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Tilray Brands, Inc. - Quarter Report: 2023 August (Form 10-Q)

tlry20230731_10q.htm
 

 



UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, DC 20549

 


 

FORM 10-Q


 

(Mark One)

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended August 31, 2023

OR

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from to

Commission File Number: 001-38594


TILRAY BRANDS, INC.

(Exact Name of Registrant as Specified in its Charter)


 

Delaware

82-4310622

(State or other jurisdiction of

incorporation or organization)

(I.R.S. Employer
Identification No.)

265 Talbot Street West,

Leamington, ON

N8H 5L4

(Address of principal executive offices)

(Zip Code)

 

Registrants telephone number, including area code: (844) 845-7291


Securities registered pursuant to Section 12(b) of the Act:

 

Title of each class

 

Trading

Symbol(s)

 

Name of each exchange on which registered

Common Stock, $0.0001 par value per share

 

TLRY

 

The Nasdaq Global Select Market

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.     Yes  ☒    No  ☐

 

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).     Yes  ☒    No  ☐

 

 

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer

Accelerated filer

 

Non-accelerated filer

Smaller reporting company

 

Emerging growth company

  

 

 

 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).     Yes  ☐    No  ☒

 

Indicate by check mark whether the registrant has filed all documents and reports required to be filed by Sections 12, 13 or 15(d) of the Securities Exchange Act of 1934 subsequent to the distribution of securities under a plan confirmed by a court.     Yes  ☒    No  ☐

 

As of October 2, 2023, the registrant had 730,289,573 shares of Common Stock, $0.0001 par value per share issued and outstanding. 

 



 

 

  

 

Table of Contents

 

 

 

Page

PART I.

FINANCIAL INFORMATION

1

Item 1.

Financial Statements (Unaudited)

1

 

Consolidated Statements of Financial Position (Unaudited)

1

 

Consolidated Statements of Loss and Comprehensive Loss (Unaudited)

2

 

Consolidated Statements of Stockholders' Equity (Unaudited)

3

 

Consolidated Statements of Cash Flows (Unaudited)

4

 

Notes to Condensed Interim Consolidated Financial Statements (Unaudited)

5

Item 2.

Management’s Discussion and Analysis of Financial Condition and Results of Operations

29

Item 3.

Quantitative and Qualitative Disclosures About Market Risk

52

Item 4.

Controls and Procedures

52

PART II.

OTHER INFORMATION

53

Item 1.

Legal Proceedings

53

Item 1A.

Risk Factors

54

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

55

Item 3.

Defaults Upon Senior Securities

55

Item 4.

Mine Safety Disclosures

55

Item 5.

Other Information

55

Item 6.

Exhibits

56

Signatures

58

 

 

  

 

Cautionary Note Regarding Forward-Looking Statements

 

This Quarterly Report on Form 10-Q for the quarter ended August 31, 2023 (the “Form 10-Q”) contains forward-looking statements under Canadian securities laws and within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended, that are intended to be subject to the "safe harbor" created by those sections and other applicable laws. Such statements involve risks, uncertainties and assumptions. If the risks or uncertainties ever materialize or the assumptions prove incorrect, our results may differ materially from those expressed or implied by such forward-looking statements  under the Canadian securities laws and within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended, that are intended to be subject to the “safe harbor” created by those sections and other applicable laws. The words “anticipate,” “believe,” “continue,” “could,” “estimate,” “expect,” “intend,” “may,” “might,” “plan,” “project,” “will,” “would,” “seek,” or “should,” or the negative or plural of these words or similar expressions or variations are intended to identify such forward-looking statements. Forward-looking statements include, among other things, our beliefs or expectations relating to our future performance, results of operations and financial condition; our intentions or expectations regarding our cost savings initiatives; our strategic initiatives, business strategy, supply chain, brand portfolio, product performance and expansion efforts; current or future macroeconomic trends; future corporate acquisitions and strategic transactions; and our synergies, cash savings and efficiencies anticipated from the integration of our completed acquisitions and strategic transactions.

 

Risks and uncertainties that may cause actual results to differ materially from forward-looking statements include, but are not limited to, those identified in this Form 10-Q and other risks and matters described in our most recent Annual Report on Form 10-K for the fiscal year ended May 31, 2023 as well as our other filings made from time to time with the U.S. Securities and Exchange Commission and in our Canadian securities filings.

 

Forward looking statements are based on information available to us as of the date of this Form 10-Q and, while we believe that information provides a reasonable basis for these statements, these statements are inherently uncertain, and investors are cautioned not to unduly rely on these statements. You should not rely upon forward-looking statements or forward-looking information as predictions of future events.

 

We undertake no obligation to update forward-looking statements to reflect actual results or changes in assumptions or circumstances, except as required by applicable law.

 

 

 

 

 

PART IFINANCIAL INFORMATION

 

Item 1. Financial Statements (Unaudited).

TILRAY BRANDS, INC.

Consolidated Statements of Financial Position

(in thousands of United States dollars, unaudited)

 

  August 31,  May 31, 
  2023  2023 

Assets

        

Current assets

        

Cash and cash equivalents

 $177,519  $206,632 

Restricted cash

  1,613    

Marketable securities

  287,333   241,897 

Accounts receivable, net

  82,076   86,227 

Inventory

  232,075   200,551 

Prepaids and other current assets

  44,943   37,722 

Assets held for sale

  3,696    

Total current assets

  829,255   773,029 

Capital assets

  494,619   429,667 

Right-of-use assets

  5,605   5,941 

Intangible assets

  967,568   973,785 

Goodwill

  2,009,673   2,008,843 

Interest in equity investees

  4,638   4,576 

Long-term investments

  7,564   7,795 

Convertible notes receivable

  74,681   103,401 

Other assets

  8,647   222 

Total assets

 $4,402,250  $4,307,259 

Liabilities

        

Current liabilities

        

Bank indebtedness

 $14,594  $23,381 

Accounts payable and accrued liabilities

  238,081   190,682 

Contingent consideration

  7,181   16,218 

Warrant liability

  10,015   1,817 

Current portion of lease liabilities

  2,324   2,423 

Current portion of long-term debt

  13,489   24,080 

Current portion of convertible debentures payable

  251,590   174,378 

Total current liabilities

  537,274   432,979 

Long - term liabilities

        

Contingent consideration

  13,000   10,889 

Lease liabilities

  7,462   7,936 

Long-term debt

  152,390   136,889 

Convertible debentures payable

  120,861   221,044 

Deferred tax liabilities

  169,633   167,364 

Other liabilities

  74   215 

Total liabilities

  1,000,694   977,316 

Commitments and contingencies (refer to Note 18)

          

Stockholders' equity

        

Common stock ($0.0001 par value; 980,000,000 common shares; 723,292,600 and 656,655,455 common shares issued and outstanding, respectively)

  72   66 

Preferred shares ($0.0001 par value; 10,000,000 preferred shares authorized; nil and nil preferred shares issued and outstanding, respectively)

      

Additional paid-in capital

  5,909,895   5,777,743 

Accumulated other comprehensive loss

  (43,561)  (46,610)

Accumulated Deficit

  (2,487,032)  (2,415,507)

Total Tilray Brands, Inc. stockholders' equity

  3,379,374   3,315,692 

Non-controlling interests

  22,182   14,251 

Total stockholders' equity

  3,401,556   3,329,943 

Total liabilities and stockholders' equity

 $4,402,250  $4,307,259 

 

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

 

1

 

 

TILRAY BRANDS, INC.

Consolidated Statements of Loss and Comprehensive Loss

(in thousands of United States dollars, except for share and per share data, unaudited)

 

   

Three months ended

 
   

August 31,

 
   

2023

   

2022

 

Net revenue

  $ 176,949     $ 153,211  

Cost of goods sold

    132,753       104,597  

Gross profit

    44,196       48,614  

Operating expenses:

               

General and administrative

    40,516       40,508  

Selling

    6,859       9,671  

Amortization

    22,225       24,359  

Marketing and promotion

    8,535       7,248  

Research and development

    79       166  

Change in fair value of contingent consideration

    (11,107 )     211  

Litigation costs

    2,034       445  

Restructuring costs

    915        

Transaction (income) costs

    8,502       (12,816 )

Total operating expenses

    78,558       69,792  

Operating loss

    (34,362 )     (21,178 )

Interest expense, net

    (9,835 )     (4,413 )

Non-operating income (expense), net

    (4,402 )     (32,992 )

Loss before income taxes

    (48,599 )     (58,583 )

Income tax expense

    7,264       7,211  

Net loss

  $ (55,863 )   $ (65,794 )

Total net income (loss) attributable to:

               

Stockholders of Tilray Brands, Inc.

    (71,525 )     (73,482 )

Non-controlling interests

    15,662       7,688  

Other comprehensive gain (loss), net of tax

               

Foreign currency translation gain (loss)

    3,209       (60,292 )

Unrealized gain (loss) on convertible notes receivable

          (2,525 )

Total other comprehensive loss, net of tax

    3,209       (62,817 )

Comprehensive loss

  $ (52,654 )   $ (128,611 )

Total comprehensive income (loss) attributable to:

               

Stockholders of Tilray Brands, Inc.

    (68,476 )     (132,450 )

Non-controlling interests

    15,822       3,839  

Weighted average number of common shares - basic

    691,189,382       575,301,374  

Weighted average number of common shares - diluted

    691,189,382       575,301,374  

Net loss per share - basic

  $ (0.10 )   $ (0.13 )

Net loss per share - diluted

  $ (0.10 )   $ (0.13 )

 

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

 

2

 

 

TILRAY BRANDS, INC.

Consolidated Statements of Stockholders Equity

(in thousands of United States dollars, except for share data, unaudited)

 

                      Accumulated                    
    Number of           Additional     other           Non-        
    common     Common     paid-in     comprehensive     Accumulated     controlling        
    shares     stock     capital     loss    

Deficit

    interests    

Total

 

Balance at May 31, 2022

    532,674,887     $ 53     $ 5,382,367     $ (20,764 )   $ (962,851 )   $ 42,561     $ 4,441,366  

Share issuance - equity financing

    32,481,149       3       129,590                         129,593  

Shares issued to purchase HEXO convertible note receivable

    33,314,412       3       107,269                         107,272  

HTI Convertible Note - conversion feature

                9,055                         9,055  

Share issuance - Double Diamond Holdings dividend settlement

    1,529,821       1       5,063                         5,064  

Share issuance - options exercised

    3,777                                      

Share issuance - RSUs exercised

    950,893                                      

Shares effectively repurchased for employee withholding tax

                (1,189 )                       (1,189 )

Stock-based compensation

                9,193                         9,193  

Dividends declared to non-controlling interests

                                  (8,561 )     (8,561 )

Comprehensive income (loss) for the period

                      (58,968 )     (73,482 )     3,839       (128,611 )

Balance at August 31, 2022

    600,954,939       60       5,641,348       (79,732 )     (1,036,333 )     37,839       4,563,182  
                                                         

Balance at May 31, 2023

    656,655,455     $ 66     $ 5,777,743     $ (46,610 )   $ (2,415,507 )   $ 14,251     $ 3,329,943  

Share issuance - HEXO acquisition

    39,705,962       4       65,158                         65,162  

Share issuance - settlement of contractual change of control severance incurred from HEXO acquisition

    865,426             1,500                         1,500  

Share issuance - Double Diamond Holdings dividend settlement

    5,004,735             8,146                         8,146  

Share issuance - HTI convertible note

    17,148,541       2       49,998                         50,000  

Share issuance - RSUs exercised

    3,912,481                                      

Shares effectively repurchased for employee withholding tax

                (4,860 )                       (4,860 )

Equity component related to issuance of convertible debt, net of issuance costs

                3,953                         3,953  

Stock-based compensation

                8,257                         8,257  

Dividends declared to non-controlling interests

                                    (7,891 )     (7,891 )

Comprehensive income (loss) for the period

                      3,049       (71,525 )     15,822       (52,654 )

Balance at August 31, 2023

    723,292,600     $ 72     $ 5,909,895     $ (43,561 )   $ (2,487,032 )   $ 22,182     $ 3,401,556  

 

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

 

3

 

 

TILRAY BRANDS, INC.

Consolidated Statements of Cash Flows

(in thousands of United States dollars, unaudited)

 

   

Three months ended

 
   

August 31,

 
   

2023

   

2022

 

Cash used in operating activities:

               

Net loss

  $ (55,863 )   $ (65,794 )

Adjustments for:

               

Deferred income tax recovery

    59       796  

Unrealized foreign exchange (gain) loss

    (3,127 )     10,026  

Amortization

    30,789       34,069  

Loss on sale of capital assets

    3       77  

Other non-cash items

    (816 )     2,080  

Stock-based compensation

    8,257       9,193  

Loss on long-term investments & equity investments

    47       1,193  

Loss on derivative instruments

    10,345       6,336  

Change in fair value of contingent consideration

    (11,107 )     211  

Change in non-cash working capital:

               

Accounts receivable

    13,044       (3,068 )

Prepaids and other current assets

    (4,654 )     (34,891 )

Inventory

    3,650       (232 )

Accounts payable and accrued liabilities

    (6,469 )     (6,265 )

Net cash used in operating activities

    (15,842 )     (46,269 )

Cash used in investing activities:

               

Investment in capital and intangible assets, net

    (4,152 )     (3,000 )

Proceeds from disposal of capital and intangible assets

    342       1,463  

Purchase of marketable securities, net

    (45,436 )      

Net cash acquired from business acquisitions

    22,956        

Net cash used in investing activities

    (26,290 )     (1,537 )

Cash provided by (used in) financing activities:

               

Share capital issued, net of cash issuance costs

          129,593  

Shares effectively repurchased for employee withholding tax

          (1,189 )

Proceeds from long-term debt and convertible debt

    29,174       1,288  

Repayment of long-term debt and convertible debt

    (6,369 )     (5,196 )

Repayment of lease liabilities

          (1,035 )

Net increase in bank indebtedness

    (8,787 )     159  

Net cash provided by (used in) financing activities

    14,018       123,620  

Effect of foreign exchange on cash and cash equivalents

    614       (1,080 )

Net decrease in cash and cash equivalents

    (27,500 )     74,734  

Cash and cash equivalents, beginning of period

    206,632       415,909  

Cash and cash equivalents, end of period

  $ 179,132     $ 490,643  

 

Included in the statement of cash flows cash and cash equivalents is $1,613 of restricted cash as of August 31, 2023, $nil as of May 31, 2023.  

 

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

 

4

 

TILRAY BRANDS, INC.

Notes to Consolidated Financial Statements

 

Note 1. Basis of presentation and summary of significant accounting policies

 

The accompanying unaudited condensed interim consolidated financial statements (the “financial statements”) reflect the accounts of the Company for the quarterly period ended August 31, 2023. The financial statements were prepared in accordance with generally accepted accounting principles in the United States of America (“U.S. GAAP”) for interim financial information and pursuant to the rules and regulations of the United States Securities and Exchange Commission (“SEC”) for interim financial information. Accordingly, they do not include all of the information and notes required by U.S. GAAP and should be read in conjunction with the audited consolidated financial statements (the “Annual Financial Statements”) included in the Company’s Annual Report on Form 10-K for the fiscal year ended  May 31, 2023 (the “Annual Report”). These unaudited condensed interim consolidated financial statements reflect all adjustments, which, in the opinion of management, are necessary for a fair presentation of the results for the interim periods presented. Interim results are not necessarily indicative of results for a full year. 

 

These condensed interim consolidated financial statements have been prepared on the going concern basis which assumes that the Company will continue in operation for the foreseeable future and, accordingly, will be able to realize its assets and discharge its liabilities in the normal course of operations as they come due, under the historical cost convention except for certain financial instruments that are measured at fair value, as detailed in the Company’s accounting policies.

 

All amounts in the unaudited condensed interim consolidated financial statements, notes and tables have been rounded to the nearest thousand, except par values and per share amounts, unless otherwise indicated.

 

Basis of consolidation

 

Subsidiaries are entities controlled by the Company. Control exists when the Company either has a controlling voting interest or is the primary beneficiary of a variable interest entity. The financial statements of subsidiaries are included in the condensed interim consolidated financial statements from the date that control commences until the date that control ceases. A complete list of our subsidiaries that existed prior to our most recent year end is included in the Annual Report, except for the entities acquired within Note 6 (Business acquisitions), during the period ended August 31, 2023.

 

Marketable securities

 

We classify term deposits and other investments that have maturities of greater than three months but less than one year as marketable securities. The fair value of marketable securities is based on quoted market prices for publicly traded securities. Marketable securities are carried at fair value with changes in fair value recorded in the statement of net loss and comprehensive loss, within the line, “Non-operating income (expense)”.

 

Long-term investments

 

Investments in equity securities of entities over which the Company does not have a controlling financial interest or significant influence are classified as an equity investment and accounted for at fair value. Equity investments without readily determinable fair values are measured at cost with adjustments for observable changes in price or impairments (referred to as the “measurement alternative”). In applying the measurement alternative, the Company performs a qualitative assessment on a quarterly basis and recognizes an impairment if there are sufficient indicators that the fair value of the equity investments is less than carrying values. Changes in value are recorded in the statement of net loss and comprehensive loss, within the line, “Non-operating income (expense)”.

 

5

 

Investments in entities over which the Company does not have a controlling financial interest but has significant influence, are accounted for using the equity method, with the Company’s share of earnings or losses reported in earnings or losses from equity method investments on the statements of net loss and comprehensive loss. Equity method investments are recorded at cost, adjusted for the Company’s share of undistributed earnings or losses, and impairment, if any, within “Interest in equity investees” on the balance sheets. The Company assesses investments in equity method investments when events or circumstances indicate that the carrying amount of the investment may be impaired. If it is determined that the current fair value of an equity method investment is less than the carrying value of the investment, the Company will assess if the shortfall is other than temporary (OTTI). Evidence of a loss in value might include, but would not necessarily be limited to, absence of an ability to recover the carrying amount of the investment or inability of the equity investee to sustain an earnings capacity that would justify the carrying amount of the investment. Once a determination is made that an OTTI exists, the investment is written down to its fair value in accordance with ASC 820 at the reporting date, which establishes a new cost basis.

