The accompanying notes are an integral part of these condensed interim consolidated financial statements.
The accompanying notes are an integral part of these condensed interim consolidated financial statements.
The accompanying notes are an integral part of these condensed interim consolidated financial statements.
The accompanying notes are an integral part of these condensed interim consolidated financial statements.
Notes to Consolidated Financial Statements
Note 1. Description of business
Tilray Brands, Inc., and its wholly owned subsidiaries (collectively "Tilray", the "Company", "we", or "us") is a leading global cannabis-lifestyle and consumer packaged goods company with our principal executive office in Leamington, with operations in Canada, the United States, Europe, Australia and Latin America that is changing people’s lives for the better – one person at a time – by inspiring and empowering a worldwide community to live their very best life enhanced by moments of connection and wellbeing. Tilray’s mission is to be the most responsible, trusted and market leading cannabis consumer products company in the world with a portfolio of innovative, high-quality and beloved brands that address the needs of the consumers, customers and patients we serve.
Our overall strategy is to leverage our scale, expertise and capabilities to drive market share in Canada and internationally, achieve industry-leading, profitable growth and build sustainable, long-term shareholder value. In order to ensure the long-term sustainable growth of our Company, we continue to focus on developing strong capabilities in consumer insights, driving category management leadership and assessing growth opportunities with the introduction of new products. In addition, we are relentlessly focused on managing our cost of goods and expenses in order to maintain our strong financial position.
Note 2. Basis of presentation and summary of significant accounting policies
The accompanying unaudited condensed interim consolidated financial statements (the “financial statements”) reflect the accounts of the Company. The financial statements were prepared in accordance with generally accepted accounting principles in the United States of America (“U.S. GAAP”) for interim financial information and pursuant to the rules and regulations of the United States Securities and Exchange Commission (“SEC”) for interim financial information. Accordingly, they do not include all of the information and notes required by U.S. GAAP and should be read in conjunction with the audited consolidated financial statements included in the Company’s Annual Report on Form 10-K for the fiscal year ended May 31, 2022 (the “Annual Financial Statements”). These unaudited condensed interim consolidated financial statements reflect all adjustments, which, in the opinion of management, are necessary for a fair presentation of the results for the interim periods presented. Interim results are not necessarily indicative of results for a full year.
These condensed interim consolidated financial statements have been prepared on the going concern basis which assumes that the Company will continue in operation for the foreseeable future and, accordingly, will be able to realize its assets and discharge its liabilities in the normal course of operations as they come due, under the historical cost convention except for certain financial instruments that are measured at fair value, as detailed in the Company’s accounting policies.
All amounts in the unaudited condensed interim consolidated financial statements, notes and tables have been rounded to the nearest thousand, except par values and per share amounts, unless otherwise indicated.
Basis of consolidation
Subsidiaries are entities controlled by the Company. Control exists when the Company either has a controlling voting interest or is the primary beneficiary of a variable interest entity. The financial statements of subsidiaries are included in the condensed interim consolidated financial statements from the date that control commences until the date that control ceases. A complete list of our subsidiaries that existed prior to our most recent year end is included in the Annual Financial Statements.
Long-term investments
Investments in equity securities of entities over which the Company does not have a controlling financial interest or significant influence are accounted for at fair value. Equity investments without readily determinable fair values are measured at cost with adjustments for observable changes in price or impairments (referred to as the “measurement alternative”). In applying the measurement alternative, the Company performs a qualitative assessment on a quarterly basis and recognizes an impairment if there are sufficient indicators that the fair value of the equity investments are less than carrying values. Changes in value are recorded in the statement of net loss and comprehensive loss, within the line, “Non-operating income (expense)”.
Investments in entities over which the Company does not have a controlling financial interest but has significant influence, are accounted for using the equity method, with the Company’s share of earnings or losses reported in earnings or losses from equity method investments on the statements of net loss and comprehensive loss. Equity method investments are recorded at cost, plus the Company’s share of undistributed earnings or losses, and impairment, if any, within “Interest in equity investees” on the balance sheets. The Company assesses investments in equity method investments when events or circumstances indicate that the carrying amount of the investment may be impaired. If it is determined that the current fair value of an equity method investment is less than the carrying value of the investment, the Company will assess if the shortfall is other than temporary (OTTI). Evidence of a loss in value might include, but would not necessarily be limited to, absence of an ability to recover the carrying amount of the investment or inability of the equity investee to sustain an earnings capacity that would justify the carrying amount of the investment. Once a determination is made that an OTTI exists, the investment is written down to its fair value in accordance with ASC 820 at the reporting date, which establishes a new cost basis.
Convertible notes receivable
Convertible notes receivables include various investments in which the Company has the right, or potential right to convert the indenture into common stock shares of the investee and are classified as available-for-sale and are recorded at fair value. Unrealized gains and losses during the year, net of the related tax effect, are excluded from income and reflected in other comprehensive income (loss), and the cumulative effect is reported as a separate component of shareholders' equity until realized. We use judgement to assess convertible notes receivables for impairment at each measurement date. Convertible notes receivables are impaired when a decline in fair value is determined to be other-than-temporary, an impairment charge is recorded in the statements of loss and comprehensive loss and a new cost basis for the investment is established. We also evaluate whether there is a plan to sell the security, or it is more likely than not that we will be required to sell the security before recovery. If neither of the conditions exist, then only the portion of the impairment loss attributable to credit loss is recorded in the statements of net loss and the remaining amount is recorded in other comprehensive income (loss).
Earnings (loss) per share
Basic earnings (loss) per share is computed by dividing reported net income (loss) by the weighted average number of common shares outstanding during the period. Diluted earnings (loss) per share is computed by dividing reported net income (loss) by the sum of the weighted average number of common shares and the number of dilutive potential common share equivalents outstanding during the period. Potential dilutive common share equivalents consist of the incremental common shares issuable upon the exercise of vested share options, warrants and RSUs and the incremental shares issuable upon conversion of the convertible debentures and similar instruments.
In computing diluted earnings (loss) per share, common share equivalents are not considered in periods in which a net loss is reported, as the inclusion of the common share equivalents would be anti-dilutive. For the three months ended August 31, 2022, the dilutive potential common share equivalents outstanding consist of the following: 16,989,328 common shares from RSUs, 4,741,653 common shares from share options, 6,209,000 common shares from warrants and 36,687,326 common shares from convertible debentures.
Revenue
On July 12, 2022, the Company and HEXO entered into various commercial transaction agreements, as described in Note 24 (Segment reporting), which includes an advisory services arrangement. Revenue is recognized as the advisory services are provided to HEXO. Payments received for the services in advance of performance are recognized as a contract liability.
Revenue is recognized when the control of the promised goods or services, through performance obligation, is transferred/provided to the customer in an amount that reflects the consideration we expect to be entitled to in exchange for the performance obligations.
Excise taxes remitted to tax authorities are government-imposed excise taxes on cannabis and beer. Excise taxes are recorded as a reduction of sales in net revenue in the consolidated statements of operations and recognized as a current liability within accounts payable and other current liabilities on the consolidated balance sheets, with the liability subsequently reduced when the taxes are remitted to the tax authority.
