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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, DC 20549

 


 

FORM 10-Q


 

(Mark One)

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

For the quarterly period ended November 30, 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 January 5, 2024, the registrant had 742,725,148 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

29

Item 3.

Quantitative and Qualitative Disclosures About Market Risk

52

Item 4.

Controls and Procedures

52

PART II.

OTHER INFORMATION

53

Item 1.

Legal Proceedings

53

Item 1A.

Risk Factors

54

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

55

Item 3.

Defaults Upon Senior Securities

55

Item 4.

Mine Safety Disclosures

55

Item 5.

Other Information

55

Item 6.

Exhibits

56

Signatures

58

 

 

  

 

Cautionary Note Regarding Forward-Looking Statements

 

This Quarterly Report on Form 10-Q for the quarter ended November 30, 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 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; and our expectations regarding regulatory 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)

 

  November 30,  May 31, 
  2023  2023 

Assets

        

Current assets

        

Cash and cash equivalents

 $143,373  $206,632 

Restricted cash

  1,576    

Marketable securities

  116,418   241,897 

Accounts receivable, net

  90,596   86,227 

Inventory

  252,702   200,551 

Prepaids and other current assets

  36,626   37,722 

Assets held for sale

  736    

Total current assets

  642,027   773,029 

Capital assets

  615,087   429,667 

Operating lease, right-of-use assets

  13,551   5,941 

Intangible assets

  953,419   973,785 

Goodwill

  2,009,714   2,008,843 

Interest in equity investees

  4,638   4,576 

Long-term investments

  8,034   7,795 

Convertible notes receivable

  74,681   103,401 

Other assets

  9,406   222 

Total assets

 $4,330,557  $4,307,259 

Liabilities

        

Current liabilities

        

Bank indebtedness

 $20,181  $23,381 

Accounts payable and accrued liabilities

  216,898   190,682 

Contingent consideration

  7,704   16,218 

Warrant liability

  3,768   1,817 

Current portion of lease liabilities

  5,043   2,423 

Current portion of long-term debt

  12,993   24,080 

Current portion of convertible debentures payable

  128,399   174,378 

Total current liabilities

  394,986   432,979 

Long - term liabilities

        

Contingent consideration

  13,000   10,889 

Lease liabilities

  69,974   7,936 

Long-term debt

  169,099   136,889 

Convertible debentures payable

  123,691   221,044 

Deferred tax liabilities

  166,454   167,364 

Other liabilities

     215 

Total liabilities

  937,204   977,316 

Commitments and contingencies (refer to Note 19)

          

Stockholders' equity

        

Common stock ($0.0001 par value; 1,198,000,000 common shares authorized; 732,907,552 and 656,655,455 common shares issued and outstanding, respectively)

  73   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

  5,942,671   5,777,743 

Accumulated other comprehensive loss

  (38,367)  (46,610)

Accumulated Deficit

  (2,536,040)  (2,415,507)

Total Tilray Brands, Inc. stockholders' equity

  3,368,337   3,315,692 

Non-controlling interests

  25,016   14,251 

Total stockholders' equity

  3,393,353   3,329,943 

Total liabilities and stockholders' equity

 $4,330,557  $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

   

Six months ended

 
   

November 30,

   

November 30,

 
   

2023

   

2022

   

2023

   

2022

 

Net revenue

  $ 193,771     $ 144,136     $ 370,720     $ 297,347  

Cost of goods sold

    146,362       101,254       279,115       205,851  

Gross profit

    47,409       42,882       91,605       91,496  

Operating expenses:

                               

General and administrative

    43,313       37,878       83,829       78,386  

Selling

    7,583       9,669       14,442       19,340  

Amortization

    21,917       23,995       44,142       48,354  

Marketing and promotion

    9,208       8,535       17,743       15,783  

Research and development

    56       165       135       331  

Change in fair value of contingent consideration

    300             (10,807 )     211  

Litigation costs, net of recoveries

    3,042       2,815       5,076       3,260  

Restructuring costs

    2,655       8,064       3,570       8,064  

Transaction (income) costs

    1,094       3,552       9,596       (9,264 )

Total operating expenses

    89,168       94,673       167,726       164,465  

Operating loss

    (41,759 )     (51,791 )     (76,121 )     (72,969 )

Interest expense, net

    (8,625 )     (3,107 )     (18,460 )     (7,520 )

Non-operating income (expense), net

    821       (18,450 )     (3,581 )     (51,442 )

Loss before income taxes

    (49,563 )     (73,348 )     (98,162 )     (131,931 )

Income tax (recovery) expense

    (3,380 )     (11,713 )     3,884       (4,502 )

Net loss

  $ (46,183 )   $ (61,635 )   $ (102,046 )   $ (127,429 )

Total net income (loss) attributable to:

                               

Stockholders of Tilray Brands, Inc.

    (49,008 )     (69,463 )     (120,533 )     (142,945 )

Non-controlling interests

    2,825       7,828       18,487       15,516  

Other comprehensive gain (loss), net of tax

                               

Foreign currency translation gain (loss)

    5,203       (24,597 )     8,412       (84,889 )

Unrealized gain (loss) on convertible notes receivable

          (17,643 )           (20,168 )

Total other comprehensive loss, net of tax

    5,203       (42,240 )     8,412       (105,057 )

Comprehensive loss

  $ (40,980 )   $ (103,875 )   $ (93,634 )   $ (232,486 )

Total comprehensive income (loss) attributable to:

                               

Stockholders of Tilray Brands, Inc.

    (43,814 )     (111,186 )     (112,290 )     (243,636 )

Non-controlling interests

    2,834       7,311       18,656       11,150  

Weighted average number of common shares - basic

    730,769,132       611,711,377       710,877,859       589,112,358  

Weighted average number of common shares - diluted

    730,769,132       611,711,377       710,877,859       589,112,358  

Net loss per share - basic

  $ (0.07 )   $ (0.11 )   $ (0.17 )   $ (0.24 )

Net loss per share - diluted

  $ (0.07 )   $ (0.11 )   $ (0.17 )   $ (0.24 )

 

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 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  
                                                         

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  

 

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

 

3

 

 

TILRAY BRANDS, INC.

Consolidated Statements of Cash Flows

(in thousands of United States dollars, unaudited)

 

  

For the six months

 
  

ended November 30,

 
  

2023

  

2022

 

Cash used in operating activities:

        

Net loss

 $(102,046) $(127,429)

Adjustments for:

        

Deferred income tax recovery

  (4,042)  (12,941)

Unrealized foreign exchange (gain) loss

  (5,604)  2,261 

Amortization

  62,341   67,387 

(Gain) loss on sale of capital assets

  (20)  13 

Other non-cash items

  (2,623)  10,372 

Stock-based compensation

  16,458   20,136 

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

  (412)  1,918 

Loss on derivative instruments

  7,992   18,997 

Change in fair value of contingent consideration

  (10,807)  211 

Change in non-cash working capital:

        

Accounts receivable

  4,524   6,690 

Prepaids and other current assets

  3,764   (7,780)

Inventory

  8,669   5,046 

Accounts payable and accrued liabilities

  (24,445)  (1,941)

Net cash used in operating activities

  (46,251)  (17,060)

Cash provided by (used in) investing activities:

        

Investment in capital and intangible assets, net

  (10,011)  (7,537)

Proceeds from disposal of capital and intangible assets

  365   2,160 

Disposal (purchase) of marketable securities, net

  125,479   (243,186)

Business acquisitions, net of cash acquired

  (60,626)  (24,372)

Net cash provided by (used in) investing activities

  55,207   (272,935)

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

  (14,901)  (10,420)

Proceeds from convertible debt

  21,553    

Repayment of convertible debt

  (107,330)  (48,975)

Repayment of lease liabilities

  (91)  (1,114)

Net decrease in bank indebtedness

  (3,200)  (2,819)

Net cash provided by (used in) financing activities

  (71,348)  66,364 

Effect of foreign exchange on cash and cash equivalents

  709   (2,060)

Net decrease in cash and cash equivalents

  (61,683)  (225,691)

Cash and cash equivalents, beginning of period

  206,632   415,909 

Cash and cash equivalents, end of period

 $144,949  $190,218 

 

 

Included in the statement of cash flows cash and cash equivalents is $1,576 of restricted cash as of   November 30, 2023, $nil as of May 31, 2023.  

 

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 November 30, 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, 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, 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 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, except for the entities acquired within Note 7 (Business acquisitions), during the period ended November 30, 2023.

 

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)”.

 

Restricted cash

 

We classify cash that is legally or contractually restricted as to withdrawal or usage, as restricted cash. As of November 30, 2023, the Company reported $1,576 restricted cash related to letters of credit and collateral from the acquisition of HEXO Corp. as described in Note 7 (Business acquisitions). 

 

Assets held for sale

 

We classify capital assets that are available and which are probable for immediate sale in their present condition, which the Company has approved the action or plan to sell, as assets held for sale. As of November 30, 2023, the Company reported $736 assets held for sale related to Kirkland lake property from the acquisition of HEXO Corp. as described in Note 7 (Business acquisitions). 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 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, 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, 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).

 

Revenue

 

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 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 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 months ended  November 30, 2023 and November 30, 2022, the dilutive potential common share equivalents outstanding consisted of the following: 20,939,082 and 16,884,493 common shares from RSUs, 6,280,065 and 4,674,512 common shares from share options, 6,209,000 and 6,209,000 common shares for warrants and 77,181,260 and 23,981,704 common shares for convertible debentures, respectively.

 

New accounting pronouncements not yet adopted

 

In August 2023, the FASB issued 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:

 

    November 30,     May 31,  
    2023     2023  

Plants

  $ 14,908     $ 10,884  

Dried cannabis

    107,805       89,801  

Cannabis trim

    -       322  

Cannabis derivatives

    4,814       9,229  

Cannabis vapes

    7,076       1,173  

Packaging and other inventory items

    17,924       19,997  

Wellness inventory

    11,395       11,164  

Beverage alcohol inventory

    52,371       27,837  

Distribution inventory

    36,409       30,144  

Total

  $ 252,702     $ 200,551  

  

 

Note 3. Capital assets

 

Capital assets consisted of the following:

 

    November 30,     May 31,  
    2023     2023  

Land

  $ 46,385     $ 30,635  

Production facility

    344,593       344,627  

Equipment

    319,749       185,422  

Leasehold improvement

    8,147       7,753  

Finance lease, right-of-use assets

    57,056        

Construction in progress

    12,794       8,048  
    $ 788,724     $ 576,485  

Less: accumulated amortization

    (173,637 )     (146,818 )

Total

  $ 615,087     $ 429,667  

    

8

  
 

 Note 4. Leases

 

The table below presents the lease-related assets and liabilities recorded on the balance sheet.

 

     

November 30,

   

May 31,

 
 

Classification on Balance Sheet

 

2023

   

2023

 

Assets

                 

Finance lease, right-of-use assets

Capital assets

  $ 57,056     $  

Operating lease, right-of-use assets

Right of use assets

    13,551       5,941  

Total right-of-use asset

  $ 70,607     $ 5,941  

Liabilities

                 

Current:

                 

Current portion of finance lease liabilities

Accrued lease obligations - current

  $ 1,336     $  

Current portion of operating lease liabilities

Accrued lease obligations - current

    3,707       2,423  

Non-current:

                 

Finance lease liabilities

Accrued lease obligations - non-current

    56,010        

Operating lease liabilities

Accrued lease obligations - non-current

    13,964       7,936  

Total lease liabilities

  $ 75,017     $ 10,359  

 

 

The following table presents the future undiscounted payment associated with lease liabilities as of November 30, 2023:

 

   

Operating

   

Finance

 
   

leases

   

leases

 

2024

  $ 4,106     $ 4,622  

2025

    3,295       4,699  

2026

    3,486       4,782  

2027

    3,412       4,542  

Thereafter

    4,012       87,903  

Total minimum lease payments

  $ 18,311     $ 106,548  

Imputed interest

    (640 )     (49,202 )

Obligations recognized

  $ 17,671     $ 57,346  

 

 

Note 5. Intangible Assets

 

Intangible assets consisted of the following items:

 

  

November 30,

  

May 31,

 
  

2023

  

2023

 

Customer relationships & distribution channel

 $620,876  $614,062 

Licenses, permits & applications

  370,753   366,793 

Non-compete agreements

  12,441   12,394 

Intellectual property, trademarks, knowhow & brands

  594,948   583,468 
   1,599,018  $1,576,717 

Less: accumulated amortization

  (229,755)  (187,088)

Less: impairments

  (415,844)  (415,844)

Total

 $953,419  $973,785 

 

Included in licenses, permits & applications was $184,858 of indefinite-lived intangible assets as of November 30, 2023, compared to $181,093 as of May 31, 2023.

 

Expected future amortization expense for intangible assets as of  November 30, 2023 are as follows:

 

  

Amortization

 

2024 (remaining six months)

 $36,861 

2025

  73,722 

2026

  73,722 

2027

  73,722 

2028

  73,722 

Thereafter

  436,812 

Total

 $768,561 

 

9

     
 

Note 6. Goodwill

 

The following table shows the carrying amount of goodwill by reporting units:

 

   

November 30,

   

May 31,

 

Reporting Unit

 

2023

   

2023

 

Cannabis

  $ 2,640,669     $ 2,640,669  

Distribution

    4,458       4,458  

Beverage alcohol

    120,802       120,802  

Wellness

    77,470       77,470  

Effect of foreign exchange

    8,746       7,875  

Impairments

    (842,431 )     (842,431 )

Total

  $ 2,009,714     $ 2,008,843  

 

10
  
 

Note 7. Business acquisitions

  

Acquisition of Montauk Brewing Company, Inc.

 

On   November 7, 2022, Tilray acquired Montauk Brewing Company, Inc. (“Montauk”), a leading craft brewer based in Montauk, New York, which expanded our distribution network with a strong brand in the tri-state region of the U.S. In consideration for the acquisition of Montauk, and after giving effect to post-closing adjustments, the Company paid an aggregate purchase price equal to $35,123, which was comprised of $ 28,701 in cash and the remainder through the issuance of 1,708,521 shares of Tilray's common stock (having a value of $6,422 at closing). In the event that Montauk achieves certain volume and/or EBITDA targets on or before  December 31, 2025, the stockholders of Montauk shall be eligible to receive additional contingent cash consideration of up to $18,000. The Company determined that the closing date fair value of this contingent consideration was $10,245 based on the inputs disclosed in Note 25 (Fair value measurements). 

 

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

 

  

Amount

 

Consideration

    

Cash

 $28,701 

Shares

  6,422 

Contingent consideration

  10,245 

Net assets acquired

    

Current assets

    

Cash and cash equivalents

  1,983 

Accounts receivable

  1,116 

Prepaids and other current assets

  467 

Inventory

  1,570 

Long-term assets

    

Capital assets

  420 

Customer relationships (15 years)

  18,540 

Intellectual property, trademarks & brands (15 years)

  13,650 

Goodwill

  17,803 

Total assets

  55,549 

Current liabilities

    

Accounts payable and accrued liabilities

  1,580 

Long-term liabilities

    

Deferred tax liability

  4,851 

Other liabilities

  3,750 

Total liabilities

  10,181 

Total net assets acquired

 $45,368 

 

In the event that the Montauk acquisition had occurred on June 1, 2022, the Company would have had additional net revenue of approximately $3,100 and $9,000 for the three and six months ended November 30, 2022 and net loss and comprehensive net loss would have increased by approximately $600 and $500 for the three and six months ended  November 30, 2022, primarily as a result of amortization of the intangible assets acquired. This unaudited pro forma financial information does not reflect the realization of any expected ongoing synergies relating to the integration of Montauk.

 

11

     

Acquisition of HEXO Corp.

 

On June 22, 2023, Tilray acquired HEXO, a cannabis company in Canada (the “HEXO Acquisition”) for the purpose of expanding the Company’s revenue base, production capabilities around certain form factors and growth opportunities with the Redecan brand. In consideration for the HEXO Acquisition, the Company paid a total purchase price equivalent of $93,882, which consisted of stock consideration of $63,927, settlement of convertible notes receivable of $28,720, the fair value of HEXO stock-based compensation of $1,188 and the assumption of warrants of $47. In connection with the HEXO Acquisition, each outstanding HEXO common share was exchanged for 0.4352 of a share of Tilray common stock and each outstanding HEXO preferred share was exchanged for 0.7805 of a share of Tilray common stock. In the aggregate, the Company issued 39,705,962 shares of Tilray common stock, at a share price of $1.61 per share, in connection with the HEXO Acquisition. The Company intends to sell HEXO's Kirkland lake property and has recorded the value of the associated capital assets as an asset held for sale.

 

The Company is in the process of assessing the fair value of the net assets acquired and, as a result, the fair value may be subject to adjustments pending completion of final valuations and post-closing adjustments. The table below summarizes the preliminary estimated fair value of the assets acquired and the liabilities assumed for the HEXO Acquisition at the effective acquisition date as follows: 

 

  

Amount

 

Consideration

    

Shares

 $63,927 

Settlement of convertible notes receivable

  28,720 

Warrants assumed

  47 

Estimated fair value of HEXO stock-based compensation

  1,188 

Net assets acquired

    

Current assets

    

Cash and cash equivalents

  14,634 

Restricted cash

  1,656 

Accounts receivable

  7,855 

Asset held for sale

  755 

Prepaids and other current assets

  2,709 

Inventory

  25,947 

Long-term assets

    

Prepaid expenses

  8,384 

Capital assets

  70,634 

Intellectual property, trademarks & brands (15 years)

  2,680 

Interest in equity investee

  3,145 

Total assets

  138,399 

Current liabilities

    

Accounts payable and accrued liabilities

  44,517 

Total liabilities

  44,517 

Total net assets acquired

 $93,882 

 

Included in accounts payable and accrued liabilities was $12,253 of litigation settlement accruals as of June 22, 2023. 

 

In the event the HEXO Acquisition had occurred on June 1, 2022, the Company would have had, on an unaudited proforma basis, additional net revenue of approximately $nil and $7,000 for the three and six months period ended  November 30, 2023 and $20,000 and $40,000 for the three and six months period ended November 30, 2022, respectively, and its net loss and comprehensive net loss would have increased by approximately $nil and $1,800 for the three and six months period ended November 30, 2023, and $30,000 and $60,000 for the three and six months period ended November 30, 2022, respectively. This unaudited pro forma financial information does not reflect the realization of any expected ongoing synergies relating to the integration of HEXO.

 

Acquisition of Truss Beverage Co.

 

On August 3, 2023, Tilray acquired the remaining 57.5% equity interest in Truss Beverage Co. ("Truss"), a cannabis beverage company, from Molson Coors Canada ("Molson").  This purchase represents the equity portion of Truss that had not been previously acquired as part of the HEXO Acquisition. The consideration paid by Tilray consisted of $74 (CAD$100) in cash and contingent consideration fair valued at $4,181. Tilray initially planned to divest Truss' assets and recorded the value of the associated capital assets and lease obligations as an asset held for sale. Tilray has agreed to pay Molson as contingent consideration an amount equal to 57.5% of any proceeds from any divesture, net of any costs and expenses associated with the disposition. During the period ended November 30, 2023, due to a change in circumstance in the Company's ability to sell these assets, they were subsequently reclassified as capital assets as the Company has made alternative plans for their utilization. The asset was 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 were recorded in the statement of net loss and comprehensive loss as amortization in cost of goods sold. 