 

Convertible notes receivable

 

Convertible notes receivable include various investments in which the Company has the right, or potential right to convert the indenture into common stock of the investee and are classified as available-for-sale and are recorded at fair value. Unrealized gains and losses during the year, net of the related tax effect, are excluded from income and reflected in other comprehensive income (loss), and the cumulative effect is reported as a separate component of shareholders' equity until realized. We use judgement to assess convertible notes receivables for impairment at each measurement date. Convertible notes receivables are impaired when a decline in fair value is determined to be other-than-temporary, an impairment charge is recorded in the statements of loss and comprehensive loss and a new cost basis for the investment is established. We also evaluate whether there is a plan to sell the security, or it is more likely than not that we will be required to sell the security before recovery. If neither of the conditions exist, then only the portion of the impairment loss attributable to credit loss is recorded in the statements of net loss and the remaining amount is recorded in other comprehensive income (loss).

 

Earnings (loss) per share

 

Basic earnings (loss) per share is computed by dividing reported net income (loss) attributable to stockholders of Tilray Brands, Inc. by the weighted average number of common shares outstanding during the year. Diluted earnings (loss) per share is computed by dividing reported net income (loss) attributable to stockholders of Tilray Brands, Inc. by the sum of the weighted average number of common shares and the number of dilutive potential common share equivalents outstanding during the period. Potential dilutive common share equivalents consist of the incremental common shares issuable upon the exercise of vested share options, warrants, and RSUs and the incremental shares issuable upon conversion of the convertible debentures and similar instruments. Shares of common stock outstanding under the share lending arrangement entered into in conjunction with the TLRY 27 Notes, see Note 12 (Convertible debentures payable) are excluded from the calculation of basic and diluted earnings per share because the borrower of the shares is required under the share lending.

 

In computing diluted earnings (loss) per share, common share equivalents are not considered in periods in which a net loss is reported, as the inclusion of the common share equivalents would be anti-dilutive. For the three months ended August 31, 2023 and August 31, 2022, the dilutive potential common share equivalents outstanding consisted of the following: 21,202,933 and 16,989,328 common shares from RSUs, 6,325,348 and 4,741,653 common shares from share options, 7,847,219 and 6,209,000 common shares for warrants and 77,819,141 and 36,687,326 common shares for convertible debentures, respectively.

 

Revenue

 

Revenue is recognized when the control of the promised goods or services, through performance obligation, is transferred/provided to the customer in an amount that reflects the consideration we expect to be entitled to in exchange for the performance obligations.

 

Excise taxes remitted to tax authorities are government-imposed excise taxes on cannabis and beer. Excise taxes are recorded as a reduction of sales in net revenue in the consolidated statements of operations and recognized as a current liability within accounts payable and accrued liabilities on the consolidated balance sheets, with the liability subsequently reduced when the taxes are remitted to the tax authority.

 

In addition, amounts disclosed as net revenue are net of excise taxes, sales tax, duty tax, allowances, discounts and rebates.

 

6

 

In determining the transaction price for the sale of goods or services, the Company considers the effects of variable consideration and the existence of significant financing components, if any.

 

We may enter into certain contracts for the sale of goods or services, which provide customers with rights of return, volume discounts, bonuses for volume/quality achievement, and/or sales allowances. In addition, the Company may provide in certain circumstances, a retrospective price reduction to a customer based primarily on inventory movement. The inclusion of these items may give rise to variable consideration. The Company uses the expected value method to estimate the variable consideration because this method provides the most accurate estimation of the amount of variable consideration to which the Company will be entitled. The Company uses historical evidence, current information and forecasts to estimate the variable consideration. The Company reduces revenue and recognizes a contract liability equal to the amount expected to be refunded to the customer in the form of a future rebate or credit for a retrospective price reduction, representing its obligation to return the customer’s consideration. The estimate is updated at each reporting period date.

 

On July 12, 2022, the Company and HEXO Corp. ("HEXO") entered into various commercial transaction agreements, as described in Note 24 (Segment reporting), which included an advisory services arrangement. The fees associated with the advisory services arrangement were recognized as revenue when such services were provided to HEXO. Any payments that were received for such services in advance of performance were recognized as a contract liability. On June 22, 2023, the Company completed the acquisition of HEXO as described in Note 6 (Business acquisitions), simultaneously terminating the advisory services arrangement and other commercial transactions.

 

New accounting pronouncements not yet adopted

 

In August 2023, the FASB issued ASU 2023-05, Business Combination - Joint Venture Formations (Subtopic 805-60) Recognition and Initial Measurement (“ASU 2023-05”), which is intended to address the accounting for contributions made to a joint venture. ASU 2023-05 is effective for the Company beginning June 1, 2026. This update will be applied prospectively on or after the effective date of the amendments. The Company is currently evaluating the effect of adopting this ASU.

 

New accounting pronouncements recently adopted

 

In October 2021, the FASB issued ASU 2021-08, Business Combinations (Subtopic 805), Accounting for Contract Assets and Contract Liabilities from Contracts with Customers (“ASU 2021-08”), which is intended to improve the accounting for acquired revenue contracts with customers in a business combination by addressing diversity in practice and inconsistency. The Company adopted the ASU 2021-08 beginning June 1, 2023, however, it did not have any impact on our condensed interim consolidated financial statements.

 

7

  
 

Note 2. Inventory

 

Inventory consisted of the following:

 

    August 31,     May 31,  
    2023     2023  

Plants

  $ 19,152     $ 10,884  

Dried cannabis

    102,711       89,801  

Cannabis trim

    -       322  

Cannabis derivatives

    10,406       9,229  

Cannabis vapes

    4,076       1,173  

Packaging and other inventory items

    17,932       19,997  

Wellness inventory

    11,788       11,164  

Beverage alcohol inventory

    31,434       27,837  

Distribution inventory

    34,576       30,144  

Total

  $ 232,075     $ 200,551  

  

 

Note 3. Capital assets

 

Capital assets consisted of the following:

 

    August 31,     May 31,  
    2023     2023  

Land

  $ 36,076     $ 30,635  

Production facility

    330,012       344,627  

Equipment

    271,992       185,422  

Leasehold improvement

    7,786       7,753  

Construction in progress

    9,727       8,048  
    $ 655,593     $ 576,485  

Less: accumulated amortization

    (160,974 )     (146,818 )

Total

  $ 494,619     $ 429,667  

    

8

  
 

Note 4. Intangible Assets

 

Intangible assets consisted of the following items:

 

  

August 31,

  

May 31,

 
  

2023

  

2023

 

Customer relationships & distribution channel

 $618,672  $614,062 

Licenses, permits & applications

  369,479   366,793 

Non-compete agreements

  12,432   12,394 

Intellectual property, trademarks, knowhow & brands

  592,545   583,468 
   1,593,128  $1,576,717 

Less: accumulated amortization

  (209,716) $(187,088)

Less: impairments

  (415,844)  (415,844)

Total

 $967,568  $973,785 

 

As of August 31, 2023, included in licenses, permits & applications is $183,660 of indefinite-lived intangible assets. As of May 31, 2023, there was $181,093 of indefinite-lived intangible assets included in Licenses, permits & applications.

 

Expected future amortization expense for intangible assets as of  August 31, 2023 are as follows:

 

  

Amortization

 

2024 (remaining nine months)

 $55,895 

2025

  73,414 

2026

  73,414 

2027

  73,414 

2028

  73,414 

Thereafter

  434,357 

Total

 $783,908 

 

9

     
 

Note 5. Goodwill

 

The following table shows the carrying amount of goodwill by reporting units:

 

   

August 31,

   

May 31,

 

Reporting Unit

 

2023

   

2023

 

Cannabis

  $ 2,640,669     $ 2,640,669  

Distribution

    4,458       4,458  

Beverage alcohol

    120,802       120,802  

Wellness

    77,470       77,470  

Effect of foreign exchange

    8,705       7,875  

Impairments

    (842,431 )     (842,431 )

Total

  $ 2,009,673     $ 2,008,843  

 

10
  
 

Note 6. Business acquisitions

  

Acquisition of Montauk Brewing Company, Inc.

 

On   November 7, 2022, Tilray acquired Montauk Brewing Company, Inc. (“Montauk”), a leading craft brewer company based in Montauk, New York, which expanded our distribution network with a strong brand in the tri-state region of the U.S. In consideration for the acquisition of Montauk, and after giving effect to post-closing adjustments, the Company paid an aggregate purchase price equal to $35,123, which was comprised of $28,701 in cash and the remainder through the issuance of 1,708,521 shares of Tilray's common stock (having a value of $6,422 at closing). In the event that Montauk achieves certain volume and/or EBITDA targets on or before  December 31, 2025, the stockholders of Montauk shall be eligible to receive additional contingent cash consideration of up to $18,000. The Company determined that the closing date fair value of this contingent consideration was $10,245 based on the inputs disclosed in Note 23 (Fair value measurements). 

 

The table below summarizes fair value of the assets acquired and the liabilities assumed at the effective acquisition date. 

 

  

Amount

 

Consideration

    

Cash

 $28,701 

Shares

  6,422 

Contingent consideration

  10,245 

Net assets acquired

    

Current assets

    

Cash and cash equivalents

  1,983 

Accounts receivable

  1,116 

Prepaids and other current assets

  467 

Inventory

  1,570 

Long-term assets

    

Capital assets

  420 

Customer relationships (15 years)

  18,540 

Intellectual property, trademarks & brands (15 years)

  13,650 

Goodwill

  17,803 

Total assets

  55,549 

Current liabilities

    

Accounts payable and accrued liabilities

  1,580 

Long-term liabilities

    

Deferred tax liability

  4,851 

Other liabilities

  3,750 

Total liabilities

  10,181 

Total net assets acquired

 $45,368 

 

In the event that the Montauk acquisition had occurred on June 1, 2022, the Company would have had additional revenue of approximately $3,000 for the three months ended  August 31, 2022 and net loss and comprehensive net loss would have increased by approximately $600 for the three months ended  August 31, 2022, primarily as a result of amortization of the intangible assets acquired. This unaudited pro forma financial information does not reflect the realization of any expected ongoing synergies relating to the integration of Montauk.

 

11

     

Acquisition of HEXO Corp.

 

On June 22, 2023, Tilray acquired HEXO, a cannabis company in Canada (the “HEXO Acquisition”) for the purpose of expanding the Company’s revenue base, production capabilities around certain form factors and growth opportunities with the Redecan brand. In consideration for the HEXO Acquisition, the Company paid a total purchase price equivalent of $93,882, which consisted of stock consideration of $63,927, settlement of convertible notes receivable of $28,720, the fair value of HEXO stock-based compensation of $1,188 and the assumption of warrants of $47. In connection with the HEXO Acquisition, each outstanding HEXO common share was exchanged for 0.4352 of a share of Tilray common stock and each outstanding HEXO preferred share was exchanged for 0.7805 of a share of Tilray common stock. In the aggregate, the Company issued 39,705,962 shares of Tilray common stock, at a share price of $1.61 per share, in connection with the HEXO Acquisition. The Company intends to sell HEXO's Kirkland lake property and has recorded the value of the associated capital assets as an asset held for sale. 

 

The Company is in the process of assessing the fair value of the net assets acquired and, as a result, the fair value may be subject to adjustments pending completion of final valuations and post-closing adjustments. The table below summarizes the preliminary estimated fair value of the assets acquired and the liabilities assumed for the HEXO Acquisition at the effective acquisition date as follows: 

 

  

Amount

 

Consideration

    

Shares

 $63,927 

Settlement of convertible notes receivable

  28,720 

Warrants assumed

  47 

Estimated fair value of HEXO stock-based compensation

  1,188 

Net assets acquired

    

Current assets

    

Cash and cash equivalents

  14,634 

Restricted cash

  1,657 

Accounts receivable

  7,855 

Asset held for sale

  755 

Prepaids and other current assets

  2,530 

Inventory

  27,495 

Long-term assets

    

Prepaid expenses

  8,384 

Capital assets

  70,782 

Intellectual property, trademarks & brands (15 years)

  2,000 

Interest in equity investee

  3,145 

Total assets

  139,237 

Current liabilities

    

Accounts payable and accrued liabilities

  45,355 

Total liabilities

  45,355 

Total net assets acquired

 $93,882 

 

Included in accounts payable and accrued liabilities was $12,856 of litigation settlement accruals as of June 22, 2023. 

 

In the event the HEXO Acquisition had occurred on June 1, 2022, the Company would have had, on an unaudited proforma basis, additional revenue of approximately $7,000 and $20,000 for the three month period ended  August 31, 2023 and 2022, respectively, and its net loss and comprehensive net loss would have increased by approximately $1,800 and $30,000 for the three month period ended August 31, 2023, and 2022, respectively. This unaudited pro forma financial information does not reflect the realization of any expected ongoing synergies relating to the integration of HEXO.

 

Acquisition of Truss Beverage Co.

 

On August 3, 2023, Tilray acquired the remaining 57.5% equity interest in Truss Beverage Co. ("Truss"), a cannabis beverage company, for $74 (CAD$100) in cash and $4,181 of contingent consideration from Molson Coors Canada ("Molson"). This represents the portion of Truss that had not been previously acquired as part of the HEXO Acquisition. The Company currently intends to divest Truss's assets and has recorded the value of the associated capital assets and lease obligations as an asset held for sale. The Company has agreed to pay Molson as contingent consideration an amount equal to 57.5% of any proceeds from any divesture, net of any costs and expenses associated with the disposition. 

 

The Company is in the process of assessing the fair value of the net assets acquired and, as a result, the fair value of the net assets acquired may be subject to adjustments pending completion of final valuations and post-closing adjustments. The table below summarizes preliminary estimated fair value of the assets acquired and the liabilities assumed at the effective acquisition date as follows:

 

  

Amount

 

Consideration

    

Cash consideration

 $74 

Investment in equity investees

  3,145 

Contingent consideration

  4,181 

Net assets acquired

    

Current assets

    

Cash and cash equivalents

  6,739 

Accounts receivable

  1,038 

Prepaids and other current assets

  78 

Inventory

  2,573 

Asset held for sale

  2,960 

Long-term assets

    

Intangible assets

  296 

Total assets

  13,684 

Current liabilities

    

Accounts payable and accrued liabilities

  5,408 

Other liabilities

  876 

Total liabilities

  6,284 

Total net assets acquired

  7,400 

 

In the event that the Truss acquisition had occurred on June 1, 2022 the Company would have had, on an unaudited proforma basis, additional revenue of approximately $3,000 and $5,000 for the three month period ended  August 31, 2023 and 2022, respectively, and net loss and comprehensive net loss would have increased by approximately $700 and $1,000 for the three month period ended August 31, 2023, and 2022, respectively. This unaudited pro forma financial information does not reflect the realization of any expected ongoing synergies relating to the integration of Truss.

 

Note 7. Convertible notes receivable

 

Convertible notes receivable is comprised of the following:

 

  

August 31,

  

May 31,

 
  

2023

  

2023

 

HEXO Convertible Note

 $-  $28,720 

MedMen Convertible Note

  74,681   74,681 

Total convertible notes receivable

  74,681   103,401 

Deduct - current portion

  -   - 

Total convertible notes receivable, non current portion

 $74,681  $103,401 

 

HEXO Convertible Note

 

On June 22, 2023, the Company completed the HEXO Acquisition as described in Note 6 (Business acquisitions). Concurrently with the closing of the HEXO Acquisition, the HEXO convertible note was converted for shares of HEXO.

 

12

 

MedMen Convertible Note

 

On August 31, 2021, the Company issued 9,817,061 shares valued at $117,804 to acquire 68% interest in Superhero Acquisition L.P. (“SH Acquisition”), which purchased a senior secured convertible note issued by MedMen (the "MedMen Convertible Note"), together with certain associated warrants to acquire Class B subordinate voting shares of MedMen, in the principal amount of $165,799. The MedMen Convertible Note bears interest at the Secured Overnight Financing Rate ("SOFR") plus 6%, with a SOFR floor of 2.5% and, any accrued interest is added to the outstanding principal amount, and is to be paid at maturity of the MedMen Convertible Note. SH Acquisition was also granted “top-up” rights enabling it (and its limited partners) to maintain its percentage ownership (on an “as-converted” basis) in the event that MedMen issues equity securities. The Company’s ability to convert the MedMen Convertible Note and exercise the Warrants is dependent upon U.S. federal legalization of cannabis (a “Triggering Event”) or Tilray’s waiver of such requirement as well as any additional regulatory approvals. The MedMen Convertible Note has a maturity date of August 17, 2028.

 

The MedMen Convertible Note was based upon the fair value of the collateral assets net of disposal costs.  In the prior year, the Company used the Black-Scholes model using the following assumptions: the risk-free rate of 3.50%; expected life of the convertible note; volatility of 70% based on comparable companies; forfeiture rate of nil; dividend yield of nil; probability of legalization between 0% and 60%; and, the exercise price of the respective conversion feature. 

 

The Company did not recognize any interest income on the MedMen Convertible Note for the three months ended August 31, 2023, which would have increased its value. 

 

Note 8. Long term investments

 

Long term investments consisted of the following:

 

    August 31,     May 31,  
    2023     2023  

Equity investments measured at fair value

  $ 2,064     $ 2,144  

Equity investments under measurement alternative

    5,500       5,651  

Total

  $ 7,564     $ 7,795  

     

13

  
 

Note 9. Accounts payable and accrued liabilities

 

Accounts payable and accrued liabilities are comprised of:

 

    August 31,     May 31,  
    2023     2023  

Trade payables

  $ 78,971     $ 70,819  

Accrued liabilities

    129,517       78,007  

Accrued payroll and employment related taxes

    6,826       18,772  

Income taxes payable

    15,727       14,934  

Accrued interest

    6,974       8,102  

Other accruals

    66       48  

Total

  $ 238,081     $ 190,682  

     

 

Note 10. Bank indebtedness

 

Aphria Inc., a subsidiary of the Company, has an operating line of credit in the amount of C$1,000, which bears interest at the lender’s prime rate plus 75 basis points. As of August 31, 2023, the Company has not drawn on the line of credit. The operating line of credit is secured by a security interest on that certain real property located at 265 Talbot St. West, Leamington, Ontario.

