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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 November 30, 2022

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

Class 2 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 January 5, 2023, the registrant had 615,494,626 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

27

Item 3.

Quantitative and Qualitative Disclosures About Market Risk

48

Item 4.

Controls and Procedures

48

PART II.

OTHER INFORMATION

49

Item 1.

Legal Proceedings

49

Item 1A.

Risk Factors

49

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

51

Item 3.

Defaults Upon Senior Securities

51

Item 4.

Mine Safety Disclosures

51

Item 5.

Other Information

51

Item 6.

Exhibits

52

Signatures

54

 

 

 

 

Cautionary Note Regarding Forward-Looking Statements

 

This Quarterly Report on Form 10-Q for the quarter ended November 30, 2022 (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 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 regarding our cost savings initiatives; what our revenue would have been had we completed the acquisition of Double Diamond Distillery LLC and Montauk Brewing Company each on June 1, 2021; 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 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 and our other filings 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.

TILRAY BRANDS, INC.

Consolidated Statements of Financial Position

(in thousands of United States dollars, unaudited)

 

  November 30,  May 31, 
  2022  2022 

Assets

        

Current assets

        

Cash and cash equivalents

 $190,218  $415,909 

Marketable Securities

  243,286    

Accounts receivable, net

  89,705   95,279 

Inventory

  240,946   245,529 

Prepaids and other current assets

  50,550   46,786 

Total current assets

  814,705   803,503 

Capital assets

  539,124   587,499 

Right-of-use assets

  11,351   12,996 

Intangible assets

  1,214,842   1,277,875 

Goodwill

  2,621,401   2,641,305 

Interest in equity investees

  4,638   4,952 

Long-term investments

  8,211   10,050 

Convertible notes receivable

  255,310   111,200 

Other assets

  4,797   314 

Total assets

 $5,474,379  $5,449,694 

Liabilities

        

Current liabilities

        

Bank indebtedness

 $15,304  $18,123 

Accounts payable and accrued liabilities

  162,900   157,431 

Contingent consideration

  26,463   16,007 

Warrant liability

  12,670   14,255 

Current portion of lease liabilities

  6,976   6,703 

Current portion of long-term debt

  20,681   67,823 

Current portion of convertible debentures payable

  181,511    

Total current liabilities

  426,505   280,342 

Long - term liabilities

        

Lease liabilities

  8,999   11,329 

Long-term debt

  152,150   117,879 

Convertible debentures payable

  223,295   401,949 

Deferred tax liabilities

  180,099   196,638 

Other liabilities

  185   191 

Total liabilities

  991,233   1,008,328 

Commitments and contingencies (refer to Note 18)

          

Stockholders' equity

        

Common stock ($0.0001 par value; 990,000,000 shares authorized; 613,181,559 and 532,674,887 shares issued and outstanding, respectively)

  61   53 

Additional paid-in capital

  5,697,466   5,382,367 

Accumulated other comprehensive loss

  (121,455)  (20,764)

Accumulated Deficit

  (1,105,796)  (962,851)

Total Tilray Brands, Inc. stockholders' equity

  4,470,276   4,398,805 

Non-controlling interests

  12,870   42,561 

Total stockholders' equity

  4,483,146   4,441,366 

Total liabilities and stockholders' equity

 $5,474,379  $5,449,694 

 

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

  

Six months ended

 
  

November 30,

  

November 30,

 
  

2022

  

2021

  

2022

  

2021

 

Net revenue

 $144,136  $155,153  $297,347  $323,176 

Cost of goods sold

  104,012   122,387   208,609   239,455 

Gross profit

  40,124   32,766   88,738   83,721 

Operating expenses:

                

General and administrative

  41,672   33,469   82,180   82,956 

Selling

  9,669   9,210   19,340   16,642 

Amortization

  23,995   29,016   48,354   59,755 

Marketing and promotion

  8,535   7,120   15,783   12,585 

Research and development

  165   515   331   1,300 

Change in fair value of contingent consideration

     845   211   1,682 

Litigation costs

  2,815   1,080   3,260   2,274 

Transaction (income) costs

  5,064   7,040   (7,752)  31,425 

Total operating expenses

  91,915   88,295   161,707   208,619 

Operating loss

  (51,791)  (55,529)  (72,969)  (124,898)

