TILRAY BRANDS, INC. This Management's Discussion and Analysis of Financial Condition and Results of Operations should be read in conjunction with the Consolidated Financial Statements and the related Notes thereto for the period endedFebruary 28, 2022 contained in this Quarterly Report on Form 10-Q and our Annual Report on Form 10-K for the fiscal year endedMay 31, 2021 . Forward 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 inLeamington, Ontario , with the largest global geographic footprint in the industry; including operations inCanada ,the United States ,Europe ,Australia ,New Zealand andLatin America that is changing people's lives for the better - one person at a time - by inspiring and empowering the worldwide community to live their very best life by providing them with products that meet the needs of their mind, body, and soul and invoke a sense of wellbeing.Tilray's mission is to be the trusted partner for its patients and consumers by providing them with a cultivated experience and health and wellbeing through high-quality, differentiated brands and innovative products. In the pursuit of our strategic vision and mission, we continue to leverage our scale, expertise and capabilities to drive brand awareness and market share inCanada ,Europe ,the United States and the rest of world, achieve industry-leading, profitable growth and build sustainable, long-term stockholder value. In order to ensure the long-term sustainable growth of our Company, we continue to focus on developing strong capabilities, including in consumer and patient insights, drive category management leadership and assess growth opportunities with the introduction of innovative new products and the entry into new markets. In addition, we are relentlessly focused on managing our cost of goods and expenses in order to maintain our strong financial position and expand our profit margins. OnApril 30, 2021 , upon consummation of the arrangement with Aphria Inc. ("Aphria") pursuant to a plan of arrangement under the Business Corporations Act (Ontario ) (the "Arrangement"), Aphria stockholders andTilray stockholders owned approximately 61.2% and 38.8%, respectively, of the post-closing outstandingTilray common stock resulting in the reverse acquisition ofTilray , wherebyTilray is the legal acquirer and Aphria is the acquirer for accounting purposes. Accordingly, as reported in our Annual Report and in this Form 10-Q, the assets and liabilities of Aphria are presented at their historical carrying values and the assets and liabilities ofTilray are recognized on the effective date of the business combination transaction and measured at fair value. The operating results for the comparable period, the three and nine months endedFebruary 28, 2021 , are of those of Aphria. Accordingly, comparisons between the Company's results for the three and nine months endedFebruary 28, 2022 and prior periods may not be meaningful. In conjunction with the reverse acquisition, the Company elected to adopt Aphria's fiscal year ofJune 1 to May 31 . Prior to the completion of the Arrangement, our condensed consolidated financial statements were presented under International Financial Reporting Standards ("IFRS") as issued by theInternational Accounting Standards Board and in Canadian Dollars (C$). All prior periods have been recast and are shown in this Form 10-Q under GAAP and inUnited States Dollars ($).
Trends and Other Factors Affecting Our Business
Market Dynamics.
Our cannabis business reporting segment operates in an industry that is still in its early stages of development. InCanada , the industry celebrated its third year of adult-use legalization inOctober 2021 . As the industry continues to mature, there are a number of new entrants into the industry, which has led to increased competition. This competitive environment in the Canadian cannabis industry subjects us to the risk of loss of market share, price discounting by competitors, and to the challenge of acquiring new customers amidst the evolving market changes. The number of licenses granted, and the number of licensed producers ultimately authorized byHealth Canada could have an adverse impact on our ability to compete for market share inCanada . During the three months endedFebruary 28, 2022 , we maintained our market leadership withinCanada but experienced a decline in market share percent to 10.2% from the 12.8% market share we maintained for the three months endedNovember 30, 2021 . Prior to the end of our fiscal second quarter, the Company was primarily focused on margin maintenance inCanada . With the current market dynamics and the Company's cost advantages, the Company adjusted its focus to be more price competitive in the value, mainstream and premium plus market categories, particularly, in vape and pre-rolled products. Our price adjustments in the vape and pre-rolled markets proved successful, with the Company increasing its market share in both categories in the current quarter, as measured by HiFyre data. 24 -------------------------------------------------------------------------------- The cannabis industry inEurope is also in its early stages of development whereby countries withinEurope are at different stages of legalization of medical and adult-use cannabis as some countries have expressed a clear political ambition to broadly legalize adult-use cannabis (Germany ,Portugal , Luxembourg andMalta ), some are engaging in an experiment for adult-use (Netherlands ,Switzerland ) and some are debating regulations for cannabinoid-based medicine (France ,Spain ,Italy , and theUnited Kingdom ). InEurope , we believe that, despite continuing COVID-19 pressure, and the Russian conflict withUkraine cannabis legalization (both medicinal and adult-use) will continue to gain traction, especially following actions of the Maltese and German governments. We also continue to believe thatTilray remains uniquely positioned to win in these markets with its infrastructure being the only company with EU-GMP cultivation facilities in two countries withinEurope , our distribution network and our demonstrated commitment to the availability, quality and safety of our products. Today,Germany remains the largest medical cannabis market inEurope .