 

CC Pharma GmbH, a subsidiary of the Company, has two operating lines of credit for €7,000 and €500 each, which bear interest at Euro Short-Term Rate ("ESTR") plus 2.50% and Euro Interbank Offered Rate ("EURIBOR") plus 3.75%, respectively. As of August 31, 2023, a total of €6,967 ($7,594) was drawn down from the available credit of €7,500. The operating line of credit for €7,000 are secured by an interest in the inventory of CC Pharma GmbH as well as the Densborn facility and underlying real property. The operating line of credit for €500 is unsecured.

 

Four Twenty Corporation (“420”), a subsidiary of the Company, has a revolving credit facility of $30,000, which bears interest at SOFR plus an applicable margin. As of August 31, 2023, the Company has drawn $7,000 on the revolving line of credit. The revolving credit facility is secured by all of 420's assets and includes a corporate guarantee by a subsidiary of the Company. 

 

14

     
 

Note 11. Long-term debt

 

The following table sets forth the net carrying amount of long-term debt instruments:

 

  

August 31,

  

May 31,

 
  

2023

  

2023

 

Credit facility - C$66,000 - Canadian prime interest rate plus an applicable margin, 3-year term, with a 10-year amortization, repayable in blended monthly payments, due in November 2025

 $44,400  $45,260 

Term loan - C$25,000 - Canadian prime plus 1.00%, compounded monthly, 5-year term, with a 15-year amortization, repayable in equal monthly installments of C$181 including interest, due in July 2033

  10,905   10,959 

Term loan - C$25,000 - Canadian prime plus 1.00%, compounded monthly, 5-year term with a 15-year amortization, repayable in equal monthly installments of C$196 including interest, due in July 2033

  13,105   13,092 

Term loan - C$1,250 - Canadian prime plus 1.50%, 5-year term, with a 10-year amortization, repayable in equal monthly installments of C$12 including interest, due in August 2026

  330   346 

Mortgage payable - C$3,750 - Canadian prime plus 1.50%, 5-year term, with a 20-year amortization, repayable in equal monthly installments of C$23 including interest, due in August 2026

  2,128   2,104 

Term loan ‐ €5,000 ‐ EURIBOR plus 2.15%, 5‐year term, repayable in quarterly installments of €250 plus interest, due in December 2023

  545   803 

Term loan ‐ €1,200 ‐ at fixed 4.26%, 1‐year term, repayable in monthly installments of €100 plus interest, due in December 2023

  442   755 

Term loan ‐ €1,500 ‐ at a fixed 2.00%, 5‐year term, repayable in quarterly installments of €94 plus interest, due in April 2025

  732   819 

Term loan ‐ €3,500 ‐ at a fixed rate of 4.59%, 5‐year term, repayable in monthly installments of €52 plus interest, due in August 2028

  3,702   1,706 

Mortgage payable - $22,635 - EURIBOR rate plus 1.5%, 10-year term, with a 10-year amortization, repayable in monthly installments of $57 plus interest, due in October 2030

  20,688   20,863 

Term loan - $70,000 -SOFR plus an applicable margin, 5-year term, repayable in quarterly installments of $875 to $1,750 due in June 2028

  70,000   65,000 

Carrying amount of long-term debt

  166,977   161,707 

Unamortized financing fees

  (1,098)  (738)

Net carrying amount

  165,879   160,969 

Less principal portion included in current liabilities

  (13,489)  (24,080)

Total noncurrent portion of long-term debt

 $152,390  $136,889 

 

During the quarter ended August 31, 2023, Four Twenty Corporation ("420"), a wholly-owned subsidiary of the Company, repaid its $100,000 term loan and entered  into a new secured credit agreement, which comprised of: (i) a $70,000 term loan facility, bearing interest at SOFR plus an applicable margin and having a maturity date of June 30, 2028 (the "420 Term Loan"), and (ii) a $20,000 delayed draw term loan facility, issued on the same terms as the $70,000 term loan facility (the "420 Delayed Draw Term Loan" and, together with the 420 Term Loan the "420 Secured Credit Agreement"). The 420 Term Loan was fully drawn on June 30, 2023. The 420 Delayed Draw Term Loan was fully drawn subsequent to August 31, 2023, as described in Note 25 (Subsequent events).  Under the terms of the 420 Secured Credit Agreement, the Company pledged all of Sweetwater, Breckenridge and Montauk’s assets and the related equity interest, and Tilray Brands, Inc. provided a limited guarantee.

 

As of August 31, 2023, the Company and its subsidiaries, were in compliance with its covenants under its long-term debt agreements. 

 

15

     
 

Note 12. Convertible debentures payable

 

The following table sets forth the net carrying amount of the convertible debentures payable:

 

  

August 31,

  

May 31,

 
  

2023

  

2023

 

5.20% Convertible Notes ("TLRY 27")

 $120,861  $100,476 

HTI Convertible Note

  -   47,834 

5.25% Convertible Notes ("APHA 24")

  124,453   120,568 

5.00% Convertible Notes ("TLRY 23")

  127,137   126,544 

Total

  372,451   395,422 

Deduct - current portion

  251,590   174,378 

Total convertible debentures payable, non current portion

 $120,861  $221,044 

 

HTI Convertible Note

 

  

August 31,

  

May 31,

 
  

2023

  

2023

 

4.00% Contractual debenture

 $  $50,000 

Unamortized discount

     (2,166)

Net carrying amount

 $  $47,834 

 

On July 12, 2022, the Company issued a $50,000 convertible promissory note to HTI ("HTI Convertible Note"), bearing a 4% interest rate payable on a quarterly basis and having a maturity date of September 1, 2023. On August 31, 2023, the Company settled in full the HTI Convertible Note through the issuance of shares as described in Note 14 (Stockholder's equity).    

 

TLRY 27

 

  

August 31,

  

May 31,

 
  

2023

  

2023

 

5.20% Contractual debenture

 $172,500  $150,000 

Unamortized discount

  (51,639)  (49,524)

Net carrying amount

 $120,861  $100,476 

 

The TLRY 27 convertible debentures were issued on  May 30, 2023 and on June 9, 2023 by way of overallotment, in the principal amount totaling $172,500 (the “TLRY 27 Notes”). The TLRY 27 Notes bear interest at a rate of 5.20% per annum, payable semi-annually in arrears on  June 15 and  December 15 of each year, and mature on  June 15, 2027, unless earlier converted. The TLRY 27 Notes are Tilray’s general unsecured obligations and rank senior in right of payment to all of Tilray’s indebtedness that is expressly subordinated in right of payment to the notes; equal in right of payment with any of Tilray’s unsecured indebtedness that is not so subordinated, including TLRY 23 and APHA 24, effectively junior in right of payment to any of Tilray’s secured indebtedness to the extent of the value of the assets securing such indebtedness; and structurally junior to all indebtedness and other liabilities (including trade payables but excluding intercompany obligations) of Tilray’s current or future subsidiaries. Noteholders will have the right to convert their TLRY 27 Notes into shares of Tilray’s common stock at their option, at any time, until the close of business on the second scheduled trading day immediately before  June 15, 2027. The initial conversion rate is 376.6478 shares per $1,000 principal amount of TLRY 27 Notes, which represents a conversion price of approximately $2.66 per share. The conversion rate and conversion price will be subject to adjustment upon the occurrence of certain events.

 

The TLRY 27 Notes will be redeemable, in whole and not in part, at Tilray’s option at any time on or after   June 20, 2025 at a cash redemption price equal to the principal amount of the notes to be redeemed, plus accrued and unpaid interest, if any, to, but excluding, the redemption date, but only if the last reported sale price of Tilray’s common stock exceeds 130% of the conversion price for a specified period of time. If certain corporate events that constitute a fundamental change occur, then, subject to a limited exception, noteholders  may require Tilray to repurchase their TLRY 27 Notes for cash. The repurchase price will be equal to the principal amount of the notes to be repurchased, plus accrued and unpaid interest, if any, to, but excluding, the applicable repurchase date. In connection with the Company’s offering of the TLRY 27 Notes, the Company entered into a share lending agreement with an affiliate of Jefferies LLC (the “Share Borrower”), pursuant to which it lent to the Share Borrower 38,500,000 shares of the Company’s common stock (the "Borrowed Shares"). The Borrowed Shares were newly-issued shares, will be held as treasury shares until the expiration or early termination of the share lending agreement and may be used by purchasers of the TLRY 27 Notes to sell up to 38,500,000 shares of the Company’s common stock. The fair value of the share lending agreement has been recorded as part of the unamortized discount on the debenture. The Company expects that the selling stockholders will use their position created by such sales to establish their initial hedge with respect to their investments in the TLRY 27 Notes. The Company did not receive any proceeds from the sale of the Borrowed Shares. 

 

APHA 24

 

  

August 31,

  

May 31,

 
  

2023

  

2023

 

5.25% Contractual debenture

 $350,000  $350,000 

Debt settlement

  (213,260)  (213,260)

Fair value adjustment

  (12,287)  (16,172)

Net carrying amount

 $124,453  $120,568 

 

The APHA 24 convertible debentures, were entered into in April 2019, in the principal amount of $350,000, bear interest at a rate of 5.25% per annum, payable semi-annually in arrears on June 1 and December 1 of each year, and mature on June 1, 2024, unless earlier converted (the APHA 24 Notes"). The APHA 24 Notes are Tilray’s general unsecured obligations and rank senior in right of payment to all of Tilray’s indebtedness that is expressly subordinated in right of payment to the notes; equal in right of payment with any of Tilray’s unsecured indebtedness that is not so subordinated, including TLRY 23 and TLRY 27, effectively junior in right of payment to any of Tilray’s secured indebtedness to the extent of the value of the assets securing such indebtedness; and structurally junior to all indebtedness and other liabilities (including trade payables but excluding intercompany obligations) of Tilray’s current or future subsidiaries. 

 

Holders of the APHA 24 Notes may convert all or any portion of such note, in multiples of $1 principal amount, at their option at any time between December 1, 2023 to the maturity date of June 1, 2024. The initial conversion which the Company may settle in cash, or common shares of Tilray, or a combination thereof, at Tilray's election, is equivalent to an initial conversion price of approximately $11.20 per common share, subject to adjustments in certain events. In addition, holders of the APHA 24 Notes may convert all or any portion of their notes, in multiples of $1 principal amount, at their option at any time preceding December 1, 2023, if:

 

 

(a)

the last reported sales price of the common shares for at least 20 trading days during a period of 30 consecutive trading days immediately preceding fiscal quarter is greater than or equal to 130% of the conversion price on each applicable trading day;

 

(b)

during the five-business day period after any five consecutive trading day period (the “measurement period”) in which the trading price per $1 principal amount of the APHA 24 Notes for each trading day of the measurement period is less than 98% of the product of the last reported sale price of the Company’s common shares and the conversion rate on each such trading day;

 

(c)

the Company calls any or all of the APHA 24 Notes for redemption or;

 

(d)

upon occurrence of a specified corporate event.

 

16

 

The Company was not able to redeem the APHA 24 prior to  June 6, 2022, except upon the occurrence of certain changes in tax laws. On or after  June 6, 2022, the Company  may redeem for cash all or part of the APHA 24, at its option, if the last reported sale price of the Company’s common shares has been at least 130% of the conversion price then in effect for at least 20 trading days during any 30 consecutive trading day period ending on and including trading day immediately preceding the date on which the Company provides notice of redemption. The redemption of the APHA 24 will be equal to 100% of the principal amount plus accrued and unpaid interest to, but excluding, the redemption date.

 

The Company elected the fair value option under ASC 825 Fair Value Measurements for the APHA 24. The APHA 24 was initially recognized at fair value on the balance sheet. All subsequent changes in fair value, excluding the impact of the change in fair value related to instrument-specific credit risk are recorded in non-operating income. The changes in fair value related to instrument-specific credit risk is recorded through other comprehensive income (loss).

 

The Company  may from time to time seek to retire or purchase its APHA 24, in open market purchases, privately negotiated transactions or otherwise. Such purchases or exchanges, if any, will depend on prevailing market conditions, the company's liquidity requirements, contractual restrictions and other factors. During the previous fiscal year, the Company purchased $122,500 principal of APHA 24.

 

The overall change in fair value of APHA 24 during the quarter ended  August 31, 2023 decreased by $3,885, this was comprised of $2,147 of fair value changes which was offset by the decrease in foreign exchange of $1,738 ( August 31, 2022 – $7,884 of fair value changes, offset by a decrease in foreign exchange of $8,367).

 

As at  August 31, 2023, there was $136,740 principal outstanding as compared to on May 31, 2023 there was $136,740 of principal outstanding.

 

During the three months ended August 31, 2023 and 2022, the Company recognized total interest expense of $1,795 and $3,403, respectively.

 

TLRY 23

 

  August 31,  May 31, 
  2023  2023 

5.00% Contractual debenture

 $277,856  $277,856 

Principal amount paid

  (150,526)  (150,526)

Unamortized discount

  (193)  (786)

Net carrying amount

 $127,137  $126,544 

 

The TLRY 23 bears interest at a rate of 5.00% per annum, payable semi-annually in arrears on April 1 and October 1 of each year. Additional interest may accrue on the TLRY 23 in specified circumstances. The TLRY 23 will mature on October 1, 2023, unless earlier repurchased, redeemed or converted. There are no principal payments required over the five-year term of the TLRY 23, except in the case of redemption or events of default.

 

The TLRY 23 Notes are Tilray’s general unsecured obligations and rank senior in right of payment to all of Tilray’s indebtedness that is expressly subordinated in right of payment to the notes; equal in right of payment with any of Tilray’s unsecured indebtedness that is not so subordinated, including TLRY 27 and APHA 24, effectively junior in right of payment to any of Tilray’s secured indebtedness to the extent of the value of the assets securing such indebtedness; and structurally junior to all indebtedness and other liabilities (including trade payables but excluding intercompany obligations) of Tilray’s current or future subsidiaries. 

 

The TLRY 23 includes customary covenants and sets forth certain events of default after which the convertible notes may be declared immediately due and payable, including certain types of bankruptcy or insolvency involving the Company. To the extent the Company so elects, the sole remedy for an event of default relating to certain failures by the Company to comply with certain reporting covenants, for the first 365 days after such event of default, consist exclusively of the right to receive additional interest on the notes. Upon conversion, the Company will pay or deliver, as the case may be, cash, shares of our common stock or a combination of cash and shares of the Company's common stock, at the Company's election (the "cash conversion option"). The initial conversion rate for the convertible notes is 5.9735 shares of common stock per one thousand dollar principal amount of notes, which is equivalent to an initial conversion price of approximately $167.41 per share of common stock, which represents approximately 760,588 shares of common stock, based on the $127,330 aggregate principal amount of convertible notes outstanding as of   August 31, 2023. Throughout the term of the TLRY 23, the conversion rate may be adjusted upon the occurrence of certain events.

 

Prior to the close of business on the business day immediately preceding April 1, 2023, the TLRY 23 will be convertible only under the specified circumstances. On or after April 1, 2023 until the close of business on the business day immediately preceding the maturity date, September 30, 2023, holders may convert all or any portion of their TLRY 23, in multiples of $1 principal amount, at the option of the holder regardless of the aforementioned circumstances. This note was repaid on maturity as described in Note 25 (Subsequent events).  

 

As of August 31, 2023, the Company was in compliance with all the covenants set forth under the TLRY 23. The effective interest rate on the debt is 6.9%, the Company recognized interest expense of $1,592 and amortized discount interest of $593 for the three months ended August 31, 2023.

 

17

     
 

Note 13. Warrant liability

 

As of August 31, 2023 and May 31, 2023, there were 6,209,000 warrants outstanding, with an original exercise price of $5.95 per warrant, expiring March 17, 2025. Each warrant is exercisable for one common share of the Company.

 

The warrants contain anti-dilution price protection features, which adjust the exercise price of the warrants if the Company subsequently issues common stock at a price lower than the exercise price of the warrants. In the event additional warrants or convertible debt are issued with a lower and/or variable exercise price, the exercise price of the warrants will be adjusted accordingly. During the three months ended August 31, 2023, the Company issued shares which triggered the anti-dilution price protection feature lowering the exercise price to $1.61. These warrants are classified as liabilities as they are to be settled in registered shares, and the registration statement is required to be active, unless such shares may be subject to an applicable exemption from registration requirements. The holders, at their sole discretion, may elect to affect a cashless exercise, and be issued exempt securities in accordance with Section 3(a)(9) of the 1933 Act. In the event the Company does not maintain an effective registration statement, the Company may be required to pay a daily cash penalty equal to 1% of the number of shares of common stock due to be issued multiplied by any trading price of the common stock between the exercise date and the share delivery date, as selected by the holder. Alternatively, the Company may deliver registered common stock purchased by the Company in the open market. The Company may also be required to pay cash if it does not have sufficient authorized shares to deliver to the holders upon exercise.

 

The Company estimated the fair value of warrants outstanding at August 31, 2023 at $1.613 per warrant using the Black Scholes pricing model (Level 3) with the following assumptions: Risk-free interest rate of 4.4%, expected volatility of 50%, expected term of 2.05 years, strike price of $1.61 and fair value of common stock of $2.96.

 

Expected volatility is based on both historical and implied volatility of the Company’s common stock.

 

Note 14. Stockholders' equity 

 

Issued and outstanding

 

As of   August 31, 2023, the Company had 980,000,000 common shares and 10,000,000 preferred shares authorized to be issued, with 723,292,600 common shares and nil preferred shares issued and outstanding. Historically, the Company has issued shares of its common stock as consideration for business acquisitions, including the settlement of convertible notes, the settlement of litigation claims, in connection with public offerings and as payment of dividends to non-controlling interests for profit distributions.

 

During the three months ended August 31, 2023, the Company issued the following common shares:

 

 a)

39,705,962 shares in connection with the HEXO Acquisition, see Note 6 (Business acquisitions).

 b)

865,426 shares to settle a contractual change of  control severance in the amount of $1,500 incurred in connection with the HEXO Acquisition. 

 

c)

5,004,735 shares to settle dividends payable to the non-controlling shareholders of Aphria Diamond in the amount of $8,146. 

