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tlry20230117_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 February 28, 2023

☐	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

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 April 3, 2023, the registrant had 618,007,938 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	32
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	57
Item 4.	Controls and Procedures	57
PART II.	OTHER INFORMATION	58
Item 1.	Legal Proceedings	58
Item 1A.	Risk Factors	59
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	62
Item 3.	Defaults Upon Senior Securities	62
Item 4.	Mine Safety Disclosures	62
Item 5.	Other Information	62
Item 6.	Exhibits	63
Signatures		65

Cautionary Note Regarding Forward-Looking Statements

This Quarterly Report on Form 10-Q for the quarter ended February 28, 2023 (the “Form 10-Q”) contains forward-looking statements under Canadian securities laws and within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended, that are intended to be subject to the "safe harbor" created by those sections and other applicable laws. Such statements involve risks, uncertainties and assumptions. If the risks or uncertainties ever materialize or the assumptions prove incorrect, our results may differ materially from those expressed or implied by such forward-looking statements under 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; our strategic initiatives, business strategy, supply chain, brand portfolio, product performance and expansion efforts; current or future macroeconomic trends; future corporate acquisitions and strategic transactions; and our synergies, cash savings and efficiencies anticipated from the integration of our completed acquisitions and strategic transactions.

Risks and uncertainties that may cause actual results to differ materially from forward-looking statements include, but are not limited to, those identified in this Form 10-Q and other risks and matters described in our most recent Annual Report on Form 10-K for the fiscal year ended May 31, 2022 as well as our other filings made from time to time with the U.S. Securities and Exchange Commission and in our Canadian securities filings.

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

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

PART I—FINANCIAL INFORMATION

Item 1. Financial Statements.

TILRAY BRANDS, INC.

Consolidated Statements of Financial Position

(in thousands of United States dollars, unaudited)

