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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 February 28, 2023

OR

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

For the transition period from to

Commission File Number: 001-38594


TILRAY BRANDS, INC.

(Exact Name of Registrant as Specified in its Charter)


 

Delaware

82-4310622

(State or other jurisdiction of

incorporation or organization)

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

265 Talbot Street West,

Leamington, ON

N8H 5L4

(Address of principal executive offices)

(Zip Code)

 

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


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

 

Title of each class

 

Trading

Symbol(s)

 

Name of each exchange on which registered

Common Stock, $0.0001 par value per share

 

TLRY

 

The Nasdaq Global Select Market

 

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

 

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

 

 

 

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

 

Large accelerated filer

Accelerated filer

 

Non-accelerated filer

Smaller reporting company

 

Emerging growth company

  

 

 

 

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

 

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

 

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

 

As of 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 IFINANCIAL 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.

 

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

   

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.

 

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  

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.

 

3

 

 

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.

 

4

 

TILRAY BRANDS, INC.

Notes to Consolidated Financial Statements

 

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

 

The accompanying unaudited condensed interim consolidated financial statements (the “financial statements”) reflect the accounts of the Company for the quarterly period ended 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)”.

 

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 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.

 

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 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, 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.

 

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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.

 

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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