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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 29, 2024

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 05, 2024, the registrant had 774,028,558 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

50

Item 4.

Controls and Procedures

50

PART II.

OTHER INFORMATION

51

Item 1.

Legal Proceedings

51

Item 1A.

Risk Factors

52

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

53

Item 3.

Defaults Upon Senior Securities

53

Item 4.

Mine Safety Disclosures

53

Item 5.

Other Information

53

Item 6.

Exhibits

54

Signatures

56

 

 

  

 

Cautionary Note Regarding Forward-Looking Statements

 

This Quarterly Report on Form 10-Q for the quarter ended February 29, 2024 (the “Form 10-Q”) contains forward-looking statements under Canadian securities laws and within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended, that are intended to be subject to the "safe harbor" created by those sections and other applicable laws. Such statements involve risks, uncertainties and assumptions. If the risks or uncertainties ever materialize or the assumptions prove incorrect, our results may differ materially from those expressed or implied by such forward-looking statements  under the Canadian securities laws and within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended, that are intended to be subject to the “safe harbor” created by those sections and other applicable laws. The words “anticipate,” “believe,” “continue,” “could,” “estimate,” “expect,” “intend,” “may,” “might,” “plan,” “project,” “will,” “would,” “seek,” or “should,” or the negative or plural of these words or similar expressions or variations are intended to identify such forward-looking statements. Forward-looking statements include, among other things, our beliefs or expectations relating to our future performance, results of operations and financial condition; our intentions or expectations regarding our cost savings initiatives; our strategic initiatives, business strategy, supply chain, brand portfolio, product performance and expansion efforts; current or future macroeconomic trends; our expectations regarding regulatory developments; our expectations regarding any future tax developments; future corporate acquisitions and strategic transactions; and our synergies, cash savings and efficiencies anticipated from the integration of our completed acquisitions and strategic transactions.

 

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

 

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

 

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

 

 

 

 

 

PART IFINANCIAL INFORMATION

 

Item 1. Financial Statements (Unaudited).

TILRAY BRANDS, INC.

Consolidated Statements of Financial Position

(in thousands of United States dollars, unaudited)

 

 

  

February 29,

  

May 31,

 
  

2024

  

2023

 

Assets

        

Current assets

        

Cash and cash equivalents

 $146,253  $206,632 

Marketable securities

  79,605   241,897 

Accounts receivable, net

  89,542   86,227 

Inventory

  244,139   200,551 

Prepaids and other current assets

  43,034   37,722 

Assets held for sale

  28,638    

Total current assets

  631,211   773,029 

Capital assets

  578,783   429,667 

Operating lease, right-of-use assets

  17,453   5,941 

Intangible assets

  930,105   973,785 

Goodwill

  2,009,632   2,008,843 

Interest in equity investees

     4,576 

Long-term investments

  8,058   7,795 

Convertible notes receivable

  32,000   103,401 

Other assets

  5,614   222 

Total assets

 $4,212,856  $4,307,259 

Liabilities

        

Current liabilities

        

Bank indebtedness

 $15,029  $23,381 

Accounts payable and accrued liabilities

  209,763   190,682 

Contingent consideration

     16,218 

Warrant liability

  3,182   1,817 

Current portion of lease liabilities

  5,424   2,423 

Current portion of long-term debt

  12,351   24,080 

Current portion of convertible debentures payable

  83,351   174,378 

Total current liabilities

  329,100   432,979 

Long - term liabilities

        

Contingent consideration

  14,000   10,889 

Lease liabilities

  73,228   7,936 

Long-term debt

  165,648   136,889 

Convertible debentures payable

  126,587   221,044 

Deferred tax liabilities, net

  161,042   167,364 

Other liabilities

  210   215 

Total liabilities

  869,815   977,316 

Commitments and contingencies (refer to Note 19)

          

Stockholders' equity

        

Common stock ($0.0001 par value; 1,198,000,000 common shares authorized; 774,028,053 and 656,655,455 common shares issued and outstanding, respectively)

  77   66 

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

      

Additional paid-in capital

  6,030,709   5,777,743 

Accumulated other comprehensive loss

  (43,187)  (46,610)

Accumulated Deficit

  (2,628,741)  (2,415,507)

Total Tilray Brands, Inc. stockholders' equity

  3,358,858   3,315,692 

Non-controlling interests

  (15,817)  14,251 

Total stockholders' equity

  3,343,041   3,329,943 

Total liabilities and stockholders' equity

 $4,212,856  $4,307,259 

 

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

 

1

 

 

TILRAY BRANDS, INC.