The following is a summary of the state of cannabis legalization within
Germany . The new coalition government led by chancellorOlaf Schulz declared its intention to legalize adult-use cannabis use, which aims to regulate the sale of adult-use cannabis. To date,Tilray remains the sole producer among the three selected to distribute domestically grown cannabis for the BfArM through its state-of-the-art first operating medical cannabis center in Neuemunster.Malta . InDecember 2021 ,Malta now allows its citizens to grow up to six plants at home, possess up to seven grams for personal use, establish a dedicated government authority, and allows the creation of social cannabis clubs. Although commercial sales are still forbidden, such achievement marks an important cornerstone for the cannabis industry inEurope .
Italy . Cannabis activists successfully set up a referendum to decriminalize domestic cannabis cultivation and remove penalties for cannabis possession. Although blocked by the constitutional court on other grounds, we are witnessing strong evolutions in the ways the Italian Government and administration are planning to facilitate patient access to medical cannabis. We project the market opening towards more exhaustive supply sources for flowers and extracts.Switzerland . InOctober 2021 ,Switzerland announced its intention to legalize cannabis by allowing production, cultivation, trade, and consumption. In the meantime, a three-year pilot project will commence in the Fall 2022 to conduct scientific studies on the cannabis market and its impact on Swiss society.Spain . A subcommittee on medical cannabis was recently created in SpanishCongress' Health Committee. Hearings started in earlyMarch 2022 , with a series of national and EU experts attending. A report with recommendations for a regulation on MC inSpain is expected by the end ofJune 2022 , which will likely lead the way for a government-sponsored bill on medical cannabis.
United Kingdom . Medical cannabis is legal in theUnited Kingdom , however, there is a need to maximize both clinical research and patient benefit in a safe, cautious and ethical manner so that those patients for whom medical cannabis is shown to be effective can access it. Currently, a new piece of legislation is in discussion, which aims to improve access to cannabinoid-based medicine through two measures: (1) expanding the ability to prescribe these products to General Practitioners (GPs) who are registered with theGeneral Medical Council and (2) establishing a commission for the assessment of cannabinoid-based medicinal products. The bill is sitting for the session ofMay 6 at theHouse of Commons . The department of health and social care announced that trials of medical cannabis in theUK will begin "as soon as possible." The Government'sNational Institute for Health Research oversees the studies, which will study the effects of medical cannabis on epilepsy.
Acquisitions and synergies.
We have grown, and strive to continue to expand our business, through a combination of organic growth and acquisition. While we continue to execute against our strategic initiatives that we believe will result the in 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 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. For the nine months endedFebruary 28, 2022 , we incurred$42.9 million of transaction costs. 25 -------------------------------------------------------------------------------- In connection with the Arrangement, we committed to achieving at least$80 million of synergies in connection with the integration ofTilray and Aphria and developed a robust plan and timeline to achieve such synergies. In executing our integration plan, we evaluated and optimized the organizational structure, evaluated and retained the talent and capabilities we identified as necessary to achieve our longer-term growth plan and vision, reviewed contracts and arrangements, and analyzed our supply chain and our strategic partnerships. During the nine months endedFebruary 28, 2022 , we have executed on a series of synergistic actions, which included:
• We entered into a termination and settlement agreement with ABG Intermediate
Holdings 2, LLC ("ABG") and certain of its affiliates whereby we terminated
the license to use certain trademarks and the obligation to pay associated
royalties. Pursuant to this settlement agreement, we terminated
million in remaining guaranteed royalty payments owed to ABG in exchange for
the payment of a
• We continued efforts to close down the legacy-Tilray Canadian facilities in
and products in
the lease term of the
to a lease amendment that is intended to provide the Company with additional
time to facilitate a disposition of the facility. On
Company entered into a sale agreement for the
CAD
Note 24.