 

The Company is in the process of assessing the fair value of the net assets acquired and, as a result, the fair value of the net assets acquired may be subject to adjustments pending completion of final valuations and post-closing adjustments. The table below summarizes preliminary estimated fair value of the assets acquired and the liabilities assumed at the effective acquisition date as follows:

 

  

Amount

 

Consideration

    

Cash consideration

 $74 

Investment in equity investees

  3,145 

Contingent consideration

  4,181 

Net assets acquired

    

Current assets

    

Cash and cash equivalents

  6,739 

Accounts receivable

  1,038 

Prepaids and other current assets

  78 

Inventory

  2,573 

Asset held for sale

  2,960 

Long-term assets

    

Intangible assets

  296 

Total assets

  13,684 

Current liabilities

    

Accounts payable and accrued liabilities

  5,408 

Other liabilities

  876 

Total liabilities

  6,284 

Total net assets acquired

  7,400 

 

In the event that the Truss acquisition had occurred on June 1, 2022 the Company would have had, on an unaudited proforma basis, additional net revenue of approximately $nil and $3,000 for the three and six months period ended  November 30, 2023 and $3,300 and $6,300 for the three and six months period ended November 30, 2022, respectively, and its net loss and comprehensive net loss would have increased by approximately $nil and $700 for the three and six months period ended November 30, 2023, and $500 and $1,200 for the three and six months period ended November 30, 2022, respectively. This unaudited pro forma financial information does not reflect the realization of any expected ongoing synergies relating to the integration of Truss.

 

Acquisition of Craft Beverage Business Portfolio

 

On September 29, 2023, Tilray acquired a portfolio of craft brands, assets and businesses comprising eight beer and beverage brands from Anheuser-Busch Companies, LLC, ("AB") including breweries and brewpubs associated with them (the “Craft Acquisition”). The acquired businesses/brands include Shock Top, Breckenridge Brewery, Blue Point Brewing Company, 10 Barrel Brewing Company, Redhook Brewery, Widmer Brothers Brewing, Square Mile Cider Company, and HiBall Energy. The Company paid a total purchase price equivalent of $83,658 in cash, net of a preliminary working capital adjustment at closing of $1,342, which is subject to a final working capital adjustment. As described in Note 12 (Long-term debt)$20,000 was borrowed under the 420 Delayed Draw Term Loan Agreement to fund part of the purchase price paid for the Craft Acquisition.

 

The Company is in the process of assessing the fair value of the net assets acquired and, as a result, the fair value may be subject to adjustments pending completion of final valuations and post-closing adjustments. The table below summarizes the preliminary estimated fair value of the assets acquired and the liabilities assumed for the Craft Acquisition at the effective acquisition date as follows: 

 

  

Amount

 

Consideration

    

Cash consideration

 $83,658 

Net assets acquired

    

Current assets

    

Cash and cash equivalents

  77 

Inventory

  22,493 

Prepaids and other current assets

  573 

Long-term assets

    

Capital assets

  62,614 

Finance lease, right-of-use assets

  45,496 

Operating lease, right-of-use assets

  7,677 

Other assets

  108 

Total assets

  139,038 

Current liabilities

    

Accounts payable and accrued liabilities

  2,206 

Current portion of finance lease liabilities

  1,031 

Current portion of operating lease liabilities

  1,408 

Long - term liabilities

    

Finance lease liabilities

  44,465 

Operating lease liabilities

  6,270 

Total liabilities

  55,380 

Total net assets acquired

  83,658 

 

In the event that the Craft Acquisition had occurred on June 1, 2022, the Company would have had, on an unaudited proforma basis, additional revenue of approximately $14,000 and $55,000 for the three and six months period ended  November 30, 2023 and $42,000 and $85,000 for the three and six months period ended November 30, 2022, respectively, and its net loss and comprehensive net loss would have increased by approximately $2,000 and $5,000 for the three and six months period ended November 30, 2023, and $1,400 and $900 for the three and six months period ended November 30, 2022, respectively. This unaudited pro forma financial information does not reflect the realization of any expected ongoing synergies relating to the integration of the Craft Acquisition.

 

Note 8. Convertible notes receivable

 

Convertible notes receivable is comprised of the following:

 

  

November 30,

  

May 31,

 
  

2023

  

2023

 

HEXO Convertible Note

 $-  $28,720 

MedMen Convertible Note

  74,681   74,681 

Total convertible notes receivable

  74,681   103,401 

Deduct - current portion

  -   - 

Total convertible notes receivable, non current portion

 $74,681  $103,401 

 

HEXO Convertible Note

 

On June 22, 2023, the Company completed the HEXO Acquisition as described in Note 7 (Business acquisitions). Concurrently with the closing of the HEXO Acquisition, the HEXO convertible note was converted into shares of HEXO.

 

12

 

MedMen Convertible Note

 

On August 31, 2021, the Company issued 9,817,061 shares valued at $117,804 to acquire 68% interest in Superhero Acquisition L.P. (“SH Acquisition”), which purchased a senior secured convertible note issued by MedMen (the "MedMen Convertible Note"), together with certain associated warrants to acquire Class B subordinate voting shares of MedMen, in the principal amount of $165,799. The MedMen Convertible Note bears interest at the Secured Overnight Financing Rate ("SOFR") plus 6%, with a SOFR floor of 2.5% with any accrued interest being added to the outstanding principal amount. The outstanding principal amount, together with accrued interest is to be paid on August 17, 2028, the maturity date of the MedMen Convertible Note. SH Acquisition was also granted “top-up” rights enabling it (and its limited partners) to maintain its percentage ownership (on an “as-converted” basis) in the event that MedMen issues equity securities. SH Acquisition’s ability to convert the MedMen Convertible Note and exercise the Warrants is dependent upon U.S. federal legalization of cannabis or Tilray’s waiver of such requirement as well as any additional regulatory approvals. 

 

The MedMen Convertible Note was based upon the fair value of the collateral assets net of disposal costs.  In the prior year, the Company used the Black-Scholes model using the following assumptions: the risk-free rate of 3.50%; expected life of the convertible note; volatility of 70% based on comparable companies; forfeiture rate of nil; dividend yield of nil; probability of legalization between 0% and 60%; and, the exercise price of the respective conversion feature. 

 

The Company did not derive any revenue or cash from MedMen's operations, and fully complies with all limitations imposed by applicable U.S. law and regulations in connection with its ownership of the MedMen Convertible Note. In addition, the Company did not recognize any interest income on the MedMen Convertible Note for the three and six months ended November 30, 2023, which would have increased its value. 

 

Note 9. Long term investments

 

Long term investments consisted of the following:

 

    November 30,     May 31,  
    2023     2023  

Equity investments measured at fair value

  $ 2,534     $ 2,144  

Equity investments under measurement alternative

    5,500       5,651  

Total

  $ 8,034     $ 7,795  

     

13

  
 

Note 10. Bank indebtedness

 

Aphria Inc., a subsidiary of the Company, has an operating line of credit in the amount of C$1,000, which bears interest at the lender’s prime rate plus 75 basis points. As of November 30, 2023, the Company has not drawn on the line of credit. The operating line of credit is secured by a security interest on that certain real property located at 265 Talbot St. West, Leamington, Ontario.

 

CC Pharma GmbH, a subsidiary of the Company, has two operating lines of credit for €7,000 and €500 each, which bear interest at Euro Short-Term Rate ("ESTR") plus 2.50% and Euro Interbank Offered Rate ("EURIBOR") plus 4.00%, respectively. As of November 30, 2023, a total of €7,438 ($8,181) was drawn down from the available credit of €7,500. The operating line of credit for €7,000 are secured by an interest in the inventory of CC Pharma GmbH as well as the Densborn facility and underlying real property. The operating line of credit for €500 is unsecured.

 

Four Twenty Corporation (“420”), a subsidiary of the Company, has a revolving credit facility of $30,000, which bears interest at SOFR plus an applicable margin. As of November 30, 2023, the Company has drawn $12,000 on the revolving line of credit. The revolving credit facility is secured by all of Montauk, the Craft Acquisition's assets and 420's assets and includes a corporate guarantee by a subsidiary of the Company. 

 

 

Note 11. Accounts payable and accrued liabilities

 

Accounts payable and accrued liabilities are comprised of:

 

    November 30,     May 31,  
    2023     2023  

Trade payables

  $ 88,363     $ 70,819  

Accrued liabilities

    75,851       48,394  

Litigation expense accrual

    25,338       25,000  

Accrued payroll and employment related taxes

    11,382       18,772  

Income taxes payable

    3,248       14,934  

Accrued interest

    8,147       8,102  

Sales taxes payable

    4,569       4,661  

Total

  $ 216,898     $ 190,682  

     

14

     
 

Note 12. Long-term debt

 

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

 

  

November 30,

  

May 31,

 
  

2023

  

2023

 

Credit facility - C$66,000 - Canadian prime interest rate plus an applicable margin, 3-year term, with a 10-year amortization, repayable in blended monthly payments, due in November 2025

 $42,920  $45,260 

Term loan - C$25,000 - Canadian prime plus 1.00%, compounded monthly, 5-year term, with a 15-year amortization, repayable in equal monthly installments of C$181 including interest, due in July 2033

  10,726   10,959 

Term loan - C$25,000 - Canadian prime plus 1.00%, compounded monthly, 5-year term with a 15-year amortization, repayable in equal monthly installments of C$196 including interest, due in July 2033

  12,937   13,092 

Term loan - C$1,250 - Canadian prime plus 1.50%, 5-year term, with a 10-year amortization, repayable in equal monthly installments of C$12 including interest, due in August 2026

  309   346 

Mortgage payable - C$3,750 - Canadian prime plus 1.50%, 5-year term, with a 20-year amortization, repayable in equal monthly installments of C$23 including interest, due in August 2026

  2,125   2,104 

Term loan ‐ €5,000 ‐ EURIBOR plus 2.15%, 5‐year term, repayable in quarterly installments of €250 plus interest, due in December 2023

  112   803 

Term loan ‐ €1,200 ‐ at 4.26%, 1‐year term, repayable in monthly installments of €100 plus interest, due in December 2023

  275   755 

Term loan ‐ €1,500 ‐ at 2.00%, 5‐year term, repayable in quarterly installments of €94 plus interest, due in April 2025

  634   819 

Term loan ‐ €3,500 ‐ at 4.59%, 5‐year term, repayable in monthly installments of €52 plus interest, due in August 2028

  3,563   1,706 

Mortgage payable - $22,635 - EURIBOR rate plus 1.5%, 10-year term, repayable in monthly installments of $57 including interest, due in October 2030

  20,512   20,863 

Term loan - $90,000 - SOFR plus an applicable margin, 5-year term, repayable in quarterly installments of $875 to $1,750 due in June 2028

  89,125   65,000 

Carrying amount of long-term debt

  183,238   161,707 

Unamortized financing fees

  (1,146)  (738)

Net carrying amount

  182,092   160,969 

Less principal portion included in current liabilities

  (12,993)  (24,080)

Total noncurrent portion of long-term debt

 $169,099  $136,889 

 

During the quarter ended August 31, 2023, Four Twenty Corporation ("420"), a wholly-owned subsidiary of the Company, repaid its $100,000 term loan and entered  into a new secured credit agreement, which comprised of: (i) a $70,000 term loan facility, bearing interest at SOFR plus an applicable margin and having a maturity date of June 30, 2028 (the "420 Term Loan"), and (ii) a $20,000 delayed draw term loan facility, issued on the same terms as the $70,000 term loan facility (the "420 Delayed Draw Term Loan" and, together with the 420 Term Loan the "420 Secured Credit Agreement"). The 420 Term Loan was fully drawn on June 30, 2023. The 420 Delayed Draw Term Loan was fully drawn on September 29, 2023 to fund part of the purchase price for the Craft Acquisition as described in Note 7 (Business acquisitions). Under the terms of the 420 Secured Credit Agreement, the Company pledged all of Sweetwater, Breckenridge, Montauk and the Craft Acquisition's assets and the related equity interests, and Tilray Brands, Inc. provided a limited guarantee, as well as requiring the lenders approval to transfer assets to Tilray Brands, Inc. 

 

As of November 30, 2023420 was not in compliance with the leverage ratio covenant under the 420 Secured Credit Agreement, but obtained a waiver from the lender on January 5, 2024. 

 

15

     
 

Note 13. Convertible debentures payable

 

The following table sets forth the net carrying amount of the convertible debentures payable:

 

  

November 30,

  

May 31,

 
  

2023

  

2023

 

5.20% Convertible Notes ("TLRY 27")

 $123,691  $100,476 

HTI Convertible Note

  -   47,834 

5.25% Convertible Notes ("APHA 24")

  128,399   120,568 

5.00% Convertible Notes ("TLRY 23")

  -   126,544 

Total

  252,090   395,422 

Deduct - current portion

  128,399   174,378 

Total convertible debentures payable, non current portion

 $123,691  $221,044 

 

TLRY 27 Notes

 

  

November 30,

  

May 31,

 
  

2023

  

2023

 

5.20% Contractual debenture

 $172,500  $150,000 

Unamortized discount

  (48,809)  (49,524)

Net carrying amount

 $123,691  $100,476 

 

The TLRY 27 convertible debentures were issued on  May 30, 2023 and on June 9, 2023 by way of overallotment, in the principal amount of $172,500 (the “TLRY 27 Notes”). The TLRY 27 Notes bear interest at a rate of 5.20% per annum, payable semi-annually in arrears on  June 15 and  December 15 of each year, and mature on  June 15, 2027, unless earlier converted. The TLRY 27 Notes are Tilray’s general unsecured obligations and rank senior in right of payment to all of Tilray’s indebtedness that is expressly subordinated in right of payment to the notes; equal in right of payment with any of Tilray’s unsecured indebtedness that is not so subordinated, including TLRY 23 and APHA 24, effectively junior in right of payment to any of Tilray’s secured indebtedness to the extent of the value of the assets securing such indebtedness; and structurally junior to all indebtedness and other liabilities (including trade payables but excluding intercompany obligations) of Tilray’s current or future subsidiaries. Noteholders will have the right to convert their TLRY 27 Notes into shares of Tilray’s common stock at their option, at any time, until the close of business on the second scheduled trading day immediately before  June 15, 2027. The initial conversion rate is 376.6478 shares per $1,000 principal amount of TLRY 27 Notes, which represents a conversion price of approximately $2.66 per share. The conversion rate and conversion price will be subject to adjustment upon the occurrence of certain events.

 

The TLRY 27 Notes will be redeemable, in whole and not in part, at Tilray’s option at any time on or after   June 20, 2025 at a cash redemption price equal to the principal amount of the notes to be redeemed, plus accrued and unpaid interest, if any, to, but excluding, the redemption date, but only if the last reported sale price of Tilray’s common stock exceeds 130% of the conversion price for a specified period of time. If certain corporate events that constitute a fundamental change occur, then, subject to a limited exception, noteholders  may require Tilray to repurchase their TLRY 27 Notes for cash. The repurchase price will be equal to the principal amount of the notes to be repurchased, plus accrued and unpaid interest, if any, to, but excluding, the applicable repurchase date. In connection with the Company’s offering of the TLRY 27 Notes, the Company entered into a share lending agreement with an affiliate of Jefferies LLC (the “Share Borrower”), pursuant to which it lent to the Share Borrower 38,500,000 shares of the Company’s common stock (the "Borrowed Shares"). The Borrowed Shares were newly-issued shares, will be held as treasury shares until the expiration or early termination of the share lending agreement and may be used by purchasers of the TLRY 27 Notes to sell up to 38,500,000 shares of the Company’s common stock. The fair value of the share lending agreement has been recorded as part of the unamortized discount on the debenture. The Company expects that the selling stockholders will use their position created by such sales to establish their initial hedge with respect to their investments in the TLRY 27 Notes. The Company did not receive any proceeds from the sale of the Borrowed Shares. 

 

During the three and six months ended November 30, 2023, the Company recognized interest expense of $2,423 and $4,485 and accretion of amortized discount interest of $2,829 and $5,624. For the same periods in the prior year there was no interest or accretion of amortized discount.

 

HTI Convertible Note

 

  

November 30,

  

May 31,

 
  

2023

  

2023

 

4.00% Contractual debenture

 $  $50,000 

Unamortized discount

     (2,166)

Net carrying amount

 $  $47,834 

 

On July 12, 2022, the Company issued a $50,000 convertible promissory note to HTI ("HTI Convertible Note"), bearing a 4% interest rate payable on a quarterly basis and having a maturity date of September 1, 2023. On August 31, 2023, the Company settled in full the HTI Convertible Note through the issuance of shares as described in Note 15 (Stockholders' equity).    

 

APHA 24 Notes

 

  

November 30,

  

May 31,

 
  

2023

  

2023

 

5.25% Contractual debenture

 $350,000  $350,000 

Debt settlement

  (213,260)  (213,260)

Fair value adjustment

  (8,341)  (16,172)

Net carrying amount

 $128,399  $120,568 

 

The APHA 24 convertible debentures, were entered into in April 2019, in the principal amount of $350,000, bear interest at a rate of 5.25% per annum, payable semi-annually in arrears on June 1 and December 1 of each year, and mature on June 1, 2024, unless earlier converted (the APHA 24 Notes"). The APHA 24 Notes are Tilray’s general unsecured obligations and rank senior in right of payment to all of Tilray’s indebtedness that is expressly subordinated in right of payment to the notes; equal in right of payment with any of Tilray’s unsecured indebtedness that is not so subordinated, including TLRY 23 and TLRY 27, effectively junior in right of payment to any of Tilray’s secured indebtedness to the extent of the value of the assets securing such indebtedness; and structurally junior to all indebtedness and other liabilities (including trade payables but excluding intercompany obligations) of Tilray’s current or future subsidiaries. 

 

Holders of the APHA 24 Notes may convert all or any portion of such note, in multiples of $1 principal amount, at their option at any time between December 1, 2023 to the maturity date of June 1, 2024. The initial conversion which the Company may settle in cash, or common shares of Tilray, or a combination thereof, at Tilray's election, is equivalent to an initial conversion price of approximately $11.20 per common share, subject to adjustments in certain events. 

 

16

 

The Company  may redeem for cash all or part of the APHA 24, at its option, if the last reported sale price of the Company’s common shares has been at least 130% of the conversion price then in effect for at least 20 trading days during any 30 consecutive trading day period ending on and including trading day immediately preceding the date on which the Company provides notice of redemption. The redemption of the APHA 24 will be equal to 100% of the principal amount plus accrued and unpaid interest to, but excluding, the redemption date.

 

The Company elected the fair value option under ASC 825 Fair Value Measurements for the APHA 24. The APHA 24 was initially recognized at fair value on the balance sheet. All subsequent changes in fair value, excluding the impact of the change in fair value related to instrument-specific credit risk are recorded in non-operating income. The changes in fair value related to instrument-specific credit risk is recorded through other comprehensive income (loss).

 

The Company plans to purchase or exchange some or all of its APHA 24 Notes, in open market purchases, privately negotiated transactions or otherwise prior to their maturity in June 2024. Such purchases or exchanges, if any, will depend on prevailing market conditions, contractual restrictions and other factors. See Note 27 (Subsequent Events) for additional details.

 

The overall change in fair value of APHA 24 during the six months ended  November 30, 2023 decreased by $7,831 ( November 30, 2022 – $6,542 of fair value changes), this was comprised of $6,041 of fair value changes and a foreign exchange loss of $1,790

 

There was $136,740 principal outstanding as at  November 30, 2023 and May 31, 2023.

 

During the three and six months ended November 30, 2023,the Company recognized total interest expense of $1,795 and $3,589, respectively and total interest expense of $3,393 and $6,786, respectively for the same period in the prior year.

 

TLRY 23 Notes

 

  November 30,  May 31, 
  2023  2023 

5.00% Contractual debenture

 $  $277,856 

Principal amount paid

     (150,526)

Unamortized discount

     (786)

Net carrying amount

 $  $126,544 

 

The TLRY 23 Notes bore interest at a rate of 5.00% per annum, payable semi-annually in arrears on April 1 and October 1 of each year. On  September 12, 2023, the Company repurchased $20,000 of its TLRY 23 Notes for cancellation by issuing 7,000,000 shares and paying $610 of cash to settle both principal and accrued interest. Upon repurchase of the TLRY 23 Notes, a portion of the settlement consideration was allocated to the equity component of the instrument and was recognized as a $1,672 reduction of additional paid-in capital in the Consolidated Statements of Changes in Equity. Additionally, this repurchase resulted in a loss of $1,062 which was recorded in other non-operating (losses) gains, net as shown in Note 24 (Non-operating income (expense)).  