Interest expense, net

  (3,107)  (9,940)  (7,520)  (20,110)

Non-operating income (expense), net

  (18,450)  65,595   (51,442)  115,292 

(Loss) income before income taxes

  (73,348)  126   (131,931)  (29,716)

Income taxes (benefit) expense

  (11,713)  (5,671)  (4,502)  (909)

Net (loss) income

 $(61,635) $5,797  $(127,429) $(28,807)

Total net income (loss) attributable to:

                

Stockholders of Tilray Brands, Inc.

  (69,463)  (201)  (142,945)  (41,850)

Non-controlling interests

  7,828   5,998   15,516   13,043 

Other comprehensive loss, net of tax

                

Foreign currency translation loss

  (24,597)  (32,367)  (84,889)  (133,139)

Unrealized loss on convertible notes receivable

  (17,643)  (16,305)  (20,168)  (16,954)

Total other comprehensive loss, net of tax

  (42,240)  (48,672)  (105,057)  (150,093)

Comprehensive loss

 $(103,875) $(42,875) $(232,486) $(178,900)

Total comprehensive income (loss) attributable to:

                

Stockholders of Tilray Brands, Inc.

  (111,186)  (41,853)  (243,636)  (184,923)

Non-controlling interests

  7,311   (1,022)  11,150   6,023 

Weighted average number of common shares - basic

  611,711,377   460,254,275   589,122,358   454,797,598 

Weighted average number of common shares - diluted

  611,711,377   460,254,275   589,122,358   454,797,598 

Net loss per share - basic

 $(0.11) $0.00  $(0.24) $(0.09)

Net loss per share - diluted

 $(0.11) $0.00  $(0.24) $(0.09)

 

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     income (loss)    

Deficit

    interests    

Total

 

Balance at May 31, 2021

    446,440,641     $ 46     $ 4,792,406     $ 152,668     $ (486,050 )   $ 6,243     $ 4,465,313  

Third party contribution to Superhero Acquisition LP

                                  52,995       52,995  

Share issuance - options exercised

    417,489                                      

Share issuance - RSUs exercised

    3,665,337                                      

Shares effectively repurchased for employee withholding tax

                (5,944 )                       (5,944 )

Stock-based compensation

                9,417                         9,417  

Comprehensive income (loss) for the period

                      (101,421 )     (41,649 )     7,045       (136,025 )

Balance at August 31, 2021

    450,523,467     $ 46     $ 4,795,879     $ 51,247     $ (527,699 )   $ 66,283     $ 4,385,756  

Share issuance - Superhero Acquisition LP

    9,817,061             117,804                         117,804  

Share issuance - Double Diamond Holdings note

    2,677,596             28,560                   (28,560 )      

Share issuance - options exercised

    98,044                                      

Share issuance - RSUs exercised

    470,324                                      

Shares effectively repurchased for employee withholding tax

                (2,742 )                       (2,742 )

Share issuance - legal settlement

    215,901             2,170                         2,170  

Stock-based compensation

                12,876                         12,876  

Comprehensive income (loss) for the period

                      (41,652 )     (201 )     (1,022 )     (42,875 )

Balance at November 30, 2021

    463,802,393     $ 46     $ 4,954,547     $ 9,595     $ (527,900 )   $ 36,701     $ 4,472,989  
                                                         

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 note

    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  

Shares issued to purchase Montauk

    1,708,521             6,422                         6,422  

Share issuance - options exercised

    4,183                                      

Share issuance - RSUs exercised

    237,611                                      

Stock-based compensation

                10,943                         10,943  

Share issuance - Double Diamond Holdings note

    10,276,305       1       38,753                   (32,280 )     6,474  

Comprehensive income (loss) for the period

                      (41,723 )     (69,463 )     7,311       (103,875 )