In addition, amounts disclosed as net revenue are net of excise taxes, sales tax, duty tax, allowances, discounts and rebates.
In determining the transaction price for the sale of goods or service, the Company considers the effects of variable consideration and the existence of significant financing components, if any.
Some contracts for the sale of goods or services may provide customers with a right of return, volume discount, bonuses for volume/quality achievement, or sales allowance. In addition, the Company may provide in certain circumstances, a retrospective price reduction to a customer based primarily on inventory movement. These items give rise to variable consideration. The Company uses the expected value method to estimate the variable consideration because this method best predicts the amount of variable consideration to which the Company will be entitled. The Company uses historical evidence, current information and forecasts to estimate the variable consideration. The Company reduces revenue and recognizes a contract liability equal to the amount expected to be refunded to the customer in the form of a future rebate or credit for a retrospective price reduction, representing its obligation to return the customer’s consideration. The estimate is updated at each reporting period date.
New accounting pronouncements not yet adopted
In October 2021, the FASB issued ASU 2021-08, Business Combinations (Subtopic 805), Accounting for Contract Assets and Contract Liabilities from Contracts with Customers (“ASU 2021-08”), which is intended to improve the accounting for acquired revenue contracts with customers in a business combination by addressing diversity in practice and inconsistency. ASU 2021-08 is effective for the Company beginning June 1, 2023. This update should be applied prospectively on or after the effective date of the amendments. The Company is currently evaluating the effect of adopting this ASU.
New accounting pronouncements recently adopted
In August 2020, the FASB issued ASU 2020-06, Debt—Debt with Conversion and Other Options (Subtopic 470-20) and Derivatives and Hedging—Contracts in Entity’s Own Equity (Subtopic 815-40): Accounting for Convertible Instruments and Contracts in an Entity’s Own Equity (“ASU 2020-06”), which amends and simplifies existing guidance in an effort to reduce the complexity of accounting for convertible instruments and to provide financial statement users with more meaningful information. The Company adopted ASU 2020-06 beginning June 1, 2022 and the adoption did not have material retrospective impacts on our condensed interim consolidated financial statements.
In May 2021, the FASB issued ASU 2021-04, Modifications and Extinguishments (Subtopic 470-50), Compensation—Stock Compensation (Topic 718), and Derivatives and Hedging—Contracts in Entity’s Own Equity (Subtopic 815-40) (“ASU 2021-04”), which amends existing guidance for earnings per share (EPS) in accordance with Topic 260. The Company adopted the ASU beginning June 1, 2022 and the adoption of ASU 2021-04 did not have an impact on our condensed interim consolidated financial statements.
In November 2021, the FASB issued ASU 2021-10, Government Assistance (Topic 832), Disclosures by Business Entities about Government Assistance, which is intended to increase the transparency of government assistance including the disclosure of (1) the types of assistance, (2) an entity’s accounting for the assistance, and (3) the effect of the assistance on an entity’s financial statements. The Company adopted the ASU beginning June 1, 2022 and the adoption of ASU 2021-04 did not have an impact on the disclosure in our condensed interim consolidated financial statements.
Note 3. Inventory
Inventory consisted of the following:
| | August 31, | | | May 31, | |
| | 2022 | | | 2022 | |
Plants | | $ | 12,217 | | | $ | 14,521 | |
Dried cannabis | | | 121,566 | | | | 116,739 | |
Cannabis trim | | | 890 | | | | 592 | |
Cannabis derivatives | | | 20,965 | | | | 24,685 | |
Cannabis vapes | | | 3,915 | | | | 542 | |
Packaging and other inventory items | | | 19,928 | | | | 21,691 | |
Wellness inventory | | | 12,986 | | | | 13,275 | |
Beverage alcohol inventory | | | 27,128 | | | | 27,840 | |
Distribution inventory | | | 25,059 | | | | 25,644 | |
Total | | $ | 244,654 | | | $ | 245,529 | |
Note 4. Capital assets
Capital assets consisted of the following:
| | August 31, | | | May 31, | |
| | 2022 | | | 2022 | |
Land | | $ | 29,275 | | | $ | 31,882 | |
Production facility | | | 435,085 | | | | 453,412 | |
Equipment | | | 245,413 | | | | 254,486 | |
Leasehold improvement | | | 7,564 | | | | 7,455 | |
Construction in progress | | | 9,323 | | | | 7,505 | |
| | $ | 726,660 | | | $ | 754,740 | |
Less: accumulated amortization | | | (173,054 | ) | | | (167,241 | ) |
Total | | $ | 553,606 | | | $ | 587,499 | |
Note 5. Intangible Assets
Intangible assets consisted of the following items:
| | August 31, | | | May 31, | |
| | 2022 | | | 2022 | |
Customer relationships & distribution channel | | $ | 595,579 | | | $ | 617,437 | |
Licenses, permits & applications | | $ | 366,684 | | | | 377,897 | |
Non-compete agreements | | $ | 12,390 | | | | 12,512 | |
Intellectual property, trademarks, knowhow & brands | | $ | 616,509 | | | | 634,997 | |
| | $ | 1,591,162 | | | $ | 1,642,843 | |
Less: accumulated amortization | | $ | (169,740 | ) | | $ | (154,124 | ) |
Less: impairments | | | (210,844 | ) | | | (210,844 | ) |
Total | | $ | 1,210,578 | | | $ | 1,277,875 | |
As of August 31, 2022, included in Licenses, permits & applications is $236,543 of indefinite-lived intangible assets. As of May 31, 2022, there was $248,411 of indefinite-lived intangible assets included in Licenses, permits & applications.
Note 6. Goodwill
The following table shows the carrying amount of goodwill:
| | August 31, | | | May 31, | |
Segment | | 2022 | | | 2022 | |
Cannabis | | $ | 2,640,669 | | | $ | 2,640,669 | |
Distribution | | | 4,458 | | | | 4,458 | |
Beverage alcohol | | | 102,999 | | | | 102,999 | |
Wellness | | | 77,470 | | | | 77,470 | |
Effect of foreign exchange | | | 16,031 | | | | 39,640 | |
Impairments | | | (223,931 | ) | | | (223,931 | ) |
Total | | $ | 2,617,696 | | | $ | 2,641,305 | |
Acquisition of Double Diamond Distillery LLC (d/b/a Breckenridge Distillery)
On December 7, 2021, the Company through its wholly-owned subsidiary Four Twenty Corporation, completed the purchase of all the membership interests of Double Diamond Distillery LLC (d/b/a Breckenridge Distillery), a Colorado limited liability company and a leading distilled spirits brand located in Breckenridge, Colorado (the “Breckenridge Acquisition”). As consideration for the Breckenridge Acquisition, the Company paid a purchase price in an aggregate amount equal to $114,068, which purchase price was satisfied through the issuance of 12,540,479 shares of Tilray’s Class 2 common shares.