 

After cancellation, the outstanding principal balance of the TLRY 23 Notes was $107,330. On  October 2, 2023, the Company repaid the remaining principal of the TLRY 23 Notes in cash upon maturity.

 

During the three and six months ended November 30, 2023, the Company recognized total interest expense of $1,592 and $2,122, respectively and total interest expense of $2,373 and $3,746, respectively for the same period in the prior year.

 

17

     
 

Note 14. Warrant liability

 

As of November 30, 2023 and May 31, 2023, there were 6,209,000 warrants outstanding, with an original exercise price of $5.95 per warrant, expiring March 17, 2025. Each warrant is exercisable for one common share of the Company.

 

The warrants contain anti-dilution price protection features, which adjust the exercise price of the warrants if the Company subsequently issues common stock at a price lower than the exercise price of the warrants. In the event additional warrants or convertible debt are issued with a lower and/or variable exercise price, the exercise price of the warrants will be adjusted accordingly. During the six months ended November 30, 2023, the Company issued shares which triggered the anti-dilution price protection feature lowering the exercise price to $1.61. These warrants are classified as liabilities as they are to be settled in registered shares, and the registration statement is required to be active, unless such shares may be subject to an applicable exemption from registration requirements. The holders, at their sole discretion, may elect to affect a cashless exercise, and be issued exempt securities in accordance with Section 3(a)(9) of the 1933 Act. In the event the Company does not maintain an effective registration statement, the Company may be required to pay a daily cash penalty equal to 1% of the number of shares of common stock due to be issued multiplied by any trading price of the common stock between the exercise date and the share delivery date, as selected by the holder. Alternatively, the Company may deliver registered common stock purchased by the Company in the open market. The Company may also be required to pay cash if it does not have sufficient authorized shares to deliver to the holders upon exercise.

 

The Company estimated the fair value of warrants outstanding at November 30, 2023 at $0.607 per warrant using the Black Scholes pricing model (Level 3) with the following assumptions: Risk-free interest rate of 4.4%, expected volatility of 50%, expected term of 1.30 years, strike price of $1.61 and fair value of common stock of $1.81.

 

Expected volatility is based on both historical and implied volatility of the Company’s common stock.

 

Note 15. Stockholders' equity 

 

Issued and outstanding

 

As of   November 30, 2023, the Company had 1,198,000,000 common shares and 10,000,000 preferred shares authorized to be issued, with 732,907,552 common shares and nil preferred shares issued and outstanding. Historically, the Company has issued shares of its common stock as consideration for business acquisitions, including the settlement of convertible notes, the settlement of litigation claims, in connection with public offerings and as payment of dividends to non-controlling interests for profit distributions.

 

During the six months ended November 30, 2023, the Company issued the following common shares:

 

 

a)

39,705,962 shares in connection with the HEXO Acquisition, see Note 7 (Business acquisitions).

 

b)

865,426 shares to settle a contractual change of control severance obligations in the aggregate amount of $1,500 incurred in connection with the HEXO Acquisition.

 

c)

5,004,735 shares to settle dividends payable to the non-controlling shareholders of Aphria Diamond in the amount of $8,146
 

d)

17,148,541 shares for the settlement of the HTI Convertible Note payable see Note 13 (Convertible debentures payable).
 e)

1,032,616 shares to HTI Investments MA LLC pursuant to the terms of a $50.0 million convertible promissory note originally issued by Tilray to HTI on July 12, 2022 and which was settled at maturity as previously disclosed.

 f)

1,573,152 shares to settle HEXO-based litigation judgement obtained by MediPharm Labs Inc. in 2022.

 

g)

7,000,000 shares to repurchase $20,000 of its TLRY 23 Notes for cancellation.

 h)3,921,665 shares in connection with the exercise of previously awarded stock-based compensation awards.

 

The Company maintains stock-based compensation plans as disclosed in our Annual Financial Statements. For the three and six months ended November 30, 2023, the total stock-based compensation was $ 8,201 and $ 16,458. For the three and six months ended   November 30, 2022, total stock based compensation was $ 10,943 and $ 20,136 respectively.
 

During the six months ended November 30, 2023 the Company granted 11,559,549 time-based RSUs, and 7,566,146 performance-based RSUs ( November 30, 2022 - 6,004,995 time-based RSUs and 2,634,744 performance based RSUs). The 7,566,146 performance based RSUs issued during the quarter had performance conditions not yet finalized. The Company's total stock-based compensation expense recognized is as follows:

 

  

For the three months

  

For the six months

 
  

ended November 30,

  

ended November 30,

 
  

2023

  

2022

  

2023

  

2022

 

Stock options

 $  $20  $  $624 

RSUs

  8,201   10,923   16,458   19,512 

Total

 $8,201  $10,943  $16,458  $20,136 

 

18

     
 

Note 16. Accumulated other comprehensive income (loss)

 

Accumulated other comprehensive loss includes the following components:

 

           

Unrealized

         
   

Foreign

   

loss on

         
   

currency

   

convertible

         
   

translation

   

notes

         
   

gain (loss)

   

receivables

   

Total

 

Balance May 31, 2022

  $ 54,413     $ (75,177 )     (20,764 )

Other comprehensive loss

    (56,443 )     (2,525 )     (58,968 )

Balance August 31, 2022

  $ (2,030 )   $ (77,702 )   $ (79,732 )

Other comprehensive loss

    (24,080 )     (17,643 )     (41,723 )

Balance at November 30, 2022

  $ (26,110 )   $ (95,345 )   $ (121,455 )
                         

Balance May 31, 2023

  $ (46,610 )   $     $ (46,610 )

Other comprehensive loss

    3,049             3,049  

Balance August 31, 2023

  $ (43,561 )   $     $ (43,561 )

Other comprehensive loss

    5,194             5,194  

Balance November 30, 2023

  $ (38,367 )   $     $ (38,367 )

 

 

Note 17. Non-controlling interests

 

The following tables summarize the information relating to the Company’s subsidiaries, SH Acquisition (68%), CC Pharma Nordic ApS (75%), Aphria Diamond (51%), and ColCanna S.A.S. (90%) before intercompany eliminations. 

 

Summary of balance sheet information of the entities in which there is a non-controlling interest as of November 30, 2023:

 

  SH  CC Pharma  Aphria  ColCanna  November 30, 
  Acquisition  Nordic ApS  Diamond  S.A.S.  2023 

Current assets

 $  $73  $131,023  $196  $131,292 

Non-current assets

  74,681      131,726   3,580   209,987 

Current liabilities

     (14)  (129,105)  (6,613)  (135,732)

Non-current liabilities

     (1,195)  (49,833)  (1,460)  (52,488)

Net assets

 $74,681  $(1,136) $83,811  $(4,297) $153,059 

 

Summary of balance sheet information of the entities there is a non-controlling interest as of May 31, 2023:

 

  

SH

  

CC Pharma

  

Aphria

  

ColCanna

  

May 31,

 
  

Acquisition

  

Nordic ApS

  

Diamond

  

S.A.S.

  

2023

 

Current assets

 $  $114  $127,689  $224  $128,027 

Non-current assets

  74,681      135,085   3,307   213,073 

Current liabilities

     (1,166)  (142,554)  (6,697)  (150,417)

Non-current liabilities

        (53,197)  (1,428)  (54,625)

Net assets

 $74,681  $(1,052) $67,023  $(4,594) $136,058 

 

19

 

Summary of income statement information of the entities in which there is a non-controlling interest for the six months ended November 30, 2023:

 

  SH  CC Pharma  Aphria  ColCanna  November 30, 
  Acquisition  Nordic ApS  Diamond  S.A.S.  2023 

Revenue

 $  $  $57,078  $  $57,078 

Total expenses

     54   32,803   (519)  32,338 

Net (loss) income

     (54)  24,275   519   24,740 

Other comprehensive (loss) income

     (30)  404   (222)  152 

Net comprehensive (loss) income

 $  $(84) $24,679  $297  $24,892 

Non-controlling interest %

  32%  25%  49%  10% 

NA

 

Comprehensive (loss) income attributable to NCI

  -   (21)  12,093   30   12,102 

Additional income attributable to NCI

        6,554      6,554 

Net comprehensive (loss) income attributable to NCI

 $  $(21) $18,647  $30  $18,656 

 

Summary of income statement information of the entities in which there is a non-controlling interest for the six months ended November 30, 2022:

 

  

SH

  

CC Pharma

  

Aphria

  

ColCanna

  

November 30,

 
  

Acquisition

  

Nordic ApS

  

Diamond

  

S.A.S.

  

2022

 

Revenue

 $  $108  $65,437  $  $65,545 

Total expenses

  (7,006)  471   39,039   56,265   88,769 

Net (loss) income

  7,006   (363)  26,398   (56,265)  (23,224)

Other comprehensive (loss) income

  (11,321)     (1,590)  363   (12,548)

Net comprehensive (loss) income

 $(4,315) $(363) $24,808  $(55,902) $(35,772)

Non-controlling interest %

  32%  25%  49%  10% 

NA

 

Comprehensive (loss) income attributable to NCI

  (1,381)  (91)  12,156   (5,590)  5,094 

Additional income attributable to NCI

        6,056      6,056 

Net comprehensive (loss) income attributable to NCI

 $(1,381) $(91) $18,212  $(5,590) $11,150 

      

On January 5, 2024, Aphria Inc. (“Aphria”), a wholly-owned subsidiary of the Company, entered into an Amended and Restated Wholesale Cannabis Supply Agreement (the “Supply Agreement”) with 1974568 Ontario Limited (“Aphria Diamond”), Aphria’s joint venture with Double Diamond Holdings Ltd. The Supply Agreement amends and restates the existing supply agreement, effective as of September 1, 2023, and amends certain terms relating to pricing and product classes. Due to the terms stipulated in the Supply Agreement, the reduced transfer price will lead to a decrease in income attributable to non-controlling interest over the duration of the agreement. If this agreement had been effective June 1, 2023, the Company would have recognized approximately $15,000 in additional net income attributed to the Stockholders of Tilray Brands, Inc.

 

Note 18. Income taxes

 

The determination of the Company’s overall effective tax rate requires significant judgment, the use of estimates, and the interpretation and application of complex tax laws. The effective tax rate reflects the income earned and taxed in various United States federal, state, and foreign jurisdictions. Tax law changes, increases, and decreases in temporary and permanent differences between book and tax items, valuation allowances against the deferred tax assets, stock compensation, and the Company’s change in income in each jurisdiction all affect the overall effective tax rate. It is the Company’s practice to recognize interest and penalties related to uncertain tax positions in income tax expense.

 

The Company reported income tax (recovery) expense of $(3,380) and $3,884 for the three and six months ended November 30, 2023, and income tax recovery of $(11,713) and $ (4,502) for the three and six months ended November 30, 2022. The income tax benefit in the current period varies from the US statutory income tax rate and prior period primarily due to the geographical mix of earnings and losses with no tax benefit resulting from valuation allowances in certain jurisdictions.

 

20

     
 

Note 19. Commitments and contingencies

 

Purchase and other commitments

 

The Company has payments on long-term debt, refer to Note 12 (Long-term debt), convertible notes, refer to Note 13 (Convertible debentures payable), material purchase commitments and construction commitments as follows:

 

  

Total

  

2024

  

2025

  

2026

  

2027

  

Thereafter

 

Long-term debt repayment

 $183,238  $12,993  $45,968  $8,953  $10,332  $104,992 

Convertible notes

  309,240   136,740         172,500    

Material purchase obligations

  56,972   33,584   21,388   2,000       

Construction commitments

  822   822             

Total

 $550,272  $184,139  $67,356  $10,953  $182,832  $104,992 

 

Legal proceedings

 

In the ordinary course of business, we are at times subject to various legal proceedings and disputes, including the proceedings specifically discussed below. We assess our liabilities and contingencies in connection with outstanding legal proceedings utilizing the latest information available. Where it is probable that we will incur a loss and the amount of the loss can be reasonably estimated, we record a liability in our consolidated financial statements. These legal reserves  may be increased or decreased to reflect any relevant developments on a quarterly basis. Where a loss is not probable or the amount of loss is not estimable, we do not accrue legal reserves. While the outcome of legal proceedings is inherently uncertain, based on information currently available and available insurance coverage, our management believes that it has established appropriate legal reserves. Any incremental liabilities arising from pending legal proceedings are not expected to have a material adverse effect on our consolidated financial position, consolidated results of operations, or consolidated cash flows. However, it is possible that the ultimate resolution of these matters, if unfavorable,  may be material to our consolidated financial position, consolidated results of operations, or consolidated cash flows.

 

There have been no material changes from the legal proceedings since our Annual Report on Form 10-K for the fiscal year ended May 31, 2023, except with respect to certain aspects of the legal proceedings disclosed below:

 

Class Action Suits and Stockholder Derivative Suits

 

Authentic Brands Group Related Class Action (New York, United States)

 

On  May 4, 2020, Ganesh Kasilingam filed a lawsuit in the United States District Court for the Southern District of New York (“SDNY”), against Tilray Brands, Inc., Brendan Kennedy and Mark Castaneda, on behalf of himself and a putative class, seeking to recover damages for alleged violations of Sections 10(b) and 20(a) of the Securities Exchange Act of 1934 (the “Kasilingam litigation”). The complaint alleges that Tilray and the individual defendants overstated the anticipated advantages of the Company’s revenue sharing agreement with Authentic Brands Group (“ABG”), announced on  January 15, 2019, and that the plaintiff suffered losses when Tilray’s stock price dropped after Tilray recognized an impairment with respect to the ABG deal on  March 2, 2020. On  August 6, 2020, SDNY entered an order appointing Saul Kassin as Lead Plaintiff and The Rosen Law Firm, P.A. as Lead Counsel. Lead Plaintiff filed an amended complaint on  October 5, 2020, which asserts the same Sections 10(b) and 20(a) claims against the same defendants on largely the same theory, and includes new allegations that Tilray’s reported inventory, cost of sales, and gross margins in its financial reports during the class period were false and misleading because Tilray improperly recorded unsellable “trim” as inventory and understated the cost of sales for its products.

 

On  September 27, 2021, the U.S. District Court entered an Opinion & Order granting the Defendants’ motion to dismiss the amended complaint in the Kasilingam litigation without prejudice. On  December 3, 2021, the lead plaintiff filed a second amended complaint alleging similar claims against Tilray and Brendan Kennedy. The defendants moved to dismiss the second amended complaint on  February 2, 2022. On  September 28, 2022, the Court granted in part and denied in part the defendants’ motion to dismiss the second amended complaint. On  October 12, 2022, the Company filed a motion for reconsideration and/or interlocutory appeal of this Court decision.

 

On August 21, 2023, the U.S. District Court granted Tilray’s motion for reconsideration and dismissed the second amended complaint with leave to amend one final time. On September 27, 2023, plaintiff filed a third amended complaint. Tilray continues to believe that all of the underlying claims in the amended complaint are without merit and should be dismissed with prejudice.

 

21

 

Legal Proceedings Related to Contractual Obligations

 

420 Investments Ltd. Litigation

 

On  February 21, 2020, 420 Investments Ltd., as Plaintiff (“420 Investments”), filed a lawsuit against Tilray Brands, Inc. and High Park Shops Inc. as Defendants, in Calgary, Alberta in the Court of Queen’s Bench of Alberta. In  August 2019, Tilray and High Park entered into an Arrangement Agreement with 420 Investments and others (the “Agreement”). Pursuant to the Agreement, High Park was to acquire the securities of 420 Investments. In  February 2020, Tilray and High Park gave notice of termination of the Agreement. 420 Investments alleges that the termination was unlawful and without merit and further alleges that the Defendants had no legal basis to terminate. 420 Investments alleges that the Defendants did not meet their contractual and good faith obligations under the Agreement. 420 Investment seeks damages in the stated amount of C$110,000, plus C$20,000 in aggravated damages. The Tilray and High Park Statement of Defense and counterclaim were both filed on  March 20, 2020. 420 Investment’s Statement of Defense to our counterclaim was filed on  April 20, 2020. Respectively, 420 Investments and Tilray / High Park served each other with their Affidavits of Records on  August 25, 2020 and  November 30, 2020. Tilray and High Park cross-examined the litigation representative of 420 Investments. The Company denies the Plaintiff’s allegations and intends to continue to vigorously defend this litigation matter, although there can be no assurance as to its outcome.

 

In  February 2023, Tilray and High Park filed an Application for Summary Judgment to collect an unpaid C$7,000 bridge loan made to 420 Investments on  August 28, 2019, relating to the subject transaction.  That debt was repayable in  March 2020, but was never repaid.  The application is pending and a decision from the Court is expected on Tilray’s Application for Summary Judgment in the calendar year of 2024.

 

Docklight Litigation Settlement

 

On  November 5, 2021 Docklight Brands, Inc. (“Docklight”) filed a complaint against the Company and its wholly-owned subsidiary, High Park Holdings, Ltd. in Superior Court of the State of Washington, King County. Docklight claimed breach of contract against High Park arising from a 2018 license agreement pursuant to which Docklight licensed certain Bob Marley-related brands to High Park (as amended in 2020 and 2021, the “High Park License”). In addition, Docklight brought a negligent misrepresentation claim against Tilray, alleging that certain individuals at Tilray or Aphria had made false statements to Docklight in order to induce Docklight to waive Docklight’s alleged right to terminate the High Park License for change-of-control on the basis of the 2021 Tilray-Aphria Arrangement Agreement. Effective October 10, 2023, the parties entered into a settlement agreement pursuant to which the Company paid an aggregate amount equal to $3,000 to Docklight in exchange for mutual releases and a dismissal of the pending Docklight litigation claims.

 

MediPharm / HEXO Litigation Settlement

 

In July 2022, MediPharm Labs Inc. (“MediPharm) and Peter Hwang obtained a judgement for damages against HEXO Inc. in an amount equal to CAD $9,800, together with costs and interest, in connection with HEXO’s alleged failure to pay for certain products. Subsequent to Tilray’s acquisition of HEXO, on October 2, 2023, MediPharm, HEXO and Tilray reached a settlement of the MediPharm judgment. Specifically, the terms of the settlement consisted of the following: (i) CAD $3,000 cash payment to MediPharm; (ii) issuance to MediPharm of a product supply credit for CAD $1,000 for the purchase of Tilray cannabis products at market pricing; (iii) Tilray acquired all of the outstanding shares of a MediPharm subsidiary in exchange for the issuance by Tilray of 1,573,152 Tilray common shares; (iv) payment of CAD $210 to Peter Hwang; and (v) dismissal of the MediPharm judgment and mutual releases of all claims.

 

Summary of litigation accruals 

 

As described in Note 11 (Accounts payable and accrued liabilities), the total litigation expense accrual included in accrued liabilities as of  November 30, 2023 was $25,338 to cover various ongoing litigation matters that are probable and estimable ( May 31, 2023 - $25,000). During the six months ended November 30, 2023, the Company assumed $12,253 of litigation accruals from the acquisition of HEXO, several of which were settled in the period as described above.  The Company did not assume any litigation accruals from the Craft Acquisition. 

 

22

  
 

Note 20. Net revenue

 

The Company reports its net revenue in four reporting segments: cannabis, distribution, beverage alcohol and wellness.