Balance at November 30, 2022

    613,181,559     $ 61     $ 5,697,466     $ (121,455 )   $ (1,105,796 )   $ 12,870     $ 4,483,146  

 

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)

 

   

For the six months

 
   

ended November 30,

 
   

2022

   

2021

 

Cash used in operating activities:

               

Net loss

  $ (127,429 )   $ (28,807 )

Adjustments for:

               

Deferred income tax recovery

    (12,941 )     (11,228 )

Unrealized foreign exchange loss

    2,261       (6,530 )

Amortization

    67,387       76,804  

Loss on sale of capital assets

    2,208       230  

Inventory valuation write down

          12,000  

Other non-cash items

    8,177       3,739  

Stock-based compensation

    20,136       17,670  

Loss on long-term investments & equity investments

    1,918       2,197  

Loss (gain) on derivative instruments

    18,997       (133,436 )

Change in fair value of contingent consideration

    211       1,682  

Change in non-cash working capital:

               

Accounts receivable

    6,690       2,734  

Prepaids and other current assets

    (7,780 )     (6,299 )

Inventory

    5,046       3,409  

Accounts payable and accrued liabilities

    (1,941 )     (44,513 )

Net cash used in operating activities

    (17,060 )     (110,348 )

Cash used in investing activities:

               

Investment in capital and intangible assets

    (7,537 )     (23,856 )

Proceeds from disposal of capital and intangible assets

    2,160       8,264  

Purchase of marketable securities

    (243,186 )      

Net cash paid for business acquisition

    (24,372 )      

Net cash used in investing activities

    (272,935 )     (15,592 )

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 )     (3,927 )

Proceeds from long-term debt

    1,288        

Repayment of long-term debt and convertible debt

    (59,395 )     (20,779 )

Repayment of lease liabilities

    (1,114 )     (3,360 )

Net (decrease) increase in bank indebtedness

    (2,819 )     19  

Net cash provided by (used in) financing activities

    66,364       (28,047 )

Effect of foreign exchange on cash and cash equivalents

    (2,060 )     (2,696 )

Net increase (decrease) in cash and cash equivalents

    (225,691 )     (156,683 )

Cash and cash equivalents, beginning of period

    415,909       488,466  

Cash and cash equivalents, end of period

  $ 190,218     $ 331,783  

 

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

 

4

 

 

TILRAY BRANDS, INC.

Not

es to Consolidated Financial Statements

 

Note 1. Description of business

 

Tilray Brands, Inc., and its wholly owned subsidiaries (collectively "Tilray", the "Company", "we", or "us") is a leading global cannabis-lifestyle and consumer packaged goods company with our principal executive office in Leamington, 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 scale, expertise and capabilities to drive market share in Canada and internationally, 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, driving category management leadership and assessing growth opportunities with the introduction of new products. In addition, we are relentlessly focused on managing our cost of goods and expenses in order to maintain our strong financial position.

     

 

Note 2. 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. 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 included in the Company’s Annual Report on Form 10-K for the fiscal year ended  May 31, 2022 (the “Annual Financial Statements”). 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 Financial Statements.

 

Marketable Securities

 

We classify time 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 are based on quoted market prices for publicly traded securities. Changes in fair value are 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 are 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, plus 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 receivables include various investments in which the Company has the right, or potential right to convert the indenture into common stock shares 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) by the weighted average number of common shares outstanding during the period. Diluted earnings (loss) per share is computed by dividing reported net income (loss) 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 payable and similar instruments.

 

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 and six months ended November 30, 2022, the dilutive potential common share equivalents outstanding consist of the following: 16,884,493 common shares from RSUs, 4,674,512 common shares from share options, 6,209,000 common shares from warrants and 23,981,704 common shares from convertible debentures payable.