 

d)17,148,541 shares for the settlement of the HTI Convertible Note payable see Note 12 (Convertible debentures payable).

 

e)3,912,481 shares in connection with the exercise of previously awarded stock-based compensation awards.

 

The Company maintains stock-based compensation plans as disclosed in our Annual Financial Statements. For the three months ended August 31, 2023 and 2022, the total stock-based compensation was $ 8,257 and $9,193 respectively.

 

During the three months ended August 31, 2023 and 2022, the Company granted 11,559,549 and 5,747,938 time-based RSUs, respectively, and 7,566,146 and 2,540,394 performance-based RSUs, respectively. The 7,566,146 performance based RSUs issued during the quarter had performance conditions not yet finalized. The Company's total stock-based compensation expense recognized is as follows:

 

  

For the three months

 
  

ended August 31,

 
  

2023

  

2022

 

Stock options

 $  $604 

RSUs

  8,257   8,589 

Total

 $8,257  $9,193 

 

18

     
 

Note 15. Accumulated other comprehensive income (loss)

 

Accumulated other comprehensive loss includes the following components:

 

 

           

Unrealized

         
   

Foreign

   

loss on

         
   

currency

   

convertible

         
   

translation

   

notes

         
   

gain (loss)

   

receivables

   

Total

 

Balance May 31, 2022

  $ 54,413     $ (75,177 )     (20,764 )

Other comprehensive loss

    (56,443 )     (2,525 )     (58,968 )

Balance at August 31, 2022

  $ (2,030 )   $ (77,702 )   $ (79,732 )
                         

Balance May 31, 2023

  $ (46,610 )   $     $ (46,610 )

Other comprehensive loss

    3,049             3,049  

Balance August 31, 2023

  $ (43,561 )   $     $ (43,561 )

  

 

Note 16. Non-controlling interests

 

The following tables summarize the information relating to the Company’s subsidiaries, SH Acquisition (68%), CC Pharma Nordic ApS (75%), Aphria Diamond (51%), and ColCanna S.A.S. (90%) before intercompany eliminations. 

 

Summary of balance sheet information of the entities in which there is a non-controlling interest as of August 31, 2023:

 

  SH  CC Pharma  Aphria  ColCanna  August 31, 
  Acquisition  Nordic ApS  Diamond  S.A.S.  2023 

Current assets

 $  $91  $148,222  $169  $148,482 

Non-current assets

  74,681      134,351   3,730   212,762 

Current liabilities

     (1,198)  (147,917)  (6,982)  (156,097)

Non-current liabilities

        (51,397)  (2,072)  (53,469)

Net assets

 $74,681  $(1,107) $83,259  $(5,155) $151,678 

 

Summary of balance sheet information of the entities there is a non-controlling interest as of May 31, 2023:

 

  

SH

  

CC Pharma

  

Aphria

  

ColCanna

  

May 31,

 
  

Acquisition

  

Nordic ApS

  

Diamond

  

S.A.S.

  

2023

 

Current assets

 $  $114  $127,689  $224  $128,027 

Non-current assets

  74,681      135,085   3,307   213,073 

Current liabilities

     (1,166)  (142,554)  (6,697)  (150,417)

Non-current liabilities

        (53,197)  (1,428)  (54,625)

Net assets

 $74,681  $(1,052) $67,023  $(4,594) $136,058 

 

19

 

Summary of income statement information of the entities in which there is a non-controlling interest for the three months ended August 31, 2023:

 

  SH  CC Pharma  Aphria  ColCanna  August 31, 
  Acquisition  Nordic ApS  Diamond  S.A.S.  2023 

Revenue

 $  $  $39,230  $  $39,230 

Total expenses

     35   15,636   216   15,887 

Net (loss) income

     (35)  23,594   (216)  23,343 

Other comprehensive (loss) income

     (20)  533   (345)  168 

Net comprehensive (loss) income

 $  $(55) $24,127  $(561) $23,511 

Non-controlling interest %

  32%  25%  49%  10% 

NA

 

Comprehensive (loss) income attributable to NCI

  -   (14)  11,822   (56)  11,752 

Additional income attributable to NCI

        4,070      4,070 

Net comprehensive (loss) income attributable to NCI

 $  $(14) $15,892  $(56) $15,822 

 

Summary of income statement information of the entities in which there is a non-controlling interest for the three months ended August 31, 2022:

 

  

SH

  

CC Pharma

  

Aphria

  

ColCanna

  

August 31,

 
  

Acquisition

  

Nordic ApS

  

Diamond

  

S.A.S.

  

2022

 

Revenue

 $  $  $36,401  $  $36,401 

Total expenses

  (3,492)  154   20,427   55,845   72,934 

Net (loss) income

  3,492   (154)  15,974   (55,845)  (36,533)

Other comprehensive (loss) income

  (7,103)  29   (3,280)  240   (10,114)

Net comprehensive (loss) income

 $(3,611) $(125) $12,694  $(55,605) $(46,647)

Non-controlling interest %

  32%  25%  49%  10% 

NA

 

Comprehensive (loss) income attributable to NCI

  (1,156)  (31)  6,220   (5,561)  (528)

Additional income attributable to NCI

        4,367      4,367 

Net comprehensive (loss) income attributable to NCI

 $(1,156) $(31) $10,587  $(5,561) $3,839 

      

 

Note 17. Income taxes

 

The determination of the Company’s overall effective tax rate requires significant judgment, the use of estimates, and the interpretation and application of complex tax laws. The effective tax rate reflects the income earned and taxed in various United States federal, state, and foreign jurisdictions. Tax law changes, increases, and decreases in temporary and permanent differences between book and tax items, valuation allowances against the deferred tax assets, stock compensation, and the Company’s change in income in each jurisdiction all affect the overall effective tax rate. It is the Company’s practice to recognize interest and penalties related to uncertain tax positions in income tax expense.

 

The Company reported income tax expense of $7,264 for the three months ended August 31, 2023, and income tax expense of $7,211 for the three months ended August 31, 2022. The income tax expense (benefit) in the current period varies from the US statutory income tax rate and prior period primarily due to the geographical mix of earnings and losses with no tax benefit resulting from valuation allowances in certain jurisdictions.

 

20

     
 

Note 18. Commitments and contingencies

 

Purchase and other commitments

 

The Company has payments on long-term debt, refer to Note 11 (Long-term debt), convertible notes, refer to Note 12 (Convertible debentures payable), material purchase commitments and construction commitments as follows:

 

  

Total

  

2024

  

2025

  

2026

  

2027

  

Thereafter

 

Long-term debt repayment

 $166,977  $66,829  $17,233  $6,662  $8,412  $67,841 

Convertible notes

  436,570   264,070            172,500 

Material purchase obligations

  56,525   33,484   18,491   3,675   875    

Construction commitments

  1,515   1,515             

Total

 $661,587  $365,898  $35,724  $10,337  $9,287  $240,341 

 

The following table presents the future undiscounted payment associated with lease liabilities as of August 31, 2023:

 

  

Operating

 
  

leases

 

2024

 $4,106 

2025

  3,295 

2026

  3,486 

2027

  3,412 

Thereafter

  4,012 

Total minimum lease payments

 $18,311 

Imputed interest

  (8,525)

Obligations recognized

 $9,786 

 

Legal proceedings

 

In the ordinary course of business, we are at times subject to various legal proceedings and disputes, including the proceedings specifically discussed below. We assess our liabilities and contingencies in connection with outstanding legal proceedings utilizing the latest information available. Where it is probable that we will incur a loss and the amount of the loss can be reasonably estimated, we record a liability in our consolidated financial statements. These legal reserves  may be increased or decreased to reflect any relevant developments on a quarterly basis. Where a loss is not probable or the amount of loss is not estimable, we do not accrue legal reserves. While the outcome of legal proceedings is inherently uncertain, based on information currently available and available insurance coverage, our management believes that it has established appropriate legal reserves. Any incremental liabilities arising from pending legal proceedings are not expected to have a material adverse effect on our consolidated financial position, consolidated results of operations, or consolidated cash flows. However, it is possible that the ultimate resolution of these matters, if unfavorable,  may be material to our consolidated financial position, consolidated results of operations, or consolidated cash flows.

 

There have been no material changes from the legal proceedings since our Annual Report on Form 10-K for the fiscal year ended May 31, 2023, except with respect to certain aspects of the legal proceedings disclosed below:

 

Class Action Suits and Stockholder Derivative Suits

 

Authentic Brands Group Related Class Action (New York, United States)

 

On  May 4, 2020, Ganesh Kasilingam filed a lawsuit in the United States District Court for the Southern District of New York (“SDNY”), against Tilray Brands, Inc., Brendan Kennedy and Mark Castaneda, on behalf of himself and a putative class, seeking to recover damages for alleged violations of Sections 10(b) and 20(a) of the Securities Exchange Act of 1934 (the “Kasilingam litigation”). The complaint alleges that Tilray and the individual defendants overstated the anticipated advantages of the Company’s revenue sharing agreement with Authentic Brands Group (“ABG”), announced on  January 15, 2019, and that the plaintiff suffered losses when Tilray’s stock price dropped after Tilray recognized an impairment with respect to the ABG deal on  March 2, 2020. On  August 6, 2020, SDNY entered an order appointing Saul Kassin as Lead Plaintiff and The Rosen Law Firm, P.A. as Lead Counsel. Lead Plaintiff filed an amended complaint on  October 5, 2020, which asserts the same Sections 10(b) and 20(a) claims against the same defendants on largely the same theory, and includes new allegations that Tilray’s reported inventory, cost of sales, and gross margins in its financial reports during the class period were false and misleading because Tilray improperly recorded unsellable “trim” as inventory and understated the cost of sales for its products.

 

 

On  September 27, 2021, the U.S. District Court entered an Opinion & Order granting the Defendants’ motion to dismiss the amended complaint in the Kasilingam litigation without prejudice. On  December 3, 2021, the lead plaintiff filed a second amended complaint alleging similar claims against Tilray and Brendan Kennedy. The defendants moved to dismiss the second amended complaint on  February 2, 2022. On  September 28, 2022, the Court granted in part and denied in part the defendants’ motion to dismiss the second amended complaint. On  October 12, 2022, the Company filed a motion for reconsideration and/or interlocutory appeal of this Court decision.

 

On August 21, 2023, the U.S. District Court granted Tilray’s motion for reconsideration and dismissed the second amended complaint with leave to amend one final time. Tilray continues to believe that all of the underlying claims are without merit, and that the plaintiff will not be able to fix the deficiencies in its claims as part of its amended complaint.

 

21

 

Legal Proceedings Related to Contractual Obligations

 

420 Investments Ltd. Litigation

 

On  February 21, 2020, 420 Investments Ltd., as Plaintiff (“420 Investments”), filed a lawsuit against Tilray Brands, Inc. and High Park Shops Inc. (“High Park”), as Defendants, in Calgary, Alberta in the Court of Queen’s Bench of Alberta. In  August 2019, Tilray and High Park entered into an Arrangement Agreement with 420 Investments and others (the “Agreement”). Pursuant to the Agreement, High Park was to acquire the securities of 420 Investments. In  February 2020, Tilray and High Park gave notice of termination of the Agreement. 420 Investments alleges that the termination was unlawful and without merit and further alleges that the Defendants had no legal basis to terminate. 420 Investments alleges that the Defendants did not meet their contractual and good faith obligations under the Agreement. 420 Investment seeks damages in the stated amount of C$110,000, plus C$20,000 in aggravated damages. The Tilray and High Park Statement of Defense and counterclaim were both filed on  March 20, 2020. 420 Investment’s Statement of Defense to our counterclaim was filed on  April 20, 2020. Respectively, 420 Investments and Tilray / High Park served each other with their Affidavits of Records (“AOR”) on  August 25, 2020 and  November 30, 2020. Tilray and High Park cross-examined the litigation representative of 420 Investments about its AOR with 420 Investments producing supplemental documents in  August 2021 and 2022. Additional discovery  may take place in the Fall of 2023. The Company denies the Plaintiff’s allegations and intends to vigorously defend this litigation matter, although there can be no assurance as to its outcome.

 

In  February 2023, Tilray and High Park filed an Application for Summary Judgment to collect an unpaid C$7,000 bridge loan made to 420 Investments on  August 28, 2019, relating to the subject transaction.  That debt was repayable in  March 2020, but was never repaid.  The application is pending and a decision from the Court is expected on Tilray’s Application for Summary Judgment in October or November 2023.

 

Docklight Litigation

 

On  November 5, 2021 Docklight Brands, Inc. (“Docklight”) filed a complaint against the Company and its wholly-owned subsidiary, High Park Holdings, Ltd. (“High Park”) in Superior Court of the State of Washington, King County. Docklight claimed breach of contract against High Park arising from a 2018 license agreement pursuant to which Docklight licensed certain Bob Marley-related brands to High Park (as amended in 2020 and 2021, the “High Park License”). In addition, Docklight brought a negligent misrepresentation claim against Tilray, alleging that certain individuals at Tilray or Aphria had made false statements to Docklight in order to induce Docklight to waive Docklight’s alleged right to terminate the High Park License for change-of-control on the basis of the 2021 Tilray-Aphria Arrangement Agreement. Docklight seeks injunctive relief as well as unspecified damages. On  December 17, 2021, Defendants removed the case to the United States District Court, Federal District of Washington.  Defendants’ answer to the complaint was filed  January 21, 2022, and discovery is ongoing. Mediation was held  April 2023, but the parties were unable to reach a resolution. Tilray and High Park continue to believe that the claims are without merit and we intend to continue to vigorously defend the Docklight suit. Recently, the parties have engaged in active settlement discussions to fully resolve Docklight’s claims.

 

Summary of Litigation accruals

 

The total litigation expense accrual included in accrued liabilities for the period ended August 31, 2023 was $35,138 to cover various ongoing litigation matters that are probable and estimable ( May 31, 2023 - $25,000). The increase of $10,138 from the prior period is due to the inclusion of the HEXO liabilities assumed, net of settlements during the quarter.

 

22

  
 

Note 19. Net revenue

 

The Company reports its net revenue in four reporting segments: cannabis, distribution, beverage alcohol and wellness.

 

Net revenue is comprised of:

 

  

For the three months

 
  

ended August 31,

 
  

2023

  

2022

 

Cannabis revenue

 $96,884  $75,689 

Cannabis excise taxes

  (26,551)  (17,119)

Net cannabis revenue

  70,333   58,570 

Beverage alcohol revenue

  25,339   21,863 

Beverage alcohol excise taxes

  (1,177)  (1,209)

Net beverage alcohol revenue

  24,162   20,654 

Distribution revenue

  69,157   60,585 

Wellness revenue

  13,297   13,402 

Total

 $176,949  $153,211 

  

 

Note 20. Cost of goods sold

 

Cost of goods sold is comprised of:

 

   

For the three months

 
   

ended August 31,

 
   

2023

   

2022

 

Cannabis costs

  $ 50,517     $ 28,861  

Beverage alcohol costs

    11,266       10,849  

Distribution costs

    61,468       54,984  

Wellness costs

    9,502       9,903  

Total

  $ 132,753     $ 104,597  

     

 

Note 21. General and administrative expenses

 

General and administrative expenses are comprised of:

 

   

For the three months

 
   

ended August 31,

 
   

2023

   

2022

 

Executive compensation

  $ 3,661     $ 3,555  

Office and general

    8,168       5,829  

Salaries and wages

    13,114       14,635  

Stock-based compensation

    8,257       9,193  

Insurance

    3,849       2,703  

Professional fees

    1,499       2,490  

Gain on sale of capital assets

    3       77  

Travel and accommodation

    1,107       1,161  

Rent

    858       865  

Total

  $ 40,516     $ 40,508  

 

23

     
 

Note 22. Non-operating income (expense)

 

Non-operating income (expense) is comprised of:

 

   

For the three months

 
   

ended August 31,

 
   

2023

   

2022

 

Change in fair value of convertible debenture payable

  $ (2,147 )   $ (7,884 )

Change in fair value of warrant liability

    (8,198 )     1,548  

Foreign exchange loss (gain)

    6,267       (25,573 )

Loss on long-term investments

    (109 )     (1,008 )

Other non-operating (losses) gains, net

    (215 )     (75 )

Total

  $ (4,402 )   $ (32,992 )

 

     Other non-operating (losses) gains, net for the three months ended August 31, 2023, includes amounts to settle outstanding notes with non-controlling interest shareholders.

 

Note 23. Fair value measurements

 

Financial instruments

 

The Company has classified its financial instruments as described in Note 3 Significant accounting policies in our Annual Financial Statements.

 

The carrying values of accounts receivable, bank indebtedness and accounts payable and accrued liabilities approximate their fair values due to their short periods to maturity.

 

At August 31, 2023 and  May 31, 2023 the Company had long-term debt of $4,876 and $nil, respectively, and the principal portion of convertible debentures payable of $436,570 subject to fixed interest rates. The Company’s long-term debt is valued based on discounting the future cash outflows associated with the long-term debt. The discount rate is based on the incremental premium above market rates for the U.S. Department of the Treasury securities of similar duration. In each period thereafter, the incremental premium is held constant while the U.S. Department of the Treasury security is based on the then current market value to derive the discount rate.

 

24

 

The following tables present information about the Company’s assets and liabilities that are measured at fair value on a recurring basis as of August 31, 2023 and  May 31, 2023 and indicates the fair value hierarchy of the valuation techniques the Company utilized to determine such fair value:

 

              August 31, 
  

Level 1

  

Level 2

  

Level 3

  2023 

Financial assets

                

Cash and cash equivalents

 $177,519  $  $  $177,519 

Restricted cash

  1,613         1,613 

Marketable securities

  287,333         287,333 

Convertible notes receivable

        74,681   74,681 

Equity investments measured at fair value

  1,078   986   5,500   7,564 

Financial liabilities

                

Warrant liability

        (10,015)  (10,015)

Contingent consideration

        (20,181)  (20,181)

APHA 24 Convertible debenture

        (124,453)  (124,453)

Total recurring fair value measurements

 $467,543  $986  $(74,468) $394,061 

 

              May 31, 
  

Level 1

  

Level 2

  

Level 3

  2023 

Financial assets

                

Cash and cash equivalents

 $206,632  $  $  $206,632 

Restricted cash

            

Marketable Securities

  241,897         241,897 

Convertible notes receivable

        103,401   103,401 

Equity investments measured at fair value

  1,056   1,088   5,651   7,795 

Financial liabilities

                

Warrant liability

        (1,817)  (1,817)

Contingent consideration

        (27,107)  (27,107)

APHA 24 Convertible debenture

        (120,568)  (120,568)

Total recurring fair value measurements

 $449,585  $1,088  $(40,440) $410,233 

 

The Company’s financial assets and liabilities required to be measured on a recurring basis are its convertible notes receivable, equity investments measured at fair value, convertible debentures measured at fair value, acquisition-related contingent consideration, and warrant liability.