The Company is in the process of assessing the fair value of the net assets acquired and, as a result, the fair value of the net assets acquired may be subject to adjustments pending completion of final valuations and post-closing adjustments. The table below summarizes preliminary estimated fair value of the assets acquired and the liabilities assumed at the effective acquisition date.
| | Amount | |
Consideration | | | | |
Shares | | $ | 114,068 | |
Net assets acquired | | | | |
Current assets | | | | |
Cash and cash equivalents | | | 326 | |
Accounts receivable | | | 2,128 | |
Prepaids and other current assets | | | 367 | |
Inventory | | | 20,351 | |
Long-term assets | | | | |
Capital assets | | | 11,179 | |
Customer relationships (15 years) | | | 9,800 | |
Intellectual property, trademarks & brands (15 years) | | | 69,950 | |
Goodwill | | | 2,797 | |
Total Assets | | | 116,898 | |
Current liabilities | | | | |
Accounts payable and accrued liabilities | | | 2,228 | |
Long-term liabilities | | | | |
Deferred tax liability | | | 602 | |
Total liabilities | | | 2,830 | |
Total net assets acquired | | $ | 114,068 | |
The goodwill of $2,797 is primarily related to factors such as synergies and market opportunities and is reported under the Company’s Beverage alcohol segment. Revenue for the Company would have been higher by approximately $6,000 for the three months ended August 31, 2021, if the acquisition had taken place on June 1, 2021. Net loss and comprehensive net loss would have increased by approximately $1,500 for the three months ended August 31, 2021, if the acquisition had taken place on June 1, 2021, primarily as a result of amortization of the intangible assets acquired.
Note 7. Convertible notes receivable
Convertible notes receivable is comprised of the following:
| | August 31, | | | May 31, | |
| | 2022 | | | 2022 | |
HEXO Convertible Note | | $ | 161,850 | | | $ | - | |
MedMen Convertible Note | | | 107,590 | | | | 111,200 | |
Total convertible notes receivable | | | 269,440 | | | | 111,200 | |
Deduct - current portion | | | - | | | | - | |
Total convertible notes receivable, non current portion | | | 269,440 | | | | 111,200 | |
During the three months ended August 31, 2022, the Company acquired a secured convertible note initially issued by HEXO Corp. ("HEXO") in the principal amount of $173,700 for an aggregate purchase price of $157,272 (the "HEXO Convertible Note").
The unrealized loss on convertible notes receivable recognized in other comprehensive income amounts to $2,525 and $649 for the three months ended August 31, 2022 and August 31, 2021 respectively.
HEXO Corp. ("HEXO")
On July 12, 2022, the Company closed a strategic alliance with HEXO, pursuant to which, the Company acquired the HEXO Convertible Note from HT Investments MA LLC (“HTI”), which had a principal balance of $173,700 outstanding. The purchase price paid to HTI for the HEXO Convertible Note was $157,272. The purchase price was satisfied by Tilray to HTI in the form of a newly-issued $50,000 convertible promissory note ("HTI Convertible Note") refer to Note 12 (Convertible debentures) and the remaining balance in 33,314,412 shares of Tilray's Class 2 common stock, par value $0.0001 (“HTI Share Consideration”). The HEXO Convertible Note bears interest at a rate of 5.0% per annum, calculated daily, which is payable to Tilray on a semi-annual basis. Interest payments made under the HEXO Convertible Note will be made in the form of cash until July 12, 2023. The HEXO Convertible Note has a maturity date of May 1, 2026. Subject to certain limitations and adjustments, the HEXO Convertible Note is convertible into HEXO Common Shares at Tilray's option at any time prior to the second scheduled trading day prior to the maturity date, at a conversion price of CAD$0.40 per HEXO Common share as determined the day before exercise, including all capitalized interest. HEXO has the ability to force the conversion if the daily VWAP per common share is equal to or exceeds $3.00 per share for twenty consecutive trading days.
All third-party transaction costs associated with the acquisition of these notes were reimbursed by HEXO. During the three months ended August 31, 2022, in connection with the HEXO Convertible Note, the Company recognized interest revenue of $1,206 and an unrealized gain on convertible notes receivable in other comprehensive income of $4,578.
The HTI Share Consideration included a purchase price derivative, where the consideration paid is adjusted based on the sum of the VWAP of the Company's common stock for the 44 trading days after the issuance of the shares. The purchase price derivative is settled through the issuance of additional shares of the Company if the share price declined, or a cash payment back to the Company if the share price increased over the period. On issuance this was valued at $nil, the subsequent change in fair value resulted in a gain of $18,256 due to the share price increasing, which was recorded in Transaction (income) costs, and included in Other current assets as at August 31, 2022.
The fair value of the HEXO Convertible Note was determined using the Black-Scholes model using the following assumptions: the risk-free rate of 1.50%; expected life of the convertible note; volatility of 90% based on comparable companies; forfeiture rate of nil; dividend yield of nil and the exercise price of the respective conversion feature.
Concurrent with the aforementioned purchase of the HEXO Convertible Note, the Company and HEXO also entered into various commercial transaction agreements as described in Note 24 (Segment reporting).
MedMen Enterprises Inc. (“MedMen”)
On August 31, 2021, the Company issued 9,817,061 shares valued at $117,804 to acquire 68% interest in Superhero Acquisition L.P. (“SH Acquisition”), which purchased a senior secured convertible note (the "MedMen Convertible Note") together with certain associated warrants to acquire Class B subordinate voting shares of MedMen in the principal amount of $165,799. The MedMen Convertible Note bears interest at the Secured overnight financing rate ("SOFR") plus 6%, with a SOFR floor of 2.5% and, any accrued interest is added to the outstanding principal amount, and is to be paid at maturity of the MedMen Convertible Note. SH Acquisition was also granted “top-up” rights enabling it (and its limited partners) to maintain its percentage ownership (on an “as-converted” basis) in the event that MedMen issues equity securities upon conversion of convertible securities that may be issued by MedMen. The Company’s ability to convert the MedMen Convertible Note and exercise the Warrants is dependent upon U.S. federal legalization of cannabis (a “Triggering Event”) or Tilray’s waiver of such requirement as well as any additional regulatory approvals. The MedMen Convertible Note has a maturity date of August 17, 2028.
The fair value of the MedMen Convertible Note was determined using the Black-Scholes model using the following assumptions: the risk-free rate of 1.43%; expected life of the convertible note; volatility of 70% based on comparable companies; forfeiture rate of nil; dividend yield of nil; probability of legalization between 0% and 60%; and, the exercise price of the respective conversion feature.
Note 8. Long term investments
Long term investments consisted of the following:
| | August 31, | | | May 31, | |
| | 2022 | | | 2022 | |
Equity investments measured at fair value | | $ | 3,192 | | | $ | 4,347 | |
Equity investments under measurement alternative | | | 5,687 | | | | 5,703 | |
Total | | $ | 8,879 | | | $ | 10,050 | |
Note 9. Accounts payable and accrued liabilities
Accounts payable and accrued liabilities are comprised of:
| | August 31, | | | May 31, | |
| | 2022 | | | 2022 | |
Trade payables | | $ | 75,840 | | | $ | 68,604 | |
Accrued liabilities | | | 62,815 | | | | 57,497 | |
Accrued payroll and employment related taxes | | | 5,463 | | | | 17,736 | |
Income taxes payable | | | 6,540 | | | | 6,150 | |
Accrued interest | | | 3,428 | | | | 6,772 | |
Other accruals | | | 577 | | | | 672 | |
Total | | $ | 154,663 | | | $ | 157,431 | |
Note 10. Bank indebtedness
Aphria Inc., a subsidiary of the Company, has an operating line of credit in the amount of C$1,000 which bears interest at the lender’s prime rate plus 75 basis points. As of August 31, 2022, the Company has not drawn on the line of credit. The operating line of credit is secured by a security interest on that certain real property at 265 Talbot St. West, Leamington, Ontario.