 

Revenue

 

On July 12, 2022, the Company and HEXO entered into various commercial transaction agreements, as described in Note 24 (Segment reporting), which includes an advisory services arrangement.  Revenue is recognized as the advisory services are provided to HEXO. Payments received for the services in advance of performance are recognized as a contract liability.

 

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 other current 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 service, the Company considers the effects of variable consideration and the existence of significant financing components, if any.

 

Some contracts for the sale of goods or services may provide customers with a right of return, volume discount, bonuses for volume/quality achievement, or sales allowance. In addition, the Company may provide in certain circumstances, a retrospective price reduction to a customer based primarily on inventory movement. These items give rise to variable consideration. The Company uses the expected value method to estimate the variable consideration because this method best predicts 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.

 

New accounting pronouncements not yet 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. ASU 2021-08 is effective for the Company beginning June 1, 2023. This update should 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 August 2020, the FASB issued ASU 2020-06, DebtDebt with Conversion and Other Options (Subtopic 470-20) and Derivatives and HedgingContracts in Entitys Own Equity (Subtopic 815-40): Accounting for Convertible Instruments and Contracts in an Entitys Own Equity (“ASU 2020-06”), which amends and simplifies existing guidance in an effort to reduce the complexity of accounting for convertible instruments and to provide financial statement users with more meaningful information. The Company adopted ASU 2020-06 beginning June 1, 2022 and the adoption did not have material retrospective impacts on our condensed interim consolidated financial statements.

 

In May 2021, the FASB issued ASU 2021-04, Modifications and Extinguishments (Subtopic 470-50), CompensationStock Compensation (Topic 718), and Derivatives and HedgingContracts in Entitys Own Equity (Subtopic 815-40) (“ASU 2021-04”), which amends existing guidance for earnings per share (EPS) in accordance with Topic 260. The Company adopted the ASU beginning June 1, 2022 and the adoption of ASU 2021-04 did not have an impact on our condensed interim consolidated financial statements.

 

In November 2021, the FASB issued ASU 2021-10, Government Assistance (Topic 832), Disclosures by Business Entities about Government Assistance, which is intended to increase the transparency of government assistance including the disclosure of (1) the types of assistance, (2) an entity’s accounting for the assistance, and (3) the effect of the assistance on an entity’s financial statements. The Company adopted the ASU beginning June 1, 2022 and the adoption of ASU 2021-04 did not have an impact on the disclosure in our condensed interim consolidated financial statements.

    

 

Note 3. Inventory

 

Inventory consisted of the following:

 

  November 30,  May 31, 
  2022  2022 

Plants

 $12,460  $14,521 

Dried cannabis

  123,871   116,739 

Cannabis trim

  1,249   592 

Cannabis derivatives

  15,728   24,685 

Cannabis vapes

  2,815   542 

Packaging and other inventory items

  20,781   21,691 

Wellness inventory

  12,921   13,275 

Beverage alcohol inventory

  27,250   27,840 

Distribution inventory

  23,871   25,644 

Total

 $240,946  $245,529 

 

7

     
 

Note 4. Capital assets

 

Capital assets consisted of the following:

 

  November 30,  May 31, 
  2022  2022 

Land

 $28,967  $31,882 

Production facility

  430,631   453,412 

Equipment

  219,282   254,486 

Leasehold improvement

  7,772   7,455 

Construction in progress

  8,421   7,505 
  $695,073  $754,740 

Less: accumulated amortization

  (155,949)  (167,241)

Total

 $539,124  $587,499 

     

 

Note 5. Intangible Assets

 

Intangible assets consisted of the following items:

 

  

November 30,

  

May 31,

 
  

2022

  

2022

 

Customer relationships & distribution channel

 $610,401  $617,437 

Licenses, permits & applications

  365,695   377,897 

Non-compete agreements

  13,626   12,512 

Intellectual property, trademarks, knowhow & brands

  623,629   634,997 
   1,613,351  $1,642,843 

Less: accumulated amortization

  (187,665) $(154,124)

Less: impairments

  (210,844)  (210,844)

Total

 $1,214,842  $1,277,875 

 

As of November 30, 2022, included in Licenses, permits & applications is $235,391 of indefinite-lived intangible assets. As of May 31, 2022, there was $248,411 of indefinite-lived intangible assets included in Licenses, permits & applications.