• We rightsized our real-estate portfolio to match our changing business needs
through our site rationalizations and through the reduction of our
commercial office space. Specifically, we reduced our redundant commercial
office space by terminating a
Additionally, we sold two vacant land properties adjacent to our
a purchase price of
in
Due to the Company's decisive and impactful actions in connection with the integration ofTilray and Aphria, we are on track to achieve the identified$80 million of cost synergies 5 months earlier than previously projected. As of the date of this filing, we achieved$76 million in cost-savings on a run-rate basis and$42 million in actual cash-savings. Additionally, we have identified an additional$20 million of synergies, bringing the total identified synergies to$100 million , which we expect to achieve by the end of our fiscal year endedMay 31, 2023 to drive further stockholder value.
During the nine months ended
• The acquisition of
brand located in
bourbon whiskey collection and innovative craft spirits portfolio.
of
net revenue mix. In addition to acquiring a strong brand and accretive
business, this strategic acquisition delivers additional scale in the
beverage alcohol category and further positions
infrastructure and a larger footprint in the U.S. market upon federal
cannabis legalization. When federally permissible,
acquisition of
and innovative products through the development of non-alcoholic distilled
spirits, including bourbon whisky, that is infused with cannabis.
• The purchase of the previously leased SweetWater Brewing facility and
taproom located in
ownership of its state-of-the-art brewing facility and integrated restaurant
and live music venue.
• Building upon SweetWaters's strategic plan to expand into all 50 states
within the
acquisition was completed shortly after SweetWater announced plans to move
into a 32,450-square-foot production facility in
recently acquired, which also includes a 10,000-square-foot taproom. We
believe that these initiatives, coupled with SweetWater's new taproom inside
further distribute to the
Lastly, onMarch 3, 2022 ,Tilray announced a proposed agreement for a potential strategic alliance with HEXO Corp. ("HEXO"). Through this potential alliance, both companies would be expected to realize commercial benefits with production efficiencies and support services. The Company would also acquire up to$211 million of senior secured convertible notes ("Notes") that were issued by HEXO and are currently held by funds affiliated withHT Investments MA LLC . The Notes would be amended to permit the Company to exercise conversion rights and potentially acquire a significant equity ownership position in HEXO. In connection with the proposed agreement, the Company would agree to amend and restate the indenture governing the Notes, to among other things, (i) extend the maturity date by three years, toMay 1, 2026 ; (ii) provide for the revised interest amounts; and (iii) amend or eliminate certain affirmative and negative covenants. The Notes will also provide the Company with subscription rights and top-up rights in respect of all future 26 -------------------------------------------------------------------------------- equity and debt issuances by HEXO following closing. The proposed transaction is subject to satisfactory completion of due diligence, negotiation of definitive agreements and satisfaction of a number of conditions precedent to closing.
The Coronavirus ("COVID-19") Pandemic, Its Impact on Us
We continuously address the effects of the COVID-19 pandemic, a discussion of
which is available in sections entitled "Risk Factors" in Item 1A of Part I and
"The Coronavirus ("COVID-19") Pandemic, Its Impact on Us" in Item 7 of our
Annual Report on Form 10-K for the fiscal year ended May 31, 2021 .