CC Pharma GmbH, a subsidiary of the Company, has three operating lines of credit for €8,000, €3,500, and €500 each, which bear interest at Euro Over Night Index Average plus 1.79% and Euro Interbank Offered Rate ("EURIBOR") plus 3.682% respectively. As of August 31, 2022, a total of €8,258 ($8,282) was drawn down from the available credit of €12,000. The operating lines of credit are secured by a security interest in the inventory of CC Pharma GmbH.
Four Twenty Corporation (“420”), a subsidiary of the Company, has a revolving credit facility of $30,000 which bears interest at EURIBOR plus an applicable margin. As of August 31, 2022, the Company has drawn $10,000 on the revolving line of credit. The revolving credit facility is secured by all of 420's assets and includes a corporate guarantee by a subsidiary of the Company.
Note 11. Long-term debt
The following table sets forth the net carrying amount of long-term debt instruments:
| | August 31, | | | May 31, | |
| | 2022 | | | 2022 | |
Credit facility - C$80,000 - Canadian prime interest rate plus an applicable margin, 3-year term, with a 10-year amortization, repayable in blended monthly payments, due in November 2022 | | $ | 50,160 | | | $ | 53,720 | |
Term loan - C$25,000 - 4.68%, compounded monthly, 5-year term, with a 15-year amortization, repayable in equal monthly instalments of C$194 including interest, due in July 2023 | | | 12,057 | | | | 12,750 | |
Term loan - C$25,000 - 5.70%, compounded monthly, 5-year term with a 15-year amortization, repayable in equal monthly instalments of C$190 including interest, due in April 2032 | | | 14,215 | | | | 15,050 | |
Term loan - C$1,250 - Canadian prime plus 1.50%, 5-year term, with a 10-year amortization, repayable in equal monthly instalments of C$12 including interest, due in August 2026 | | | 423 | | | | 462 | |
Mortgage payable - C$3,750 - Canadian prime plus 1.50%, 5-year term, with a 20-year amortization, repayable in equal monthly instalments of C$23 including interest, due in August 2026 | | | 2,218 | | | | 2,327 | |
Term loan ‐ €5,000 ‐ EURIBOR plus 1.79%, 5‐year term, repayable in quarterly instalments of €250 plus interest, due in December 2023 | | | 3,009 | | | | 1,878 | |
Term loan ‐ €5,000 ‐ EURIBOR plus 2.68%, 5‐year term, repayable in quarterly instalments of €250 plus interest, due in December 2023 | | | 1,504 | | | | 1,878 | |
Term loan ‐ €1,500 ‐ EURBIOR plus 2.00%, 5‐year term, repayable in quarterly instalments of €98 including interest, due in April 2025 | | | 1,047 | | | | 1,219 | |
Term loan ‐ €1,500 ‐ EURIBOR plus 2.00%, 5‐year term, repayable in quarterly instalments of €98 including interest, due in June 2025 | | | 1,128 | | | | 1,307 | |
Mortgage payable - $22,635 - EURIBOR rate plus 1.5%, 10-year term, with a 10-year amortization, repayable in monthly instalments of $57 plus interest, due in October 2030 | | | 21,389 | | | | 21,561 | |
Term loan - $100,000 - EURIBOR rate plus an applicable margin, 3-year term, repayable in quarterly instalments beginning March 31, 2021 of $7,500 in its first twelve months and $10,000 in each of the next two years, due in March 2024 | | | 72,500 | | | | 75,000 | |
Carrying amount of long-term debt | | | 179,650 | | | | 187,152 | |
Unamortized financing fees | | | (1,258 | ) | | | (1,450 | ) |
Net carrying amount | | | 178,392 | | | | 185,702 | |
Less principal portion included in current liabilities | | | (64,098 | ) | | | (67,823 | ) |
Total noncurrent portion of long-term debt | | $ | 114,294 | | | $ | 117,879 | |
As of August 31, 2022, the Company was in compliance with all of its long-term debt covenants.
Note 12. Convertible debentures
The following table sets forth the net carrying amount of the convertible debentures:
| | August 31, | | | May 31, | |
| | 2022 | | | 2022 | |
HTI Convertible Note | | $ | 41,943 | | | $ | — | |
5.25% Convertible Notes ("APHA 24") | | | 216,270 | | | | 216,753 | |
5.00% Convertible Notes ("TLRY 23") | | | 186,062 | | | | 185,196 | |
Total | | $ | 444,275 | | | $ | 401,949 | |
HTI Convertible Note
| | August 31, | | | May 31, | |
| | 2022 | | | 2022 | |
4.00% Contractual debenture | | $ | 50,000 | | | $ | — | |
Unamortized discount | | | (8,057 | ) | | | — | |
Net carrying amount | | $ | 41,943 | | | $ | — | |
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. The fair value of the conversion feature was determined to be $9,055. Refer to Note 7 (Convertible notes receivable) for additional details on the transaction. HTI may convert the HTI Convertible Note, in whole or in part, at any time prior to the second trading day immediately preceding the maturity date, into shares of Common Stock at a conversion price equal to $4.03, which is calculated as 125% of the closing sale price as of the closing date ( July 12, 2022). In no event will HTI be allowed to effect a conversion of the HTI Convertible Note if such conversion, along with all other shares of Common Stock beneficially owned by HTI and its affiliates, would exceed 9.99% of the outstanding Common Stock (the "Beneficial Ownership Limitation"). If HTI does not elect or is unable to elect to convert under the Beneficial Ownership Limitation the Company will be responsible for repaying the debt in cash.
APHA 24
| | August 31, | | | May 31, | |
| | 2022 | | | 2022 | |
5.25% Contractual debenture | | $ | 350,000 | | | $ | 350,000 | |
Debt settlement | | | (90,760 | ) | | | (90,760 | ) |
Fair value adjustment | | | (42,970 | ) | | | (42,487 | ) |
Net carrying amount | | $ | 216,270 | | | $ | 216,753 | |
Holders of the APHA 24 may convert all or any portion of their Notes, 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. In addition, holders of the APHA 24 may convert all or any portion of their Notes, in multiples of $1 principal amount, at their option at any time preceding December 1, 2023, if:
| (a) | the last reported sales price of the common shares for at least 20 trading days during a period of 30 consecutive trading days immediately preceding fiscal quarter is greater than or equal to 130% of the conversion price on each applicable trading day; |
| (b) | during the five-business day period after any five consecutive trading day period (the “measurement period”) in which the trading price per $1 principal amount of the APHA 24 for each trading day of the measurement period is less than 98% of the product of the last reported sale price of the Company’s common shares and the conversion rate on each such trading day; |
| (c) | the Company calls any or all of the APHA 24 for redemption or; |
| (d) | upon occurrence of a specified corporate event. |
The Company may not redeem the APHA 24 prior to June 6, 2022, except upon the occurrence of certain changes in tax laws. On or after June 6, 2022, the Company may redeem for cash all or part of the Notes, 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 of $259,240 plus accrued and unpaid interest to, but excluding, the redemption date.