Consolidated Statements of Loss and Comprehensive Loss

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

 

  

Three months ended

  

Nine months ended

 
  February 29,  February 28,  February 29,  February 28, 
  

2024

  

2023

  

2024

  

2023

 

Net revenue

 $188,340  $145,589  $559,060  $442,936 

Cost of goods sold

  138,944   157,288   418,059   363,139 

Gross profit (loss)

  49,396   (11,699)  141,001   79,797 

Operating expenses:

                

General and administrative

  39,940   38,999   123,769   117,385 

Selling

  9,995   6,452   24,437   25,792 

Amortization

  21,558   23,518   65,700   71,872 

Marketing and promotion

  11,191   7,354   28,934   23,137 

Research and development

  106   171   241   502 

Change in fair value of contingent consideration

  (5,983)  352   (16,790)  563 

Impairments

     934,000      934,000 

Other than temporary change in fair value of convertible notes receivable

  42,681   181,376   42,681   181,376 

Litigation costs, net of recoveries

  3,363   (5,230)  8,439   (1,970)

Restructuring costs

  5,178   2,663   8,748   10,727 

Transaction costs (income)

  3,465   5,382   13,061   (3,882)

Total operating expenses

  131,494   1,195,037   299,220   1,359,502 

Operating loss

  (82,098)  (1,206,736)  (158,219)  (1,279,705)

Interest expense, net

  (8,517)  (1,040)  (26,977)  (8,560)

Non-operating income (expense), net

  (17,239)  1,213   (20,820)  (50,229)

Loss before income taxes

  (107,854)  (1,206,563)  (206,016)  (1,338,494)

Income tax (recovery) expense

  (2,871)  (10,811)  1,013   (15,313)

Net loss

 $(104,983) $(1,195,752) $(207,029) $(1,323,181)

Total net income (loss) attributable to:

                

Stockholders of Tilray Brands, Inc.

  (92,701)  (1,170,998)  (213,234)  (1,313,943)

Non-controlling interests

  (12,282)  (24,754)  6,205   (9,238)

Other comprehensive gain (loss), net of tax

                

Foreign currency translation gain (loss)

  (4,696)  6,390   3,716   (78,499)

Unrealized gain (loss) on convertible notes receivable

     95,345      75,177 

Total other comprehensive gain (loss), net of tax

  (4,696)  101,735   3,716   (3,322)

Comprehensive loss

 $(109,679) $(1,094,017) $(203,313) $(1,326,503)

Total comprehensive income (loss) attributable to:

                

Stockholders of Tilray Brands, Inc.

  (97,521)  (1,092,491)  (209,811)  (1,336,127)

Non-controlling interests

  (12,158)  (1,526)  6,498   9,624 

Weighted average number of common shares - basic

  754,439,331   615,534,670   725,346,952   597,829,714 

Weighted average number of common shares - diluted

  754,439,331   615,534,670   725,346,952   597,829,714 

Net loss per share - basic

 $(0.12) $(1.90) $(0.29) $(2.20)

Net loss per share - diluted

 $(0.12) $(1.90) $(0.29) $(2.20)

 

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

 

2

 

 

TILRAY BRANDS, INC.

Consolidated Statements of Stockholders Equity

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

 

              

Accumulated

             
  

Number of

      

Additional

  

other

      

Non-

     
  

common

  

Common

  

paid-in

  

comprehensive

  

Accumulated

  

controlling

     
  

shares

  

stock

  

capital

  

loss

  

Deficit

  

interests

  

Total

 

Balance at May 31, 2022

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

Share issuance - equity financing

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

Shares issued to purchase HEXO convertible note receivable

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

HTI Convertible Note - conversion feature

        9,055            9,055 

Share issuance - Double Diamond Holdings dividend settlement

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

Share issuance - options exercised

  3,777                   

Share issuance - RSUs exercised

  950,893                   

Shares effectively repurchased for employee withholding tax

        (1,189)           (1,189)