During the three and nine months ended
Our Canadian adult-use cannabis business continued to experience the effect of the changes in consumer demand that were established during the onset of COVID-19 pandemic and periods of lockdown. As we previously reported, consumers shifted their demand behavior to purchasing elections based primarily on pricing. This consumer model of purchasing eroded the sales of our higher quality, higher priced brands resulting in our market share reduction during the period. Our Canadian medical cannabis business experienced a slight uptick in patient demand. In our international cannabis business, we continue to see access to physician practices remains limited due to protective measures in place throughoutGermany , slowing down the adoption of medical cannabis as an innovative treatment option. Our distribution business experienced slight improvement in the global supply chain disrupted by the COVID-19 pandemic resulting in a modest increase in net revenue in its base currency but due to the impact of change in the exchange rate between the US dollar and the Euro, the Company recognized a decrease in sales from the prior year's comparable period. Our beer and alcohol business continues to see a decline in on-premise business primarily as the on-premise industry dealt with a lack of staffing and a change demand pattern related to after work alcohol consumption. The continued impact of the COVID-19 pandemic has hampered revenue growth in our main consumer facing markets. Within the hemp food segment of our business, we continue to navigate the changes with growth in ecommerce and "click + pickup" channels offsetting declines in traditional retailer channels as consumer shopping behaviors shift. Our business and operating results for the three and nine months endedFebruary 28, 2022 continue to be impacted by the COVID-19 pandemic, including Delta and Omicron variants. The COVID-19 pandemic remains highly volatile, and the responses of local governments based on numbers of new cases, disease severity, risk of reinfection, and vaccine performance continue are unpredictable. We cannot accurately predict the duration or extent of the impact of the COVID-19 virus. We will continue to assess our operations and will continue to consider the guidance of local governments throughout the world. If economic conditions caused by the pandemic do not recover as currently estimated by management or market factors currently in place change, there could be a further impact on our results of operations, financial condition and cash flows from operations. 27 --------------------------------------------------------------------------------
Results of Operations
Our consolidated results, in thousands except for per share data, are as
follows:
For the three months For the nine months
ended February 28, Change % Change ended February 28, Change % Change
(in thousands of U.S.
dollars) 2022 2021 2022 vs. 2021 2022 2021 2022 vs. 2021
Net revenue $ 151,871 $ 123,900 $ 27,971 23 % $ 475,047 $ 370,849 $ 104,198 28 %
Cost of goods sold 112,042 93,444 18,598 20 % 351,497 270,165 81,332 30 %
Gross profit 39,829 30,456 9,373 31 % 123,550 100,684 22,866 23 %
Operating expenses:
General and 38,445 24,491 13,954 57 % 121,401 78,736 42,665 54 %
administrative
Selling 8,641 6,155 2,486 40 % 25,283 18,051 7,232 40 %
Amortization 24,590 10,786 13,804 128 % 84,345 19,121 65,224 341 %
Marketing and 7,578 3,259 4,319 133 % 20,163 12,436 7,727 62 %
promotion
Research and 164 127 37 29 % 1,464 472 992 210 %
development
Transaction costs 9,238 9,688 (450 ) (5 %) 42,937 30,352 12,585 41 %
Total operating 59,591 54,506 5,085 9 % 295,593 159,168 136,425 86 %
expenses
Operating loss (19,762 ) (24,050 ) 4,288 (18 %) (142,978 ) (58,484 ) (84,494 ) 144 %
Interest expense, net (2,312 ) (7,943 ) 5,631 (71 %) (22,422 ) (18,511 ) (3,911 ) 21 %
Non-operating 72,719 (220,340 ) 293,059 (133 %) 186,329 (306,348 ) 492,677 (161 %)
(expense) income, net
Income (loss) before 50,645 (252,333 ) 302,978 (120 %) 20,929 (383,343 ) 404,272 (105 %)
income taxes
Income taxes (1,830 ) 6,310 (8,140 ) (129 %) (2,739 ) (13,707 ) 10,968 (80 %)
(recovery)
Net income (loss) 52,475 (258,643 ) 311,118 (120 %) 23,668 (369,636 ) 393,304 (106 %)
28--------------------------------------------------------------------------------
Key Operating Metrics
We use the following key operating metrics 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 key operating metrics 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 nine months
ended February 28, ended February 28,
(in thousands of U.S. dollars) 2022 2021 2022 2021
Net cannabis revenue $ 55,045 $ 41,721 $ 184,269 $ 147,689
Net beverage alcohol revenue 19,597 11,942 48,765 12,652
Distribution revenue 62,532 70,237 198,587 210,508
Wellness revenue 14,697 NA 43,426 NA
Cannabis gross margin 33 % 39 % 34 % 45 %
Cannabis adjusted gross margin (1) 33 % 39 % 40 % 45 %
Beverage alcohol gross margin 59 % 41 % 58 % 42 %
Distribution gross margin 8 % 13 % 10 % 14 %
Wellness gross margin 36 % NA 30 % NA
Adjusted EBITDA (1) 10,086 9,367 36,543 27,576
Cash and cash equivalents 279,214 210,591 279,214 210,591
Working capital 413,358 331,923 413,358 331,923
Free cash flow (1) (47,742 ) (3,372 ) (173,682 ) (80,290 )
Adjusted free cash flow (1) (35,600 ) 6,316 (105,030 ) (49,938 )
(1) Cannabis adjusted gross margin, adjusted EBITDA, free cash flow, and adjusted free cash flow are non-GAAP financial measures. See "Use of Non-GAAP Measures" below for a reconciliation of these Non-GAAP Measures to our most comparable GAAP measure. NA=This reporting segment did not exist in the prior year period. The related acquisition occurred thereafter.