TLRY 23
| | August 31, | | | May 31, | |
| | 2022 | | | 2022 | |
5.00% Contractual debenture | | $ | 277,856 | | | $ | 277,856 | |
Principal amount paid | | | (88,026 | ) | | | (88,026 | ) |
Unamortized discount | | | (3,768 | ) | | | (4,634 | ) |
Net carrying amount | | $ | 186,062 | | | $ | 185,196 | |
The TLRY 23 bears interest at a rate of 5.00% per annum, payable semi-annually in arrears on April 1 and October 1 of each year. Additional interest may accrue on the TLRY 23 in specified circumstances. The TLRY 23 will mature on October 1, 2023, unless earlier repurchased, redeemed or converted. There are no principal payments required over the five-year term of the TLRY 23, except in the case of redemption or events of default.
The TLRY 23 is an unsecured obligation and ranks senior in right of payment to all of the Company's indebtedness that is expressly subordinated in right of payment to the TLRY 23; equal in right of payment with any of the Company's unsecured indebtedness that is not so subordinated; effectively junior in right of payment to any of the Company's secured indebtedness to the extent 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 the Company's current or future subsidiaries.
Upon conversion, the Company will pay or deliver, as the case may be, cash, shares of our common stock or a combination of cash and shares of the Company’s common stock, at the Company’s election (the “cash conversion option”). The initial conversion rate for the convertible notes is 5.9735 shares of common stock per one thousand dollar principal amount of notes, which is equivalent to an initial conversion price of approximately $167.41 per share of common stock, which represents approximately 1,133,950 shares of common stock, based on the $189,830 aggregate principal amount of convertible notes outstanding as of August 31, 2022. Throughout the term of the TLRY 23, the conversion rate may be adjusted upon the occurrence of certain events.
Prior to the close of business on the business day immediately preceding April 1, 2023, the TLRY 23 will be convertible only under the specified circumstances. On or after April 1, 2023 until the close of business on the business day immediately preceding the maturity date, September 30, 2023, holders may convert all or any portion of their TLRY 23, in multiples of $1 principal amount, at the option of the holder regardless of the aforementioned circumstances. Please refer to note 25 (subsequent events) for additional transactions related to this instrument that occurred after the period ended.
As of August 31, 2022, the Company was in compliance with all the covenants set forth under the TLRY 23. The effective interest rate on the debt is 6.9%, the Company recognized interest expense of $2,373 and amortized discount interest of $866.
Note 13. Warrant liability
As of August 31, 2022, there are 6,209,000 warrants outstanding ( May 31, 2022 - 6,209,000), 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 quarter ended August 31, 2022, the Company issued shares which triggered the anti-dilution price protection feature lowering the exercise price to $3.15. 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 the warrant liability at August 31, 2022 at $2.05 per warrant using the Black Scholes pricing model (Level 3) with the following assumptions: Risk-free interest rate of 3.59%, expected volatility of 70%, expected term of 3.05 years, strike price of $3.15 and fair value of common stock of $3.80.
Expected volatility is based on both historical and implied volatility of the Company’s common stock.
Note 14. Stockholders' equity
Issued and outstanding
At August 31, 2022, the Company had 990,000,000 shares authorized to be issued, of which 243,333,333 are Class 1 shares, with nil shares issued and outstanding and 746,666,667 are Class 2 shares, with 600,954,939 shares issued and outstanding.
During the three months ended August 31, 2022, the Company issued the following shares:
| a) | 32,481,149 shares under its At-the-Market (“ATM”) program for gross proceeds of $132,238. The Company paid $2,645 in commissions and other fees associated with these issuances for net proceeds of $129,593. |
| b) | 33,314,412 shares to purchase the HEXO convertible notes receivable. |
| c) | 1,529,821 shares to settle amounts owed to the non-controlling shareholders of Aphria Diamond in the amount of $5,064. |
| d) | 954,670 shares for the exercise of various stock-based compensation awards. |
The Company maintains stock-based compensation plans as disclosed in our Annual Financial Statements. For the three months ended August 31, 2022, the total stock-based compensation was $9,193, whereas for the three months ended August 31, 2021, total stock based compensation was $9,417.
During the three months ended August 31, 2022, the Company granted 5,747,938 time-based RSUs and 2,540,394 performance based RSUs ( August 31, 2021 - 981,229 time-based RSUs and 2,326,387 performance based RSUs). The Company's total stock-based compensation expense recognized is as follows:
| | For the three months | |
| | ended August 31, | |
| | 2022 | | | 2021 | |
Stock options | | $ | 604 | | | $ | 2,756 | |
RSUs | | | 8,589 | | | | 6,661 | |
Total | | $ | 9,193 | | | $ | 9,417 | |
Note 15. 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, 2021 | | $ | 156,417 | | | $ | (3,749 | ) | | $ | 152,668 | |
Other comprehensive loss | | | (100,772 | ) | | | (649 | ) | | | (101,421 | ) |
Balance at August 31, 2021 | | $ | 55,645 | | | $ | (4,398 | ) | | $ | 51,247 | |
| | | | | | | | | | | | |
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 | ) |
Note 16. 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 August 31, 2022:
| | Superhero | | | CC Pharma | | | Aphria | | | ColCanna | | | August 31, | |
| | LP | | | Nordic ApS | | | Diamond | | | S.A.S. | | | 2022 | |
Current assets | | $ | — | | | $ | 361 | | | $ | 23,250 | | | $ | 229 | | | $ | 23,840 | |
Non-current assets | | | 107,590 | | | | 88 | | | | 146,014 | | | | 38,210 | | | | 291,902 | |
Current liabilities | | | — | | | | (599 | ) | | | (57,672 | ) | | | (29 | ) | | | (58,300 | ) |
Non-current liabilities | | | — | | | | (383 | ) | | | (26,192 | ) | | | (6,665 | ) | | | (33,240 | ) |
Net assets | | $ | 107,590 | | | $ | (533 | ) | | $ | 85,400 | | | $ | 31,745 | | | $ | 224,202 | |
Summary of balance sheet information of the entities there is a non-controlling interest as of May 31, 2022:
| | SH | | | CC Pharma | | | Aphria | | | ColCanna | | | May 31, | |
| | Acquisition | | | Nordic ApS | | | Diamond | | | S.A.S. | | | 2022 | |
Current assets | | $ | — | | | $ | 485 | | | $ | 20,546 | | | $ | 193 | | | $ | 21,224 | |
Non-current assets | | | 111,200 | | | | 158 | | | | 152,786 | | | | 141,929 | | | | 406,073 | |
Current liabilities | | | — | | | | (642 | ) | | | (63,196 | ) | | | (53 | ) | | | (63,891 | ) |
Non-current liabilities | | | — | | | | (410 | ) | | | (29,653 | ) | | | (6,537 | ) | | | (36,600 | ) |