Stock-based compensation

        9,193            9,193 

Dividends declared to non-controlling interests

                 (8,561)  (8,561)

Comprehensive income (loss) for the period

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

Balance at August 31, 2022

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

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 dividend settlement

  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 dividend settlement

  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 
                             

Balance at May 31, 2023

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

Share issuance - HEXO acquisition

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

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

  865,426      1,500            1,500 

Share issuance - Double Diamond Holdings dividend settlement

  5,004,735      8,146            8,146 

Share issuance - HTI convertible note

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

Share issuance - RSUs exercised

  3,912,481                   

Shares effectively repurchased for employee withholding tax

        (4,860)           (4,860)

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

        3,953            3,953 

Stock-based compensation

        8,257            8,257 

Dividends declared to non-controlling interests

                 (7,891)  (7,891)

Comprehensive income (loss) for the period

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

Balance at August 31, 2023

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

Share issuance - HTI convertible note

  1,032,616      2,313            2,313 

Share issuance - Settlement of litigation claims from MediPharm Labs Inc

  1,573,152      3,477            3,477 

Share issuance - Repurchase of TLRY 23 convertible note

  7,000,000   1   20,457            20,458 

Share issuance - Settlement of equity component of TLRY 23 convertible note

        (1,672)           (1,672)

Share issuance - RSUs exercised

  9,184                   

Stock-based compensation

        8,201            8,201 

Comprehensive income (loss) for the period

           5,194   (49,008)  2,834   (40,980)

Balance at November 30, 2023

  732,907,552   73   5,942,671   (38,367)  (2,536,040)  25,016   3,393,353 

Share issuance - Repurchase of APHA 24 convertible note

  27,228,252   3   51,380            51,383 

Share issuance - Double Diamond Holdings dividend settlement

  13,627,391   1   28,599         (26,217)  2,383 

Share issuance - RSUs exercised

  260,567                   

Share issuance - options exercised

  4,291                   

Stock-based compensation

        8,059            8,059 

Dividends declared to non-controlling interests

                 (2,458)  (2,458)

Comprehensive income (loss) for the period

           (4,820)  (92,701)  (12,158)  (109,679)

Balance at February 29, 2024

  774,028,053  $77  $6,030,709  $(43,187) $(2,628,741) $(15,817) $3,343,041 

 

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 29,  February 28, 
  

2024

  

2023

 

Cash used in operating activities:

        

Net loss

 $(207,029) $(1,323,181)

Adjustments for:

        

Deferred income tax recovery

  (7,399)  (29,537)

Unrealized foreign exchange (gain) loss

  (6,622)  13,711 

Amortization

  95,183   101,156 

Accretion of convertible debt discount

  11,463   7,941 

Inventory valuation write down

     55,000 

Impairments

     934,000 

Other than temporary change in fair value of convertible notes receivable

  42,681   181,376 

Other non-cash items

  13,297   4,990 

Stock-based compensation

  24,517   29,766 

(Gain) loss on long-term investments & equity investments

  4,255   2,843 

Loss on derivative instruments

  13,717   13,534 

Change in fair value of contingent consideration

  (16,790)  563 

Change in non-cash working capital:

        

Accounts receivable

  5,578   18,053 

Prepaids and other current assets

  1,148   (32,680)

Inventory

  (4,629)  (11,808)

Accounts payable and accrued liabilities

  (30,982)  (1,419)

Net cash used in operating activities

  (61,612)  (35,692)

Cash provided by (used in) investing activities:

        

Investment in capital and intangible assets

  (19,539)  (8,394)

Proceeds from disposal of capital and intangible assets

  1,166   2,175 

Disposal (purchase) of marketable securities, net

  162,292   (243,186)

Business acquisitions, net of cash acquired

  (60,626)  (28,122)

Net cash provided by (used in) investing activities

  83,293   (277,527)

Cash provided by (used in) financing activities:

        

Share capital issued, net of cash issuance costs

     129,593 

Shares effectively repurchased for employee withholding tax

     (1,189)

Proceeds from long-term debt

  32,621   1,288 

Repayment of long-term debt

  (17,978)  (64,658)

Proceeds from convertible debt

  21,553    

Repayment of convertible debt

  (107,330)   