 

Convertible notes receivable and long-term investments are recorded at fair value. The estimated fair value is determined using the Black Scholes option pricing model, probability of legalization and is classified as Level 3.

 

Convertible debentures payable are recorded at fair value when elected or required under US GAAP. Specifically, the APHA 24 instrument's estimated fair value is determined using the Black-Scholes option pricing model and is classified as Level 3. 

 

Certain equity investments recorded at fair value have quoted prices in active markets for identical assets and are classified as Level 1.The Company classified securities with observable inputs as level 2 and without a quoted market price as Level 3.

 

The warrants associated with the warrant liability are classified as Level 3 derivatives. Consequently, the estimated fair value of the warrant liability is determined using the Black-Scholes pricing model. Until the warrants are exercised, expire, or other facts and circumstances lead the warrant liability to be reclassified to stockholders’ equity, the warrant liability (which relates to warrants to purchase shares of common stock) is marked-to-market each reporting period with the change in fair value recorded in change in fair value of warrant liability. Any significant adjustments to the unobservable inputs disclosed in the table below would have a direct impact on the fair value of the warrant liability.

 

The contingent consideration from the acquisitions of SweetWater, Montauk, and Truss due in   December 2023,  December 2025, and upon the triggering event respectively and are payable in cash, is determined by discounting future expected cash outflows at a discount rate in the range of 5% - 11.4%, respectively and probability of achievement of 25% and 90%. The unobservable inputs into the future expected cash outflows result in a fair value measurement classified as Level 3

 

The balances of assets and liabilities categorized within Level 3 of the fair value hierarchy measured at fair value on a recurring basis are reconciled, as follows:

 

25

 
                   APHA 24 
  Convertible  Equity  Warrant  Contingent  Convertible 
  

notes receivable

  

Investments

  

Liability

  

Consideration

  

Debt

 

Balance, May 31, 2023

 $103,401  $5,651  $(1,817) $(27,107) $(120,568)

Additions

           (4,181)   

Disposals

  (28,720)            

Unrealized gain (loss) on fair value

     (151)  (8,198)  11,107   (3,885)

Impairments

                

Balance, August 31, 2023

 $74,681  $5,500  $(10,015) $(20,181) $(124,453)

 

The unrealized gain (loss) on fair value for the convertible debenture, the warrant liability, contingent consideration, and debt securities classified under available-for-sale method is recognized in the consolidated statements of loss and comprehensive loss using the following inputs:

 

    

Significant

   
  

Valuation

 

unobservable

   

Financial asset / financial liability

 

technique

 

input

 

Inputs

 

APHA Convertible debentures

 

Black-Scholes

 

Volatility,

 

50%

 
    

expected life (in years)

 

0.8

 

Warrant liability

 

Black-Scholes

 

Volatility,

 

50%

 
    

expected life (in years)

 

1.5

 

Contingent consideration

 

Discounted cash flows

 

Discount rate,

 5% - 11% 
    

achievement

 

25% - 90%

 

 

Items measured at fair value on a non-recurring basis

 

The Company's prepaids and other current assets, long lived assets, including property and equipment, goodwill and intangible assets are measured at fair value when there is an indicator of impairment and are recorded at fair value only when an impairment charge is recognized.

 

Management reviews its capital management approach on an ongoing basis and believes that this approach, given the relative size of the Company, is reasonable. There have been no changes to the Company’s capital management approach in the period. The Company considers its cash and cash equivalents and marketable securities as capital.

 

Note 24. Segment reporting

 

Information reported to the Chief Operating Decision Maker (“CODM”) for the purpose of resource allocation and assessment of segment performance focuses on the nature of the operations. The Company operates in four reportable segments: (1) cannabis operations, which encompasses the production, distribution, sale, co-manufacturing and advisory services of both medical and adult-use cannabis, (2) beverage alcohol operations, which encompasses the production, marketing and sale of beverage alcohol products, (3) distribution operations, which encompasses the purchase and resale of pharmaceuticals products to customers, and (4) wellness products, which encompasses hemp foods and cannabidiol (“CBD”) products. This structure is in line with how our Chief Operating Decision Maker (“CODM”) assesses our performance and allocates resources.

 

Operating segments have not been aggregated and no asset information is provided for the segments because the Company’s CODM does not receive asset information by segment on a regular basis. 

 

26

 

Segment gross profit from external customers:

 

  

For the three months

 
  

ended August 31,

 
  

2023

  

2022

 

Cannabis

        

Net cannabis revenue

 $70,333  $58,570 

Cannabis costs

  50,517   28,861 

Gross profit

  19,816   29,709 

Distribution

        

Distribution revenue

  69,157   60,585 

Distribution costs

  61,468   54,984 

Gross profit

  7,689   5,601 

Beverage alcohol

        

Net beverage alcohol revenue

  24,162   20,654 

Beverage alcohol costs

  11,266   10,849 

Gross profit

  12,896   9,805 

Wellness

        

Wellness revenue

  13,297   13,402 

Wellness costs

  9,502   9,903 

Gross profit

 $3,795  $3,499 

 

Channels of Cannabis revenue were as follows:

 

  

For the three months

 
  

ended August 31,

 
  

2023

  

2022

 

Revenue from Canadian medical cannabis

 $6,142  $6,520 

Revenue from Canadian adult-use cannabis

  71,195   58,355 

Revenue from wholesale cannabis

  5,295   392 

Revenue from international cannabis

  14,252   10,422 

Less excise taxes

  (26,551)  (17,119)

Total

 $70,333  $58,570 

 

On July 12, 2022, Tilray acquired the HEXO Convertible Note from HTI and also entered into a strategic alliance with HEXO Corp. (“HEXO”) as discussed in Note 7 (Convertible notes receivable) and Note 12 (Convertible debentures payable). In addition, the Company and HEXO entered into various commercial transaction agreements. On June 22, 2023, the Company completed the HEXO Acquisition as described in Note 6 (Business acquisitions), and thus these commercial arrangements were terminated and HEXO's financial results were consolidated in the current period results.    

 

Included in revenue from Canadian adult-use cannabis is $1,500 of advisory services revenue for the three months ended August 31, 2023 from the aforementioned HEXO commercial transaction agreements, compared to $7,753 in the prior comparative period.

 

27

 

Geographic net revenue:

 

  

For the three months

 
  

ended August 31,

 
  

2023

  

2022

 

North America

 $93,521  $82,192 

EMEA

  79,704   66,041 

Rest of World

  3,724   4,978 

Total

 $176,949  $153,211 

 

Geographic capital assets:

 

  August 31,  May 31, 
  2023  2023 

North America

 $384,091  $319,173 

EMEA

  106,761   107,131 

Rest of World

  3,767   3,363 

Total

 $494,619  $429,667 

 

Major customers are defined as customers that are materially significant to the Company’s annual revenues. For the three months ended August 31, 2023 and 2022, there were no major customers representing a material contribution to our quarterly revenues.

 

 

Note 25. Subsequent Events

 

On August 7, 2023, the Company entered into a securities and asset purchase agreement (the “Purchase Agreement”) by and among Anheuser-Busch Companies, LLC, Craft USA Holdings, LLC, Craft Brew Alliance, Inc. (collectively, “AB”), the Company and Tilray Beverages, LLC.  Pursuant to the Purchase Agreement, Tilray will acquire from AB a portfolio of craft beer and beverage brands, assets and businesses related to Breckenridge Brewery, Blue Point, 10 Barrel, Redhook, Widmer Brothers, Square Mile, Shock Top and HiBall.  The purchase price paid to AB at closing was equal to $85,000 in cash and is subject to working capital and other applicable closing adjustments. The acquisition closed on September 29, 2023 and $20,000 was borrowed under the 420 Delayed Draw Term Loan Agreement to fund part of the purchase price paid for the AB Transaction.

 

On September 12, 2023, the Company repurchased $20,000 of its TLRY 23 Notes for cancellation by issuing 7,000,000 shares and paying $610 of cash to settle both principal and accrued interest. After cancellation, the outstanding principal balance of the TLRY 23 Notes was $107,331.

 

On October 2, 2023, the Company repaid the remaining $107,331 of the TLRY 23 Notes in cash upon maturity.

 

28

  
 

Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations.

 

This Managements Discussion and Analysis of Financial Condition and Results of Operations should be read in conjunction with the Condensed Interim Consolidated Financial Statements and the related Notes thereto for the period ended August 31, 2023 contained in this Quarterly Report on Form 10-Q and the Audited Consolidated Financial Statements and the related Notes thereto contained in our Annual Report on Form 10-K for the fiscal year ended May 31, 2023, as well as  in conjunction with the sections entitled Item 1A. Risk Factors and Item 7. Managements Discussion and Analysis of Financial Condition and Results of Operations in our Annual Report on Form 10-K for the fiscal year ended May 31, 2023Forward looking statements in this Form 10-Q are qualified by the cautionary statement included in this Form 10-Q under the sub-heading Cautionary Note Regarding Forward-Looking Statements in the introduction of this Form 10-Q.

 

Company Overview

 

We are a leading global cannabis-lifestyle and consumer packaged goods company headquartered in Leamington and New York, with operations in Canada, the United States, Europe, Australia, and Latin America that is changing people’s lives for the better – one person at a time – by inspiring and empowering a worldwide community to live their very best life, enhanced by moments of connection and wellbeing. Tilray’s mission is to be the most responsible, trusted and market leading cannabis consumer products company in the world with a portfolio of innovative, high-quality and beloved brands that address the needs of the consumers, customers and patients we serve.

 

Our overall strategy is to leverage our brands, infrastructure, expertise and capabilities to drive market share in the industries in which we compete, achieve industry-leading, profitable growth and build sustainable, long-term shareholder value. In order to ensure the long-term sustainable growth of our Company, we continue to focus on developing strong capabilities in consumer insights, drive category management leadership and assess growth opportunities with the introduction of new products and entries into new geographies. In addition, we are relentlessly focused on managing our cost of goods and expenses in order to maintain our strong financial position.

 

 

29

 

Trends and Other Factors Affecting Our Business 

 

Canadian cannabis market trends:

 

The cannabis industry in Canada continues to evolve at a rapid pace during the early periods following the federal legalization of adult-use cannabis. Through analysis of the current market conditions, the following key trends have emerged and are anticipated to influence the near-term future in the industry:

 

 

-

Market share. Tilray continues to maintain its market leadership position in Canada. During the quarter, we experienced a significant increase in market share in Canada, with our share increasing from 8.1% to a 13.4% from the immediately preceding quarter, as reported by Hifyre data for all provinces excluding Quebec where Weedcrawler was deemed more accurate. This increase was driven by the strategic acquisitions of HEXO and Truss during the quarter which contributed favorably to our increase in adult use revenue. We expect that during the next fiscal year, the contribution to our market share from these acquired lines of business will fluctuate until they are fully absorbed into our distribution channels.

 

 

-

Price compression. We have historically seen price compression in the market, when compared to the prior fiscal year, which was driven by intense competition from the approximately 1,000 Licensed Producers in Canada. The price compression year over year has reduced the Company's revenue by approximately $3.1 million for the three months ended August 31, 2023, which affects our cannabis gross margin as well as our bottom line. 

 

 

-

Excise taxes. Given the impacts of the above-referenced price compression, excise tax continues to become a larger component of net revenue as it is predominantly computed as a fixed price on grams sold rather than as a percentage of the selling price. The Cannabis Council of Canada has formed an Excise Task Force to present these challenges to the Ministry of Finance in Canada and continues to pursue reform. Additionally, as many as two-thirds of Canadian licensed producers had excise tax deficits owed, which they were unable to pay on time. The Company believes this may result in insolvencies and may be a key element of potential consolidation in the industry and we believe long term there is a possibility of some level of reform but it will likely not occur in the near term.

 

 

-

Timing difference in recognizing synergized operating results. As we continue to acquire businesses such as HEXO and Truss, a large part of our strategy involves removing legacy costs from these businesses as part of our acquisition strategy. Once we have completed our full $27 million synergy plan for HEXO and integrated Truss's operations, we expect our operating results to be more profitable.

 

 

-

Change facility utilization as a result of acquisitions. We continue to assess our facilities for further optimization or cost reduction to ensure utilization is prioritized and our value chain is operating at its peak efficiency. During this period of facility optimization, we expect there to be a temporary short-term negative impact on our operating results until our capacity is optimized.

 

These identified trends have had impacts on the current period results of operations and are discussed in greater detail in the respective sections. 

 

International cannabis market trends:

 

30

 

The cannabis industry in Europe is in its early stages of development whereby countries within Europe are at different stages of legalization of medical and adult-use cannabis as some countries have expressed a clear political ambition to legalize adult-use cannabis (Germany, Portugal, Luxembourg and Czech Republic), some are engaging in an experiment for adult-use (Netherlands, Switzerland) and some are debating regulations for cannabinoid-based medicine (France, Spain, Italy, and the United Kingdom). In Europe, we believe that, despite continuing recessionary economic conditions and the Russian conflict with Ukraine, cannabis legalization (both medicinal and adult-use) will continue to gain traction albeit more slowly than originally expected. We also continue to believe that Tilray remains uniquely positioned to maintain and gain significant market share in these markets with its infrastructure and its investments, which is comprised of two EU-GMP cultivation facilities within Europe located in Portugal and Germany, our distribution network and our demonstrated commitment to the availability, quality and safety of our cannabinoid-based medical products. Today, Germany remains the largest medical cannabis market in Europe.

 

The following is a summary of the state of cannabis legalization within Europe:

 

Germany. In late October 2022, the German government published key details of its plan to legalize and regulate adult-use cannabis, including what Health Minister Karl Lauterbach described as “complete” cultivation within the country. 

 

Recently, Mr. Lauterbach advised that the proposal had been revised and that the new plan is a two-part model, which appears to be designed in order to legalize cannabis as broadly as possibly without running afoul of European Union rules. On July 6, 2023, it was announced that the draft regulations pertaining to decriminalization, home cultivation and non-commercial “cultivation associations” (i.e., social clubs) had been finalized by the health ministry and was ready to be delivered to the German parliament, which is expected to take place in the Fall of 2023.

 

We continue to believe that Tilray is well-positioned in Germany to provide consistent and sustainable cannabis products for the adult-use market whether only in-country cultivation is permitted or whether imports are also allowed given our Aphria RX facility located in Germany and our EU-GMP-certified production facility in Portugal, as well as our distribution platform, which provides us with access to 13,000 pharmacies in Germany.

 

Switzerland. In October 2021, Switzerland announced its intention to legalize cannabis by allowing production, cultivation, trade, and consumption. In the meantime, a three-year pilot project commenced on January 30, 2023, which permits selected participants to purchase cannabis for adult-use in various pharmacies in Basel, and more recently in Zurich, to conduct studies on the cannabis market and its impact on Swiss society. It is the first trial for the legal distribution of adult-use cannabis containing THC in Europe.

 

Spain. The Spanish Congress' Health Committee has recently approved a Medical Cannabis Report that paves the way for a government-sponsored bill on medical cannabis. The Report explicitly opens the door to standardized preparations other than the drugs already approved, highlighting their advantages in relation to safety, security and stability; as well as the possibility to prescribe medical cannabis in community pharmacies and not only in hospitals, favoring the access to the patients that may need it.

 

France. France launched a two-year pilot experiment to supply approximately 3,000 patients with medical cannabis. To date, 2,300 patients are enrolled in the experiment, which has been extended for another year and is now ending March 2024 in order to collect more data and to adopt a legal framework. The first results of the experimentation are positive. Several independent agencies have produced reports that show the effectiveness of medical cannabis, especially in situations of chronic pain.

 

Czech Republic. The Czech Republic has discussed plans to launch a fully regulated adult-use cannabis market and is reviewing in the context of the European regulations.

 

Malta.  In 2021, became the first country in the European Union to legalize personal possession of the drug and permit private “cannabis clubs,” where members can grow and share the drug.

 

Beverage alcohol market trends:

 

The beverage alcohol category, while more established, continues to shift with changes in consumer trends for the craft industry. Specifically, based on IRI data, for the last 13 weeks ended August 27, 2023, the US beer industry grew 3.14%, with craft beer growing 0.71%, a slight improvement from the immediately preceding quarter. Nationally SweetWater trends softened during the three months ended August 31, 2023, due to the timing of key marketing programming being pushed into our second quarter, while SweetWater’s home market remained in a growth trend, finishing an increased 5.9% in the quarter. SweetWater is expected to return to growth nationally at the start of the second quarter through programming and innovation. Early results from the launch of SweetWater’s latest innovation, Gummies, are encouraging, with the brand quickly becoming a top 3 offering in activated markets. Additionally, Montauk finished the period with an increased 9.2% growth based on IRI data for the aforementioned period, through sustained success in home markets and new market expansion. The Company anticipates continued growth through focused innovation, targeted marketing efforts, and gains in distribution across the portfolio of brands. 
 

Breckenridge Distillery is a leader in the bourbon industry and continues to gain market share in both the vodka and gin markets. A primary growth objective is to continue expansion of market share across the United States, including expanding the national chain's footprint, to maintain a double-digit annual top-line growth. To ensure continued growth in the future, the company is focused on expanding the marketing strategy, highlighting its quality products. Recent media coverage includes coverage of newly released products, the expanded Denver Broncos Sponsorship, and recognition of the world class restaurant located at the distillery. The overall whiskey market continues to grow through premiumization and expanding into new target demographics. The Company expects its spirits business to continue to grow with the integration of the national distributer agreement with RNDC as well as new product offerings.