 

Net revenue is comprised of:

 

  

For the three months

  

For the six months

 
  

ended November 30,

  

ended November 30,

 
  

2023

  

2022

  

2023

  

2022

 

Cannabis revenue

 $94,556  $66,696  $191,440  $142,385 

Cannabis excise taxes

  (27,442)  (16,798)  (53,993)  (33,917)

Net cannabis revenue

  67,114   49,898   137,447   108,468 

Beverage alcohol revenue

  49,651   23,405   74,990   45,268 

Beverage alcohol excise taxes

  (3,146)  (2,010)  (4,323)  (3,219)

Net beverage alcohol revenue

  46,505   21,395   70,667   42,049 

Distribution revenue

  67,223   60,188   136,380   120,773 

Wellness revenue

  12,929   12,655   26,226   26,057 

Total

 $193,771  $144,136  $370,720  $297,347 

  

 

Note 21. Cost of goods sold

 

Cost of goods sold is comprised of:

 

   

For the three months

   

For the six months

 
   

ended November 30,

   

ended November 30,

 
   

2023

   

2022

   

2023

   

2022

 

Cannabis costs

  $ 46,472     $ 28,577     $ 96,989     $ 57,438  

Beverage alcohol costs

    30,513       11,420       41,779       22,269  

Distribution costs

    60,147       52,495       121,615       107,479  

Wellness costs

    9,230       8,762       18,732       18,665  

Total

  $ 146,362     $ 101,254     $ 279,115     $ 205,851  

     

 

Note 22. General and administrative expenses

 

General and administrative expenses are comprised of:

 

   

For the three months

   

For the six months

 
   

ended November 30,

   

ended November 30,

 
   

2023

   

2022

   

2023

   

2022

 

Executive compensation

  $ 3,324     $ 3,050     $ 6,985     $ 6,605  

Office and general

    8,065       7,383       16,233       13,212  

Salaries and wages

    15,795       10,151       28,909       24,786  

Stock-based compensation

    8,201       10,943       16,458       20,136  

Insurance

    2,499       2,726       6,348       5,429  

Professional fees

    2,503       1,730       4,002       4,220  

(Gain) loss on sale of capital assets

    (23 )     (64 )     (20 )     13  

Travel and accommodation

    1,374       1,219       2,481       2,380  

Rent

    1,575       740       2,433       1,605  

Total

  $ 43,313     $ 37,878     $ 83,829     $ 78,386  

 

23

     
 

Note 23. Restructuring charges

 

In connection with the execution of our acquisition strategy and strategic transactions, the Company has incurred restructuring and exit costs associated with the integration efforts of these non-recurring transactions. The Company recognized $2,655 and $3,570 of restructuring charges for the three and six months ended November 30, 2023, compared to $8,064 and $8,064 for prior year comparative periods. The Company approves detailed restructuring initiative plans at the executive level and recognizes these expenses in the period in which the plan has been committed to. All amounts incurred as of November 30 2023, have been paid. 

 

Within the Cannabis reporting unit, three restructuring plans have been initiated as follows;  HEXO acquisition related charges which is expected to take place 24 months from the acquisition date, Truss acquisition related charges which is expected to take place 18 months from the acquisition date and the Canadian business cost reduction plan, which concluded during the quarter. In the six month period ended November 30, 2023, the following expenses were recognized, $1,221 of employee termination benefits for the HEXO acquisition plan, $1,586 of restructuring charges related to the costs of exiting the facility until the new business has resumed for the Truss acquisition plan and $281 of employee termination benefits for the Canadian business cost reduction plan.

 

Within the Distribution reporting unit, the Company executed a cost optimization plan during the three months ended November 30, 2023. It is expected that this plan will be completed within the current fiscal year. In the six month period ended November 30, 2023, the Company recognized $482 related to employee termination benefits in association with executing this plan.

 

For the prior period three and six months ended November 30, 2022, the Company recognized $8,064 and $8,064 which was comprised of $1,599 of exit cost and $2,758 for inventory adjustments from the termination of our producer partnership in Uruguay due to a breach of the underlying contract in our International cannabis business. Additionally, amounts related to the Tilray-Aphria Arrangement Agreement for the closure of our Canadian cannabis facility in Enniskillen of $1,512 million were incurred. The Company also incurred $2,195 million of write-offs from the exit of our medical device reprocessing business in our distribution reporting segment. These exit costs were completed in the prior year quarter ended November 30, 2022, and did not have on going impacts in the six months ended November 30, 2023. 

 

 

Note 24. Non-operating income (expense)

 

Non-operating income (expense) is comprised of:

 

  

For the three months

  

For the six months

 
  

ended November 30,

  

ended November 30,

 
  

2023

  

2022

  

2023

  

2022

 

Change in fair value of convertible debenture payable

 $(3,894) $(12,698) $(6,041) $(20,582)

Change in fair value of warrant liability

  6,247   37   (1,951)  1,585 

Foreign exchange loss (gain)

  (1,024)  907   5,243   (24,666)

Loss on long-term investments

  459   (596)  350   (1,604)

Other non-operating (losses) gains, net

  (967)  (6,100)  (1,182)  (6,175)

Total

 $821  $(18,450) $(3,581) $(51,442)

 

Included in other non-operating (losses) gains, net for the three and six months ended November 30, 2023, are losses of $(967) and $(1,182) resulting from the downside protection share issuance relating to the HTI note, as described in Note 15 (Stockholders' equity) and the gain on the settlement of TLRY 23 Convertible Notes.

 

Note 25. Fair value measurements

 

Financial instruments

 

The Company has classified its financial instruments as described in Note 3 Significant accounting policies in our Annual Financial Statements.

 

The carrying values of accounts receivable, bank indebtedness and accounts payable and accrued liabilities approximate their fair values due to their short periods to maturity.

 

At November 30, 2023 and  May 31, 2023 the Company had long-term debt of $4,472 and $3,280, respectively, and the principal portion of convertible debentures payable of $309,240 and $464,070, respectively, subject to fixed interest rates. The Company’s long-term debt is valued based on discounting the future cash outflows associated with the long-term debt. The discount rate is based on the incremental premium above market rates for the U.S. Department of the Treasury securities of similar duration. In each period thereafter, the incremental premium is held constant while the U.S. Department of the Treasury security is based on the then current market value to derive the discount rate.

 

24

 

The following tables present information about the Company’s assets and liabilities that are measured at fair value on a recurring basis as of November 30, 2023 and  May 31, 2023 and indicates the fair value hierarchy of the valuation techniques the Company utilized to determine such fair value:

 

              November 30, 
  

Level 1

  

Level 2

  

Level 3

  2023 

Financial assets

                

Cash and cash equivalents

 $143,373  $  $  $143,373 

Restricted cash

  1,576         1,576 

Marketable securities

  116,418         116,418 

Convertible notes receivable

        74,681   74,681 

Equity investments measured at fair value

        5,500   5,500 

Financial liabilities

                

Warrant liability

        (3,768)  (3,768)

Contingent consideration

        (20,704)  (20,704)

APHA 24 Convertible debenture

        (128,399)  (128,399)

Total recurring fair value measurements

 $261,367  $  $(72,690) $188,677 

 

              May 31, 
  

Level 1

  

Level 2

  

Level 3

  2023 

Financial assets

                

Cash and cash equivalents

 $206,632  $  $  $206,632 

Restricted cash

            

Marketable Securities

  241,897         241,897 

Convertible notes receivable

        103,401   103,401 

Equity investments measured at fair value

  1,056   1,088   5,651   7,795 

Financial liabilities

                

Warrant liability

        (1,817)  (1,817)

Contingent consideration

        (27,107)  (27,107)

APHA 24 Convertible debenture

        (120,568)  (120,568)

Total recurring fair value measurements

 $449,585  $1,088  $(40,440) $410,233 

 

The Company’s financial assets and liabilities required to be measured on a recurring basis are its convertible notes receivable, equity investments measured at fair value, convertible debentures measured at fair value, acquisition-related contingent consideration, and warrant liability.

 

Convertible notes receivable and long-term investments are recorded at fair value. The estimated fair value is determined using the Black Scholes option pricing model, probability of legalization and is classified as Level 3.

 

Convertible debentures payable are recorded at fair value when elected or required under US GAAP. Specifically, the APHA 24 instrument's estimated fair value is determined using the Black-Scholes option pricing model and is classified as Level 3. 

 

Certain equity investments recorded at fair value have quoted prices in active markets for identical assets and are classified as Level 1. The Company classified securities with observable inputs as Level 2 and without a quoted market price as Level 3.

 

The warrants associated with the warrant liability are classified as Level 3 derivatives. Consequently, the estimated fair value of the warrant liability is determined using the Black-Scholes pricing model. Until the warrants are exercised, expire, or other facts and circumstances lead the warrant liability to be reclassified to stockholders’ equity, the warrant liability (which relates to warrants to purchase shares of common stock) is marked-to-market each reporting period with the change in fair value recorded in change in fair value of warrant liability. Any significant adjustments to the unobservable inputs disclosed in the table below would have a direct impact on the fair value of the warrant liability.

 

The contingent consideration from the acquisitions of SweetWater, Montauk, and Truss due in   December 2023,  December 2025, and upon the triggering event if met, respectively and are payable in cash, is determined by discounting future expected cash outflows at a discount rate in the range of 5% - 11.4%, and probability of achievement of 25% and 90%. The unobservable inputs into the future expected cash outflows result in a fair value measurement classified as Level 3. During the six months ended November 30, 2023, a decrease in fair value of $10,584, inclusive of changes in foreign exchange, was recognized and was comprised of  a decrease of fair value of $13,218 for the contingent consideration from the Sweetwater acquisition as a result of a lower probability of achieving the incentive targets which was offset by an increase in fair value of $2,411 for the contingent consideration from the Montauk acquisition as a result of a higher probability of achieving the incentive targets. Lastly, the addition of $4,181 of contingent consideration liability was assumed as part of the Truss acquisition and an increase in fair value of $223 as a result of foreign exchange.

 

The balances of assets and liabilities categorized within Level 3 of the fair value hierarchy measured at fair value on a recurring basis are reconciled, as follows:

 

25

 
                  APHA 24 
  Convertible  Equity  Warrant  Contingent  Convertible 
  

notes receivable

  

Investments

  

Liability

  

Consideration

  

Debt

 

Balance, May 31, 2023

 $103,401  $5,651  $(1,817) $(27,107) $(120,568)

Additions

           (4,181)   

Disposals

  (28,720)            

Unrealized gain (loss) on fair value

     (151)  (1,951)  10,584   (7,831)

Impairments

                

Balance, November 30, 2023

 $74,681  $5,500  $(3,768) $(20,704) $(128,399)

 

The unrealized gain (loss) on fair value for the convertible debenture, the warrant liability, contingent consideration, and debt securities classified under available-for-sale method is recognized in the consolidated statements of loss and comprehensive loss using the following inputs:

 

    

Significant

   
  

Valuation

 

unobservable

   

Financial asset / financial liability

 

technique

 

input

 

Inputs

 

APHA Convertible debentures

 

Black-Scholes

 

Volatility,

 

50%

 
    

expected life (in years)

 

0.5

 

Warrant liability

 

Black-Scholes

 

Volatility,

 

50%

 
    

expected life (in years)

 

1.3

 

Contingent consideration

 

Discounted cash flows

 

Discount rate,

 5% - 11% 
    

achievement

 

25% - 90%

 

 

Items measured at fair value on a non-recurring basis

 

The Company's prepaids and other current assets, long lived assets, including property and equipment, goodwill and intangible assets are measured at fair value when there is an indicator of impairment and are recorded at fair value only when an impairment charge is recognized.

 

Management reviews its capital management approach on an ongoing basis and believes that this approach, given the relative size of the Company, is reasonable. There have been no changes to the Company’s capital management approach in the period. The Company considers its cash and cash equivalents and marketable securities as capital.

 

Note 26. Segment reporting

 

Information reported to the Chief Operating Decision Maker (“CODM”) for the purpose of resource allocation and assessment of segment performance focuses on the nature of the operations. The Company operates in four reportable segments: (1) cannabis operations, which encompasses the production, distribution, sale, co-manufacturing and advisory services of both medical and adult-use cannabis, (2) beverage alcohol operations, which encompasses the production, marketing and sale of beverage and beverage alcohol products, (3) distribution operations, which encompasses the purchase and resale of pharmaceuticals products to wholesale and pharmacy customers, and (4) wellness products, which encompasses hemp foods and hemp-based cannabidiol (“CBD”) consumer products. This structure is in line with how our Chief Operating Decision Maker (“CODM”) assesses our performance and allocates resources.

 

Operating segments have not been aggregated and no asset information is provided for the segments because the Company’s CODM does not receive asset information by segment on a regular basis. 

 

26

 

Segment gross profit from external customers:

 

  

For the three months

  

For the six months

 
  

ended November 30,

  

ended November 30,

 
  

2023

  

2022

  

2023

  

2022

 

Cannabis

                

Net cannabis revenue

 $67,114  $49,898  $137,447  $108,468 

Cannabis costs

  46,472   28,577   96,989   57,438 

Gross profit

  20,642   21,321   40,458   51,030 

Distribution

                

Distribution revenue

  67,223   60,188   136,380   120,773 

Distribution costs

  60,147   52,495   121,615   107,479 

Gross profit

  7,076   7,693   14,765   13,294 

Beverage alcohol

                

Net beverage alcohol revenue

  46,505   21,395   70,667   42,049 

Beverage alcohol costs

  30,513   11,420   41,779   22,269 

Gross profit

  15,992   9,975   28,888   19,780 

Wellness

                

Wellness revenue

  12,929   12,655   26,226   26,057 

Wellness costs

  9,230   8,762   18,732   18,665 

Gross profit

 $3,699  $3,893  $7,494  $7,392 

 

Channels of Cannabis revenue were as follows:

 

  

For the three months

  

For the six months

 
  

ended November 30,

  

ended November 30,

 
  

2023

  

2022

  

2023

  

2022

 

Revenue from Canadian medical cannabis

 $6,288  $6,365  $12,430  $12,885 

Revenue from Canadian adult-use cannabis

  72,048   52,390   143,243   110,745 

Revenue from wholesale cannabis

  4,289   236   9,584   628 

Revenue from international cannabis

  11,931   7,705   26,183   18,127 

Less excise taxes

  (27,442)  (16,798)  (53,993)  (33,917)

Total

 $67,114  $49,898  $137,447  $108,468 

 

On July 12, 2022, Tilray acquired the HEXO Convertible Note from HTI and also entered into a strategic alliance with HEXO Corp. (“HEXO”) as discussed in Note 8 (Convertible notes receivable) and Note 13 (Convertible debentures payable). In addition, the Company and HEXO entered into various commercial transaction agreements. On June 22, 2023, the Company completed the HEXO Acquisition as described in Note 7 (Business acquisitions), and thus these commercial arrangements were terminated and HEXO's financial results were consolidated in the current period results.    

 

Included in revenue from Canadian adult-use cannabis is $nil and $1,500 of advisory services revenue for the three and six months ended November 30, 2023, from the aforementioned HEXO commercial transaction agreements, compared to $7,882 and $15,635 of advisory services revenue in the prior comparative period.

 

27

 

Geographic net revenue:

 

  

For the three months

  

For the six months

 
  

ended November 30,

  

ended November 30,

 
  

2023

  

2022

  

2023

  

2022

 

North America

 $114,619  $76,211  $208,140  $158,403 

EMEA

  75,292   62,715   154,996   128,756 

Rest of World

  3,860   5,210   7,584   10,188 

Total

 $193,771  $144,136  $370,720  $297,347 

 

Geographic capital assets:

 

  November 30,  May 31, 
  2023  2023 

North America

 $506,151  $319,173 

EMEA

  105,325   107,131 

Rest of World

  3,611   3,363 

Total

 $615,087  $429,667 

 

Major customers are defined as customers that are materially significant to the Company’s annual revenues. For the three and six months ended November 30, 2023 and 2022, there were no major customers representing a material contribution to our quarterly revenues.

 

 

Note 27. Subsequent Events

 

On December 15, 2023 and December 21, 2023, the Company exchanged $18,500 aggregate principal of its APHA 24 Notes for cancellation by issuing 9,601,538 shares. 

 

On January 5, 2024, the Company obtained a Waiver from its lender as 420 was not in compliance with the leverage ratio covenant under the 420 Secured Credit Agreement. See “420 Credit Agreement” discussed in Part II, Item 5. Other Information.

 

On January 5, 2024, Aphria Inc. (“Aphria”), a wholly-owned subsidiary of the Company, entered into an Amended and Restated Wholesale Cannabis Supply Agreement (the “Supply Agreement”) with 1974568 Ontario Limited (“Aphria Diamond”), Aphria’s joint venture with Double Diamond Holdings Ltd. The Supply Agreement amends and restates the existing supply agreement, effective as of September 1, 2023, and amends certain terms relating to pricing and product classes. See “Aphria Diamond Amended Supply Agreement” discussed in Part II, Item 5. Other Information.

 

28

  
 

Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations.

 

This Managements Discussion and Analysis of Financial Condition and Results of Operations should be read in conjunction with the Condensed Interim Consolidated Financial Statements and the related Notes thereto for the period ended November 30, 2023 contained in this Quarterly Report on Form 10-Q and the Audited Consolidated Financial Statements and the related Notes thereto contained in our Annual Report on Form 10-K for the fiscal year ended May 31, 2023, as well as  in conjunction with the sections entitled Item 1A. Risk Factors and Item 7. Managements Discussion and Analysis of Financial Condition and Results of Operations in our Annual Report on Form 10-K for the fiscal year ended May 31, 2023Forward looking statements in this Form 10-Q are qualified by the cautionary statement included in this Form 10-Q under the sub-heading Cautionary Note Regarding Forward-Looking Statements in the introduction of this Form 10-Q.

 

Company Overview

 

We are a leading global cannabis-lifestyle and consumer packaged goods company headquartered in Leamington and New York, with operations in Canada, the United States, Europe, Australia, and Latin America that is changing people’s lives for the better – one person at a time – by inspiring and empowering a worldwide community to live their very best life, enhanced by moments of connection and wellbeing. Tilray’s mission is to be the most responsible, trusted and market leading cannabis consumer products company in the world with a portfolio of innovative, high-quality and beloved brands that address the needs of the consumers, customers and patients we serve.

 

Our overall strategy is to leverage our brands, infrastructure, expertise and capabilities to drive market share in the industries in which we compete, achieve industry-leading, profitable growth and build sustainable, long-term shareholder value. In order to ensure the long-term sustainable growth of our Company, we continue to focus on developing strong capabilities in consumer insights, drive category management leadership and assess growth opportunities with the introduction of new products and entries into new geographies. In addition, we are relentlessly focused on managing our cost of goods and expenses in order to maintain our strong financial position.

 

29

 

Trends and Other Factors Affecting Our Business 

 

Canadian cannabis market trends:

 

The cannabis industry in Canada continues to evolve at a rapid pace during the early periods following the federal legalization of adult-use cannabis. Through analysis of the current market conditions, the following key trends have emerged and are anticipated to influence the near-term future in the industry:

 

 

-

Market share. Tilray continues to maintain its market leadership position in Canada. However, during the quarter, we experienced a marginal dip in market share in Canada from 13.4% to 12.5% from the immediately preceding quarter, as reported by Hifyre data for all provinces excluding Quebec where Weedcrawler was deemed more accurate. While our market share has increased from the prior year comparison as a result of the strategic acquisitions of HEXO and Truss, the current period decrease reflects the intricacies of integrating products from strategic acquisitions like HEXO and Truss into our distribution channels. Challenges during this integration, including issues with SKU-specific gaps due to facility transitions, impacted our performance. However, we anticipate a rebound in market share for the latter half of our third quarter as we address these issues and integrate our processes.

 

 

-

Price compression. Historical price compression persists in the market, intensified by fierce competition among the approximately 1,000 Licensed Producers in Canada. Despite increased sales volume, year-over-year price compression has adversely impacted revenue by approximately $3.6 million and $6.7 million for the three and six months ended November 30, 2023, influencing both cannabis gross margin and the bottom line. The fixed impact of excise per gram, notwithstanding the decline in average selling prices, further compounds these challenges, prompting ongoing industry lobbying efforts.