Segment Reporting
Management updated our reporting segments during the three and nine months endedFebruary 28, 2022 . While the Company reported "business under development" as a fifth reporting segment in its previous Annual Report, management determined that this no longer met the definition of a reporting segment. Our reporting segments revenue is primarily comprised of revenues from our cannabis, distribution, beverage alcohol operations, and wellness, as follows: For the three months For the nine months endedFebruary 28 , Change
% Change ended
2021 2022 vs. 2021 2022 2021 2022 vs. 2021
Cannabis business $ 55,045 $ 41,721 $ 13,324 32 % $ 184,269 $ 147,689 $ 36,580 25 %
Distribution business 62,532 70,237 (7,705 ) (11 %) 198,587 210,508 (11,921 ) (6 %)
Beverage alcohol business 19,597 11,942 7,655 64 % 48,765 12,652 36,113 285 %
Wellness business 14,697 - 14,697 NM 43,426 - 43,426 NM
Total net revenue $ 151,871 $ 123,900 $ 27,971 23 % $ 475,047 $ 370,849 $ 104,198 28 %
Our geographic revenue is, as follows:
For the three months For the nine months
ended February 28 , Change
% Change ended
2021 2022 vs. 2021 2022 2021 2022 vs. 2021
North America $ 73,234 $ 54,190 $ 19,044 35 % $ 236,220 $ 159,857 $ 76,363 48 %
EMEA 74,671 68,701 5,970 9 % 225,596 207,492 18,104 9 %
Rest of World 3,966 1,009 2,957 293 % 13,231 3,500 9,731 278 %
Total net revenue $ 151,871 $ 123,900 $ 27,971 23 % $ 475,047 $ 370,849 $ 104,198 28 %
29--------------------------------------------------------------------------------
Our geographic capital assets are, as follows:
Change % Change
February 28, May 31,
(in thousands of U.S. dollars) 2022 2021 2022 vs. 2021
North America $ 472,096 $ 504,575 $ (32,479 ) (6 %)
EMEA 127,482 140,838 (13,356 ) (9 %)
Rest of World 3,894 5,285 (1,391 ) (26 %)
Total capital assets $ 603,472 $ 650,698 $ (47,226 ) (7 %)
Cannabis revenue
Cannabis revenue based on market channel is, as follows:
For the three months For the nine months
ended February 28, Change % Change ended February 28, Change % Change
(in thousands of US dollars) 2022 2021 2022 vs. 2021 2022 2021 2022 vs. 2021
Revenue from Canadian medical
cannabis $ 7,050 $ 5,931 $ 1,119 19 % $ 23,353 $ 18,571 $ 4,782 26 %
products
Revenue from Canadian adult-use
cannabis 43,504 48,097 $ (4,593 ) (10 %) 162,632 163,220
products
Revenue from wholesale cannabis 2,804 1,327
111 % 6,763 6,559$ 204 3 %
products
Revenue from international cannabis 15,820 347$ 15,473 4,459 % 39,792 4,627$ 35,165 760 %
products
Total cannabis revenue 69,178 55,702$ 13,476 24 % 232,540 192,977$ 39,563 21 % Excise taxes (14,133 ) (13,981 )$ (152 ) 1 % (48,271 ) (45,288 )$ (2,983 ) 7 %
Total cannabis net revenue
32 %$ 184,269 $ 147,689 $ 36,580 25 % Revenue from Canadian medical cannabis products: Revenue from Canadian medical cannabis products increased 19% to$7.1 million and 26% to$23.4 million for the three and nine months endedFebruary 28, 2022 , compared to revenue of$5.9 million and$18.6 million for the prior year same periods. This increase in revenue from medical cannabis products is primarily driven by the contributions of legacyTilray's medical cannabis business resulting from the business combination ofApril 30, 2021 . The increase is also due to new innovative product launches, including our new brand Symbios launched earlier in the year, to address unmet medical needs and to provide patients with more choices in managing their health conditions with medical products. This increase was partially offset by the limitations caused by the COVID-19 pandemic from patients unable or unwilling to see a doctor as well as increased competition from the adult-rec and the price compression therein. Revenue from Canadian adult-use cannabis products: During the three and nine months endedFebruary 28, 2022 , our gross revenue from Canadian adult-use cannabis product decreased 10% to$43.5 million and decreased to$162.6 million compared to revenue of$48.1 million and$163.2 million for the prior year same periods. The decrease in gross revenue from Canadian adult-use cannabis is primarily driven by the following series of factors:
• We continued to experience the residual impact of the COVID-19 pandemic in
relation to consumer behaviors through their heightened sensitivity to
price and appetite for sacrificing brand loyalty to save costs;
• We continued to experience disruptions to consumer's purchasing patterns as
a result of the COVID-19 pandemic. The decline was partially driven by the
government lockdowns reinstated in
as well as vaccine passport requirements to shop in retail stores in
Quebec , reducing consumer's accessibility to our products; and
• We also experienced additional declines in average gross selling price due
to increased price-based competition in the more recent months from
increased competition in the market. During the three months ended February
28, 2022, we maintained our market leadership but experienced a decline in
market share to 10.2% from 12.8% at November 30, 2021 as a result of these
factors.
• These factors were partially offset by the impact of the Arrangement, by
including legacy
We continue to focus on expanding our product offerings to accommodate the changes in our adult-use customers, During the first quarter, we completed our first shipments toNunavut, Canada . In the second quarter of 2022, we expanded the terms of our distribution partnership with Rose LifeScience, which will now represent the entireTilray portfolio inQuebec . In addition, we expanded 30 --------------------------------------------------------------------------------
our partnership with
The Company has also announced the planned strategic alliance with HEXO. We plan to leverage this relationship to allow us to identify production efficiencies and generate cost savings.
The nine months decrease in gross revenue is attributable to the same factors as the cause for the decrease in the three months.
Wholesale cannabis revenue: Revenue from wholesale cannabis products increased 111% to$2.8 million and increased 3% to$6.8 million for the three and nine months endedFebruary 28, 2022 compared to revenue of$1.3 million and$6.6 million for the prior year same periods. The Company continues to believe that wholesale cannabis revenue will remain subject to quarter-to-quarter variability and is based on opportunistic sales. International cannabis revenue: Revenue from international cannabis products increased 4,459% to$15.8 million and 760% to$39.8 million for the three and nine months endedFebruary 28, 2022 compared to revenue of$0.3 million and$4.6 million for the prior year same periods. The increase is due to the contributions of legacyTilray's larger international cannabis business as well as newly obtained business to business transactions. InEurope , we believe that, despite continuing COVID-19 pressure, cannabis legalization (both medicinal and adult-use) will continue to gain traction, especially following actions of the German and Maltese governments. We also continue to believe thatTilray remains uniquely positioned to win in these markets with its infrastructure being the only company with EU-GMP cultivation facilities in two countries withinEurope and our demonstrated commitment to the consistency, quality and safety of our products.Germany . During the three and nine months endedFebruary 28, 2022 , we continued to experience deceleration in the growth of our business caused by the COVID-19 pandemic, which resulted in some patients being unable or unwilling to see a doctor. Despite these impacts, we generated 19% revenue growth in connection with our medical cannabis products when compared to the prior quarter.