 

31

 

Wellness market trends:

 

Manitoba Harvest’s branded hemp business continued to expand its U.S. and Canadian leading market share position this year. During the quarter, the Company successfully continued expansion of its Hemp Food portfolio into more accessible consumer formats with the continued launch of a breakthrough CBD wellness beverage, Happy Flower™. The Company will look to expand the Happy Flower™ brand with retail distribution into key markets, focusing on U.S. states with established CBD permissibility and sales momentum in future periods. 

 

Acquisitions, Strategic Transactions and Synergies

 

We strive to continue to expand our business on a consolidated basis, through a combination of organic growth and acquisition. While we continue to execute against our strategic initiatives that we believe will result in the long-term, sustainable growth and value to our stockholders, we continue to evaluate potential acquisitions and other strategic transactions of businesses that we believe complement our existing portfolio, infrastructure and capabilities or provide us with the opportunity to enter attractive new geographic markets and product categories as well as expand our existing capabilities. In addition, we have exited certain businesses and continue to evaluate certain businesses within our portfolio that are dilutive to profitability and cash flow. As a result, we incur transaction costs in connection with identifying and completing acquisitions and strategic transactions, as well as ongoing integration costs as we combine acquired companies and continue to achieve synergies, which is offset by income generated in connection with the execution of these transactions. For the three months ended August 31, 2023, we incurred $8.5 million of transaction expenses, discussed further below.

 

Our acquisition strategy has had a material impact on the Company’s results in the current quarter and we expect will continue into future periods generating accretive impacts for our stockholders. There are currently three primary cost saving initiatives as follows:

 

 

HEXO acquisition:

 

On June 22, 2023, Tilray acquired HEXO Corp. (“HEXO”) as discussed in Note 6 (Business acquisitions). With the HEXO Acquisition, Tilray expects to achieve additional cost savings in excess of $27M on an annualized pre-tax basis, driven by synergies across production, sales, marketing, distribution, and corporate savings, with potential incremental upside resulting from consolidating packaging, procurement, freight, and logistics. This builds on Tilray’s substantial progress optimizing its Canadian cannabis operations discussed below. During the three months ended August 31, 2023, we have achieved $17.1 million of our synergy plan on an annualized run-rate basis of which $2.9 million represented actual cost savings during the period. As discussed in our trends section, these saving initiatives take time to implement, resulting in related benefits being realized over time. 

 

32

 

 

Cannabis business cost reduction plan:

 

During the fourth quarter of our fiscal year ended May 31, 2022, the Company launched a $30 million cost optimization plan of our existing cannabis business to solidify our position as an industry leading low-cost producer. The Company took decisive action to manage cash flow amid an evolving retail environment by identifying opportunities to leverage technology, supply chain, procurement, and packaging efficiencies while driving labor savings. In the current period ended August 31, 2023, we have achieved $22 million of our cost optimization plan on an annualized run-rate basis of which $21 million represented actual cost savings during the period. The amount achieved is comprised of the following items:

 

  -

Optimizing cultivation. We made impactful strides to right-size our cultivation footprint by maximizing our yield per plant and by honing the ability to flex production during optimal growing seasons to manage our cost to grow.

 

 

-

Refining selling fees. We assessed our current product-to-market strategy to optimize our direct and controllable selling fees as a percentage of revenue without compromising our sales strategy on a go-forward basis.

 

 

-

Reducing general and administrative costs. We remain focused on reducing operating expenses by leveraging innovative solutions to maintain a lean organization. We plan to further automate processes, reducing outside spend where efficient, and ensuring we are obtaining competitive pricing on our administrative services.

 

 

International Cannabis business cost reduction plan:

 

During our fiscal year ended May 31 2023, the Company launched an $8.0 million cost optimization plan for our international cannabis business to adapt to changing market dynamics and slower than anticipated legalization in Europe. In the current period ended August 31, 2023, the Company achieved an annualized run-rate basis of $6.8 million of cost savings. This was driven by the integration of our Distribution and European cannabis business for redundant costs including headcount consolidation in addition to optimization of our facility utilization.  

 

In addition to our cost saving strategies, the Company has also executed the following strategic transactions during the quarter:

 

 

Beverage Alcohol Acquisitions:

 

On August 7, 2023, the Company entered into a securities and asset purchase agreement (the “Purchase Agreement”) by and among Anheuser-Busch Companies, LLC, Craft USA Holdings, LLC, Craft Brew Alliance, Inc. (collectively, “AB”), the Company and Tilray Beverages, LLC.  Pursuant to the Purchase Agreement, Tilray will acquire a portfolio of craft beer brands, assets and businesses from AB that includes Breckenridge Brewery, Blue Point, 10 Barrel, Redhook, Widmer Brothers, Square Mile, Shock Top and HiBall.  The purchase price to be paid to AB at closing is expected to be equal to $85.0 million in cash, subject to working capital and other applicable closing adjustments. The acquisition closed on September 29, 2023 as described in Note 25 (Subsequent events), and is expected to be transformational to our growing beverage alcohol strategy.

 

33

 

Political and Economic Environment

 

Our results of operations can also be affected by economic, political, legislative, regulatory, legal actions, the global volatility and general market disruption resulting from geopolitical tensions, such as Russia's incursion into Ukraine. Economic conditions, such as recessionary trends, inflation, supply chain disruptions, interest and monetary exchange rates, and government fiscal policies, and the recent banking credit crises, can have a significant effect on operations. Accordingly, we could be affected by civil, criminal, environmental, regulatory or administrative actions, claims or proceedings.

 

Results of Operations

 

Our consolidated results, in thousands except for per share data, are as follows:

 

   

For the three months

                 
   

ended August 31,

   

Change

   

% Change

 

(in thousands of U.S. dollars)

 

2023

   

2022

   

2023 vs. 2022

 

Net revenue

  $ 176,949     $ 153,211     $ 23,738       15 %

Cost of goods sold

    132,753       104,597       28,156       27 %

Gross profit

    44,196       48,614       (4,418 )     (9 )%

Operating expenses:

                               

General and administrative

    40,516       40,508       8       0 %

Selling

    6,859       9,671       (2,812 )     (29 )%

Amortization

    22,225       24,359       (2,134 )     (9 )%

Marketing and promotion

    8,535       7,248       1,287       18 %

Research and development

    79       166       (87 )     (52 )%

Change in fair value of contingent consideration

    (11,107 )     211       (11,318 )     (5,364 )%

Litigation costs

    2,034       445       1,589       357 %

Restructuring costs

    915             915       0 %

Transaction (income) costs

    8,502       (12,816 )     21,318       (166 )%

Total operating expenses

    78,558       69,792       8,766       13 %

Operating loss

    (34,362 )     (21,178 )     (13,184 )     62 %

Interest expense, net

    (9,835 )     (4,413 )     (5,422 )     123 %

Non-operating (expense) income, net

    (4,402 )     (32,992 )     28,590       (87 )%

Loss before income taxes

    (48,599 )     (58,583 )     9,984       (17 )%

Income tax expense

    7,264       7,211       53       1 %

Net loss

  $ (55,863 )   $ (65,794 )   $ 9,931       (15 )%

 

34

 

Use of Non-GAAP Measures

 

Throughout this Management's Discussion and Analysis of Financial Condition and Results of Operations in this Quarterly Report on Form 10-Q, we discuss non-GAAP financial measures, including reference to:

 

 

adjusted gross profit (excluding purchase price allocation (“PPA”) fair value step up) for each reporting segment (Cannabis, Beverage alcohol, Distribution and Wellness) as applicable,

 

 

adjusted gross margin (excluding purchase price allocation (“PPA”) fair value step up) for each reporting segment (Cannabis, Beverage alcohol, Distribution and Wellness) as applicable,

 

 

adjusted EBITDA, 

 

 

cash and marketable securities, and

 

 

constant currency presentation of net revenue.

 

All these non-GAAP financial measures should be considered in addition to, and not in lieu of, the financial measures calculated and presented in accordance with accounting principles generally accepted in the United States of America, ("GAAP"). These measures, which may be different than similarly titled measures used by other companies, are presented to help investors' overall understanding of our financial performance and should not be considered a substitute for, or superior to, the financial information prepared and presented in accordance with GAAP. Please see "Reconciliation of Non-GAAP Financial Measures to GAAP Measures" below for reconciliation of such non-GAAP Measures to the most directly comparable GAAP financial measures, as well as a discussion of our adjusted gross margin, adjusted gross profit and adjusted EBITDA measures and the calculation of such measures.

 

Constant Currency Presentation

 

We believe that this measure provides useful information to investors because it provides transparency to underlying performance in our consolidated net sales by excluding the effect that foreign currency exchange rate fluctuations have on period-to-period comparability given the volatility in foreign currency exchange markets. To present this information for historical periods, current period net sales for entities reporting in currencies other than the U.S. Dollar are translated into U.S. Dollars at the average monthly exchange rates in effect during the corresponding period of the prior fiscal year rather than at the actual average monthly exchange rate in effect during the current period of the current fiscal year. As a result, the foreign currency impact is equal to the current year results in local currencies multiplied by the change in average foreign currency exchange rate between the current fiscal period and the corresponding period of the prior fiscal year.

 

Cash and Marketable Securities

 

The Company combines the Cash and cash equivalent financial statement line item and the Marketable securities financial statement line item as an aggregate total as reconciled in the liquidity and capital resource section below. The Company’s management believes that this presentation provides useful information to management, analysts and investors regarding certain additional financial and business trends relating to its short-term liquidity position by combining these three GAAP metrics.

 

35

 

Operating Metrics and Non-GAAP Measures

 

We use the following operating metrics and non-GAAP measures to evaluate our business and operations, measure our performance, identify trends affecting our business, project our future performance, and make strategic decisions. Other companies, including companies in our industry, may calculate operating metrics and non-GAAP measures with similar names differently which may reduce their usefulness as comparative measures. Certain variances are labeled as not meaningful ("NM") throughout management's discussion and analysis.

 

   

For the three months

 
   

ended August 31,

 

(in thousands of U.S. dollars)

 

2023

   

2022

 

Net cannabis revenue

  $ 70,333     $ 58,570  

Distribution revenue

    69,157       60,585  

Net beverage alcohol revenue

    24,162       20,654  

Wellness revenue

    13,297       13,402  

Cannabis costs

    50,517       28,861  

Beverage alcohol costs

    11,266       10,849  

Distribution costs

    61,468       54,984  

Wellness costs

    9,502       9,903  

Adjusted gross profit (excluding PPA step-up) (1)

    49,302       49,721  

Cannabis adjusted gross margin (excluding PPA step-up) (1)

    35 %     51 %

Beverage alcohol adjusted gross margin (excluding PPA step-up) (1)

    56 %     53 %

Distribution gross margin

    11 %     9 %

Wellness gross margin

    29 %     26 %

Adjusted EBITDA (1)

  $ 11,434     $ 13,531  

Cash and marketable securities (1) as at the period ended:

    464,852       490,643  

Working capital as at the period ended:

  $ 291,981     $ 637,623  

 

(1) Adjusted EBITDA, adjusted gross profit (excluding PPA step-up) and adjusted gross margin (excluding PPA step-up) for each of our segments, and cash and marketable securities are non-GAAP financial measures. See Use of Non-GAAP Measures below for a reconciliation of these Non-GAAP Measures to our most comparable GAAP measure.

 

Segment Reporting

 

Our reporting segments revenue is comprised of revenues from our cannabis, distribution, beverage alcohol, and wellness operations, as follows:

 

   

For the three months

                 
   

ended August 31,

   

Change

   

% Change

 

(in thousands of U.S. dollars)

 

2023

   

2022

   

2023 vs. 2022

 

Cannabis business

  $ 70,333     $ 58,570     $ 11,763       20 %

Distribution business

    69,157       60,585       8,572       14 %

Beverage alcohol business

    24,162       20,654       3,508       17 %

Wellness business

    13,297       13,402       (105 )     (1 )%

Total net revenue

  $ 176,949     $ 153,211     $ 23,738       15 %

 

36

 

Our reporting segments revenue using a constant currency(1) are as follows:

 

   

For the three months

                 
   

ended August 31,

                 
   

as reported in constant currency

   

Change

   

% Change

 

(in thousands of U.S. dollars)

 

2023

   

2022

   

2023 vs. 2022

 

Cannabis business

  $ 71,389     $ 58,570     $ 12,819       22 %

Distribution business

    66,952       60,585       6,367       11 %

Beverage alcohol business

    24,162       20,654       3,508       17 %

Wellness business

    13,459       13,402       57       0 %

Total net revenue

  $ 175,962     $ 153,211     $ 22,751       15 %

 

Our geographic revenue is as follows:

 

   

For the three months

                 
   

ended August 31,

   

Change

   

% Change

 

(in thousands of U.S. dollars)

 

2023

   

2022

   

2023 vs. 2022

 

North America

  $ 93,521     $ 82,192     $ 11,329       14 %

EMEA

    79,704       66,041       13,663       21 %

Rest of World

    3,724       4,978       (1,254 )     (25 )%

Total net revenue

  $ 176,949     $ 153,211     $ 23,738       15 %

 

Our geographic revenue using a constant currency(1) is as follows:

 

   

For the three months

                 
   

ended August 31,

                 
   

as reported in constant currency

   

Change

   

% Change

 

(in thousands of U.S. dollars)

 

2023

   

2022

   

2023 vs. 2022

 

North America

  $ 95,214     $ 82,192     $ 13,022       16 %

EMEA

    75,116       66,041       9,075       14 %

Rest of World

    5,632       4,978       654       13 %

Total net revenue

  $ 175,962     $ 153,211     $ 22,751       15 %

 

Our geographic capital assets are as follows:

 

   

August 31,

   

May 31,

   

Change

   

% Change

 

(in thousands of U.S. dollars)

 

2023

   

2023

   

2023 vs. 2022

 

North America

  $ 384,091     $ 319,173     $ 64,918       20 %

EMEA

    106,761       107,131       (370 )     (0 )%

Rest of World

    3,767       3,363       404       12 %

Total capital assets

  $ 494,619     $ 429,667     $ 64,952       15 %

 

37

 

Cannabis revenue

 

Cannabis revenue based on market channel is as follows:

 

   

For the three months

                 
   

ended August 31,

   

Change

   

% Change

 

(in thousands of US dollars)

 

2023

   

2022

   

2023 vs. 2022

 

Revenue from Canadian medical cannabis

  $ 6,142     $ 6,520     $ (378 )     (6 )%

Revenue from Canadian adult-use cannabis

    71,195       58,355       12,840       22 %

Revenue from wholesale cannabis

    5,295       392       4,903       1,251 %

Revenue from international cannabis

    14,252       10,422       3,830       37 %

Total cannabis revenue

    96,884       75,689       21,195       28 %

Excise taxes

    (26,551 )     (17,119 )     (9,432 )     55 %

Total cannabis net revenue

  $ 70,333     $ 58,570     $ 11,763       20 %

 

Cannabis revenue based on market channel using a constant currency(1) is as follows:

 

   

For the three months

                 
   

ended August 31,

                 
   

as reported in constant currency

   

Change

   

% Change

 

(in thousands of US dollars)

 

2023

   

2022

   

2023 vs. 2022

 

Revenue from Canadian medical cannabis

  $ 6,310     $ 6,520     $ (210 )     (3 )%

Revenue from Canadian adult-use cannabis

    73,111       58,355       14,756       25 %

Revenue from wholesale cannabis

    5,458       392       5,066       1,292 %

Revenue from international cannabis

    13,777       10,422       3,355       32 %

Total cannabis revenue

    98,656       75,689       22,967       30 %

Excise taxes

    (27,267 )     (17,119 )     (10,148 )     59 %

Total cannabis net revenue

  $ 71,389     $ 58,570     $ 12,819       22 %

 

   (1)

The constant currency presentation of our Cannabis revenue based on market channel is a non-GAAP financial measure. See Use of Non-GAAP Measures Constant Currency Presentation above for a discussion of these Non-GAAP Measures.

 

38

 

Revenue from Canadian medical cannabis: Revenue from Canadian medical cannabis decreased to $6.1 million for the three months ended August 31, 2023, compared to revenue of $6.5 million for the prior year same period. On a constant currency basis revenue from Canadian medical cannabis decreased to $6.3 million for the three months ended August 31, 2023, compared to revenue of  $6.5 million for the prior year same periods. While revenue was relatively consistent period over period and on a constant currency basis, the decrease in revenue from medical cannabis continues to be driven by increased competition from the adult-use recreational market and its related price compression impacting the medical cannabis market.

 

Revenue from Canadian adult-use cannabis: During the three months ended August 31, 2023, our revenue from Canadian adult-use cannabis increased to $71.2 million compared to revenue of $58.4 million and for the prior year same period.  The increase in adult-use revenue was driven by organic growth from launching new product innovations from our existing brand portfolios as well as the increased revenue from the acquisition of HEXO on June 22, 2023, and Truss on August 3, 2023. Additionally, due to the decline in the Canadian dollar, on a constant currency basis, our revenue from Canadian adult-use cannabis increased to $73.1 million for the three months ended August 31, 2023. Offsetting the increase in the current period, was the reduction of advisory services revenue to $1.5 million from $7.8 million in the prior year comparative period as a result of the HEXO acquisition being completed during the quarter which terminated the previous strategic arrangement that was in place.

 

Wholesale cannabis revenue: Revenue from wholesale cannabis increased to $5.3 million for the three months ended August 31, 2023, compared to revenue of $0.4 million for the prior year same period. On a constant currency basis, revenue from wholesale cannabis increased to $5.5 million. The Company continues to believe that wholesale cannabis revenue will remain subject to quarter-to-quarter variability and is based on opportunistic sales. The wholesale transactions that occurred in the period aided with our liquidity initiatives to increase our cash flow from operations despite having unfavorable impacts on our gross margin and EBITDA of $(2.7) million. 

 

International cannabis revenue: Revenue from international cannabis increased to $14.3 million for the three months ended August 31, 2023, compared to revenue of $10.4 million for the prior year same period. Given the increase of the Euro against the U.S. Dollar when compared to the prior year quarter, on a constant currency basis, revenue from international cannabis was $13.8 million compared to $10.4 million in the prior year same period for the three months ended August 31, 2023. The increase in the period is largely driven by expansion into emerging international medical markets.  