 

 

-

Timing difference in recognizing synergized operating results. As we continue to acquire businesses such as HEXO and Truss, a large part of our strategy involves removing legacy costs from these businesses as part of our acquisition strategy. Once we have completed our full $27 million synergy plan for HEXO and integrated Truss's operations, we expect our operating results to be more profitable. Concurrently, we are actively evaluating our facilities, optimizing for efficiency, and implementing cost reduction measures to ensure our value chain operates at peak efficiency.

 

These identified trends have had impacts on the current period results of operations and are discussed in greater detail in the respective sections. 

 

International cannabis market updates:

 

30

 

The cannabis industry in Europe is in its early stages of development whereby countries within Europe are at different stages of legalization of medical and adult-use cannabis as some countries have expressed a clear political ambition to legalize adult-use cannabis (Germany, Portugal, Luxembourg and Czech Republic), some are engaging in an experiment for adult-use (Germany, Netherlands and Switzerland) and some are debating regulations for cannabinoid-based medicine (France and Spain). In Europe, we believe that, despite continuing recessionary economic conditions and the Russian conflict with Ukraine, cannabis legalization (both medicinal and adult-use) will continue to gain traction albeit more slowly than originally expected. We also continue to believe that Tilray remains uniquely positioned to maintain and gain significant market share in these markets with its infrastructure and its investments, which is comprised of two EU-GMP cultivation facilities within Europe located in Portugal and Germany, our distribution network and our demonstrated commitment to the availability, quality and safety of our cannabinoid-based medical products. Today, Germany remains the largest medical cannabis market in Europe.

 

The following is a summary of the state of cannabis legalization within Europe:

 

Germany. In late October 2022, the German government published key details of its plan to legalize and regulate adult-use cannabis, including what Health Minister Karl Lauterbach described as “complete” cultivation within the country. 

 

Recently, Mr. Lauterbach advised that the proposal had been revised and that the new plan is a two-part model, which appears to be designed in order to legalize cannabis as broadly as possibly without running afoul of European Union rules. On July 6, 2023, it was announced that the draft regulations pertaining to decriminalization, home cultivation and non-commercial “cultivation associations” (i.e., social clubs) (the "Pillar One Regulations") had been finalized by the health ministry and was ready to be delivered to the German parliament. Due to lack of internal alignment by the SPD party, the Pillar One Regulations, which were initially expected to be introduced to the German parliament in the fourth quarter of calendar year 2023, now will not be brought until early in the calendar year of 2024.  It is expected that the Pillar One Regulations will be passed in January 2024, with the new law coming into effect in the first quarter of calendar year 2024.

 

In addition to the Pillar One Regulations addressing decriminalization, home cultivation and non-commercial “cultivation associations”, it also contains provisions which provide for broad medical cannabis reform, to which there appears to be broad consensus.  These provisions include the reclassification of medical cannabis as a non-narcotic, thereby increasing the accessibility of medical cannabis to patients and the abolishment of the tender procedure for in-country cultivation in favor of a permit procedure.

 

We expect to see the cornerstone framework for the Pillar Two Regulations governing the model projects in January 2024.

 

We continue to believe that Tilray is well-positioned in Germany to provide consistent and sustainable cannabis products for the adult-use market whether only in-country cultivation is permitted or whether imports are also allowed given our Aphria RX facility located in Germany and our EU-GMP-certified production facility in Portugal, as well as our distribution platform, which provides us with access to 13,000 pharmacies in Germany. Tilray is also well-positioned to continue to service the medical cannabis market and we believe that the reclassification of medical cannabis as a non-narcotic and the adoption of a permit procedure for in-country cultivation provides Tilray with a larger market opportunity. 

 

Switzerland. In October 2021, Switzerland announced its intention to legalize cannabis by allowing production, cultivation, trade, and consumption, and in the meantime, it is commencing pilot projects in various cities, which permits selected participants to purchase cannabis for adult-use in various pharmacies in order to conduct studies on the cannabis market and its impact on Swiss society. It is the first trial for the legal distribution of adult-use cannabis containing THC in Europe. To date, Switzerland has granted several cities, including Basel, Bern, Biel/Bienne, Lucerne, Geneva, and Zurich, the opportunity to start their cannabis pilot projects. Zurich, which has recently been reported to lack cannabis consumers, is currently seeking 400 eligible individuals to participate.

 

Spain. The Spanish Congress' Health Committee has recently approved a Medical Cannabis Report that paves the way for a government-sponsored bill on medical cannabis. The Report explicitly opens the door to standardized preparations other than the drugs already approved, highlighting their advantages in relation to safety, security and stability; as well as the possibility to prescribe medical cannabis in community pharmacies and not only in hospitals, favoring the access to the patients that may need it.

 

France. France launched a two-year pilot experiment to supply approximately 3,000 patients with medical cannabis. To date, 2,300 patients are enrolled in the experiment, which has been extended for another year and is now ending March 2024 in order to collect more data and to adopt a legal framework. The first results of the experimentation are positive. Several independent agencies have produced reports that show the effectiveness of medical cannabis, especially in situations of chronic pain.

 

Czech Republic. The Czech Republic has discussed plans to launch a fully regulated adult-use cannabis market and is reviewing in the context of the European regulations.

 

Malta.  In 2021, became the first country in the European Union to legalize personal possession of the drug and permit private “cannabis clubs,” where members can grow and share the drug.

 

Netherlands. The Netherlands launched a pilot program involving the cultivation of cannabis for adult-use. The purpose of the experiment is to determine whether and how controlled cannabis can be legally supplied to coffeeshops and what the effects of this would be.  During the experiment, legally produced cannabis will be sold in coffeeshops in 10 municipalities. Coffeeshops in these municipalities may only sell legally produced cannabis.  The term of the experiment is set for four years.

 

Beverage alcohol market trends:

 

The beverage alcohol category, while more established, continues to shift with changes in consumer trends for the craft industry. Specifically, based on IRI data, for the 13 weeks ended November 30, 2023, the US beer trends softened slightly as the industry increased 1.6%, while craft beer decreased 1.6%, a slight decline from the immediately preceding quarter, which is consistent with the historical seasonality of craft beer.  Craft beer still maintains the 4th largest segment within total beer, generating over $1.1B in retail sales. Sweetwater revenues in the quarter ending August 31, 2023, and November 30, 2023, were both 1% higher than the comparable quarters of the prior year. SweetWater is expected to maintain growth nationally during the remainder of the 2024 fiscal year through programming and product innovation launches. Early results from the launch of SweetWater’s latest innovation, Gummies, are encouraging, with the brand quickly becoming a top 3 offering in activated markets. Additionally, Montauk, which was acquired on November 7, 2022, finished the period with a 5.9% growth based on IRI data for the aforementioned period, through sustained success in home markets and new market expansion. The Company anticipates continued growth through focused innovation, targeted marketing efforts, and gains in distribution across the portfolio of brands. The Company has also seen positive trends across the newly acquired brands portfolio from the Acquisition of the Beverage Alcohol Business Portfolio, which are included in our results from October 1, 2023. 

 

Breckenridge Distillery is a leader in the bourbon industry and continues to gain market share in both the vodka and gin markets. A primary growth objective is to continue expansion of market share across the United States, including expanding the national chain's footprint, to maintain a double-digit annual top-line growth. To ensure continued growth in the future, the company is focused on expanding the marketing strategy, highlighting its quality products. Recent media coverage includes coverage of newly released products, the expanded Denver Broncos Sponsorship, and recognition of the world class restaurant located at the distillery. The overall whiskey market remains positive, but the growing tequila and RTD cocktail markets have slowed. The Company expects its spirits business to continue to grow with innovative new product offerings and continued expansion in the US market.​

 

31

 

Wellness market trends:

 

Manitoba Harvest’s branded hemp business continued to expand its U.S. and Canadian leading market share position this quarter with consumption up in both the Natural and Conventional Channels, with the brands top five customers all seeing growth. For the remainder of the year, the Company will look to expand the Happy Flower™ brand with retail distribution into key markets, focusing on U.S. states with established CBD permissibility and sales momentum in future periods. 

 

Acquisitions, Strategic Transactions and Synergies

 

We strive to continue to expand our business on a consolidated basis, through a combination of organic growth and acquisition. While we continue to execute against our strategic initiatives that we believe will result in the long-term, sustainable growth and value to our stockholders, we continue to evaluate potential acquisitions and other strategic transactions of businesses that we believe complement our existing portfolio, infrastructure and capabilities or provide us with the opportunity to enter attractive new geographic markets and product categories as well as expand our existing capabilities. In addition, we have exited certain businesses and continue to evaluate certain businesses within our portfolio that are dilutive to profitability and cash flow. As a result, we incur transaction costs in connection with identifying and completing acquisitions and strategic transactions, as well as ongoing integration costs as we combine acquired companies and continue to achieve synergies, which is offset by income generated in connection with the execution of these transactions. For the three and six months ended November 30, 2023, we incurred $1.1 million and $9.6 million of transaction expenses, discussed further below.

 

Our acquisition strategy has had a material impact on the Company’s results in the current quarter and we expect will continue into future periods, generating accretive impacts for our stockholders. A summary of their impacts are as follows:

 

 

HEXO acquisition:

 

On June 22, 2023, Tilray acquired HEXO Corp. (“HEXO”) as discussed in Note 7 (Business acquisitions). With the HEXO Acquisition, Tilray initially expected to achieve additional cost savings of $27 million on an annualized pre-tax basis and has subsequently increased this target to between $30 to $ 35 million. These synergies will be realized across production, sales, marketing, distribution, and corporate savings, with incremental upside resulting from consolidating packaging, procurement, freight, and logistics. This builds on Tilray’s substantial progress optimizing its Canadian cannabis operations discussed below. During the three and six months ended November 30, 2023, we have achieved $22.0 million of our synergy plan on an annualized run-rate basis, of which $14.0 million represented actual cost savings during the period. As discussed in our trends section, these cost savings initiatives take time to implement, resulting in related benefits being realized over time. 

 

 

Craft beverage acquisition:

 

On September 29, 2023, Tilray acquired a portfolio of craft beer brands, assets and businesses comprising eight beer and beverage brands from Anheuser-Busch Companies, LLC, including breweries and brewpubs associated with them (the “Craft Acquisition”). The acquired businesses include Shock Top, Breckenridge Brewery, Blue Point Brewing Company, 10 Barrel Brewing Company, Redhook Brewery, Widmer Brothers Brewing, Square Mile Cider Company, and HiBall Energy.  The details of the acquisition are as described in Note 7 (Business acquisitions). The Craft Acquisition, is expected to be transformational to our beverage alcohol strategy elevating the Company to the 5th largest U.S. Craft Beer market share position from our previous 9th place market share position. 

 

The Company further believes the Craft transaction will be accretive to our Adjusted EBITDA, driven by a range of strategic benefits, including:

 

 

-

An established brand portfolio with a devoted consumer base, coupled with growth potential through integration and expanded capabilities in both alcoholic and non-alcoholic beverages.
 

-

The acquisition encompasses four production facilities and eight brewpub locations, further solidifying our operational presence.

 

-

A reinforced nationwide distribution footprint, propelling Tilray's beer sales volume from four million cases to twelve million, thereby tripling its market reach on a pro forma basis.

 

32

 

In addition to acquisitions completed above, the Company has also completed the following cost saving strategies during the quarter:

 

 

Cannabis business cost reduction plan:

 

During the fourth quarter of our fiscal year ended May 31, 2022, the Company launched a $30 million cost optimization plan of our existing cannabis business to solidify our position as an industry leading low-cost producer. To date as of November 30, 2023, we have achieved $22.3 million against the plan. The Company now considers this plan fulfilled, owing to a strategic shift in our Cannabis beverage strategy. The Company's original targets involved repurposing our beverage facility; however, this initiative was altered following the Truss acquisition, which required additional capacity from our existing infrastructure.

 

 

International Cannabis business cost reduction plan:

 

During our fiscal year ended May 31 2023, the Company launched an $8.0 million cost optimization plan for our international cannabis business to adapt to changing market dynamics and slower than anticipated legalization in Europe. In the current period ended November 30, 2023, the Company achieved an annualized run-rate basis of $7.6 million of cost savings. The Company concluded this savings plan as of November 30, 2023. The Company concluded this savings plan as of November 30, 2023. The remaining portion of the savings target was tied to an assumed temporary decrease in demand.  However, the assumed temporary reduction did not occur rather demand for our European cannabis products increased, rendering the cost savings associated with that part of the plan unnecessary. 

 

33

 

Political and Economic Environment

 

Our results of operations can also be affected by economic, political, legislative, regulatory, legal actions, the global volatility and general market disruption resulting from geopolitical tensions, such as Russia's incursion into Ukraine. Economic conditions, such as recessionary trends, inflation, supply chain disruptions, interest and monetary exchange rates, and government fiscal policies, and the recent banking credit crises, can have a significant effect on operations. Accordingly, we could be affected by civil, criminal, environmental, regulatory or administrative actions, claims or proceedings.

 

Results of Operations

 

Our consolidated results, in thousands except for per share data, are as follows:

 

   

For the three months

                   

For the six months

                 
   

ended November 30,

   

Change

   

% Change

   

ended November 30,

   

Change

   

% Change

 

(in thousands of U.S. dollars)

 

2023

   

2022

   

2023 vs. 2022

   

2023

   

2022

   

2023 vs. 2022

 

Net revenue

  $ 193,771     $ 144,136     $ 49,635       34 %   $ 370,720     $ 297,347     $ 73,373       25 %

Cost of goods sold

    146,362       101,254       45,108       45 %     279,115       205,851       73,264       36 %

Gross profit

    47,409       42,882       4,527       11 %     91,605       91,496       109       0 %

Operating expenses:

                                                               

General and administrative

    43,313       37,878       5,435       14 %     83,829       78,386       5,443       7 %

Selling

    7,583       9,669       (2,086 )     (22 )%     14,442       19,340       (4,898 )     (25 )%

Amortization

    21,917       23,995       (2,078 )     (9 )%     44,142       48,354       (4,212 )     (9 )%

Marketing and promotion

    9,208       8,535       673       8 %     17,743       15,783       1,960       12 %

Research and development

    56       165       (109 )     (66 )%     135       331       (196 )     (59 )%

Change in fair value of contingent consideration

    300             300       0 %     (10,807 )     211       (11,018 )     (5,222 )%

Litigation costs, net of recoveries

    3,042       2,815       227       8 %     5,076       3,260       1,816       56 %

Restructuring costs

    2,655       8,064       (5,409 )     (67 )%     3,570       8,064       (4,494 )     (0,056 )%

Transaction (income) costs

    1,094       3,552       (2,458 )     (69 )%     9,596       (9,264 )     18,860       (204 )%

Total operating expenses

    89,168       94,673       (5,505 )     (6 )%     167,726       164,465       3,261       2 %

Operating loss

    (41,759 )     (51,791 )     10,032       (19 )%     (76,121 )     (72,969 )     (3,152 )     4 %

Interest expense, net

    (8,625 )     (3,107 )     (5,518 )     178 %     (18,460 )     (7,520 )     (10,940 )     145 %

Non-operating (expense) income, net

    821       (18,450 )     19,271       (104 )%     (3,581 )     (51,442 )     47,861       (93 )%

Loss before income taxes

    (49,563 )     (73,348 )     23,785       (32 )%     (98,162 )     (131,931 )     33,769       (26 )%

Income tax expense

    (3,380 )     (11,713 )     8,333       (71 )%     3,884       (4,502 )     8,386       (186 )%

Net loss

  $ (46,183 )   $ (61,635 )   $ 15,452       (25 )%   $ (102,046 )   $ (127,429 )   $ 25,383       (20 )%

 

34

 

Use of Non-GAAP Measures

 

Throughout this Management's Discussion and Analysis of Financial Condition and Results of Operations in this Quarterly Report on Form 10-Q, we discuss non-GAAP financial measures, including reference to:

 

 

adjusted gross profit (excluding purchase price allocation (“PPA”) fair value step up) for each reporting segment (Cannabis, Beverage alcohol, Distribution and Wellness) as applicable,

 

 

adjusted gross margin (excluding purchase price allocation (“PPA”) fair value step up) for each reporting segment (Cannabis, Beverage alcohol, Distribution and Wellness) as applicable,

 

 

adjusted EBITDA, 

 

 

cash and marketable securities, and

 

 

constant currency presentation of net revenue.

 

All these non-GAAP financial measures should be considered in addition to, and not in lieu of, the financial measures calculated and presented in accordance with accounting principles generally accepted in the United States of America, ("GAAP"). These measures, which may be different than similarly titled measures used by other companies, are presented to help investors' overall understanding of our financial performance and should not be considered a substitute for, or superior to, the financial information prepared and presented in accordance with GAAP. Please see "Reconciliation of Non-GAAP Financial Measures to GAAP Measures" below for reconciliation of such non-GAAP Measures to the most directly comparable GAAP financial measures, as well as a discussion of our adjusted gross margin, adjusted gross profit and adjusted EBITDA measures and the calculation of such measures.

 

Constant Currency Presentation

 

We believe that this measure provides useful information to investors because it provides transparency to underlying performance in our consolidated net sales by excluding the effect that foreign currency exchange rate fluctuations have on period-to-period comparability given the volatility in foreign currency exchange markets. To present this information for historical periods, current period net sales for entities reporting in currencies other than the U.S. Dollar are translated into U.S. Dollars at the average monthly exchange rates in effect during the corresponding period of the prior fiscal year rather than at the actual average monthly exchange rate in effect during the current period of the current fiscal year. As a result, the foreign currency impact is equal to the current year results in local currencies multiplied by the change in average foreign currency exchange rate between the current fiscal period and the corresponding period of the prior fiscal year.

 

Cash and Marketable Securities

 

The Company combines the Cash and cash equivalent financial statement line item and the Marketable securities financial statement line item as an aggregate total as reconciled in the liquidity and capital resource section below. The Company’s management believes that this presentation provides useful information to management, analysts and investors regarding certain additional financial and business trends relating to its short-term liquidity position by combining these three GAAP metrics.

 

35

 

Operating Metrics and Non-GAAP Measures

 

We use the following operating metrics and non-GAAP measures to evaluate our business and operations, measure our performance, identify trends affecting our business, project our future performance, and make strategic decisions. Other companies, including companies in our industry, may calculate operating metrics and non-GAAP measures with similar names differently which may reduce their usefulness as comparative measures. Certain variances are labeled as not meaningful ("NM") throughout management's discussion and analysis.

 

   

For the three months

   

For the six months

 
   

ended November 30,

   

ended November 30,

 

(in thousands of U.S. dollars)

 

2023

   

2022

   

2023

   

2022

 

Net cannabis revenue

  $ 67,114     $ 49,898     $ 137,447     $ 108,468  

Distribution revenue

    67,223       60,188       136,380       120,773  

Net beverage alcohol revenue

    46,505       21,395       70,667       42,049  

Wellness revenue

    12,929       12,655       26,226       26,057  

Cannabis costs

    46,472       28,577       96,989       57,438  

Beverage alcohol costs

    30,513       11,420       41,779       22,269  

Distribution costs

    60,147       52,495       121,615       107,479  

Wellness costs

    9,230       8,762       18,732       18,665  

Adjusted gross profit (excluding PPA step-up) (1)

    52,110       43,989       101,412       93,710  

Cannabis adjusted gross margin (excluding PPA step-up) (1)

    35 %     43 %     35 %     47 %

Beverage alcohol adjusted gross margin (excluding PPA step-up) (1)

    38 %     52 %     44 %     52 %

Distribution gross margin

    11 %     13 %     11 %     11 %

Wellness gross margin

    29 %     31 %     29 %     28 %

Adjusted EBITDA (1)

  $ 10,086     $ 11,008       20,820     $ 23,839  

Cash and marketable securities (1) as at the period ended:

    259,791       433,504       259,791       433,504  

Working capital as at the period ended:

  $ 247,041     $ 388,200       247,041       388,200  

 

(1) Adjusted EBITDA, adjusted gross profit (excluding PPA step-up) and adjusted gross margin (excluding PPA step-up) for each of our segments, and cash and marketable securities are non-GAAP financial measures. See Use of Non-GAAP Measures above for a reconciliation of these Non-GAAP Measures to our most comparable GAAP measure.