Net assets | | $ | 111,200 | | | $ | (409 | ) | | $ | 80,483 | | | $ | 135,532 | | | $ | 326,806 | |
Summary of income statement information of the entities in which there is a non-controlling interest for the three months ended August 31, 2022:
| | Superhero | | | CC Pharma | | | Aphria | | | ColCanna | | | August 31, | |
| | LP | | | Nordic ApS | | | Diamond | | | S.A.S. | | | 2022 | |
Revenue | | $ | — | | | $ | — | | | $ | 36,401 | | | $ | — | | | $ | 36,401 | |
Total expenses | | | (3,492 | ) | | | 154 | | | | 20,427 | | | | 55,845 | | | | 72,934 | |
Net (loss) income | | | 3,492 | | | | (154 | ) | | | 15,974 | | | | (55,845 | ) | | | (36,533 | ) |
Other comprehensive (loss) income | | | (7,103 | ) | | | 29 | | | | (3,280 | ) | | | 240 | | | | (10,114 | ) |
Net comprehensive (loss) income | | $ | (3,611 | ) | | $ | (125 | ) | | $ | 12,694 | | | $ | (55,605 | ) | | $ | (46,647 | ) |
Non-controlling interest % | | | 32 | % | | | 25 | % | | | 49 | % | | | 10 | % | | NA | |
Comprehensive (loss) income attributable to NCI | | | (1,156 | ) | | | (31 | ) | | | 6,220 | | | | (5,561 | ) | | | (527 | ) |
Additional income attributable to NCI | | | — | | | | — | | | | 4,366 | | | | — | | | | 4,366 | |
Net comprehensive (loss) income attributable to NCI | | $ | (1,156 | ) | | $ | (31 | ) | | $ | 10,586 | | | $ | (5,561 | ) | | $ | 3,839 | |
Summary of income statement information of the entities in which there is a non-controlling interest for the three months ended August 31, 2021:
| | CC Pharma | | | Aphria | | | ColCanna | | | August 31, | |
| | Nordic ApS | | | Diamond | | | S.A.S. | | | 2021 | |
Revenue | | $ | — | | | $ | 40,422 | | | $ | — | | | $ | 40,422 | |
Total expenses | | | 14 | | | | 26,029 | | | | 24 | | | | 26,067 | |
Net (loss) income | | | (14 | ) | | | 14,393 | | | | (24 | ) | | | 14,355 | |
Other comprehensive (loss) income | | | — | | | | — | | | | — | | | | — | |
Net comprehensive (loss) income | | $ | (14 | ) | | $ | 14,393 | | | $ | (24 | ) | | $ | 14,355 | |
Non-controlling interest % | | | 25 | % | | | 49 | % | | | 10 | % | | NA | |
Net comprehensive (loss) income | | $ | (4 | ) | | $ | 7,051 | | | $ | (2 | ) | | $ | 7,045 | |
Note 17. 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-based 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 expense of $7,211 for the three months ended August 31, 2022 and income tax expense of $4,762 for the three months ended August 31, 2021. The income tax expense 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.
Note 18. Commitments and contingencies
Purchase and other commitments
The Company has payments on long-term debt ,refer to Note 10 (Long-term debt), convertible notes, refer to Note 11 (Convertible debentures), material purchase commitments and construction commitments as follows:
| | Total | | | 2023 | | | 2024 | | | 2025 | | | 2026 | | | Thereafter | |
Long-term debt repayment | | $ | 179,650 | | | $ | 99,379 | | | $ | 66,008 | | | $ | 3,117 | | | $ | 3,862 | | | $ | 7,284 | |
Convertible notes, principal and interest | | | 542,528 | | | | 24,602 | | | | 517,926 | | | | — | | | | — | | | | — | |
Material purchase obligations | | | 14,244 | | | | 11,322 | | | | 1,977 | | | | 368 | | | | 239 | | | | 338 | |
Construction commitments | | | 6,781 | | | | 6,781 | | | | — | | | | — | | | | — | | | | — | |
Total | | $ | 743,203 | | | $ | 142,084 | | | $ | 585,911 | | | $ | 3,485 | | | $ | 4,101 | | | $ | 7,622 | |
The following table presents the future undiscounted payment associated with lease liabilities as of August 31, 2022:
| | Operating | |
| | leases | |
2023 | | $ | 3,912 | |
2024 | | | 3,097 | |
2025 | | | 2,941 | |
2026 | | | 3,033 | |
Thereafter | | | 6,193 | |
Total minimum lease payments | | $ | 19,176 | |
Imputed interest | | | (2,306 | ) |
Obligations recognized | | $ | 16,870 | |
Legal proceedings
There have been no material changes from the legal proceedings since our fiscal year ended May 31, 2022, except with respect to the matters disclosed below:
Class Action Suits and Stockholder Derivative Suits – U.S. and Canada
Authentic Brands Group Related Class Action (New York, United States)
On September 27, 2021, the U.S. District Court entered an Opinion & Order granting the Defendants’ motion to dismiss the complaint in the Kasilingam litigation. 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 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. The Company still believes the claims are without merit and intend to defend vigorously against them, but there can be no assurances as to the outcome.
Tilray Brands, Inc. Reorganization Litigation (Delaware, New York) – Special Litigation Committee
On February 27, 2020, Tilray stockholders Deborah Braun and Nader Noorian filed a class action and derivative complaint in the Delaware Court of Chancery styled Braun v. Kennedy, C.A. No. 2020-0137-KSJM. On March 2, 2020, Tilray stockholders Catherine Bouvier, James Hawkins, and Stephanie Hawkins filed a class action and derivative complaint in the Delaware Court of Chancery styled Bouvier v. Kennedy, C.A. No. 2020-0154-KSJM.
On March 4, 2020, the Delaware Court of Chancery entered an order consolidating the two cases and designating the complaint in the Braun/Noorian action as the operative complaint. The operative complaint asserts claims for breach of fiduciary duty against Brendan Kennedy, Christian Groh, Michael Blue, and Privateer Evolution, LLC (the “Privateer Defendants”) for alleged breaches of fiduciary duty in their alleged capacities as Tilray’s controlling stockholders and against Kennedy, Maryscott Greenwood, and Michael Auerbach for alleged breaches of fiduciary duties in their capacities as directors and/or officers of Tilray in connection with the prior merger of Privateer Holdings, Inc. with and into a wholly owned subsidiary (the “Downstream Merger”). The complaint alleges that the Privateer Defendants breached their fiduciary duties by causing Tilray to enter into the Downstream Merger and Tilray’s Board to approve that Downstream Merger, and that Defendants Kennedy, Greenwood, and Auerbach breached their fiduciary duties as directors by approving the Downstream Merger. Plaintiffs allege that the Downstream Merger gave the Privateer Defendants hundreds of millions of dollars of tax savings without providing a corresponding benefit to Tilray and its minority stockholders and that the Downstream Merger unfairly transferred and extended Kennedy, Blue, and Groh’s control over Tilray. On July 17, 2020, the plaintiffs filed an amended complaint asserting substantially similar claims. On August 14, 2020, Tilray and the Privateer Defendants moved to dismiss the amended complaint. At the February 5, 2021 hearing on Defendants’ Motions to Dismiss, the Plaintiffs agreed that their perpetuation of control claims are moot and stated that they intend to move for a fee award in connection with those claims. On June 1, 2021, the Court denied Defendants’ Motions to Dismiss the Amended Complaint.