Repayment of lease liabilities

  (2,771)  (1,114)

Net increase (decrease) in bank indebtedness

  (8,352)  2 

Net cash provided by (used in) financing activities

  (82,257)  63,922 

Effect of foreign exchange on cash and cash equivalents

  197   (1,615)

Net decrease in cash and cash equivalents

  (60,379)  (250,912)

Cash and cash equivalents, beginning of period

  206,632   415,909 

Cash and cash equivalents, end of period

 $146,253  $164,997 

 

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 29, 2024. The financial statements were prepared in accordance with generally accepted accounting principles in the United States of America (“U.S. GAAP”) for interim financial information and pursuant to the rules and regulations of the United States Securities and Exchange Commission (“SEC”) for interim financial information. Accordingly, they do not include all of the information and notes required by U.S. GAAP and should be read in conjunction with the audited consolidated financial statements (the “Annual Financial Statements”) included in the Company’s Annual Report on Form 10-K for the fiscal year ended  May 31, 2023 (the “Annual Report”). These unaudited condensed interim consolidated financial statements reflect all adjustments, which, in the opinion of management, are necessary for a fair presentation of the results for the interim periods presented. Interim results are not necessarily indicative of results for a full year. 

 

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

 

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

 

Certain items of the comparative figures have been changed to conform to the presentation adopted in the current period. 

 

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 all subsidiaries are included in the condensed interim consolidated financial statements from the date that control commences until the date that control ceases. All intercompany balances and transactions have been eliminated on consolidation. A complete list of our subsidiaries that existed as of our most recent fiscal year end is included in the Annual Report, except for the entities acquired within Note 7 (Business acquisitions) during the nine months ended February 29, 2024.

 

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), net”.

 

Restricted cash

 

We classify cash that is legally or contractually restricted as to withdrawal or usage as restricted cash. As of February 29, 2024, and May 31, 2023, the Company reported $nil restricted cash. During the six months ended November 31, 2023, the Company acquired $1,656 of restricted cash related to letters of credit and collateral from the acquisition of HEXO Corp. as described in Note 7 (Business acquisitions). During the three months ended February 29, 2024, all of the restricted cash was released and transferred to cash and cash equivalents.

 

Assets held for sale

 

We classify capital assets that are available for immediate sale in their present condition, which the Company has approved the action or plan to sell, and the sales is probable within one year, as assets held for sale. As of February 29, 2024, the Company reported $28,638 assets held for sale related to the Kirkland lake property, the Quebec cultivation facility and the Fort Collins facility, see Note 3 (Capital assets). Assets held for sale are to be measured at the lower of carrying amount and the fair value less costs to sell. Disposition of assets held for sale are recorded in the statement of net loss and comprehensive loss, within the line, “Non-operating income (expense)”.

 

When there are changes in circumstances that were previously considered unlikely to occur, and it is decided not to proceed with a sale, an asset that was previously classified as assets held for sale is reclassified as held and used. The asset is then remeasured at the lower of its carrying amount before being classified as held for sale less the amortization that would have occurred and the fair value on the date the decision not to proceed with a sale was made. Changes in the carrying amount are recorded in the statement of net loss and comprehensive loss. 

 

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 an individual equity investment is less than its carrying value. Changes in value are recorded in the statement of net loss and comprehensive loss, within the line, “Non-operating income (expense), net”.

 

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 consolidated statements of loss and comprehensive loss. Equity method investments are recorded at cost, adjusted for the Company’s share of undistributed earnings or losses, and impairment, if any, within “Interest in equity investees” on the balance sheets. The Company assesses investments in equity method investments when events or circumstances indicate that the carrying amount of the investment may be impaired. If it is determined that the current fair value of an equity method investment is less than the carrying value of the investment, the Company will assess if the shortfall is other than temporary (OTTI). Evidence of a loss in value might include, but would not necessarily be limited to, the 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 Fair Value Measurement at the reporting date, which establishes a new cost basis.

 

Convertible notes receivable

 

Convertible notes receivable includes 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 consolidated 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 loss and the remaining amount is recorded in other comprehensive income (loss).