 

Segment Reporting

 

Our reporting segments revenue is comprised of revenues from our cannabis, distribution, beverage alcohol, and wellness operations, as follows:

 

   

For the three months

                   

For the six months

                 
   

ended November 30,

   

Change

   

% Change

   

ended November 30,

   

Change

   

% Change

 

(in thousands of U.S. dollars)

 

2023

   

2022

   

2023 vs. 2022

   

2023

   

2022

   

2023 vs. 2022

 

Cannabis business

  $ 67,114     $ 49,898     $ 17,216       35 %   $ 137,447     $ 108,468     $ 28,979       27 %

Distribution business

    67,223       60,188       7,035       12 %     136,380       120,773       15,607       13 %

Beverage alcohol business

    46,505       21,395       25,110       117 %     70,667       42,049       28,618       68 %

Wellness business

    12,929       12,655       274       2 %     26,226       26,057       169       1 %

Total net revenue

  $ 193,771     $ 144,136     $ 49,635       34 %   $ 370,720     $ 297,347     $ 73,373       25 %

 

36

 

Our reporting segments revenue using a constant currency(1) are as follows:

 

   

For the three months

                   

For the six months

                 
   

ended November 30,

                   

ended November 30,

                 
   

as reported in constant currency

   

Change

   

% Change

   

as reported in constant currency

   

Change

   

% Change

 

(in thousands of U.S. dollars)

 

2023

   

2022

   

2023 vs. 2022

   

2023

   

2022

   

2023 vs. 2022

 

Cannabis business

  $ 67,361     $ 49,898     $ 17,463       35 %   $ 138,750     $ 108,468     $ 30,282       28 %

Distribution business

    64,502       60,188       4,314       7 %     131,454       120,773       10,681       9 %

Beverage alcohol business

    46,505       21,395       25,110       117 %     70,667       42,049       28,618       68 %

Wellness business

    13,004       12,655       349       3 %     26,463       26,057       406       2 %

Total net revenue

  $ 191,372     $ 144,136     $ 47,236       33 %   $ 367,334     $ 297,347     $ 69,987       24 %

 

Our geographic revenue is as follows:

 

   

For the three months

                   

For the six months

                 
   

ended November 30,

   

Change

   

% Change

   

ended November 30,

   

Change

   

% Change

 

(in thousands of U.S. dollars)

 

2023

   

2022

   

2023 vs. 2022

   

2023

   

2022

   

2023 vs. 2022

 

North America

  $ 114,619     $ 76,211     $ 38,408       50 %   $ 208,140     $ 158,403     $ 49,737       31 %

EMEA

    75,292       62,715       12,577       20 %     154,996       128,756       26,240       20 %

Rest of World

    3,860       5,210       (1,350 )     (26 )%     7,584       10,188       (2,604 )     (26 )%

Total net revenue

  $ 193,771     $ 144,136     $ 49,635       34 %   $ 370,720     $ 297,347     $ 73,373       25 %

 

Our geographic revenue using a constant currency(1) is as follows:

 

   

For the three months

                   

For the six months

                 
   

ended November 30,

                   

ended November 30,

                 
   

as reported in constant currency

   

Change

   

% Change

   

as reported in constant currency

   

Change

   

% Change

 

(in thousands of U.S. dollars)

 

2023

   

2022

   

2023 vs. 2022

   

2023

   

2022

   

2023 vs. 2022

 

North America

  $ 115,429     $ 76,211     $ 39,218       51 %   $ 210,643     $ 158,403     $ 52,240       33 %

EMEA

    70,129       62,715       7,414       12 %     145,245       128,756       16,489       13 %

Rest of World

    5,814       5,210       604       12 %     11,446       10,188       1,258       12 %

Total net revenue

  $ 191,372     $ 144,136     $ 47,236       33 %   $ 367,334     $ 297,347     $ 69,987       24 %

 

Our geographic capital assets are as follows:

 

   

November 30,

   

May 31,

   

Change

   

% Change

 

(in thousands of U.S. dollars)

 

2023

   

2023

   

2023 vs. 2022

 

North America

  $ 506,151     $ 319,173     $ 186,978       59 %

EMEA

    105,325       107,131       (1,806 )     (2 )%

Rest of World

    3,611       3,363       248       7 %

Total capital assets

  $ 615,087     $ 429,667     $ 185,420       43 %

 

37

 

Cannabis revenue

 

Cannabis revenue based on market channel is as follows:

 

   

For the three months

                   

For the six months

                 
   

ended November 30,

   

Change

   

% Change

   

ended November 30,

   

Change

   

% Change

 

(in thousands of US dollars)

 

2023

   

2022

   

2023 vs. 2022

   

2023

   

2022

   

2023 vs. 2022

 

Revenue from Canadian medical cannabis

  $ 6,288     $ 6,365     $ (77 )     (1 )%   $ 12,430     $ 12,885     $ (455 )     (4 )%

Revenue from Canadian adult-use cannabis

    72,048       52,390       19,658       38 %     143,243       110,745       32,498       29 %

Revenue from wholesale cannabis

    4,289       236       4,053       1,717 %     9,584       628       8,956       1,426 %

Revenue from international cannabis

    11,931       7,705       4,226       55 %     26,183       18,127       8,056       44 %

Total cannabis revenue

    94,556       66,696       27,860       42 %     191,440       142,385       49,055       34 %

Excise taxes

    (27,442 )     (16,798 )     (10,644 )     63 %     (53,993 )     (33,917 )     (20,076 )     59 %

Total cannabis net revenue

  $ 67,114     $ 49,898     $ 17,216       35 %   $ 137,447     $ 108,468     $ 28,979       27 %

 

Cannabis revenue based on market channel using a constant currency(1) is as follows:

 

   

For the three months

                   

For the six months

                 
   

ended November 30,

                   

ended November 30,

                 
   

as reported in constant currency

   

Change

   

% Change

   

as reported in constant currency

   

Change

   

% Change

 

(in thousands of US dollars)

 

2023

   

2022

   

2023 vs. 2022

   

2023

   

2022

   

2023 vs. 2022

 

Revenue from Canadian medical cannabis

  $ 6,377     $ 6,365     $ 12       0 %   $ 12,687     $ 12,885     $ (198 )     (2 )%

Revenue from Canadian adult-use cannabis

    73,021       52,390       20,631       39 %     146,132       110,745       35,387       32 %

Revenue from wholesale cannabis

    4,338       236       4,102       1,738 %     9,796       628       9,168       1,460 %

Revenue from international cannabis

    11,442       7,705       3,737       49 %     25,219       18,127       7,092       39 %

Total cannabis revenue

    95,178       66,696       28,482       43 %     193,834       142,385       51,449       36 %

Excise taxes

    (27,817 )     (16,798 )     (11,019 )     66 %     (55,084 )     (33,917 )     (21,167 )     62 %

Total cannabis net revenue

  $ 67,361     $ 49,898     $ 17,463       35 %   $ 138,750     $ 108,468     $ 30,282       28 %

 

   (1)

The constant currency presentation of our Cannabis revenue based on market channel is a non-GAAP financial measure. See Use of Non-GAAP Measures Constant Currency Presentation above for a discussion of these Non-GAAP Measures.

 

38

 

Revenue from Canadian medical cannabis: Revenue from Canadian medical cannabis decreased to $6.3 million and  $12.4 million for the three and six months ended November 30, 2023, compared to revenue of $6.4 million and $12.9 million for the prior year same period. On a constant currency basis revenue from Canadian medical cannabis was $6.4 million and $12.7 million for the three and six months ended November 30, 2023, compared to revenue of  $6.4 million and $12.9 million for the prior year same periods. While revenue was relatively consistent period over period and on a constant currency basis for the three month period, the six month slight decrease in revenue from medical cannabis continues to be driven by increased competition from the adult-use recreational market and its related price compression impacting the medical cannabis market.

 

Revenue from Canadian adult-use cannabis: During the three and six months ended November 30, 2023, our revenue from Canadian adult-use cannabis increased to $72.0 million and $143.2 million, compared to revenue of $52.4 million and $110.7 million and for the prior year same period. Further, the prior year revenue includes advisory fees in the amount of $7.9 million and $15.6 million for the three and six months ended November 30, 2022, compared to $nil and $1.5 million for the three and six months ended November 30, 2023. Excluding these advisory service fees, revenue increased by $27.4 million and $46.6 million for the three and six months ended November 30, 2023. The increase in adult-use revenue was driven by continuous launches of new product innovations from our existing brand portfolios as well as the increased revenue from the acquisition of HEXO on June 22, 2023, and Truss on August 3, 2023. Additionally, excluding the decline in the Canadian dollar, on a constant currency basis, our revenue from Canadian adult-use cannabis increased to $73.0 million and $146.1 million for the three and six months ended November 30, 2023. 

 

Wholesale cannabis revenue: Revenue from wholesale cannabis increased to $4.3 million and $9.6 million for the three and six months ended November 30, 2023, compared to revenue of $0.2 million and $0.6 million for the prior year same period. On a constant currency basis, revenue from wholesale cannabis increased to $$4.3 million and $9.8 million for the three and six months ended November 30, 2023  compared to revenue of $0.2 million and $0.6 million. The Company continues to believe that wholesale cannabis revenue will remain subject to quarter-to-quarter variability and is based on opportunistic sales. The wholesale transactions that occurred in the current year periods aided with our liquidity initiatives to increase our cash flow from operations despite having unfavorable impacts on our gross margin and EBITDA of $(0.2) million and $(2.9) million for the three and six months ended November 30, 2023. 

 

International cannabis revenue: Revenue from international cannabis increased to $11.9 million and $26.2 million for the three and six months ended November 30, 2023, compared to revenue of $7.7 million and $18.1 million for the prior year same period. Given the increase of the Euro against the U.S. Dollar when compared to the prior year quarter, on a constant currency basis, revenue from international cannabis was $11.4 million and $25.2 million compared to $7.7 million and $18.1 million in the prior year same period for the three and six months ended November 30, 2023. The increase in the period is largely driven by expansion into emerging international medical markets. Additionally, in the prior period the Company recognized a one-time return adjustment of $3.1 million related to a former customer in Israel that commenced bankruptcy proceedings.

 

39

 

Distribution revenue

 

Revenue from Distribution operations increased to $67.2 million and $136.4 million for the three and six months ended November 30, 2023, compared to revenue of $60.2 million and $120.8 million for the prior year same period. Revenue was positively impacted during the three month period from the increase of the Euro against the U.S. Dollar in the quarter, which when the impacts are eliminated on a constant currency basis, revenue was $64.5 million and $131.5 million for the three and six months ended November 30, 2023. The increase in the period was driven by increased production capacity achieved through out-sourcing to third party production facilities as well as leveraging our own internal production and improved procurement processes, which has allowed CC Pharma to improve its product mix.  

 

Beverage alcohol revenue

 

Revenue from our Beverage alcohol operations increased to $46.5 million and $70.7 million for the three and six months ended November 30, 2023, compared to revenue of $21.4 million and $42.0 million for the prior year same period. The increase in the three and six month periods relate primarily to our acquisitions of the newly acquired Craft Acquisition brands and Montauk which occurred on September 29, 2023 and November 7, 2022, respectively, and is not reflected in the full prior year comparative periods. 

 

Wellness revenue

 

Our Wellness revenue from Manitoba Harvest was relatively consistent at $12.9 million and $26.2 million for the three and six months ended November 30, 2023 compared to $12.7 million and $26.1 million from the prior year same period. On a constant currency basis for the three and six months ended November 30, 2023, Wellness revenue increased to $13.0 million and $26.5 million from $12.7 and $26.1 million. Overall, sales remained relatively consistent period over period with the increase being driven by a promotional sale at a large bulk retailer. 

 

40

 

Gross profit, gross margin and adjusted gross margin(1) for our reporting segments

 

Our gross profit and gross margin for the three and six months ended November 30, 2023 and 2022, is as follows:

 

   

For the three months

                   

For the six months

                 

(in thousands of U.S. dollars)

 

ended November 30,

   

Change

   

% Change

   

ended November 30,

   

Change

   

% Change

 

Cannabis

 

2023

   

2022

   

2023 vs. 2022

   

2023

   

2022

   

2023 vs. 2022

 

Net revenue

    67,114       49,898       17,216       35 %     137,447       108,468       28,979       27 %

Cost of goods sold

    46,472       28,577       17,895       63 %     96,989       57,438       39,551       69 %

Gross profit

    20,642       21,321       (679 )     (3 )%     40,458       51,030       (10,572 )     (21 )%

Gross margin

    31 %     43 %     (12 )%     (28 )%     29 %     47 %     (18 )%     (38 )%

Purchase price accounting step-up

    2,938             2,938             7,454             7,454       0 %

Adjusted gross profit (1)

    23,580       21,321       2,259       11 %     47,912       51,030       (3,118 )     (6 )%

Adjusted gross margin (1)

    35 %     43 %     (8 )%     (19 )%     35 %     47 %     (12 )%     (26 )%

Distribution

                                                               

Net revenue

    67,223       60,188       7,035       12 %     136,380       120,773       15,607       13 %

Cost of goods sold

    60,147       52,495       7,652       15 %     121,615       107,479       14,136       13 %

Gross profit

    7,076       7,693       (617 )     (8 )%     14,765       13,294       1,471       11 %

Gross margin

    11 %     13 %     (2 )%     (15 )%     11 %     11 %     0 %     0 %

Beverage alcohol

                                                               

Net revenue

    46,505       21,395       25,110       117 %     70,667       42,049       28,618       68 %

Cost of goods sold

    30,513       11,420       19,093       167 %     41,779       22,269       19,510       88 %

Gross profit

    15,992       9,975       6,017       60 %     28,888       19,780       9,108       46 %

Gross margin

    34 %     47 %     (13 )%     (28 )%     41 %     47 %     (6 )%     (13 )%

Purchase price accounting step-up

    1,763       1,107       656       59 %     2,353       2,214       139       6 %

Adjusted gross profit (1)

    17,755       11,082       6,673       60 %     31,241       21,994       9,247       42 %

Adjusted gross margin (1)

    38 %     52 %     (14 %)     (27 %)     44 %     52 %     (8 %)     (15 %)

Wellness

                                                               

Net revenue

    12,929       12,655       274       2 %     26,226       26,057       169       1 %

Cost of goods sold

    9,230       8,762       468       5 %     18,732       18,665       67       0 %

Gross profit

    3,699       3,893       (194 )     (5 )%     7,494       7,392       102       1 %

Gross margin

    29 %     31 %     (2 )%     (6 )%     29 %     28 %     1 %     4 %

Total

                                                               

Net revenue

    193,771       144,136       49,635       34 %     370,720       297,347       73,373       25 %

Cost of goods sold

    146,362       101,254       45,108       45 %     279,115       205,851       73,264       36 %

Gross profit

    47,409       42,882       4,527       11 %     91,605       91,496       109       0 %

Gross margin

    24 %     30 %     (6 )%     (20 )%     25 %     31 %     (6 )%     (19 )%

Purchase price accounting step-up

    4,701       1,107       3,594       325 %     9,807       2,214       7,593       343 %

Adjusted gross profit (1)

    52,110       43,989       8,121       18 %     101,412       93,710       7,702       8 %

Adjusted gross margin (1)

    27 %     31 %     (4 )%     (13 )%     27 %     32 %     (5 )%     (16 )%

 

 

(1)

Adjusted gross profit is our Gross profit (adjusted to exclude purchase price accounting valuation step-up) and adjusted gross margin is our Gross margin (adjusted to exclude purchase price accounting valuation step-up) and are non-GAAP financial measures. See Use of Non-GAAP Measures above for additional discussion regarding these non-GAAP measures. The Companys management believes that adjusted gross profit and adjusted gross margin are useful to our management to evaluate our business and operations, measure our performance, identify trends affecting our business, project our future performance, and make strategic decisions. We do not consider adjusted gross profit and adjusted gross margin in isolation or as an alternative to financial measures determined in accordance with GAAP.

 

41

 

Cannabis gross margin: Gross margin decreased during the three and six months ended November 30, 2023 to 31% and 29% from 43% and 47% for the prior year same period. Excluding the impact of the non-cash fair value purchase price accounting step-up, adjusted gross margin during the three and six months ended November 30, 2023 decreased to 35% and 35% from 43% and 47% when comparing the same prior year period. A portion of the decrease is a result of the termination of the HEXO advisory services agreement which contributed $nil and $1.5 million of gross profit in the current year compared to $7.9 and $15.6 million in the prior year, which if excluded would decrease adjusted gross margin to 32% and 38% for the three and six months ended November 30, 2022. Further, in the prior year second quarter the Company's international cannabis revenue section recognized a one-time return that reduced our top line revenue as well as a one-time inventory disposals incurred as exit costs from Israel for a combined impact of reducing gross profit by $1.4 million. Lastly, significant wholesale transactions with negative gross profit of $(0.2) and $(2.9) million, were entered into to optimize our inventory levels and prioritize the generation of positive operating cash flow. Combining the aforementioned factors, adjusted gross cannabis margin would have been 37% and 38% compared 33% and 38% in the prior period comparative period. 

 

Distribution gross margin: Gross margin of 11% and 11% for the three and six months ended November 30, 2023 decreased from 13% and 11% for the same periods in the prior year. While consistent for the six month period comparison, the decrease in the gross margin for the three month period is attributed to product mix. 

 

Beverage alcohol gross margin: Gross margin of 34% and 41% for the three and six months ended November 30, 2023 decreased from 47% and 47% from the same period in the prior year. Adjusted gross margin of 38% and 44% for the three and six months ended November 30, 2023 decreased from 52% and 52% from the same periods in the prior year. The decrease in the adjusted beverage alcohol gross margin was a result of the newly acquired Craft Acquisition brands, which currently have lower margins than our historical business, primarily due to the current under utilization of the breweries we acquired.

 

Wellness gross margin: Gross margin of 29% and 29% for the three and six months ended November 30, 2023 decreased from 31% and 28% from the same period in the prior year. The decrease in the three month period was a result of a change in sales mix towards more bulk retail sales which have a lower margin. Wellness gross margin stayed consistent during the six month period.  

 

42

 

Operating expenses

 

   

For the three months

                   

For the six months

                 
   

ended November 30,

   

Change

   

% Change

   

ended November 30,

   

Change

   

% Change

 

(in thousands of US dollars)

 

2023

   

2022

   

2023 vs. 2022

   

2023

   

2022

   

2023 vs. 2022

 

General and administrative

  $ 43,313     $ 37,878     $ 5,435       14 %   $ 83,829     $ 78,386     $ 5,443       7 %

Selling

    7,583       9,669       (2,086 )     (22 )%     14,442       19,340       (4,898 )     (25 )%

Amortization

    21,917       23,995       (2,078 )     (9 )%     44,142       48,354       (4,212 )     (9 )%

Marketing and promotion

    9,208       8,535       673       8 %     17,743       15,783       1,960       12 %

Research and development

    56       165       (109 )     (66 )%     135       331       (196 )     (59 )%

Change in fair value of contingent consideration

    300             300       0 %     (10,807 )     211       (11,018 )     (5,222 )%

Litigation costs, net of recoveries

    3,042       2,815       227       8 %     5,076       3,260       1,816       56 %

Restructuring costs

    2,655       8,064       (5,409 )     (67 )%     3,570       8,064       (4,494 )     (56 )%

Transaction (income) costs

    1,094       3,552       (2,458 )     (69 )%     9,596       (9,264 )     18,860       (204 )%

Total operating expenses

  $ 89,168     $ 94,673     $ (5,505 )     (6 )%   $ 167,726     $ 164,465     $ 3,261       2 %

 

Operating expenses are comprised of general and administrative, share-based compensation, selling, amortization, marketing and promotion, research and development, change in fair value of contingent consideration, impairments, litigation costs, net of recoveries, restructuring costs and transaction (income) costs. These costs decreased by ($5.5) and increased by $3.2 million to $89.2 and $167.7 million for the three and six months ended November 30, 2023 as compared to $94.7 and $164.5 million for the same period of the prior year. These changes period over period are described below. 