	*February 28,*			*May 31,*
	*2023*			*2022*
Assets
Current assets
Cash and cash equivalents	$	164,997		$	415,909
Marketable Securities		243,286			—
Accounts receivable, net		78,342			95,279
Inventory		202,800			245,529
Prepaids and other current assets		69,087			46,786
Total current assets		758,512			803,503
Capital assets		425,263			587,499
Right-of-use assets		6,492			12,996
Intangible assets		994,325			1,277,875
Goodwill		2,005,701			2,641,305
Interest in equity investees		4,638			4,952
Long-term investments		7,620			10,050
Convertible notes receivable		168,356			111,200
Other assets		4,993			314
Total assets	$	4,375,900		$	5,449,694
Liabilities
Current liabilities
Bank indebtedness	$	18,125		$	18,123
Accounts payable and accrued liabilities		163,422			157,431
Contingent consideration		16,219			16,007
Warrant liability		7,414			14,255
Current portion of lease liabilities		2,528			6,703
Current portion of long-term debt		77,892			67,823
Current portion of convertible debentures payable		184,082			—
Total current liabilities		469,682			280,342
Long - term liabilities
Contingent consideration		10,596			—
Lease liabilities		8,598			11,329
Long-term debt		89,419			117,879
Convertible debentures payable		223,087			401,949
Deferred tax liabilities		164,412			196,638
Other liabilities		3,335			191
Total liabilities		969,129			1,008,328
Commitments and contingencies (refer to Note 17)
Stockholders' equity
Common stock ($0.0001 par value; 980,000,000 shares authorized; 617,857,031 and 532,674,887 shares issued and outstanding, respectively)		62			53
Series A Preferred Stock ($0.0001 par value; 10,000,000 shares authorized; 120,000 and nil shares issued and outstanding, respectively)		—			—
Additional paid-in capital		5,723,342			5,382,367
Accumulated other comprehensive loss		(42,948	)		(20,764	)
Accumulated Deficit		(2,276,794	)		(962,851	)
Total Tilray Brands, Inc. stockholders' equity		3,403,662			4,398,805
Non-controlling interests		3,109			42,561
Total stockholders' equity		3,406,771			4,441,366
Total liabilities and stockholders' equity	$	4,375,900		$	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*						*Nine months ended*
	*February 28,*						*February 28,*
	*2023*			*2022*			*2023*			*2022*
Net revenue	$	145,589		$	151,871		$	442,936		$	475,047
Cost of goods sold		157,288			112,042			363,139			351,497
Gross profit (loss)		(11,699	)		39,829			79,797			123,550
Operating expenses:
General and administrative		38,999			38,445			117,385			121,401
Selling		6,452			8,641			25,792			25,283
Amortization		23,518			24,590			71,872			84,345
Marketing and promotion		7,354			7,578			23,137			20,163
Research and development		171			164			502			1,464
Change in fair value of contingent consideration		352			(30,747	)		563			(29,065	)
Impairments		1,115,376			—			1,115,376			—
Litigation (recovery) costs		(5,230	)		4,215			(1,970	)		6,489
Restructuring costs		2,663			—			10,727			795
Transaction (income) costs		5,382			5,023			(3,882	)		35,653
Total operating expenses		1,195,037			57,909			1,359,502			266,528
Operating loss		(1,206,736	)		(18,080	)		(1,279,705	)		(142,978	)
Interest expense, net		(1,040	)		(2,312	)		(8,560	)		(22,422	)
Non-operating income (expense), net		1,213			71,037			(50,229	)		186,329
(Loss) income before income taxes		(1,206,563	)		50,645			(1,338,494	)		20,929
Income taxes (benefit) expense		(10,811	)		(1,830	)		(15,313	)		(2,739	)
Net (loss) income	$	(1,195,752	)	$	52,475		$	(1,323,181	)	$	23,668
Total net income (loss) attributable to:
Stockholders of Tilray Brands, Inc.		(1,170,998	)		43,190			(1,313,943	)		1,340
Non-controlling interests		(24,754	)		9,285			(9,238	)		22,328
Other comprehensive gain (loss), net of tax
Foreign currency translation gain (loss)		6,390			18,498			(78,499	)		(114,641	)
Unrealized gain (loss) on convertible notes receivable		95,345			(39,296	)		75,177			(56,250	)
Total other comprehensive gain (loss), net of tax		101,735			(20,798	)		(3,322	)		(170,891	)
Comprehensive (loss) income	$	(1,094,017	)	$	31,677		$	(1,326,503	)	$	(147,223	)
Total comprehensive income (loss) attributable to:
Stockholders of Tilray Brands, Inc.		(1,092,491	)		34,605			(1,336,127	)		(150,318	)
Non-controlling interests		(1,526	)		(2,928	)		9,624			3,095
Weighted average number of common shares - basic		615,534,670			485,668,750			597,829,714			470,303,170
Weighted average number of common shares - diluted		615,534,670			488,546,790			597,829,714			478,050,130
Net (loss) income per share - basic	$	(1.90	)	$	0.09		$	(2.20	)	$	0.00
Net (loss) income per share - diluted	$	(1.90	)	$	0.09		$	(2.20	)	$	0.00

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
Share issuance - Breckenridge Acquisition		12,540,479	$	2	$	114,066			—			—			—			114,068
Share issuance - legal settlement		2,743,485		—		20,000			—			—			—			20,000
Share issuance - options exercised		190,620		—		778			—			—			—			778
Share issuance - RSUs exercised		170,928		—		—			—			—			—			—
Share issuance - purchase of capital and intangible assets		1,289,628		—		12,146			—			—			—			12,146
Stock-based compensation		—		—		9,355			—			—			—			9,355
Comprehensive income (loss) for the period		—		—		—			(8,585	)		43,190			(2,928	)		31,677
Balance at February 28, 2022		480,737,533	$	48	$	5,110,892		$	1,010		$	(484,710	)	$	33,773		$	4,661,013