In August 2021, the Company’s Board of Directors established a Special Litigation Committee (the “SLC”) of independent directors to re-assert director control and investigate the derivative claims in this litigation matter. The SLC has appointed the law firm Wilson Sonsini to assist the SLC with an ongoing investigation of the underlying claim and determine whether continued prosecution of such claims is in the best interests of the Company. The SLC has successfully moved to have the Plaintiff’s discovery stayed during their investigation.
On May 27, 2022, the SLC informed the Court that it had completed its investigation; determined not to seek dismissal of the Action; and confirmed its determination that the Company had suffered significant damages and that the SLC would pursue claims to recover appropriate amounts for the Company's benefit. Thereafter, the SLC, all of the Defendants, and certain non-parties participated in two mediation sessions before former Chancellor of the Delaware Court of Chancery Andre G. Bouchard on June 27 and July 14, 2022.
On July 15, 2022, the SLC reached an agreement in principle with the Defendants and certain of the non-parties, and their respective insurers, to resolve the claims asserted in the Action in exchange for an aggregate amount of $26.9 million to be paid to Tilray plus mutual releases. The parties' binding term sheet remains subject to execution of long-form settlement agreements with the respective parties and approval by the Court of Chancery. The SLC notified the Court of Chancery of the parties’ agreement in principle via letter dated July 18, 2022. As of September 30, 2022, the parties are continuing to negotiate and finalize the specific terms and conditions of the definitive settlement agreement.
Docklight Litigation
On November 5, 2021 Docklight Brands, Inc. (“Docklight”) filed a complaint against the Company and its wholly-owned subsidiary, High Park Holdings, Ltd. (“High Park”) 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. Docklight seeks injunctive relief as well as unspecified damages. On December 17, 2021, Defendants removed the case to the United States District Court, Federal District of Washington. Defendants’ answer to the complaint was timely filed by January 21, 2022, and discovery in this litigation matter is ongoing. Tilray and High Park intend to continue to vigorously defend the Docklight suit.
Note 19. Net revenue
The Company reports its net revenue in four reporting segments: cannabis, distribution, beverage alcohol and wellness, in accordance with ASC 280 Segment Reporting.
Net revenue is comprised of:
| | For the three months | |
| | ended August 31, | |
| | 2022 | | | 2021 | |
Cannabis revenue | | $ | 75,689 | | | $ | 89,933 | |
Cannabis excise taxes | | | (17,119 | ) | | | (19,484 | ) |
Net cannabis revenue | | | 58,570 | | | | 70,449 | |
Beverage alcohol revenue | | | 21,863 | | | | 16,483 | |
Beverage alcohol excise taxes | | | (1,209 | ) | | | (1,022 | ) |
Net beverage alcohol revenue | | | 20,654 | | | | 15,461 | |
Distribution revenue | | | 60,585 | | | | 67,186 | |
Wellness revenue | | | 13,402 | | | | 14,927 | |
Total | | $ | 153,211 | | | $ | 168,023 | |
Note 20. Cost of goods sold
Cost of goods sold is comprised of:
| | For the three months | |
| | ended August 31, | |
| | 2022 | | | 2021 | |
Cannabis costs | | $ | 28,861 | | | $ | 40,190 | |
Beverage alcohol costs | | | 10,849 | | | | 6,663 | |
Distribution costs | | | 54,984 | | | | 59,290 | |
Wellness costs | | | 9,903 | | | | 10,925 | |
Total | | $ | 104,597 | | | $ | 117,068 | |
Note 21. General and administrative expenses
General and administrative expenses are comprised of:
| | For the three months | |
| | ended August 31, | |
| | 2022 | | | 2021 | |
Executive compensation | | $ | 3,555 | | | $ | 3,090 | |
Office and general | | | 5,829 | | | | 12,742 | |
Salaries and wages | | | 14,635 | | | | 15,311 | |
Stock-based compensation | | | 9,193 | | | | 9,417 | |
Insurance | | | 2,703 | | | | 4,631 | |
Professional fees | | | 2,490 | | | | 2,713 | |
Gain on sale of capital assets | | | 77 | | | | 27 | |
Travel and accommodation | | | 1,161 | | | | 790 | |
Rent | | | 865 | | | | 766 | |
Total | | $ | 40,508 | | | $ | 49,487 | |
Note 22. Non-operating income (expense)
Non-operating income (expense) is comprised of:
| | For the three months | |
| | ended August 31, | |
| | 2022 | | | 2021 | |
Change in fair value of convertible debenture | | $ | (7,884 | ) | | $ | 39,370 | |
Change in fair value of warrant liability | | | 1,548 | | | | 17,535 | |
Foreign exchange loss | | | (25,573 | ) | | | (5,724 | ) |
Loss on long-term investments | | | (1,008 | ) | | | (1,675 | ) |
Other non-operating (losses) gains, net | | | (75 | ) | | | 191 | |
Total | | $ | (32,992 | ) | | $ | 49,697 | |
Note 23. 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 August 31, 2022 the Company’s long-term debt of $26,272 ( May 31, 2022 - $20,358) is 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.
The following tables present information about the Company’s assets and liabilities that are measured at fair value on a recurring basis as of August 31, 2022 and May 31, 2022 and indicates the fair value hierarchy of the valuation techniques the Company utilized to determine such fair value:
| | | | | | | | | | | | | | August 31, | |
| | Level 1 | | | Level 2 | | | Level 3 | | | 2022 | |
Financial assets | | | | | | | | | | | | | | | | |
Cash and cash equivalents | | $ | 490,643 | | | $ | — | | | $ | — | | | $ | 490,643 | |
Convertible notes receivable | | | — | | | | — | | | | 269,440 | | | | 269,440 | |
Equity investments measured at fair value | | | 1,563 | | | | 1,629 | | | | 5,687 | | | | 8,879 | |
Financial liabilities | | | | | | | | | | | | | | | | |
Warrant liability | | | — | | | | — | | | | (12,707 | ) | | | (12,707 | ) |
Contingent consideration | | | — | | | | — | | | | (16,218 | ) | | | (16,218 | ) |
APHA 24 Convertible debenture | | | — | | | | — | | | | (216,270 | ) | | | (216,270 | ) |
Total recurring fair value measurements | | $ | 492,206 | | | $ | 1,629 | | | $ | 29,932 | | | $ | 523,767 | |
| | | | | | | | | | | | | | May 31, | |
| | Level 1 | | | Level 2 | | | Level 3 | | | 2022 | |
Financial assets | | | | | | | | | | | | | | | | |
Cash and cash equivalents | | $ | 415,909 | | | | — | | | | — | | | $ | 415,909 | |
Convertible notes receivable | | | — | | | | — | | | | 111,200 | | | | 111,200 | |
Equity investments measured at fair value | | | 1,878 | | | | 2,469 | | | | 5,703 | | | | 10,050 | |
Financial liabilities | | | | | | | | | | | | | | | | |
Warrant liability | | | — | | | | — | | | | (14,255 | ) | | | (14,255 | ) |
Contingent consideration | | | — | | | | — | | | | (16,007 | ) | | | (16,007 | ) |
APHA 24 Convertible debenture | | | — | | | | — | | | | (216,753 | ) | | | (216,753 | ) |
Total recurring fair value measurements | | $ | 417,787 | | | $ | 2,469 | | | $ | (130,112 | ) | | $ | 290,144 | |
The Company’s financial assets and liabilities required to be measured on a recurring basis are its equity investments measured at fair value, debt securities classified as available-for-sale, acquisition-related contingent consideration, and warrant liability.