 

39

 

Distribution revenue

 

Revenue from Distribution operations increased to $69.2 million for the three months ended August 31, 2023 compared to revenue of $60.6 million for the prior year same period. Revenue was positively impacted during the three month period from the increase of the Euro against the U.S. Dollar in the quarter, which when the impacts are eliminated on a constant currency basis, revenue was $67.0 million for the three months ended August 31, 2023. The increase in the period was driven by increased production capacity achieved through out-sourcing to third party production facilities as well as leveraging our own internal production and improved procurement processes, which has allowed CC Pharma to improve its product mix.  

 

Beverage alcohol revenue

 

Revenue from our Beverage alcohol operations increased to $24.2 million for the three months ended August 31, 2023, compared to revenue of $20.7 million for the prior year same period. The increase in the three month period relates primarily to our acquisition of Montauk which occurred on November 7, 2022, and is not reflected in the prior year comparative period. 

 

Wellness revenue

 

Our Wellness revenue from Manitoba Harvest was relatively consistent at $13.3 million for the three months ended August 31, 2023 compared to $13.4 million from the prior year same period. On a constant currency basis for the three months ended August 31, 2023, Wellness revenue increased to $13.5 million from $13.4 million. Overall, sales remained relatively consistent period over period despite increasing pricing when compared to prior year to combat the inflation of ingredient costs.   

 

40

 

Gross profit, gross margin and adjusted gross margin(1) for our reporting segments

 

Our gross profit and gross margin for the three months ended August 31, 2023 and 2022, is as follows:

 

   

For the three months

                 

(in thousands of U.S. dollars)

 

ended August 31,

   

Change

   

% Change

 

Cannabis

 

2023

   

2022

   

2023 vs. 2022

 

Net revenue

    70,333       58,570       11,763       20 %

Cost of goods sold

    50,517       28,861       21,656       75 %

Gross profit

    19,816       29,709       (9,893 )     (33 )%

Gross margin

    28 %     51 %     (23 )%     (45 )%

Purchase price accounting step-up

    4,516             4,516       NM  

Adjusted gross profit (1)

    24,332       29,709       (5,377 )     (18 )%

Adjusted gross margin (1)

    35 %     51 %     (16 )%     (31 )%

Distribution

                               

Net revenue

    69,157       60,585       8,572       14 %

Cost of goods sold

    61,468       54,984       6,484       12 %

Gross profit

    7,689       5,601       2,088       37 %

Gross margin

    11 %     9 %     2 %     22 %

Beverage alcohol

                               

Net revenue

    24,162       20,654       3,508       17 %

Cost of goods sold

    11,266       10,849       417       4 %

Gross profit

    12,896       9,805       3,091       32 %

Gross margin

    53 %     47 %     6 %     13 %

Purchase price accounting step-up

    590       1,107       (517 )     (47 )%

Adjusted gross profit (1)

    13,486       10,912       2,574       24 %

Adjusted gross margin (1)

    56 %     53 %     3 %     6 %

Wellness

                               

Net revenue

    13,297       13,402       (105 )     (1 )%

Cost of goods sold

    9,502       9,903       (401 )     (4 )%

Gross profit

    3,795       3,499       296       8 %

Gross margin

    29 %     26 %     3 %     12 %

Total

                               

Net revenue

    176,949       153,211       23,738       15 %

Cost of goods sold

    132,753       104,597       28,156       27 %

Gross profit

    44,196       48,614       (4,418 )     (9 )%

Gross margin

    25 %     32 %     (7 )%     (22 )%

Purchase price accounting step-up

    5,106       1,107       3,999       361 %

Adjusted gross profit (1)

    49,302       49,721       (419 )     (1 )%

Adjusted gross margin (1)

    28 %     32 %     (4 )%     (13 )%

 

 

(1)

Adjusted gross profit is our Gross profit (adjusted to exclude purchase price accounting valuation step-up) and adjusted gross margin is our Gross margin (adjusted to exclude purchase price accounting valuation step-up) and are non-GAAP financial measures. See Use of Non-GAAP Measures below for additional discussion regarding these non-GAAP measures. The Companys management believes that adjusted gross profit and adjusted gross margin are useful to our management to evaluate our business and operations, measure our performance, identify trends affecting our business, project our future performance, and make strategic decisions. We do not consider adjusted gross profit and adjusted gross margin in isolation or as an alternative to financial measures determined in accordance with GAAP.

 

41

 

Cannabis gross margin: Gross margin decreased during the three months ended August 31, 2023 to 28% from 51% for the prior year same period. Excluding the impact of the non-cash fair value purchase price accounting step-up, adjusted gross margin during the three months ended August 31, 2023 decreased to 35% from 51% when comparing the same prior year period. The remaining decrease is a result of the termination of the HEXO advisory services agreement which contributed $1.5 million of gross profit in the current year compared to $7.8 million in the prior year and a significant wholesale transaction with a negative gross profit of $(2.7) million, which was entered into to optimize our inventory levels and prioritize the generation of positive operating cash flow. Combining these factors, adjusted gross cannabis margin would have been 39% compared 43% in the prior period and the remaining decrease in gross margin is due to price compression.

 

Distribution gross margin: Gross margin of 11% for the three months ended August 31, 2023 increased from 9% for the same periods in the prior year. The increase in the three month period is attributed to a change in product mix as the Company continues to focus on higher margin sales and a decrease in its cost of goods driven by the outsourcing of production.

 

Beverage alcohol gross margin: Gross margin of 53% for the three months ended August 31, 2023 increased from 47% from the same period in the prior year. Adjusted gross margin of 56% for the three months ended August 31, 2023 increased from 53% from the same periods in the prior year. The increase in beverage alcohol gross margin for the current three month period is a result of a change in sales mix between beer and spirits as well as the impacts of the Montauk acquisition that was not completed in the prior period comparison. 

 

Wellness gross margin: Gross margin of 29% for the three months ended August 31, 2023 increased from 26% from the same period in the prior year. The increase in gross margin is a result of increased pricing from the prior period, which was used to combat the impacts of higher input costs of seed ingredients as a result of inflation. 

 

42

 

Operating expenses

 

   

For the three months

                 
   

ended August 31,

   

Change

   

% Change

 

(in thousands of US dollars)

 

2023

   

2022

   

2023 vs. 2022

 

General and administrative

  $ 40,516     $ 40,508     $ 8       0 %

Selling

    6,859       9,671       (2,812 )     (29 )%

Amortization

    22,225       24,359       (2,134 )     (9 )%

Marketing and promotion

    8,535       7,248       1,287       18 %

Research and development

    79       166       (87 )     (52 )%

Change in fair value of contingent consideration

    (11,107 )     211       (11,318 )     (5,364 )%

Litigation costs

    2,034       445       1,589       357 %

Restructuring costs

    915             915       NM  

Transaction (income) costs

    8,502       (12,816 )     21,318       (166 )%

Total operating expenses

  $ 78,558     $ 69,792     $ 8,766       13 %

 

Operating expenses are comprised of general and administrative, share-based compensation, selling, amortization, marketing and promotion, research and development, change in fair value of contingent consideration, impairments, litigation costs, restructuring costs and transaction (income) costs. These costs increased by $8.8 million to $78.6 million for the three months ended August 31, 2023 as compared to $69.8 million for the same period of the prior year. These changes period over period are described below. 

 

43

 

General and administrative costs

 

During the three months ended August 31, 2023, general and administrative costs were relatively unchanged as compared to the prior year same periods.

 

   

For the three months

                 
   

ended August 31,

   

Change

   

% Change

 

(in thousands of US dollars)

 

2023

   

2022

   

2023 vs. 2022

 

Executive compensation

  $ 3,661     $ 3,555     $ 106       3 %

Office and general

    8,168       5,829       2,339       40 %

Salaries and wages

    13,114       14,635       (1,521 )     (10 )%

Stock-based compensation

    8,257       9,193       (936 )     (10 )%

Insurance

    3,849       2,703       1,146       42 %

Professional fees

    1,499       2,490       (991 )     (40 )%

Gain on sale of capital assets

    3       77       (74 )     (96 )%

Travel and accommodation

    1,107       1,161       (54 )     (5 )%

Rent

    858       865       (7 )     (1 )%

Total general and administrative costs

  $ 40,516     $ 40,508     $ 8       0 %

 

Executive compensation increased by 3% in the three months ended August 31, 2023. Executive compensation has remained generally consistent period over period.

 

Office and general increased by 40% during the three months ended August 31, 2023. The increase for the three months is a result of the acquisition of Montauk and HEXO, which did not occur in the prior period. 

 

Salaries and wages decreased by 10% during the three months ended August 31, 2023. The decrease is primarily due to our focus on optimizing our cost structure and is offset by the inclusion of Montauk and HEXO employees, which were not in the prior period. 

 

44

 

The Company recognized stock-based compensation expense of $8.3 million for the three months ended August 31, 2023 compared to $9.2 million for the same period in the prior year. The balance has remained relatively consistent period over period as this is based on the time-based vesting schedules. 

 

Insurance expenses increased by 42% for the three months ended August 31, 2023 to $3.8 million from $2.7 million for the same period in the prior year. This increase was driven by the expanded polices required for our recently acquired HEXO and Montauk entities. 

 

Selling costs

 

For the three months ended August 31, 2023, the Company incurred selling costs of $6.9 million or 3.9% of net revenue as compared to $9.7 million and 6.3% of net revenue in the prior year period. These costs relate to third-party distributor commissions, shipping costs, Health Canada cannabis fees, and patient acquisition and maintenance costs. Patient acquisition and ongoing patient maintenance costs include funding to individual clinics to assist with additional costs incurred by clinics resulting from the education of patients using the Company’s products. The decrease in the three month period was related to the renegotiation of terms in one of our distributor relationships resulting in reduced variable fees. This impact was also emphasized in the three month period as a portion of our selling fees related to our Canadian adult-use cannabis with fixed components did not increase with the increase in our revenue during the quarter. 

 

Amortization

 

The Company incurred non-production related amortization charges of $22.2 million for the three months ended August 31, 2023 compared to $24.4 million in the prior year period. The decreased amortization in the period, is a result of the reduced intangible asset levels.

 

Marketing and promotion costs

 

For the three months ended August 31, 2023, the Company incurred marketing and promotion costs of $8.5 million as compared to $7.2 million for the prior year period. The increase is due to the acquisition of HEXO and Montauk in the period. 

 

Research and development

 

Research and development costs were $0.1 million during the three months ended August 31, 2023 compared to $0.2 million in the prior year period. These relate to external costs associated with the development of new products. 

 

Change in fair value of contingent consideration

 

The Company measures contingent consideration at fair value classified as Level 3, as discussed in Note 23 (Fair value measurements). The Company currently has three contingent consideration liabilities of $3.0 million, $13.0 million and $4.2 million for the Sweetwater, Montauk, and Truss acquisitions, respectively, as of August 31, 2023 compared to $16.2 million, $10.9 million and $nil respectively as of May 31, 2023. The decrease in fair value of $11.1 million was driven by the lowered probability of achieving the incentive targets, primarily relating to Sweetwater.

 

45

 

Litigation

 

For the three months ended August 31, 2023, the Company recorded $2.0 million of litigation cost compared to an expense of $0.4 million for the prior period comparative. The increase is related to period to period variability as litigation is non-recurring in nature.  

 

Restructuring costs

 

In connection with executing our acquisition strategy and strategic transactions, the Company has incurred non-recurring restructuring and exit costs associated with the integration efforts of these transactions. For the three months ended August 31, 2023, the Company incurred $0.9 million of restructuring costs compared to $nil for the prior period comparative. The restructuring charges for the three months ended August 31, 2023 are related to the HEXO cost optimizations occurring subsequent to acquisition and the operating costs of the Truss facility, which is classified as assets held for sale. 

 

Transaction (income) costs

 

Items classified as transaction (income) costs are non-recurring or extraordinary in nature and correspond largely to our acquisition and synergy strategy. The three months decrease of 166% from the prior year period is related to the following items:

 

 

the current period included costs associated with exit and closing costs on completing the HEXO Acquisition on June 22, 2023, including, but not limited to, discretionary incentive compensation payments of $5.8 million, transaction income from the loan amendment agreement of $(6.0) million, and HEXO director and office runoff insurance of $5.1 million;

 

 

in the prior year period comparative, we recognized transaction income for a change in fair value of $18.3 million on the HTI Share Consideration’s purchase price derivative as a result of an increase in our share price on the shares paid for the HEXO convertible note receivable in the previous year. This did not recur in the current period results.

 

Non-operating (expense) income, net

 

Non-operating (expense) income is comprised of:

 

   

For the three months

                 
   

ended August 31,

   

Change

   

% Change

 

(in thousands of US dollars)

 

2023

   

2022

   

2023 vs. 2022

 

Change in fair value of convertible debenture payable

  $ (2,147 )   $ (7,884 )   $ 5,737       (73 )%

Change in fair value of warrant liability

    (8,198 )     1,548       (9,746 )     (630 )%

Foreign exchange loss (gain)

    6,267       (25,573 )     31,840       (125 )%

Loss on long-term investments

    (109 )     (1,008 )     899       (89 )%

Other non-operating (losses) gains, net

    (215 )     (75 )     (140 )     187 %

Total non-operating income (expense)

  $ (4,402 )   $ (32,992 )   $ 28,590       (87 )%

 

46

 

For the three months ended August 31, 2023, the Company recognized a change in fair value of its convertible debentures payable of ($2.1) million compared to ($7.9) million in the prior year same periods. The change is driven primarily by the changes in the Company’s share price and the change in the trading price of the convertible debentures payable. Additionally, for the three months ended August 31, 2023, the Company recognized a change in fair value of its warrants, resulting in a loss of ($8.2) million compared to $1.5 million also as a result of the change in our share price and the exercise price of the instrument. For the three months ended August 31, 2023, the Company recognized a gain of $6.3 million, resulting from the changes in foreign exchange rates during the period, compared to losses of ($25.6) million for the prior year same periods, largely associated with the recovery of the Euro. Lastly, included in other non-operating (losses) gains, net for the three months ended August 31, 2023 was the disposal of an operating entity during the period. 

 

Reconciliation of Non-GAAP Financial Measures to GAAP Measures

 

Adjusted EBITDA

 

Adjusted EBITDA is a non-GAAP financial measure that does not have any standardized meaning prescribed by GAAP and may not be comparable to similar measures presented by other companies. The Company calculates adjusted EBITDA as net loss/net income before income taxes, net interest expense, depreciation and amortization, equity in net loss of equity-method investees, non-cash inventory valuation adjustments, purchase price accounting step-up on inventory, stock-based compensation, integration activities, transaction (income) costs, litigation costs, change in fair value of contingent consideration, unrealized currency gains and losses and other adjustments.

 

We believe that this presentation provides useful information to management, analysts and investors regarding certain additional financial and business trends relating to its results of operations and financial condition. In addition, management uses this measure for reviewing the financial results of the Company and as a component of performance-based executive compensation.

 

We do not consider Adjusted EBITDA in isolation or as an alternative to financial measures determined in accordance with GAAP. The principal limitation of Adjusted EBITDA is that it excludes certain expenses and income that are required by U.S. GAAP to be recorded in our consolidated financial statements. In addition, Adjusted EBITDA is subject to inherent limitations as this metric reflects the exercise of judgment by management about which expenses and income are excluded or included in determining Adjusted EBITDA. In order to compensate for these limitations, management presents Adjusted EBITDA in connection with GAAP results.

 

For three months ended August 31, 2023, adjusted EBITDA decreased to $11.4 million compared to $13.5 million from the prior year same period. The decrease was primarily driven by the aforementioned negative impacts to our cannabis gross margin.

 

 

 

 

 

47

 

   

For the three months

                 
   

ended August 31,

   

Change

   

% Change

 

Adjusted EBITDA reconciliation:

 

2023

   

2022

   

2023 vs. 2022

 

Net loss

  $ (55,863 )   $ (65,794 )   $ 9,931       (15 )%

Income tax expense

    7,264       7,211       53       1 %

Interest expense, net

    9,835       4,413       5,422       123 %

Non-operating income (expense), net

    4,402       32,992       (28,590 )     (87 )%

Amortization

    30,789       34,069       (3,280 )     (10 )%

Stock-based compensation

    8,257       9,193       (936 )     (10 )%

Change in fair value of contingent consideration

    (11,107 )     211       (11,318 )     (5,364 )%

Purchase price accounting step-up

    5,106       1,107       3,999       361 %

Facility start-up and closure costs

    600       1,800       (1,200 )     (67 )%

Lease expense

    700       700             0 %

Litigation costs

    2,034       445       1,589       357 %

Restructuring costs

    915             915       NM  

Transaction (income) costs

    8,502       (12,816 )     21,318       (166 )%

Adjusted EBITDA

  $ 11,434     $ 13,531     $ (2,097 )     (15 )%

 

48

 

Adjusted EBITDA should not be considered in isolation from, or as a substitute for, net loss. There are a number of limitations related to the use of Adjusted EBITDA as compared to net loss, the closest comparable GAAP measure. Adjusted EBITDA adjusts for the following:

 

 

Non-cash inventory valuation adjustments;

 

 

Non-cash amortization and amortization expenses and, although these are non-cash charges, the assets being depreciated and amortized may have to be replaced in the future;

 

 

Stock-based compensation expenses, a non-cash expense and are an important part of our compensation strategy;

 

 

Non-cash impairment charges, as the charges are not expected to be a recurring business activity;

 

 

Non-cash foreign exchange gains or losses, which accounts for the effect of both realized and unrealized foreign exchange transactions. Unrealized gains or losses represent foreign exchange revaluation of foreign denominated monetary assets and liabilities;

 

 

Non-cash change in fair value of warrant liability;

 

 

Interest expense, net;

 

 

Costs incurred to start up new facilities, and to fund emerging market operations for our German cultivation facilities and Columbian operations. The prior period also included start up costs for SweetWater Colorado and Malta facilities;    

 

 

Lease expense, to conform with competitors who report under IFRS;

 

 

Transaction (income) costs, which  includes acquisition related income and expenses, related legal, financial advisor and due diligence cost and expenses and transaction related compensation, which vary significantly by transaction and are excluded to evaluate ongoing operating results;

 

 

Restructuring charges;

 

 

Litigation costs includes costs related to legacy and non-operational litigation matters, legal settlements and recoveries;

 

 

Amortization of purchase accounting fair value step-up in inventory value included in costs of goods sold; and

 

 

Current and deferred income tax expenses and recoveries, which could be a significant recurring expense or recovery in our business in the future and reduce or increase cash available to us.