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
Share issuance - RSUs exercised		487,192		—		—			—			—			—			—
Stock-based compensation		—		—		9,630			—			—			—			9,630
Share issuance - Double Diamond Holdings note		4,188,280		1		15,912			—			—			(8,235	)		7,678
Preferred share issuance		120,000		—		334			—			—			—			334
Comprehensive income (loss) for the period		—		—		—			78,507			(1,170,998	)		(1,526	)		(1,094,017	)
Balance at February 28, 2023		617,977,031	$	62	$	5,723,342		$	(42,948	)	$	(2,276,794	)	$	3,109		$	3,406,771

Included in common stock is 120,000 of Series A preferred stock with par value of $0 as described in Note 13 (Stockholders’ equity). 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 nine months*
	*ended February 28,*
	*2023*			*2022*
Cash used in operating activities:
Net (loss) income	$	(1,323,181	)	$	23,668
Adjustments for:
Deferred income tax recovery		(29,537	)		(17,296	)
Unrealized foreign exchange loss		13,711			1,699
Amortization		101,156			113,824
Loss (gain) on sale of capital assets		(2	)		(631	)
Inventory valuation write down		55,000			12,000
Impairments		1,115,376			—
Other non-cash items		12,933			962
Stock-based compensation		29,766			27,025
Loss (gain) on long-term investments & equity investments		2,843			(2,401	)
Loss (gain) on derivative instruments		13,534			(210,653	)
Change in fair value of contingent consideration		563			(29,065	)
Change in non-cash working capital:
Accounts receivable		18,053			(458	)
Prepaids and other current assets		(32,680	)		(953	)
Inventory		(11,808	)		(16,512	)
Accounts payable and accrued liabilities		(1,419	)		(57,947	)
Net cash used in operating activities		(35,692	)		(156,738	)
Cash used in investing activities:
Investment in capital and intangible assets		(8,394	)		(28,470	)
Proceeds from disposal of capital and intangible assets		2,175			11,526
Purchase of marketable securities, net		(243,186	)		—
Net cash paid for business acquisition		(28,122	)		326
Net cash used in investing activities		(277,527	)		(16,618	)
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	)		(3,149	)
Proceeds from long-term debt		1,288			—
Repayment of long-term debt and convertible debt		(64,658	)		(34,570	)
Repayment of lease liabilities		(1,114	)		(4,672	)
Net increase in bank indebtedness		2			8,779
Net cash provided by (used in) financing activities		63,922			(33,612	)
Effect of foreign exchange on cash and cash equivalents		(1,615	)		(2,284	)
Net decrease in cash and cash equivalents		(250,912	)		(209,252	)
Cash and cash equivalents, beginning of period		415,909			488,466
Cash and cash equivalents, end of period	$	164,997		$	279,214

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

TILRAY BRANDS, INC.

Notes to Consolidated Financial Statements

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

The accompanying unaudited condensed interim consolidated financial statements (the “financial statements”) reflect the accounts of the Company for the quarterly period ended February 28, 2023. The financial statements were prepared in accordance with generally accepted accounting principles in the United States of America (“U.S. GAAP”) for interim financial information and pursuant to the rules and regulations of the United States Securities and Exchange Commission (“SEC”) for interim financial information. Accordingly, they do not include all of the information and notes required by U.S. GAAP and should be read in conjunction with the audited consolidated financial statements (the “Annual Financial Statements”) included in the Company’s Annual Report on Form 10-K for the fiscal year ended May 31, 2022 (the “Annual Report”). These unaudited condensed interim consolidated financial statements reflect all adjustments, which, in the opinion of management, are necessary for a fair presentation of the results for the interim periods presented. Interim results are not necessarily indicative of results for a full year.

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

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

Basis of consolidation

Subsidiaries are entities controlled by the Company. Control exists when the Company either has a controlling voting interest or is the primary beneficiary of a variable interest entity. The financial statements of subsidiaries are included in the condensed interim consolidated financial statements from the date that control commences until the date that control ceases. A complete list of our subsidiaries that existed prior to our most recent year end is included in the Annual Report.