 

Revenue

 

Revenue is recognized when the control of the promised goods or services, through performance obligation, is transferred or 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 loss and comprehensive loss and recognized as a current liability within accounts payable and accrued liabilities on the consolidated balance sheets, with the liability subsequently reduced when the taxes are remitted to the tax authority.

 

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

 

6

 

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

 

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

 

On July 12, 2022, the Company and HEXO Corp. ("HEXO") entered into various commercial transaction agreements, as described in Note 26 (Segment reporting), which included an advisory services arrangement. The fees associated with the advisory services arrangement were recognized as revenue when such services were provided to HEXO. Any payments that were received for such services in advance of performance were recognized as a contract liability. On June 22, 2023, the Company completed the acquisition of HEXO, as described in Note 7 (Business acquisitions), simultaneously terminating the advisory services arrangement and other commercial transactions.

 

Transaction (income) costs 

 

The Company expenses costs net of any gains directly attributable to business acquisitions and classifies these items as transaction (income) costs. These items include among other things, legal fees to complete the acquisition, financial advisor and due diligence costs, and transaction related compensation. These items are recognized as incurred.

 

Earnings (loss) per share

 

Basic earnings (loss) per share is computed by dividing reported net income (loss) attributable to stockholders of Tilray Brands, Inc. by the weighted average number of common shares outstanding during the year. Diluted earnings (loss) per share is computed by dividing reported net income (loss) attributable to stockholders of Tilray Brands, Inc. by the sum of the weighted average number of common shares and the number of dilutive potential common share equivalents outstanding during the period. Potential dilutive common share equivalents consist of the incremental common shares issuable upon the exercise of vested share options, warrants, and RSUs and the incremental shares issuable upon conversion of the convertible debentures and similar instruments. Shares of common stock outstanding under the share lending arrangement entered into in conjunction with the TLRY 27 Notes, see Note 13 (Convertible debentures payable) are excluded from the calculation of basic and diluted earnings per share because the borrower of the shares is required under the share lending arrangement to refund any dividends paid on the shares lent. 

 

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 29, 2024 and  February 28, 2023, the dilutive potential common share equivalents outstanding consisted of the following: 20,652,315 and 16,431,876 common shares from RSUs, 5,744,302 and 4,660,046 common shares from share options, 6,209,000 and 6,209,000 common shares for warrants and 72,653,364 and 36,388,651 common shares for convertible debentures, respectively.

 

New accounting pronouncements not yet adopted

 

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

 

In October 2023, the FASB issued ASU 2023-06, Disclosure Improvements: Codification Amendments in Response to the SEC’s Disclosure Update and Simplification Initiative, which amends the disclosure or presentation requirements related to various subtopics in the FASB Accounting Standards Codification (the “Codification”). The effective date for each amendment will be the date on which the SEC’s removal of that related disclosure from Regulation S-X or Regulation S-K becomes effective, with early adoption prohibited. If by June 30, 2027, the SEC has not removed the applicable requirement from Regulation S-X or Regulation S-K, the pending content of the related amendment will be removed from the Codification and will not become effective for any entity. The Company is currently evaluating the effect of adopting this ASU.

 

In November 2023, the FASB issued ASU 2023-07, Segment Reporting (Topic 280) Improvements to Reportable Segment Disclosures, which requires public entities to disclose information about their reportable segments’ significant expenses on an interim and annual basis. ASU 2023-07 is effective for the Company beginning the year ended May 31, 2025. The Company is currently evaluating the effect of adopting this ASU.

 

In December 2023, the FASB issued ASU 2023-09, Income Taxes (Topic 740) Improvements to Income Tax Disclosures, which requires public entities to disclose specific categories in the rate reconciliation and provide additional information for reconciling items that meet a quantitative threshold on an annual basis. ASU 2023-09 is effective for the Company beginning the year ended June 01, 2024. The Company is currently evaluating the effect of adopting this ASU.

 

New accounting pronouncements recently adopted

 

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

 

7

  
 

Note 2. Inventory

 

Inventory consisted of the following:

 

  February 29,  May 31, 
  2024  2023 

Beverage alcohol inventory

 $47,606  $27,837 

Plants

  18,623   10,884 

Dried cannabis

  102,043   89,801 

Cannabis trim

     322 

Cannabis derivatives

  4,385   9,229 

Cannabis vapes

  5,250