 

49

 

Adjusted Gross Profit and Adjusted Gross Margin

 

Adjusted gross profit and adjusted gross margin are non-GAAP financial measures and may not be comparable to similar measures presented by other companies.  Adjusted gross profit is our Gross profit (adjusted to exclude purchase price accounting valuation step-up) and adjusted gross margin is our Gross margin (adjusted to exclude purchase price accounting valuation step-up) and are non-GAAP financial measures. The Company’s management believes that adjusted gross profit and adjusted gross margin are useful to our management to evaluate our business and operations, measure our performance, identify trends affecting our business, project our future performance, and make strategic decisions.  We do not consider adjusted gross profit and adjusted gross margin percentage in isolation or as an alternative to financial measures determined in accordance with GAAP.

 

Liquidity and Capital Resources

 

We actively manage our cash and investments in order to internally fund operating needs, make scheduled interest and principal payments on our borrowings, and complete acquisitions. We believe that existing cash, cash equivalents, marketable securities and cash generated by operations, together with access to external sources of funds, will be sufficient to meet our domestic and foreign capital needs for a short and long term outlook. 

 

For the Company's short-term liquidity requirements, we are focused on generating positive cash flows from operations and being free cash flow positive.  As a result of delays in legalization across multiple markets, management continues to optimize our operating structure, headcount, as well as the elimination of other discretionary operational costs. Some of these actions may be less accretive to our adjusted EBITDA in the short term, however we believe that they will be required for our liquidity aspirations in the near term future. Additionally, the Company continues to invest our excess cash in the short-term in marketable securities which are comprised of U.S. treasury bills and term deposits with major Canadian banks.

 

For the Company's long-term liquidity requirements, we will be focused on funding operations through profitable organic and inorganic growth through acquisitions. We may need to take on additional debt or equity financing arrangements in order to achieve these ambitions on a long-term basis. 

 

The following table sets forth the major components of our statements of cash flows for the periods presented:

 

   

For the three months

 
   

ended August 31,

 
   

2023

   

2022

 

Net cash provided by (used in) operating activities

  $ (15,842 )   $ (46,269 )

Net cash (used in) investing activities

    (26,290 )     (1,537 )

Net cash (used in) provided by financing activities

    14,018       123,620  

Effect on cash of foreign currency translation

    614       (1,080 )

Cash and cash equivalents, beginning of period

    206,632       415,909  

Cash and cash equivalents, end of period

  $ 179,132     $ 490,643  

Marketable securities

    287,333       -  

Less: restricted cash

    (1,613 )     -  

Cash and marketable securities(1)

  $ 464,852     $ 490,643  

 

 

(1)

Cash and marketable securities are non-GAAP financial measures. See Use of Non-GAAP Measures below for additional discussion regarding these non-GAAP measures. The Company combines the Cash and cash equivalent financial statement line item, and the Marketable securities financial statement line item as an aggregate total as reconciled in the liquidity and capital resource section below. The Company’s management believes that this presentation provides useful information to management, analysts and investors regarding certain additional financial and business trends relating to its short-term liquidity position by combing these three GAAP metrics.

 

50

 

Cash flows from operating activities

 

The change in net cash used in operating activities was ($15.8) million for three months ended August 31, 2023 compared to ($46.3) million for the prior year same period. This decrease in cash used in the three month period was primarily related to improved operating efficiencies and increased management of our working capital requirements. 

 

Cash flows from investing activities

 

The change in net cash used in investing activities was ($26.3) million for three months ended August 31, 2023 compared to ($1.5) million for the prior year same period, and is a result of investing in marketable securities partially offset by cash acquired from the HEXO Acquisition, Note 6 (Business acquisitions). 

 

Cash flows from financing activities

 

The change in cash provided by financing activities was $14.0 million for three months ended August 31, 2023 compared to $123.6 million for the prior year same period. In the current period, cash was provided by funds from the overallotment of TLRY 27 Notes and other long term debt, while in the comparative period a larger amount of cash was provided by the ATM capital raise.  

 

Subsequent Events

 

Refer to Part I, Financial Information, Note 25 Subsequent Events. 

 

Contingencies

 

In addition to the litigation described in the Part II, Item 1 - Legal Proceedings, the Company is and may be a defendant in lawsuits from time to time in the normal course of business. While the results of litigation and claims cannot be predicted with certainty, the Company believes the reasonably possible losses of such matters, individually and in the aggregate, are not material. Additionally, the Company believes the probable final outcome of such matters will not have a material adverse effect on the Company’s consolidated results of operations, financial position, cash flows or liquidity.

 

Critical Accounting Estimates

 

Our financial statements are prepared in accordance with accounting principles generally accepted in the United States. The accounting principles we use require us to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements and amounts of income and expenses during the reporting periods presented. We believe in the quality and reasonableness of our critical accounting policies; however, materially different amounts may be reported under different conditions or using assumptions different from those that we have applied. The accounting estimates that have been identified as critical to our business operations and to understanding the results of our operations pertain to revenue recognition, valuation of inventory, valuation of long-lived assets, goodwill and intangible assets, stock-based compensation and valuation allowances for deferred tax assets. The application of each of these critical accounting policies and estimates is discussed in Part II, Item 7, Management’s Discussion and Analysis of Financial Condition and Results of Operations, of our Annual Report on Form 10-K for the fiscal year ended May 31, 2023.

 

Recently Issued Accounting Pronouncements

 

A description of recently issued accounting pronouncements that may potentially impact our financial position and results of operations is disclosed in “Part I, Item 1. Note 1 – Basis of presentation and summary of significant accounting policies” to our financial statements appearing elsewhere in this Quarterly Report on Form 10-Q.

 

51

 

Item 3. Quantitative and Qualitative Disclosures About Market Risk.

 

There have been no material changes in market risk from those addressed in the Company’s Annual Report on Form 10-K for the fiscal year ended May 31, 2023 during the three months ended August 31, 2023. See the information set forth in Part II, Item 7A, Quantitative and Qualitative Disclosures About Market Risk, of the Company’s Annual Report on Form 10-K for the fiscal year ended May 31, 2023.

 

Item 4. Controls and Procedures.

 

Disclosure Controls and Procedures

 

We maintain disclosure controls and procedures (as that term is defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act) that are designed to ensure that information required to be disclosed in our reports under the Exchange Act is recorded, processed, and summarized and reported within the time periods specified in the SEC’s rules and forms, and that such information is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosures. Any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives. An evaluation of the effectiveness of the design and operation of our disclosure controls and procedures as of the end of the period covered by this Quarterly Report was made under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer.

 

Based upon this evaluation, our Chief Executive Officer and Chief Financial Officer have concluded that, as of May 31, 2023, our disclosure controls and procedures (a) are effective to ensure that information required to be disclosed by us in reports filed or submitted under the Exchange Act is timely recorded, processed, summarized and reported and (b) include, without limitation, controls and procedures designed to ensure that information required to be disclosed by us in reports filed or submitted under the Exchange Act is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosure.

 

Consistent with guidance issued by the SEC, the scope of management’s assessment of the effectiveness of our disclosure controls and procedures did not include the internal controls over financial reporting of Montauk Brewing Company, Inc., which we acquired on November 7, 2022, of HEXO Corp., which we acquired June 22, 2023 and of Truss Beverage Co. which we acquired August 3, 2023, and represented 1.3%, 3.2% and 0.3% of our consolidated assets and 1.5%, 7% and 0.9% of our consolidated revenues respectively as of and for the three months ended August 31, 2023.

 

Changes in Internal Control over Financial Reporting

 

There have been no changes in our “internal control over financial reporting” (as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) that occurred during the period covered by this Quarterly Report that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting. As mentioned above, the Company acquired Montauk Brewing Company, Inc. on November 7, 2022, HEXO Corp. on June 22, 2023 and Truss Beverage Co., on August 3, 2023. The Company is in the process of reviewing the internal control structure of Montauk Brewing Company, Inc., HEXO Corp., and Truss Beverage Co.,  if necessary, will make appropriate changes as it integrates them into the Company’s overall internal control over financial reporting process.

 

52

 

PART IIOTHER INFORMATION

 

Item 1. Legal Proceedings.

 

In the ordinary course of business, we are at times subject to various legal proceedings and disputes, including the proceedings specifically discussed below. We assess our liabilities and contingencies in connection with outstanding legal proceedings utilizing the latest information available. Where it is probable that we will incur a loss and the amount of the loss can be reasonably estimated, we record a liability in our consolidated financial statements. These legal reserves may be increased or decreased to reflect any relevant developments on a quarterly basis. Where a loss is not probable or the amount of loss is not estimable, we do not accrue legal reserves. While the outcome of legal proceedings is inherently uncertain, based on information currently available, our management believes that it has established appropriate legal reserves. Any liabilities arising from pending legal proceedings are not expected to have a material adverse effect on our consolidated financial position, consolidated results of operations, or consolidated cash flows. However, it is possible that the ultimate resolution of these matters, if unfavorable, may be material to our consolidated financial position, consolidated results of operations, or consolidated cash flows.

 

“Item 3. Legal Proceedings” of our Annual Report on Form 10-K for the fiscal year ended May 31, 2023 includes a discussion of our legal proceedings. There have been no material changes from the legal proceedings described in our Form 10-K, except with respect to the matters disclosed and incorporated herein by reference to Note 18 (Commitments and contingencies), in the Notes to the Consolidated Financial Statements included in Part I, Item 1 of this Form 10-Q.

 

53

 

Item 1A. Risk Factors.

 

“Item 1A. Risk Factors” of our Annual Report on Form 10-K for the fiscal year ended May 31, 2023 includes a discussion of our known material risk factors, other than risks that could apply to any issuer or offering. A summary of our risk factors is included below. Except for the below risk factors, there have been no material changes from the risk factors described in our Form 10-K.

 

 

We may not achieve the expected revenue or other benefits from the craft beer operations acquired from Anheuser-Busch.

 

 

Additional impairments of our goodwill, impairments of our intangible and other long-lived assets, and changes in the estimated useful lives of intangible assets could have a material adverse impact on our financial results.

 

 

We may experience difficulties integrating Tilray and HEXO’s operations and realizing the expected benefits of the Arrangement.

 

 

Our business is dependent upon regulatory approvals and licenses, ongoing compliance and reporting obligations, and timely renewals.

 

 

Government regulation is evolving, and unfavorable changes or lack of commercial legalization could impact our ability to carry on our business as currently conducted and the potential expansion of our business.

 

 

Our production and processing facilities are integral to our business and adverse changes or developments affecting our facilities may have an adverse impact on our business.

 

 

We face intense competition, and anticipate competition will increase, which could hurt our business.

 

 

Regulations constrain our ability to market and distribute our products in Canada.

 

 

United States regulations relating to hemp-derived CBD products are new and rapidly evolving, and changes may not develop in the timeframe or manner most favorable to our business objectives.

 

 

Changes in consumer preferences or public attitudes about alcohol could decrease demand for our beverage alcohol products.

 

 

SweetWater, Breckenridge and Montauk each face substantial competition in the beer industry or the broader market for alcoholic beverage products which could impact our business and financial results.

 

 

We have a limited operating history and a history of net losses, and we may not achieve or maintain profitability in the future.

 

 

We are subject to litigation, arbitration and demands, which could result in significant liability and costs, and impact our resources and reputation.

 

 

Our strategic alliances and other third-party business relationships may not achieve the intended beneficial impact and expose us to risks.

 

 

We may not be able to successfully identify and execute future acquisitions, dispositions or other equity transactions or to successfully manage the impacts of such transactions on our operations.

 

 

We are subject to risks inherent in an agricultural business, including the risk of crop failure.

 

 

We depend on significant customers for a substantial portion of our revenue. If we fail to retain or expand our customer relationships or significant customers reduce their purchases, our revenue could decline significantly.

 

 

Our products may be subject to recalls for a variety of reasons, which could require us to expend significant management and capital resources.

 

 

Significant interruptions in our access to certain supply chains for key inputs such as raw materials, supplies, electricity, water and other utilities may impair our operations.

 

 

Management may not be able to successfully establish and maintain effective internal controls over financial reporting.

 

 

The price of our common stock in public markets has experienced and may continue to experience severe volatility and fluctuations.

 

 

The volatility of our stock and the stockholder base may hinder or prevent us from engaging in beneficial corporate initiatives.

 

 

The terms of our outstanding warrants may limit our ability to raise additional equity capital or pursue acquisitions, which may impact funding of our ongoing operations and cause significant dilution to existing stockholders.

 

 

We may not have the ability to raise the funds necessary to settle conversions of the convertible securities in cash or to repurchase the convertible securities upon a fundamental change.

 

 

We are subject to other risks generally applicable to our industry and the conduct of our business.

 

We may experience difficulties achieving the expected benefits, including revenue and sales growth, of acquiring certain craft beer operations from Anheuser-Busch (the ABI Acquisitions).

 

The success of the ABI Acquisitions will depend in part on our ability to achieve the expected business opportunities, revenue and sales growth prospects from the ABI Acquisitions in an efficient and effective manner. We may also not be able to fully realize the operational efficiencies and associated cost synergies or leverage the potential business opportunities and growth prospects to the extent anticipated or at all. 

 

The ABI Acquisitions were completed on September 29, 2023. Efforts to achieve expected benefits of the ABI Acquisitions may require substantial resources and divert management attention. Challenges associated with achieving such benefits may include those related to sales and marketing efforts across our expanded product portfolio, operational efficiency and production optimization, and effectively integrating the ABI Acquisitions into Tilray. If we are unable to successfully integrate certain aspects of the operations of the ABI Acquisitions or experience delays, we may incur unanticipated liabilities and be unable to fully realize the potential benefit of the revenue growth, synergies and other anticipated benefits resulting from the arrangement, and our business, results of operations and financial condition could be adversely affected. Some of these factors are outside our control, and any of them could delay or increase the cost of our efforts.

 

54

 

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.

 

Recent Sales of Unregistered Equity Securities

 

On June 30, 2023, Tilray entered into an assignment and assumption agreement with Double Diamond Holdings Ltd. (“DDH”), an Ontario corporation, pursuant to which, among other things, Tilray acquired from DDH a promissory note in the amount of $8,057,622 (the “Note”) payable by 1974568 Ontario Limited (“Aphria Diamond”). DDH is a joint venturer with Aphria Inc. (Tilray’s wholly-owned subsidiary) in Aphria Diamond. As consideration for the Note, Tilray issued 5,004,735 shares of its common stock to DDH.

 

Each of the foregoing issuances of Tilray’s common stock was made in reliance on the exemption provided by Section 4(a)(2) of the Securities Act of 1933, as amended, for the offer and sale of securities not involving a public offering. No underwriter participated in the offer and sale of the shares issued pursuant to the foregoing issuances, and no commission or other remuneration was paid or given directly or indirectly in connection therewith. Additionally, each of the foregoing issuance of Tilray's common stock was reported on a Form 8-K filed by the Company with the U.S. Securities and Exchange Commission.

 

Item 3. Defaults Upon Senior Securities.

 

Not applicable.

 

 

Item 4. Mine Safety Disclosures.

 

Not applicable.

 

Item 5. Other Information.

 

Not applicable.

 

55

 

Item 6. Exhibits. 

 

Exhibit

Number

 

Description

 

 

 

10.1*

  Promissory note in the amount of $8,057,622 payable by 1974568 Ontario Limited.
     
10.2   Amended Credit Agreement, effective August 31, 2023, by and among Four Twenty Corporation, certain subsidiaries and affiliates of Four Twenty Corporation, Bank of America, N.A., City National Bank, the lenders party thereto and BofA Securities, Inc. (incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K filed with the SEC on September 1, 2023)
     
10.3   Purchase Agreement, dated August 7, 2023, by and among Tilray, Anheuser-Busch Companies, LLC, Craft USA Holdings, LLC, Craft Brew Alliance, Inc. and Tilray Beverages, LLC (incorporated by reference to Exhibit 10.1 to the Companys Current Report on Form 8-K filed with the SEC on August 7, 2023).
     
10.4*   Form of 2023 EBITDA PSU Equity Incentive Award.
     

31.1*

 

Certification of Principal Executive Officer Pursuant to Rules 13a-14(a) and 15d-14(a) under the Securities Exchange Act of 1934, as Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

     

31.2*

 

Certification of Principal Financial Officer Pursuant to Rules 13a-14(a) and 15d-14(a) under the Securities Exchange Act of 1934, as Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

     

32.1**

 

Certification of Principal Executive Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

 

56

 

Exhibit

Number

  Description
     

32.2**

 

Certification of Principal Financial Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

     

101*

 

The following financial statements from the Company's Quarterly Report on Form 10-Q for the quarter ended August 31, 2023, formatted in Inline XBRL: (i) Consolidated Statements of Financial Position, (ii) Consolidated Statements of Loss and Comprehensive Loss , (iii) Consolidated Statements of Stockholders' Equity, (iv) Consolidated Statements of Cash Flows, and (v) Notes to Condensed Interim Consolidated Financial Statements, tagged as blocks of text and including detailed tags.

     

104*

 

Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101)

 

*         Filed herewith.

**       Furnished herewith.

†         Schedules have been omitted pursuant to Item 601(a)(5) of Regulation S-K.

 

57

 

SIGNATURES

 

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

 

 

 

Tilray Brands, Inc.

 

 

 

 

Date: October 4, 2023

 

By:

/s/ Irwin D. Simon

 

 

 

Irwin D. Simon

 

 

 

Chairman and Chief Executive Officer

 

 

 

 

Date: October 4, 2023

 

By:

/s/ Carl Merton

 

 

 

Carl Merton

 

 

 

Chief Financial Officer

 

58