, the Company may be involved in litigation relating to claims arising out of operations in the normal course of business. As of March 31, 2023, there were no material pending or threatened lawsuits that could be reasonably expected to have a material effect on the results of the Company’s operations. There are also no proceedings in which any of the Company's directors, officers or affiliates are an adverse party or have a material interest adverse to the Company's interest.

 

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Ayr Wellness Inc. 

Notes to the Unaudited Interim Condensed Consolidated Financial Statements 

(Expressed in United States Dollars, in thousands, except where stated otherwise)

 

 

16. FINANCIAL RISK FACTORS

 

(a)Fair value

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

There were no transfers between levels in the hierarchy during the three months ended March 31, 2023, and 2022. For financial assets and liabilities not measured at fair value, their carrying value is considered to approximate fair value due to their market terms.

 

The carrying values of cash, deposits, accounts receivable, trade payables, accrued liabilities, accrued interest payable, and purchase consideration payable approximate their fair values because of the short-term nature of these financial instruments. Long-term debt is recorded at amortized cost.

 

The following table summarizes the fair value hierarchy for the Company’s financial assets and liabilities that are re-measured at their fair values periodically:

 

   March 31, 2023   December 31, 2022 
Financial liabilities               
Contingent consideration   Level 3   $62,493   $90,090 

 

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Ayr Wellness Inc. 

Notes to the Unaudited Interim Condensed Consolidated Financial Statements 

(Expressed in United States Dollars, in thousands, except where stated otherwise)

 

 

16. FINANCIAL RISK FACTORS (Continued)

 

The following table summarizes the range of inputs used at the initial and subsequent measurement dates to value the contingent consideration for the three months ended March 31, 2023 in the table above:

 

Equity Volatility  55.65 - 85.05%
Revenue Volatility  3.99 - 23.96%
Risk-free Rate  1.62 - 4.67%
Revenue Risk Premium  5.58 - 9.61%
Credit Risk Rate  10.50 - 19.10%
Discount Rate  8.40 - 15.00%

 

(b) Interest rate risk

 

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

 

17. TAXATION

 

As the Company operates in the legal cannabis industry, the Company is subject to the limits of Section 280E for U.S. federal income tax purposes as well as state income tax purposes for all states except for Arizona and Massachusetts. Under Section 280E, the Company is generally only allowed to deduct expenses directly related to cost of goods sold. This results in permanent differences between ordinary and necessary business expenses deemed non-allowable under Section 280E. Therefore, the effective tax rate can be highly variable and may not necessarily correlate with pre-tax income or loss recognized for financial reporting purposes. The effective tax rate differs from the statutory rate primarily due to the impact of §280E.

 

The Company is treated as a U.S. corporation for the U.S. federal income tax purposes under Section 7874 of the Internal Revenue Code, as amended (“Section 7874”) and is subject to U.S. federal income tax on its worldwide income. However, for Canadian tax purposes, the Company, regardless of any application of Section 7874, is treated as a Canadian resident company (as defined in the Income Tax Act (Canada) (the “ITA”) for Canadian income tax purposes. As a result, the Company is subject to taxation both in Canada and the United States. The Company is also subject to state income taxation in Massachusetts, Pennsylvania, Florida, Arizona (see Note 4), Illinois, and New Jersey. Income Tax is accounted for in accordance with ASC 740, Income Taxes. The following table summarizes the Company’s income tax expense and effective tax rates from continuing operations for the three months ended March 31, 2023 and 2022.

 

   Three Months Ended 
   March 31, 2023   March 31, 2022 
Income (loss) from continuing operations before income taxes and noncontrolling interests  $(1,205)  $2,770 
Provision for income taxes from continuing operations   (11,178)   (9,962)
Effective tax rate   928%   -360%

 

Refer to Note 4 for income taxes related to discontinued operations.

 

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Ayr Wellness Inc. 

Notes to the Unaudited Interim Condensed Consolidated Financial Statements 

(Expressed in United States Dollars, in thousands, except where stated otherwise)

 

 

17. TAXATION (Continued)

 

The Company’s quarterly tax provision is calculated under the discrete method which treats the interim period as if it were the annual period and determines the income tax expense or benefit on that basis. The discrete method is applied when application of the estimated annual effective tax rate is impractical because it is not possible to reliably estimate the annual effective tax rate. The Company believes, at this time, the use of this discrete method is more appropriate than the annual effective tax rate method due to the high degree of uncertainty in estimating annual pre-tax income due to the early growth stage of the business.

 

18. SUBSEQUENT EVENTS

 

The Company’s management has evaluated subsequent events through the date the interim financial statements were issued.

 

Subsequent to March 31, 2023, the Company closed the acquisition of Tahoe Hydroponics Company, LLC (“Tahoe Hydro”). With this closing, the Company has assumed 100% of the membership interest of Tahoe Hydro. At close the Company paid $1,500 in cash consideration and issued 233 exchangeable shares valued at $6,800. The Company is evaluating the purchase price allocation as required by ASC 805, Business Combinations.

 

On May 11, 2023, the Company reached an agreement to amend the terms of contingent consideration under the membership interest purchase agreements of GSD and Sira. The amendment for GSD settles the contingent consideration with total proceeds of $37,213, consisting of $10,000 in cash, promissory notes in an aggregate principal amount of $14,000, $10,213 in deferred cash, and $3,000 of Equity Shares. The $14,000 promissory notes are due December 2026 with monthly interest-only payments of 13.5% until May 2024 (with 1% monthly amortization thereafter). The number of Equity Shares was calculated based on a market price equal to US$0.79 which represents 3,797 Equity Shares. The amendment for Sira represents a two-year deferral of the $27,500 of proceeds payable from the original May 2024 payment date, with an annual interest rate of 6.0% and 10% annual amortization payments. In addition, the Company has executed amendments to promissory notes issued to the GSD seller representative and certain of its affiliates to extend the maturity dates of notes with outstanding principal amount of $27,650 in the aggregate for two years, conditioned upon, among other things, holders of at least 75% of the senior secured notes agreeing to extend the maturity date of such notes by at least two years. The Company is evaluating the impact of the amended terms.

 

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