Convertible notes receivable, and equity investments are recorded at fair value. The estimated fair value is determined using quoted market prices, broker or dealer quotations or discounted cash flows and is classified as Level 2. Certain equity investments recorded at fair value have quoted prices in active markets for identical assets and are classified as Level 1.
Debt securities classified as available-for sale are recorded at fair value. The estimated fair value is determined using the Black-Scholes option pricing model and is classified as Level 3. The Company classified these securities as level 2 in the period of acquisition, when the valuation was determined to reflect the recent market transaction.
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 acquisition of SweetWater, first due in December 2023 and payable in cash, is determined by discounting future expected cash outflows at a discount rate of 5%, and probability of achievement of 25%. The unobservable inputs into the future expected cash outflows result in a fair value measurement classified as Level 3.
The APHA 24 Convertible debentures are recorded at fair value. The estimated fair value is determined using the Black-Scholes option pricing model and is classified as Level 3.
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:
| | | | | | | | | | | | | APHA 24 | | | | | |
| | Convertible | | | Warrant | | | Contingent | | | Convertible | | | | | |
| | notes receivable | | | Liability | | | Consideration | | | Debt | | | Total | |
Balance, May 31, 2022 | | $ | 111,200 | | | $ | (14,255 | ) | | $ | (16,007 | ) | | $ | (216,753 | ) | | $ | (135,815 | ) |
Additions | | | 157,272 | | | | — | | | | — | | | | — | | | | 157,272 | |
Unrealized gain (loss) on fair value | | | 968 | | | | 1,548 | | | | (211 | ) | | | 483 | | | | 2,788 | |
Balance, August 31, 2022 | | $ | 269,440 | | | $ | (12,707 | ) | | $ | (16,218 | ) | | $ | (216,270 | ) | | $ | 24,245 | |
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 non-operating income (loss) using the following inputs:
| | | | Significant | | | |
| | Valuation | | unobservable | | | |
Financial asset / financial liability | | technique | | input | | Inputs | |
APHA Convertible debentures | | Black-Scholes | | Volatility, | | 70% | |
| | | | expected life (in years) | | 1.8 | |
Warrant liability | | Black-Scholes | | Volatility, | | 70% | |
| | | | expected life (in years) | | 2.5 | |
Contingent consideration | | Discounted cash flows | | Discount rate, | | 5% | |
| | | | achievement | | 25% | |
Convertible notes receivable | | Black-Scholes | | Effective interest rate, | | 20% - 22% | |
| | | | conversion | | 0% to 60% | |
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 24. 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 alcohol products, (3) distribution operations, which encompasses the purchase and resale of pharmaceuticals products to customers, and (4) wellness products, which encompasses hemp foods and cannabidiol (“CBD”) 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.
Segment gross profit from external customers:
| | For the three months | |
| | ended August 31, | |
| | 2022 | | | 2021 | |
Cannabis | | | | | | | | |
Net cannabis revenue | | $ | 58,570 | | | $ | 70,449 | |
Cannabis costs | | | 28,861 | | | | 40,190 | |
Gross Profit | | | 29,709 | | | | 30,259 | |
Distribution | | | | | | | | |
Distribution revenue | | | 60,585 | | | | 67,186 | |
Distribution costs | | | 54,984 | | | | 59,290 | |
Gross Profit | | | 5,601 | | | | 7,896 | |
Beverage alcohol | | | | | | | | |
Net beverage alcohol revenue | | | 20,654 | | | | 15,461 | |
Beverage alcohol costs | | | 10,849 | | | | 6,663 | |
Gross Profit | | | 9,805 | | | | 8,798 | |
Wellness | | | | | | | | |
Wellness revenue | | | 13,402 | | | | 14,927 | |
Wellness costs | | | 9,903 | | | | 10,925 | |
Gross Profit | | | 3,499 | | | | 4,002 | |
Channels of Cannabis revenue were as follows:
| | For the three months | |
| | ended August 31, | |
| | 2022 | | | 2021 | |
Revenue from Canadian medical cannabis products | | $ | 6,520 | | | $ | 8,374 | |
Revenue from Canadian adult-use cannabis products | | | 58,355 | | | | 69,593 | |
Revenue from wholesale cannabis products | | | 392 | | | | 1,700 | |
Revenue from international cannabis products | | | 10,422 | | | | 10,266 | |
Less excise taxes | | | (17,119 | ) | | | (19,484 | ) |
Total | | $ | 58,570 | | | $ | 70,449 | |
On July 12, 2022, Tilray acquired the HEXO Convertible Note from HTI closed the transaction for a strategic alliance with HEXO Corp. (“HEXO”) as discussed in Note 7 (Convertible notes receivable) and Note 12 (Convertible debentures). In addition, the Company and HEXO entered into various commercial transaction agreements, including (i) an advisory services agreement regarding Tilray’s provision of advisory services to HEXO in exchange for an $18 million annual advisory fee payable to Tilray; (ii) a co-manufacturing agreement providing for third-party manufacturing services between the parties and setting forth the terms of Tilray’s international bulk supply to HEXO; and (iii) a procurement and cost savings agreement for shared savings related to specified optimization activities, procurement, and other similar cost savings realized by the parties as a result of the foregoing commercial arrangements.
Included in revenue from Canadian adult-use cannabis is $7,753 of advisory services revenue in the quarter from the aforementioned HEXO commercial transaction agreements.
Geographic net revenue:
| | For the three months | |
| | ended August 31, | |
| | 2022 | | | 2021 | |
North America | | $ | 82,192 | | | $ | 90,543 | |
EMEA | | | 66,041 | | | | 76,009 | |
Rest of World | | | 4,978 | | | | 1,471 | |
Total | | $ | 153,211 | | | $ | 168,023 | |
Geographic capital assets:
| | August 31, | | | May 31, | |
| | 2022 | | | 2022 | |
North America | | $ | 440,639 | | | $ | 464,370 | |
EMEA | | | 109,560 | | | | 119,409 | |
Rest of World | | | 3,407 | | | | 3,720 | |
Total | | $ | 553,606 | | | $ | 587,499 | |
Major customers are defined as customers that each individually account for greater than 10% of the Company’s annual revenues. For the three months ended August 31, 2022 and 2021, there were no major customers representing greater than 10% of our quarterly revenues.
Note 25. Subsequent Events
As of September 15, 2022, the Company purchased $50,000 of its TLRY 23 convertible debenture for cancellation. After cancellation the outstanding principal balance of the TLRY 23 convertible debentures is $139,830.