Australia . We continue to strengthen the reputation of ourTilray medical brand whereby, through a contract with theDepartment of Health inVictoria , 90 children are now participating in a government funded seizure program utilizing our cannabinoid-based medical products, which will continue to the end of calendar year 2024.Malta . We completed our first sale of medical cannabis dried flower inMalta in the quarter, and then in March, we expanded the offering and launched the first EU GMP medical cannabis oil products inMalta . Our EU-GMP medical cannabis products are now available in pharmacies acrossMalta , providing patients with safe and reliable access to high-quality medical cannabis.
Distribution revenue
Revenue from Distribution operations decreased 11% to$62.5 million and 6% to$198.6 million for the three and nine months endedFebruary 28, 2022 compared to revenue of$70.2 million and$210.5 million for the prior year same periods. The decrease in 31 -------------------------------------------------------------------------------- revenue during the three months endedFebruary 28, 2022 is primarily due to the impact of changes in the exchange rate between the Euro and USD totaling a$6.7 million and$14.6 million reduction for the three and nine months endedFebruary 28, 2022 , when compared to prior year same periods. Additionally, the decrease in revenue during the nine months endedFebruary 28, 2022 was also the result of the negative impact of an isolated weather event in Densborn,Germany . Specifically, heavy flooding impacted CC Pharma and forced a business closure for approximately five days leading to a decrease in net revenue in the period of almost$5.0 million . Beverage alcohol revenue Revenue from our Beverage operations increased to$19.6 million and$48.8 million for the three and nine months endedFebruary 28, 2022 compared to revenue of$11.9 million and$12.7 million for the prior year same periods. The increase in the three-month period relates primarily to our acquisition ofBreckenridge onDecember 7, 2021 but also includes an increase of almost$2.0 million in revenues generated by SweetWater. The increase in the nine-month period is consistent with the increase in the three-month period. Earlier in the year, our beverage operations began operating our new brewing facility inColorado and opened a new taproom at theDenver International Airport in connection with its strategic expansion initiative. In addition, we released an extensive new line of innovative products, including seltzers, as well as a new beer offering developed in collaboration with our Canadian cannabis Broken Coast brand and a new vodka soda offering developed in collaboration with our Canadian cannabis Riff brand asTilray continues to strengthen its strategic position in theU.S. by expanding its presence through acquisitions and collaboration with otherTilray cannabis brands. This strategy of leveraging our growing portfolio of brands enables the company to launch THC-based product adjacencies upon federal legalization in theU.S.
Wellness revenue
Included in Wellness revenue is$14.7 million and$43.4 million fromManitoba Harvest, for the three and nine months endedFebruary 28, 2022 . Manitoba Harvest was part of the assets acquired in the Arrangement. There are no comparable revenues in the prior year being presented. 32 --------------------------------------------------------------------------------
Gross profit, gross margin and adjusted gross margin(1) for our reporting segments
Our gross profit and gross margin for the three and nine months ended
(in thousands of For the three months For the nine months U.S. dollars) ended February 28, Change % Change
ended
Cannabis 2022 2021 2022 vs. 2021 2022 2021 2022 vs. 2021
Revenue $ 69,178 $ 55,702 $ 13,476 24 % $ 232,540 $ 192,977 $ 39,563 21 %
Excise taxes (14,133 ) (13,981 ) (152 ) 1 % (48,271 ) (45,288 ) (2,983 ) 7 %
Net revenue 55,045 41,721 13,324 32 % 184,269 147,689 36,580 25 %