On February 10, 2023, the Company divested its ownership interest in ASG Pharma Ltd., a wholly-owned subsidiary incorporated in Malta, and, therefore, it is no longer consolidated in the Company's results. The Company recognized a gain of $312 in other non-operating (losses) gains, net as a result of the disposal.

Marketable Securities

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

Long-term investments

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

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

Earnings (loss) per share

Basic earnings (loss) per share is computed by dividing reported net income (loss) 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 nine months ended February 28, 2023, the dilutive potential common share equivalents outstanding consist of the following: 16,431,876 common shares from RSUs, 4,660,046 common shares from share options, 6,209,000 common shares from warrants and 36,388,651 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 23 (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 will be applied prospectively on or after the effective date of the amendments. The Company is currently evaluating the effect of adopting this ASU.

New accounting pronouncements recently adopted

In 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 2. Inventory

Inventory consisted of the following:

	*February 28,*		*May 31,*
	*2023*		*2022*
Plants	$	13,566	$	14,521
Dried cannabis		84,066		116,739
Cannabis trim		591		592
Cannabis derivatives		8,557		24,685
Cannabis vapes		2,631		542
Packaging and other inventory items		17,621		21,691
Wellness inventory		12,797		13,275
Beverage alcohol inventory		30,100		27,840
Distribution inventory		32,871		25,644
Total	$	202,800	$	245,529

During the three and nine months ended February 28, 2023, the Company recorded charges of $55,000 for an inventory valuation adjustment as a component of cannabis cost of good sold, compared to $nil and $12,000 for the three and nine months ended February 28, 2022. This charge was driven by the decision of management to repurpose a portion of our existing supply of dried cannabis inventory.

Note 3. Capital assets

Capital assets consisted of the following:

	*February 28,*			*May 31,*
	*2023*			*2022*
Land	$	29,056		$	31,882
Production facility		353,630			453,412
Equipment		199,453			254,486
Leasehold improvement		7,764			7,455
Construction in progress		8,909			7,505
	$	598,812		$	754,740
Less: accumulated amortization		(173,549	)		(167,241	)
Total	$	425,263		$	587,499

The Company recorded non-cash impairments of $81,500 on its production facility in Canada and $22,500 on its equipment for the three and nine months ended February 28, 2023, which the Company has temporarily made idle in order to reduce cultivation costs and right-size the Company's production to align with current and projected demand. The impairment was calculated based on the excess of carrying value over fair value which was determined using a market approach. A reasonably possible change in any of the inputs within the determination of fair value would not result in a material change to the impairment recorded.

Note 4. Intangible Assets

Intangible assets consisted of the following items:

	*February 28,*			*May 31,*
	*2023*			*2022*
Customer relationships & distribution channel	$	613,461		$	617,437
Licenses, permits & applications		367,649			377,897
Non-compete agreements		13,644			12,512
Intellectual property, trademarks, knowhow & brands		585,777			634,997
		1,580,531		$	1,642,843
Less: accumulated amortization		(170,362	)	$	(154,124	)
Less: impairments		(415,844	)		(210,844	)
Total	$	994,325		$	1,277,875

The Company recorded non-cash impairments of $110,000 of its customer relationships & distribution channel, $55,000 of its licenses, permits & applications and $40,000 of its intellectual property, trademarks, knowhow & brands for the three and nine months ended February 28, 2023, as a result of the decline in market share in its Canadian cannabis with certain product lines and customers. As of February 28, 2023, included in licenses, permits & applications is $182,009 of indefinite-lived intangible assets. As of May 31, 2022, there was $248,411 of indefinite-lived intangible assets included in Licenses, permits & applications.

In calculating the impairment amount, using an income approach, the Company used a discount rate of 13.50%, increased from