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tlry20221103_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 November 30, 2022

☐	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)

Registrant’s 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 I—FINANCIAL 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.

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.

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.

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.

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)”.

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.

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, Debt—Debt with Conversion and Other Options (Subtopic 470-20) and Derivatives and Hedging—Contracts in Entity’s Own Equity (Subtopic 815-40): Accounting for Convertible Instruments and Contracts in an Entity’s 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), Compensation—Stock Compensation (Topic 718), and Derivatives and Hedging—Contracts in Entity’s 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

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

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.

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.

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).

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.

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