 

43

 

General and administrative costs

 

During the three and six months ended November 30, 2023, the changes in general and administrative costs when compared to the prior year same periods are described as follows:

 

   

For the three months

                   

For the six months

                 
   

ended November 30,

   

Change

   

% Change

   

ended November 30,

   

Change

   

% Change

 

(in thousands of US dollars)

 

2023

   

2022

   

2023 vs. 2022

   

2023

   

2022

   

2023 vs. 2022

 

Executive compensation

  $ 3,324     $ 3,050     $ 274       9 %   $ 6,985     $ 6,605     $ 380       6 %

Office and general

    8,065       7,383       682       9 %     16,233       13,212       3,021       23 %

Salaries and wages

    15,795       10,151       5,644       56 %     28,909       24,786       4,123       17 %

Stock-based compensation

    8,201       10,943       (2,742 )     (25 )%     16,458       20,136       (3,678 )     (18 )%

Insurance

    2,499       2,726       (227 )     (8 )%     6,348       5,429       919       17 %

Professional fees

    2,503       1,730       773       45 %     4,002       4,220       (218 )     (5 )%

(Gain) loss on sale of capital assets

    (23 )     (64 )     41       (64 )%     (20 )     13       (33 )     (254 )%

Travel and accommodation

    1,374       1,219       155       13 %     2,481       2,380       101       4 %

Rent

    1,575       740       835       113 %     2,433       1,605       828       52 %

Total general and administrative costs

  $ 43,313     $ 37,878     $ 5,435       14 %   $ 83,829     $ 78,386     $ 5,443       7 %

 

Executive compensation increased by 9% and 6% in the three and six months ended November 30, 2023. Executive compensation has remained generally consistent period over period.

 

Office and general increased by 9% and 23% during the three and six months ended November 30, 2023. The increase for the three month period is a result of the acquisition of the newly acquired beverage alcohol business portfolio, Montauk and HEXO, which did not occur in the prior period. 

 

Salaries and wages increased by 56% and 17% during the three and six months ended November 30, 2023. The increase is primarily due to the inclusion of newly acquired beverage alcohol business portfolio, Montauk and HEXO employees, which were not in the prior period. 

 

44

 

The Company recognized stock-based compensation expense of $8.2 and $16.5 million for the three and six months ended November 30, 2023 compared to $10.9 and $20.1 million for the same period in the prior year. The balance is based on the time-based vesting schedules and varies according to the assumptions used in the vesting model. During the quarter, as a result of a change in the probability of achievement of stock price targets for certain grants issued in 2021, as well as an increased forfeiture rate, stock based compensation decreased period over period.  

 

Insurance expenses decreased by 8% and increased by 17% for the three and six months ended November 30, 2023 to $2.5 and $6.3 million from $2.7 and $5.4 million for the same period in the prior year. The decrease for the three months ended November 30, 2023, was driven by the Company's decision to self-insure certain of its property risks. The increase for the six months ended November 30, 2023, was driven by the expanded polices required for our newly acquired beverage alcohol business portfolio, HEXO and Montauk entities. 

 

Rent expenses increased by 113% and 52% for the three and six months ended November 30, 2023 to $1.6 and $2.4 million from $0.7 and $1.6 million for the same period in the prior year. This increase was driven by the expanded polices required for our newly acquired beverage alcohol business portfolio, HEXO and Montauk entities. 

 

Selling costs

 

For the three and six months ended November 30, 2023, the Company incurred selling costs of $7.6 and $14.4 million or 3.9% and 3.9% of net revenue as compared to $9.7 and $19.3 million and 6.7% and 6.5% of net revenue in the prior year period. These costs relate to third-party distributor commissions, shipping costs, Health Canada cannabis fees, and patient acquisition and maintenance costs. Patient acquisition and ongoing patient maintenance costs include funding to individual clinics to assist with additional costs incurred by clinics resulting from the education of patients using the Company’s products. The decrease in the three month period was related to the renegotiation of terms in one of our distributor relationships resulting in reduced variable fees. This impact was also emphasized in the three month period as a portion of our selling fees related to our Canadian adult-use cannabis with fixed components and did not increase with the increase in our revenue during the quarter. 

 

Amortization

 

The Company incurred non-production related amortization charges of $21.9 and $44.1 million for the three and six months ended November 30, 2023 compared to $24.0 and $48.4 million in the prior year period. The decreased amortization in the period is a result of the reduced intangible asset levels, as a result of prior year impairments.

 

Marketing and promotion costs

 

For the three and six months ended November 30, 2023, the Company incurred marketing and promotion costs of $9.2 and $17.7 million as compared to $8.5 and $15.8 million for the prior year period. The increase is due to the acquisition of the newly acquired beverage alcohol business portfolio, HEXO and Montauk. 

 

Research and development

 

Research and development costs were $0.1 and $0.1 million during the three and six months ended November 30, 2023 compared to $0.2 and $0.3 million in the prior year period. These relate to external costs associated with the development of new products. 

 

Change in fair value of contingent consideration

 

The Company measures contingent consideration at fair value classified as Level 3, as discussed in Note 25 (Fair value measurements). The Company currently has three contingent consideration liabilities of $3.0 million, $13.3 million and $4.4 million for the Sweetwater, Montauk, and Truss acquisitions, respectively, as of November 30, 2023 compared to $16.2 million, $10.9 million and $nil respectively as of May 31, 2023. The decrease in fair value of $10.8 million was driven by the lowered probability of achieving the incentive targets, primarily relating to Sweetwater, which was offset by an increase related to the increased probability of achieving the contingent consideration from the Montauk acquisition as well as the newly acquired contingent consideration from the Truss acquisition.

 

45

 

Litigation

 

For the three and six months ended November 30, 2023, the Company recorded $3.0 and $5.1 million of litigation settlements costs, net of favorable recoveries, and the third party fees associated with defending these claims, compared to an expense of $2.8 and $3.3 million for the prior period comparative. The increase is related to period to period variability as litigation is non-recurring in nature.  

 

Restructuring costs

 

In connection with the execution of our acquisition strategy and strategic transactions, the Company has incurred non-recurring restructuring and exit costs associated with the integration efforts of these transactions. For the three and six months ended November 30, 2023, the Company incurred $2.7 and $3.6 million of restructuring costs compared to $8.1 and $8.1 million for the prior period comparative. 

 

The Company approves detailed restructuring initiative plans at the executive level and recognizes these expenses in the period in which the plan has been committed to. The detailed breakdown of the restructuring plans in place, inclusive of their expected timeline for completion, for the three and six months ended November 30, 2023, is as follows:

 

HEXO Acquisition: Pursuant to our announced synergy program of $27 million in relation to the HEXO acquisition, we expect our HEXO restructuring plan to span the first 24 months following the acquisition. In the current six-month period, we recognized $1.2 million related to employee termination benefits in relation to the conversion of our Masson facility from cannabis to produce and the optimization of our Redecan facilities.

 

Truss Acquisition: In relation to the acquisition of Truss, the Company has decided to repurpose the facility for the production of non-cannabis beverages. The Company expects the timeline of completion of this program to be 18 months from date of acquisition. In the current six-month period, we recognized $1.6 million of restructuring charges related to the costs of exiting the facility until the new business has resumed.

 

Canadian Business Cost Reduction Plan: As referenced in our Canadian cannabis cost optimization plan for $30 million, the Company has committed to reducing costs, which was completed during the three months ended November 30, 2023.  In the current six-month period, we recognized $0.3 million of restructuring charges related to the relocation of our Broken Coast facility from Duncan to Nanaimo, BC, and the employee termination benefits associated with the transition of packaging finished goods to the Aphria One location.

 

Distribution Cost Optimization: The Company executed a cost optimization plan during the quarter to reduce costs within the distribution segment by $1.5 million annually. It is expected that this plan will be completed within the fiscal year, however the Company continues to evaluate this segment for further cost optimizations and production efficiencies. In the current six-month period, we recognized $0.5 million related to employee termination benefits in association with executing this plan.

 

For the prior period three and six months ended November 30, 2022, the Company recognized $8.1 and $8.1 million of restructuring charges. This was comprised of  $1.6 million of exit cost and $2.8 million for inventory adjustments from the termination of our producer partnership in Uruguay due to a breach of the underlying contract in our International cannabis business. Additionally, amounts related to the Tilray-Aphria Arrangement Agreement for the closure of our Canadian cannabis facility in Enniskillen of $1.5 million were incurred. The Company also incurred $2.2 million of write-offs from the exit of our medical device reprocessing business in our distribution reporting segment. These exit costs were non-recurring in nature and did not have on going impacts in the current year. 

 

Transaction (income) costs

 

Transaction (income) costs, which  includes acquisition related income and expenses, related legal, financial advisor and due diligence cost and expenses and transaction related compensation. The three and six months ended November 30, 2023 decrease of 69% and 204% from the prior year period is related to the following items:

 

 

the current period included costs associated with completing the HEXO Acquisition on June 22, 2023, including, but not limited to, due diligence fees of $2.4 million, discretionary incentive compensation payments of $5.8 million, transaction income from the loan amendment agreement of $(6.0) million, and HEXO director and office runoff insurance of $5.1 million;

 

 

costs related to the acquisition of the beverage alcohol business portfolio;

 

 

refunds from outstanding government rebates of $(1.1) million claims not previously recognized as assets associated with the Aphria and Tilray Arrangement Agreement;

 

 

in the prior year period comparative, we recognized transaction income for a change in fair value of $(18.3) million on the HTI Share Consideration’s purchase price derivative as a result of an increase in our share price on the shares paid for the HEXO convertible note receivable in the previous year. This did not recur in the current period results.

 

Non-operating (expense) income, net

 

Non-operating (expense) income is comprised of:

 

   

For the three months

                   

For the six months

                 
   

ended November 30,

   

Change

   

% Change

   

ended November 30,

   

Change

   

% Change

 

(in thousands of US dollars)

 

2023

   

2022

   

2023 vs. 2022

   

2023

   

2022

   

2023 vs. 2022

 

Change in fair value of convertible debenture payable

  $ (3,894 )   $ (12,698 )   $ 8,804       (69 )%   $ (6,041 )   $ (20,582 )   $ 14,541       (71 )%

Change in fair value of warrant liability

    6,247       37       6,210       16,784 %     (1,951 )     1,585       (3,536 )     (223 )%

Foreign exchange (loss) gain

    (1,024 )     907       (1,931 )     (213 )%     5,243       (24,666 )     29,909       (121 )%

Loss on long-term investments

    459       (596 )     1,055       (177 )%     350       (1,604 )     1,954       (122 )%

Other non-operating (losses) gains, net

    (967 )     (6,100 )     5,133       (84 )%     (1,182 )     (6,175 )     4,993       (81 )%

Total non-operating income (expense)

  $ 821     $ (18,450 )   $ 19,271       (104 )%   $ (3,581 )   $ (51,442 )   $ 47,861       (93 )%

 

46

 

For the three and six months ended November 30, 2023, the Company recognized a change in fair value of its convertible debentures payable of ($3.9) million and ($6.0) million compared to ($12.7) million and ($20.6) million in the prior year same periods. The change is driven primarily by the changes in the Company’s share price, the change in the trading price of the convertible debentures payable. Additionally, for the three and six months ended November 30, 2023, the Company recognized a change in fair value of its warrants, resulting in a gain of $6.2 million and a loss ($2.0) million compared to gains of $0.0 million and $1.6 million also as a result of the change in our share price and the exercise price of the instrument. For the three and six months ended November 30, 2023, the Company recognized a loss of ($1.0) million and a gain of $5.2 million, resulting from the changes in foreign exchange rates during the period, compared to a gain of $0.9 million and a loss of ($24.7) million for the prior year same periods, largely associated with the recovery of the Euro. Lastly, included in other non-operating (losses) gains, net for the three and six months ended November 30, 2023 was the downside protection share issuance relating to the HTI Note settlement, as described in Note 15 (Stockholders' equity) offset by a $1.1 million gain from the repurchase of the TLRY 23 convertible note.

 

Reconciliation of Non-GAAP Financial Measures to GAAP Measures

 

Adjusted EBITDA

 

Adjusted EBITDA is a non-GAAP financial measure that does not have any standardized meaning prescribed by GAAP and may not be comparable to similar measures presented by other companies. The Company calculates adjusted EBITDA as net loss/net income before income taxes, net interest expense, depreciation and amortization, equity in net loss of equity-method investees, purchase price accounting step-up on inventory, stock-based compensation, restructuring costs, transaction (income) costs, litigation costs net of recoveries, change in fair value of contingent consideration, unrealized currency gains and losses and other adjustments.

 

We believe that this presentation provides useful information to management, analysts and investors regarding certain additional financial and business trends relating to its results of operations and financial condition. In addition, management uses this measure for reviewing the financial results of the Company and as a component of performance-based executive compensation.

 

Historically, we have included lease expenses for leases that were treated differently under IFRS 16 and ASC 842 in the calculation of adjusted EBITDA, aiming to align our definition with industry peers reporting under IFRS. The decision to include these lease expenses in the Company's definition of adjusted EBITDA was based on our efforts to maintain comparability with peers. However, as the Company has continued to diversify, particularly with strategic acquisitions such as the newly acquired beverage alcohol business portfolio, this comparison is no longer relevant, accordingly, we are no longer including this adjustment.  

 

Had the Company continued to include lease expenses that were treated differently under IFRS 16 and ASC 842 , the impact to adjusted EBITDA would have been $1.1 million and $1.8 million for the three and six months ended November 30, 2023. In comparison, under the previous reconciliation, the impact to adjusted EBITDA would have been $0.7 million and $1.4 million for the three and six months ended November 30, 2022.

 

We do not consider Adjusted EBITDA in isolation or as an alternative to financial measures determined in accordance with GAAP. The principal limitation of Adjusted EBITDA is that it excludes certain expenses and income that are required by U.S. GAAP to be recorded in our consolidated financial statements. In addition, Adjusted EBITDA is subject to inherent limitations as this metric reflects the exercise of judgment by management about which expenses and income are excluded or included in determining Adjusted EBITDA. In order to compensate for these limitations, management presents Adjusted EBITDA in connection with GAAP results.

 

For three and six months ended November 30, 2023, adjusted EBITDA decreased to $10.1 million and $20.8 million compared to $11.0 and $23.8 million from the prior year same period. The decrease was primarily driven by the aforementioned negative impacts to our cannabis gross margin.

 

47

 

   

For the three months

                   

For the six months

                 
   

ended November 30,

   

Change

   

% Change

   

ended November 30,

   

Change

   

% Change

 

Adjusted EBITDA reconciliation:

 

2023

   

2022

   

2023 vs. 2022

   

2023

   

2022

   

2023 vs. 2022

 

Net loss

  $ (46,183 )   $ (61,635 )   $ 15,452       (25 )%   $ (102,046 )   $ (127,429 )   $ 25,383       (20 )%

Income tax expense

    (3,380 )     (11,713 )     8,333       (71 )%     3,884       (4,502 )     8,386       (186 )%

Interest expense, net

    8,625       3,107       5,518       178 %     18,460       7,520       10,940       145 %

Non-operating income (expense), net

    (821 )     18,450       (19,271 )     (104 )%     3,581       51,442       (47,861 )     (93 )%

Amortization

    31,552       33,318       (1,766 )     (5 )%     62,341       67,387       (5,046 )     (7 )%

Stock-based compensation

    8,201       10,943       (2,742 )     (25 )%     16,458       20,136       (3,678 )     (18 )%

Change in fair value of contingent consideration

    300             300       0 %     (10,807 )     211       (11,018 )     (5,222 )%

Purchase price accounting step-up

    4,701       1,107       3,594       325 %     9,807       2,214       7,593       343 %

Facility start-up and closure costs

    300       3,000       (2,700 )     (90 )%     900       4,800       (3,900 )     (81 )%

Litigation costs, net of recoveries

    3,042       2,815       227       8 %     5,076       3,260       1,816       56 %

Restructuring costs

    2,655       8,064       (5,409 )     (67 )%     3,570       8,064       (4,494 )     (56 )%

Transaction (income) costs

    1,094       3,552       (2,458 )     (69 )%     9,596       (9,264 )     18,860       (204 )%

Adjusted EBITDA

  $ 10,086     $ 11,008     $ (922 )     (8 )%   $ 20,820     $ 23,839     $ (3,019 )     (13 )%

 

48

 

Adjusted EBITDA should not be considered in isolation from, or as a substitute for, net loss. There are a number of limitations related to the use of Adjusted EBITDA as compared to net loss, the closest comparable GAAP measure. Adjusted EBITDA adjusts for the following:

 

 

Non-cash amortization expenses and, although these are non-cash charges, the assets being depreciated and amortized may have to be replaced in the future;

 

 

Stock-based compensation expenses, a non-cash expense and are an important part of our compensation strategy;

 

 

Non-cash impairment charges, as the charges are not expected to be a recurring business activity;

 

 

Non-cash foreign exchange gains or losses, which accounts for the effect of both realized and unrealized foreign exchange transactions. Unrealized gains or losses represent foreign exchange revaluation of foreign denominated monetary assets and liabilities;

 

 

Non-cash change in fair value of warrant liability;

 

 

Interest expense, net;

 

 

Costs incurred to start up new facilities, and to fund emerging market operations;    

 

 

Transaction (income) costs, which includes acquisition related income and expenses, related legal, financial advisor and due diligence cost and expenses and transaction related compensation, which vary significantly by transaction and are excluded to evaluate ongoing operating results;

 

 

Restructuring charges;

 

 

Litigation costs, net of favorable recoveries and the third party fees associated with defending these claims, includes costs related to legacy and non-operational litigation matters, legal settlements and recoveries;

 

 

Amortization of purchase accounting fair value step-up in inventory value included in costs of goods sold; and

 

 

Current and deferred income tax expenses and recoveries, which could be a significant recurring expense or recovery in our business in the future and reduce or increase cash available to us.

 

49

 

Adjusted Gross Profit and Adjusted Gross Margin

 

Adjusted gross profit and adjusted gross margin are non-GAAP financial measures and may not be comparable to similar measures presented by other companies.  Adjusted gross profit is our Gross profit (adjusted to exclude purchase price accounting valuation step-up) and adjusted gross margin is our Gross margin (adjusted to exclude purchase price accounting valuation step-up) and are non-GAAP financial measures. The Company’s management believes that adjusted gross profit and adjusted gross margin are useful to our management to evaluate our business and operations, measure our performance, identify trends affecting our business, project our future performance, and make strategic decisions.  We do not consider adjusted gross profit and adjusted gross margin percentage in isolation or as an alternative to financial measures determined in accordance with GAAP.

 

Liquidity and Capital Resources

 

We actively manage our cash and investments in order to internally fund operating needs, make scheduled interest and principal payments on our borrowings, and complete acquisitions. We believe that existing cash, cash equivalents, marketable securities and cash generated by operations, together with access to external sources of funds, will be sufficient to meet our domestic and foreign capital needs for a short and long term outlook. 

 

For the Company's short-term liquidity requirements, we are focused on generating positive cash flows from operations and being free cash flow positive.  As a result of delays in legalization across multiple markets, management continues to optimize our operating structure, headcount, as well as the elimination of other discretionary operational costs. Some of these actions may be less accretive to our adjusted EBITDA in the short term, however we believe that they will be required for our liquidity aspirations in the near term future. Additionally, the Company continues to invest our excess cash in the short-term in marketable securities which are comprised of U.S. treasury bills and term deposits with major Canadian banks.