 

Expected future amortization expense for intangible assets as of November 30, 2022 are as follows:

 

  

Amortization

 

2023 (remaining six months)

 $62,464 

2024

  84,013 

2025

  84,013 

2026

  84,013 

2027

  59,207 

Thereafter

  605,741 

Total

 $979,451 

 

8

     
 

Note 6. Goodwill

 

The following table shows the carrying amount of goodwill:

 

  

November 30,

  

May 31,

 

Segment

 

2022

  

2022

 

Cannabis

 $2,640,669  $2,640,669 

Distribution

  4,458   4,458 

Beverage alcohol

  120,606   102,999 

Wellness

  77,470   77,470 

Effect of foreign exchange

  2,129   39,640 

Impairments

  (223,931)  (223,931)

Total

 $2,621,401  $2,641,305 

 

 

Acquisition of Double Diamond Distillery LLC (d/b/a Breckenridge Distillery)

 

On December 7, 2021, the Company through its wholly-owned subsidiary Four Twenty Corporation, completed the purchase of all the membership interests of Double Diamond Distillery LLC (d/b/a Breckenridge Distillery), a Colorado limited liability company and a leading distilled spirits brand located in Breckenridge, Colorado (the “Breckenridge Acquisition”). As consideration for the Breckenridge Acquisition, the Company paid a purchase price in an aggregate amount equal to $114,068, which purchase price was satisfied through the issuance of 12,540,479 shares of Tilray’s Class 2 common shares.

 

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

 

  

Amount

 

Consideration

    

Shares

 $114,068 

Net assets acquired

    

Current assets

    

Cash and cash equivalents

  326 

Accounts receivable

  2,128 

Prepaids and other current assets

  367 

Inventory

  20,351 

Long-term assets

    

Capital assets

  11,179 

Customer relationships (15 years)

  9,800 

Intellectual property, trademarks & brands (15 years)

  69,950 

Goodwill

  2,797 

Total Assets

  116,898 

Current liabilities

    

Accounts payable and accrued liabilities

  2,228 

Long-term liabilities

    

Deferred tax liability

  602 

Total liabilities

  2,830 

Total net assets acquired

 $114,068 

 

The goodwill of $2,797 is primarily related to factors such as synergies and market opportunities and is reported under the Company’s Beverage alcohol segment. Revenue for the Company would have been higher by approximately $6,000 and $12,000 for the three and six months ended November 30, 2022, if the acquisition had taken place on June 1, 2022. Net loss and comprehensive net loss would have increased by approximately $1,500 and $3,000 for the three and six months ended November 30, 2022, if the acquisition had taken place on June 1, 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 Breckenridge.

 

9

 

Acquisition of Montauk Brewing Company, Inc.

 

On November 7, 2022, Tilray acquired 100% ownership of Montauk Brewing Company, Inc. ("Montauk"), a leading craft brewer in Metro New York located in Montauk, New York (the “Montauk Acquisition”). As consideration for the Montauk Acquisition, the Company paid an initial purchase price in an aggregate amount equal to $35,110, which consisted of cash consideration of $28,688 and stock consideration of $6,422 through the issuance of 1,708,521 shares of Tilray's Class 2 common stock. 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.

 

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.

 

 

  

Amount

 

Consideration

    

Cash

 $28,688 

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)

  16,570 

Intellectual property, trademarks & brands (15 years)

  12,430 

Non-compete agreements (5 years)

  1,240 

Goodwill

  17,607 

Total Assets

  53,403 

Current liabilities

    

Accounts payable and accrued liabilities

  1,580 

Long-term liabilities

    

Deferred tax liability

  6,468 

Total liabilities

  8,048 

Total net assets acquired

 $45,355 

 

Revenue for the Company would have been higher by approximately $3,100 and $9,000 for the three and six months ended November 30, 2022, if the acquisition had taken place on June 1, 2022. Net loss and comprehensive net loss would have increased by approximately $600 and $500 for the three and six months ended November 30, 2022, if the acquisition had taken place on June 1, 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.

 

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Note 7. Convertible notes receivable

 

Convertible notes receivable is comprised of the following:

 

 

  

November 30,

  

May 31,

 
  

2022

  

2022

 

HEXO Convertible Note

 $148,425  $- 

MedMen Convertible Note

  106,885   111,200 

Total convertible notes receivable

  255,310   111,200 

Deduct - current portion

  -   - 

Total convertible notes receivable, non current portion

 $255,310  $111,200 

 

 

During the six months ended  November 30, 2022, the Company acquired a secured convertible note initially issued by HEXO Corp. ("HEXO") in the principal amount of $173,700 for an aggregate purchase price of $157,272 (the "HEXO Convertible Note").

 

The unrealized loss on convertible notes receivable recognized in other comprehensive income amounts to $(17,643) and $(20,168) and $(16,305) and $(16,954) for the three and six months ended  November 30, 2022 and November 30, 2021 respectively. The Company recognized interest income which is included as part of the convertible debentures in the amount of $3,514 and $7,006 for the three and six months ended  November 30, 2022

 

HEXO Corp. ("HEXO")

 

On July 12, 2022, the Company closed a strategic alliance with HEXO, pursuant to which the Company acquired the HEXO Convertible Note from HT Investments MA LLC (“HTI”). At the time of closing, the HEXO Convertible Note had a principal balance of $173,700, which is to be repaid and or redeemed at 110% of the outstanding principal balance. The purchase price paid to HTI for the HEXO Convertible Note was $157,272. The purchase price paid to HTI was satisfied by Tilray's issuance of (i) a newly-issued $50,000 convertible promissory note ("HTI Convertible Note") see Note 12 (Convertible debentures payable) and (ii) the remaining balance was paid through the issuance of 33,314,412 shares of Tilray's Class 2 common stock, par value $0.0001 (collectively, the “HTI Share Consideration”). The HEXO Convertible Note bears interest at a rate of 5.0% per annum, calculated daily, which is payable to Tilray on a semi-annual basis. Interest payments made under the HEXO Convertible Note will be made in the form of cash until July 12, 2023. The HEXO Convertible Note has a maturity date of May 1, 2026. Subject to certain limitations and adjustments, the HEXO Convertible Note is convertible into HEXO Common Shares at Tilray's option at any time prior to the second scheduled trading day prior to the maturity date, at a conversion price of CAD$0.40 per HEXO Common share as determined the day before exercise, including all capitalized interest. HEXO has the ability to force the conversion if the daily VWAP per common share is equal to or exceeds $3.00 per share for twenty consecutive trading days. Under the HEXO Convertible Note, the Company holds a first-priority security interest on substantially all of HEXO’s assets. In the event of a default on the HEXO Convertible Note, the Company would be entitled to exercise its rights as a secured creditor, and the Note would become redeemable at 115% of the outstanding principal balance.

 

All third-party transaction costs associated with the acquisition of these notes were reimbursed by HEXO. During the three and six months ended November 30, 2022, in connection with the HEXO Convertible Note, the Company recognized interest income of $2,172 and $3,378, and an unrealized loss on convertible notes receivable in other comprehensive income of $13,425 and $8,847 respectively.

 

The HTI Share Consideration included a purchase price derivative, where the consideration paid is adjusted based on the sum of the VWAP of the Company's common stock for the 44 trading days after the issuance of the shares. The purchase price derivative is settled through the issuance of additional shares of the Company if the share price declined, or a cash payment back to the Company if the share price increased over the applicable period. On issuance this was valued at $nil. The subsequent change in fair value resulted in a gain of $18,256 due to the share price increasing, which was recorded in Transaction (income) costs, and was collected in cash by the Company during the period ended  November 30, 2022.