 

Subsequent to the period ended November 30, 2023, the Company exchanged $18.5 million principal of APHA 24 Notes prior to their maturity, demonstrating our commitment to optimizing our capital structure and enhancing financial flexibility. We intend to continue to opportunistically purchase or exchange additional APHA 24 Notes prior to their underlying maturity date in June 2024. We believe this demonstrates and reinforces our commitment to optimizing our capital structure and enhancing financial flexibility.

 

For the Company's long-term liquidity requirements, we will be focused on funding operations through profitable organic and inorganic growth through acquisitions. We may need to take on additional debt or equity financing arrangements in order to achieve these ambitions on a long-term basis. 

 

The following table sets forth the major components of our statements of cash flows for the periods presented:

 

   

For the three months

                   

For the six months

                 
   

ended November 30,

   

Change

   

% Change

   

ended November 30,

   

Change

   

% Change

 
   

2023

   

2022

   

2023 vs. 2022

   

2023

   

2022

   

2023 vs. 2022

 

Net cash provided by (used in) operating activities

  $ (30,409 )   $ 29,209     $ (59,618 )     (204 )%   $ (46,251 )   $ (17,060 )   $ (29,191 )     171 %

Net cash provided by (used in) investing activities

    81,497       (271,398 )     352,895       (130 )%     55,207       (272,935 )     328,142       (120 )%

Net cash (used in) provided by financing activities

    (85,366 )     (57,256 )     (28,110 )     49 %     (71,348 )     66,364       (137,712 )     (208 )%

Effect on cash of foreign currency translation

    95       (980 )     1,075       (110 )%     709       (2,060 )     2,769       (134 )%

Cash and cash equivalents, beginning of period

    179,132       490,643       (311,511 )     (63 )%     206,632       415,909       (209,277 )     (50 )%

Cash and cash equivalents, end of period

  $ 144,949     $ 190,218     $ (45,269 )     (24 )%   $ 144,949     $ 190,218     $ (45,269 )     (24 )%

Marketable securities

    116,418       243,286       (126,868 )     (52 )%     116,418       243,286       (126,868 )     (52 )%

Less: restricted cash

    (1,576 )     -       (1,576 )     0 %     (1,576 )     -       (1,576 )     0 %

Cash and marketable securities(1)

  $ 259,791     $ 433,504     $ (173,713 )     (40 )%   $ 259,791     $ 433,504     $ (173,713 )     (40 )%

 

 

(1)

Cash and marketable securities are non-GAAP financial measures. See Use of Non-GAAP Measures above for additional discussion regarding these non-GAAP measures. The Company combines the Cash and cash equivalent financial statement line item, and the Marketable securities financial statement line item as an aggregate total as reconciled in the liquidity and capital resource section below. The Company’s management believes that this presentation provides useful information to management, analysts and investors regarding certain additional financial and business trends relating to its short-term liquidity position by combing these three GAAP metrics.

 

50

 

Cash flows from operating activities

 

The change in net cash provided by (used in) operating activities was ($30.4) million and ($46.3) million for three and six months ended November 30, 2023 compared to $29.2 million and ($17.1) million for the prior year same period. This increase in cash used in the three month period was primarily related to the settlement of pre-acquisition liabilities assumed from the HEXO acquisition. Additionally, the prior period included the cash collection of the $18.3 million purchase price derivative from HTI as noted in the transaction cost section above, which did not recur in the current year. 

 

Cash flows from investing activities

 

The change in net cash provided by (used in) investing activities was $81.5 million and $55.2 million for three and six months ended November 30, 2023 compared to ($271.4) million and ($272.9) million for the prior year same period, and is a result of the sale of marketable securities in the current periods compared to investing in marketable securities in the prior periods as well as the cash used in the acquisition of various businesses, Note 7 (Business acquisitions). 

 

Cash flows from financing activities

 

The change in cash (used in) provided by financing activities was ($85.4) million and ($71.3) million for three and six months ended November 30, 2023 compared to ($57.3) million and $66.4 million for the prior year same period. In the current period, cash was provided by funds from the overallotment of TLRY 27 Notes and other long term debt offset by the repurchase of convertible notes and long-term debt, while in the comparative period a larger amount of cash was provided by the ATM capital raise and smaller amounts of repurchased debt.  

 

Subsequent Events

 

Refer to Part I, Financial Information, Note 27 Subsequent Events. 

 

Contingencies

 

In addition to the litigation described in the Part II, Item 1 - Legal Proceedings, the Company is and may be a defendant in lawsuits from time to time in the normal course of business. While the results of litigation and claims cannot be predicted with certainty, the Company believes the reasonably possible losses of such matters, individually and in the aggregate, are not material. Additionally, the Company believes the probable final outcome of such matters will not have a material adverse effect on the Company’s consolidated results of operations, financial position, cash flows or liquidity.

 

Critical Accounting Estimates

 

Our financial statements are prepared in accordance with accounting principles generally accepted in the United States. The accounting principles we use require us to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements and amounts of income and expenses during the reporting periods presented. We believe in the quality and reasonableness of our critical accounting policies; however, materially different amounts may be reported under different conditions or using assumptions different from those that we have applied. The accounting estimates that have been identified as critical to our business operations and to understanding the results of our operations pertain to revenue recognition, valuation of inventory, valuation of long-lived assets, goodwill and intangible assets, stock-based compensation and valuation allowances for deferred tax assets. The application of each of these critical accounting policies and estimates is discussed in Part II, Item 7, Management’s Discussion and Analysis of Financial Condition and Results of Operations, of our Annual Report on Form 10-K for the fiscal year ended May 31, 2023.

 

Recently Issued Accounting Pronouncements

 

A description of recently issued accounting pronouncements that may potentially impact our financial position and results of operations is disclosed in “Part I, Item 1. Note 1 – Basis of presentation and summary of significant accounting policies” to our financial statements appearing elsewhere in this Quarterly Report on Form 10-Q.

 

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Item 3. Quantitative and Qualitative Disclosures About Market Risk.

 

There have been no material changes in market risk from those addressed in the Company’s Annual Report on Form 10-K for the fiscal year ended May 31, 2023 during the six months ended November 30, 2023. See the information set forth in Part II, Item 7A, Quantitative and Qualitative Disclosures About Market Risk, of the Company’s Annual Report on Form 10-K for the fiscal year ended May 31, 2023.

 

Item 4. Controls and Procedures.

 

Disclosure Controls and Procedures

 

We maintain disclosure controls and procedures (as that term is defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act) that are designed to ensure that information required to be disclosed in our reports under the Exchange Act is recorded, processed, and summarized and reported within the time periods specified in the SEC’s rules and forms, and that such information is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosures. Any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives. An evaluation of the effectiveness of the design and operation of our disclosure controls and procedures as of the end of the period covered by this Quarterly Report was made under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer.

 

Based upon this evaluation, our Chief Executive Officer and Chief Financial Officer have concluded that, as of November 30, 2023, our disclosure controls and procedures (a) are effective to ensure that information required to be disclosed by us in reports filed or submitted under the Exchange Act is timely recorded, processed, summarized and reported and (b) include, without limitation, controls and procedures designed to ensure that information required to be disclosed by us in reports filed or submitted under the Exchange Act is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosure.

 

Consistent with guidance issued by the SEC, the scope of management’s assessment of the effectiveness of our disclosure controls and procedures did not include the internal controls over financial reporting of our recently acquired businesses including: (i) HEXO Corp., acquired June 22, 2023;, (ii) Truss Beverage Co. acquired August 3, 2023; and (iii) the portfolio of craft beer brands, assets and businesses comprising eight beer and beverage brands, acquired on September 29, 2023. These acquired businesses represented 2.3%, 0.6% and 3.2% of our consolidated assets and 5.9%, 1.3%, and 3.2% of our consolidated net revenues respectively as of and for the six months ended November 30, 2023.

 

Changes in Internal Control over Financial Reporting

 

There have been no changes in our “internal control over financial reporting” (as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) that occurred during the period covered by this Quarterly Report that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting. As mentioned above, the Company acquired HEXO Corp. on June 22, 2023, Truss Beverage Co., on August 3, 2023 and the eight beer and beverage brands on September 29, 2023. The Company is in the process of reviewing the internal control structure of HEXO Corp., Truss Beverage Co., and the eight beer and beverage brands and if necessary, will make appropriate changes as it integrates them into the Company’s overall internal control over financial reporting process.

 

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PART IIOTHER INFORMATION

 

Item 1. Legal Proceedings.

 

In the ordinary course of business, we are at times subject to various legal proceedings and disputes, including the proceedings specifically discussed below. We assess our liabilities and contingencies in connection with outstanding legal proceedings utilizing the latest information available. Where it is probable that we will incur a loss and the amount of the loss can be reasonably estimated, we record a liability in our consolidated financial statements. These legal reserves may be increased or decreased to reflect any relevant developments on a quarterly basis. Where a loss is not probable or the amount of loss is not estimable, we do not accrue legal reserves. While the outcome of legal proceedings is inherently uncertain, based on information currently available, our management believes that it has established appropriate legal reserves. Any liabilities arising from pending legal proceedings are not expected to have a material adverse effect on our consolidated financial position, consolidated results of operations, or consolidated cash flows. However, it is possible that the ultimate resolution of these matters, if unfavorable, may be material to our consolidated financial position, consolidated results of operations, or consolidated cash flows.

 

“Item 3. Legal Proceedings” of our Annual Report on Form 10-K for the fiscal year ended May 31, 2023 includes a discussion of our legal proceedings. There have been no material changes from the legal proceedings described in our Form 10-K, except with respect to the matters disclosed and incorporated herein by reference to Note 19 (Commitments and contingencies), in the Notes to the Consolidated Financial Statements included in Part I, Item 1 of this Form 10-Q.

 

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Item 1A. Risk Factors.

 

“Item 1A. Risk Factors” of our Annual Report on Form 10-K for the fiscal year ended May 31, 2023 includes a discussion of our known material risk factors, other than risks that could apply to any issuer or offering. A summary of our risk factors is included below. Except for the below risk factors, there have been no material changes from the risk factors described in our Form 10-K.

 

 

We may not achieve the expected revenue or other benefits from the craft beer operations acquired.

 

 

We may experience difficulties integrating HEXO’s operations and realizing the expected benefits of the HEXO arrangement.

 

 

Additional impairments of our goodwill, impairments of our intangible and other long-lived assets, and changes in the estimated useful lives of intangible assets could have a material adverse impact on our financial results.

 

 

Our business is dependent upon regulatory approvals and licenses, ongoing compliance and reporting obligations, and timely renewals.

 

 

Government regulation is evolving, and unfavorable changes or lack of commercial legalization could impact our ability to carry on our business as currently conducted and the potential expansion of our business.

 

 

Our production and processing facilities are integral to our business and adverse changes or developments affecting our facilities may have an adverse impact on our business.

 

 

We face intense competition, and anticipate competition will increase, which could hurt our business.

 

 

Regulations constrain our ability to market and distribute our products in Canada.

 

 

United States regulations relating to hemp-derived CBD products are new and rapidly evolving, and changes may not develop in the timeframe or manner most favorable to our business objectives.

 

 

Changes in consumer preferences or public attitudes about alcohol could decrease demand for our beverage alcohol products.

 

 

SweetWater, Breckenridge and Montauk each face substantial competition in the beer industry or the broader market for alcoholic beverage products which could impact our business and financial results.

 

 

We have a limited operating history and a history of net losses, and we may not achieve or maintain profitability in the future.

 

 

We are subject to litigation, arbitration and demands, which could result in significant liability and costs, and impact our resources and reputation.

 

 

Our strategic alliances and other third-party business relationships may not achieve the intended beneficial impact and expose us to risks.

 

 

We may not be able to successfully identify and execute future acquisitions, dispositions or other equity transactions or to successfully manage the impacts of such transactions on our operations.

 

 

We are subject to risks inherent in an agricultural business, including the risk of crop failure.

 

 

We depend on significant customers for a substantial portion of our revenue. If we fail to retain or expand our customer relationships or significant customers reduce their purchases, our revenue could decline significantly.

 

 

Our products may be subject to recalls for a variety of reasons, which could require us to expend significant management and capital resources.

 

 

Significant interruptions in our access to certain supply chains for key inputs such as raw materials, supplies, electricity, water and other utilities may impair our operations.

 

 

Management may not be able to successfully establish and maintain effective internal controls over financial reporting.

 

 

The price of our common stock in public markets has experienced and may continue to experience severe volatility and fluctuations.

 

 

The volatility of our stock and the stockholder base may hinder or prevent us from engaging in beneficial corporate initiatives.

 

 

The terms of our outstanding warrants may limit our ability to raise additional equity capital or pursue acquisitions, which may impact funding of our ongoing operations and cause significant dilution to existing stockholders.

 

 

We may not have the ability to raise the funds necessary to settle conversions of the convertible securities in cash or to repurchase the convertible securities upon a fundamental change.

 

 

We are subject to other risks generally applicable to our industry and the conduct of our business.

 

We may experience difficulties achieving the expected benefits, including revenue and sales growth, of acquiring certain craft beer operations (the “Craft Acquisition”). 

 

  The Craft Acquisitions were completed on September 29, 2023. Efforts to achieve expected benefits of the Craft Acquisitions may require substantial resources and divert management attention. Challenges associated with achieving such benefits may include those related to sales and marketing efforts across our expanded product portfolio, operational efficiency and production optimization, and effectively integrating the Craft Acquisitions into Tilray. If we are unable to successfully integrate certain aspects of the operations of the Craft Acquisitions or experience delays, we may incur unanticipated liabilities and be unable to fully realize the potential benefit of the revenue growth, synergies and other anticipated benefits resulting from the arrangement, and our business, results of operations and financial condition could be adversely affected. Some of these factors are outside our control, and any of them could delay or increase the cost of our efforts. 

 

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Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.

 

Recent Sales of Unregistered Equity Securities

 

On September 12, 2023, Tilray repurchased $20,000 of its TLRY 23 Notes for cancellation by issuing 7,000,000 shares and paying $610 of cash to settle both principal and accrued interest. After cancellation, the outstanding principal balance of the TLRY 23 Notes was $107,331. 

 

On September 29, 2023, Tilray issued 1,032,616 shares of its common stock to HTI Investments MA LLC pursuant to the terms of a $50.0 million convertible promissory note originally issued by Tilray to HTI on July 12, 2022 and which was settled at maturity on August 31, 2023 as previously disclosed.

 

On October 4, 2023, Tilray entered into an arrangement with MediPharm Labs Inc. (“MediPharm”) to acquire 100% ownership of 1000652011 Ontario Inc.. As consideration for such acquisition, Tilray issued 1,371,157 shares of its common stock to Medipharm.  On October 13, 2023, Tilray issued an additional 201,995 shares of its common stock to MediPharm to satisfy certain obligations under the acquisition arrangement.

 

Each of the foregoing issuances of Tilray’s common stock was made in reliance on the exemption provided by Section 4(a)(2) of the Securities Act of 1933, as amended, for the offer and sale of securities not involving a public offering. No underwriter participated in the offer and sale of the shares issued pursuant to the foregoing issuances, and no commission or other remuneration was paid or given directly or indirectly in connection therewith. Additionally, each of the foregoing issuance of Tilray's common stock was reported on a Form 8-K filed by the Company with the U.S. Securities and Exchange Commission.

 

Item 3. Defaults Upon Senior Securities.

 

Not applicable.

 

Item 4. Mine Safety Disclosures.

 

Not applicable.

 

 

Item 5. Other Information.

 

420 Credit Agreement

 

On January 5, 2024, the Company’s wholly-owned subsidiary, Four Twenty Corporation (the “Borrower”), entered into a Waiver (the “Waiver”) to that certain Credit Agreement dated as of June 30, 2023 (the “420 Credit Agreement”) by and among the Borrower, Bank of America, N.A., in its capacity as Administrative Agent (in such capacity, the “Administrative Agent”), and certain other guarantors and lenders thereto. The Waiver provides for a waiver of a potential event of default relating to the “Consolidated Leverage Ratio” financial covenant contained in the 420 Credit Agreement. The foregoing description of the Waiver does not purport to be complete and is qualified in its entirety by the full text of the Waiver, which is being filed as Exhibit 10.2 to this quarterly report on Form 10-Q for the quarter ended November 30, 2023.

 

Aphria Diamond Amended Supply Agreement

 

On January 5, 2024, Aphria Inc. (“Aphria”), a wholly-owned subsidiary of the Company, entered into an Amended and Restated Wholesale Cannabis Supply Agreement (the “Supply Agreement”) with 1974568 Ontario Limited (“Aphria Diamond”), Aphria’s joint venture with Double Diamond Holdings Ltd.

 

The Supply Agreement amends and restates the existing supply agreement, effective as of September 1, 2023, and amends certain terms relating to pricing and product classes. Pursuant to the Supply Agreement, Aphria will purchase cannabis products on a non-exclusive basis from Aphria Diamond grown at Aphria Diamond’s Leamington, Ontario cannabis cultivation facility (the “Aphria Diamond Facility”) and will supply Aphria Diamond with rooted cuttings to be used for cultivation of cannabis products at the Aphria Diamond Facility. Aphria Diamond agrees to exclusively supply cannabis products to Aphria, subject to limited exceptions to allocate un-utilized cultivation capacity at the Aphria Diamond Facility. The foregoing summary of the Supply Agreement does not purport to be complete and is qualified in its entirety by reference to the Supply Agreement, a copy of which is attached hereto as Exhibit 10.1 and incorporated herein by reference.

 

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Item 6. Exhibits. 

 

Exhibit

Number

 

Description

 

 

 

3.1*

  Fourth Amended and Restated Certificate of Incorporation of Tilray Brands, Inc., dated as of November 30, 2023.
     
10.1*†   Fourth Amended and Restated Wholesale Cannabis Supply Agreement, dated as of January 5, 2024, by and between 1974568 Ontario Limited and Aphria Inc.
     
10.2*†   Waiver to Credit Agreement, dated as of January 5, 2024, by and between Four Twenty Corporation, Bank of America, N.A., and the Guarantors and Lenders party thereto.
     

31.1*

 

Certification of Principal Executive Officer Pursuant to Rules 13a-14(a) and 15d-14(a) under the Securities Exchange Act of 1934, as Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

     

31.2*

 

Certification of Principal Financial Officer Pursuant to Rules 13a-14(a) and 15d-14(a) under the Securities Exchange Act of 1934, as Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

     

32.1**

 

Certification of Principal Executive Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

 

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Exhibit

Number

  Description
     

32.2**

 

Certification of Principal Financial Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

     

101*

 

The following financial statements from the Company's Quarterly Report on Form 10-Q for the quarter ended November 30, 2023, formatted in Inline XBRL: (i) Consolidated Statements of Financial Position, (ii) Consolidated Statements of Loss and Comprehensive Loss , (iii) Consolidated Statements of Stockholders' Equity, (iv) Consolidated Statements of Cash Flows, and (v) Notes to Condensed Interim Consolidated Financial Statements, tagged as blocks of text and including detailed tags.

     

104*

 

Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101)

 

*         Filed herewith.

**       Furnished herewith.

†         Schedules have been omitted pursuant to Item 601(a)(5) of Regulation S-K.

 

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SIGNATURES

 

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

 

 

 

Tilray Brands, Inc.

 

 

 

 

Date: January 9, 2024

 

By:

/s/ Irwin D. Simon

 

 

 

Irwin D. Simon

 

 

 

Chairman and Chief Executive Officer

 

 

 

 

Date: January 9, 2024

 

By:

/s/ Carl Merton

 

 

 

Carl Merton

 

 

 

Chief Financial Officer

 

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