 

The fair value of the HEXO Convertible Note was determined using the Black-Scholes model using the following assumptions: the risk-free rate of 3.50%; expected life of the convertible note; volatility of 90% based on comparable companies; forfeiture rate of nil; dividend yield of nil and the exercise price of the respective conversion feature.

 

Concurrent with the aforementioned purchase of the HEXO Convertible Note, the Company and HEXO also entered into various commercial transaction agreements as described in Note 24 (Segment reporting). 

 

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MedMen Enterprises Inc. (MedMen)

 

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 (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 upon conversion of convertible securities that may be issued by MedMen. 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 fair value of the MedMen Convertible Note was determined using 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.

     

 

Note 8. Long term investments

 

Long term investments consisted of the following:

 

  November 30,  May 31, 
  2022  2022 

Equity investments measured at fair value

 $2,522  $4,347 

Equity investments under measurement alternative

  5,689   5,703 

Total

 $8,211  $10,050 

     

 

Note 9. Accounts payable and accrued liabilities

 

Accounts payable and accrued liabilities are comprised of:

 

  November 30,  May 31, 
  2022  2022 

Trade payables

 $75,725  $68,604 

Accrued liabilities

  63,545   57,497 

Accrued payroll and employment related taxes

  12,933   17,736 

Income taxes payable

  3,245   6,150 

Accrued interest

  7,258   6,772 

Other accruals

  194   672 

Total

 $162,900  $157,431 

     

 

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 November 30, 2022, 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 at 265 Talbot St. West, Leamington, Ontario.

 

CC Pharma GmbH, a subsidiary of the Company, has three operating lines of credit for €8,000, €3,500, and €500 each, which bear interest at Euro Over Night Index Average plus 1.79% and Euro Interbank Offered Rate ("EURIBOR") plus 3.682% respectively. As of November 30, 2022, a total of €5,100 ($5,306) was drawn down from the available credit of €12,000. The operating lines of credit are secured by a security interest in the inventory of CC Pharma GmbH.

 

Four Twenty Corporation (“420”), a subsidiary of the Company, has a revolving credit facility of $30,000 which bears interest at EURIBOR plus an applicable margin. As of November 30, 2022, the Company has drawn $10,000 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.

 

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Note 11. Long-term debt

 

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

 

  

November 30,

  

May 31,

 
  

2022

  

2022

 

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

 $48,840  $53,720 

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$194 including interest, due in July 2033

  11,533   12,750 

Term loan - C$25,000 - Canadian prime plus 1.50%, compounded monthly, 5-year term with a 15-year amortization, repayable in equal monthly installments of C$190 including interest, due in April 2032

  13,631   15,050 

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

  391   462 

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

  2,147   2,327 

Term loan ‐ €5,000 ‐ EURIBOR plus 1.79%, 5‐year term, repayable in quarterly installments of €250 plus interest, due in December 2023

  1,300   1,878 

Term loan ‐ €1,500 ‐ EURIBOR plus 1.79%, 1‐year term, repayable in monthly installments of €100 plus interest, due in December 2023

  1,560    

Term loan ‐ €5,000 ‐ EURIBOR plus 2.68%, 5‐year term, repayable in quarterly installments of €250 plus interest, due in December 2023

  1,300   1,878 

Term loan ‐ €1,500 ‐ EURBIOR plus 2.00%, 5‐year term, repayable in quarterly installments of €98 including interest, due in April 2025

  1,041   1,219 

Term loan ‐ €1,500 ‐ EURIBOR plus 2.00%, 5‐year term, repayable in quarterly installments of €98 including interest, due in June 2025

  1,021   1,307 

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

  21,217   21,561 

Term loan - $100,000 - EURIBOR rate plus an applicable margin, 3-year term, repayable in quarterly installments of $2,500, due in March 2024

  70,000   75,000 

Carrying amount of long-term debt

  173,981   187,152 

Unamortized financing fees

  (1,150)  (1,450)

Net carrying amount

  172,831   185,702