Cost of goods sold 37,042 25,373 11,669 46 % 122,492 80,780 41,712 52 %
Gross profit 18,003 16,348 1,655 10 % 61,777 66,909 (5,132 ) (8 %)
Gross margin 33 % 39 % (6 %) (17 %) 34 % 45 % (12 %) (26 %)
Inventory valuation - - - (0%) 12,000 - 12,000 (0%)
adjustments
Adjusted gross 18,003 16,348 1,655 12 % 73,777 66,909 6,868 19 %
profit (1)
Adjusted gross 33 % 39 % (6 %) (17 %) 40 % 45 % (5 %) (12 %)
margin (1)
Distribution
Revenue $ 62,532 $ 70,237 $ (7,705 ) (11 %) $ 198,587 $ 210,508 $ (11,921 ) (6 %)
Excise taxes - - - NM - - - NM
Net revenue 62,532 70,237 (7,705 ) (11 %) 198,587 210,508 (11,921 ) (6 %)
Cost of goods sold 57,566 61,015 (3,449 ) (6 %) 178,093 182,048 (3,955 ) (2 %)
Gross profit 4,966 9,222 (4,256 ) (46 %) 20,494 28,460 (7,966 ) (28 %) Gross margin
8 % 13 % (5 %) (40 %) 10 % 14 % (3 %) (24 %)
Beverage alcohol
Revenue $ 20,473 $ 12,358 $ 8,115 66 % $ 51,500 $ 13,112 $ 38,388 NM
Excise taxes (876 ) (416 ) (460 ) 111 % (2,735 ) (460 ) (2,275 ) NM
Net revenue 19,597 11,942 7,655 64 % 48,765 12,652 36,113 NM
Cost of goods sold 8,091 7,056 1,035 15 % 20,674 7,337 13,337 NM
Gross profit 11,506 4,886 6,620 135 % 28,091 5,315 22,776 NM
Gross margin 59 % 41 % 18 % 44 % 58 % 42 % 16 % 37 %
Wellness
Revenue $ 14,697 $ - $ 14,697 NM $ 43,426 $ - $ 43,426 NM
Excise taxes - - - NM - - - NM
Net revenue 14,697 - 14,697 NM 43,426 - 43,426 NM
Cost of goods sold 9,343 - 9,343 NM 30,238 - 30,238 NM
Gross profit 5,354 - 5,354 NM 13,188 - 13,188 NM
Gross margin 36 % - % 36 % NM 30 % - % 30 % NM
Total
Revenue $ 166,880 $ 138,297 $ 28,583 21 % $ 526,053 $ 416,597 $ 109,456 26 %
Excise taxes (15,009 ) (14,397 ) (612 ) 4 % (51,006 ) (45,748 ) (5,258 ) 11 %
Net revenue 151,871 123,900 27,971 23 % 475,047 370,849 104,198 28 %
Cost of goods sold 112,042 93,444 18,598 20 % 351,497 270,165 81,332 30 %
Gross profit 39,829 30,456 9,373 31 % 123,550 100,684 22,866 23 %
Gross margin 26 % 25 % 2 % 7 % 26 % 27 % (1 %) (4 %)
Inventory valuation - - - (0%) 12,000 - 12,000 (0%)
adjustments
Adjusted gross 39,829 30,456 9,373 31 % 135,550 100,684 34,866 35 %
profit (1)
Adjusted gross 26 % 25 % 2 % 7 % 29 % 27 % 1 % 5 %
margin (1)
(1) Adjusted gross profit is our Gross profit (adjusted to exclude inventory
valuation adjustments) and adjusted gross margin percentage is our Gross
margin adjusted to exclude inventory valuation adjustments) and are
non-GAAP financial measures. See "Use of Non-GAAP Measures" below foradditional discussion regarding these non-GAAP 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.
Cannabis gross margin: Gross margin decreased during the three and nine months
ended February 28, 2022 to 33% and 34% from 39% and 45% versus the prior year
same periods. The three months' decrease in cannabis gross margin is primarily
related to a single wholesale cannabis sale resulting in revenue of $3.0 and
negative gross profit of $2.6 million , lowering the cannabis gross margin by 7%
solely related to the single transaction. The transaction was a sale of aged
dried cannabis that was nearing the end of its shelf life. In addition, margins
were impacted by our price reduction on vape and pre-rolled products originally
initiated in the prior quarter. The nine months decrease in cannabis gross
margin is a result of selling the acquired legacy-Tilray brands, which had
higher costs to produce, and the Company took an additional non-cash inventory
write down of $12 million in November 2021 . Significant efforts have been
33
--------------------------------------------------------------------------------
taken to reduce the Company's cultivation costs at its legacy-Tilray Canadian
facilities, including announcing the shutdown of both the Enniskillen and
Nanaimo Canadian facilities. In the interim and until the inventory cultivated
at these facilities is depleted, we expect to report lower gross margins until
the inventory cultivated at legacy Aphria facilities replaces these products.
Our European operations continue to work to optimize the cost structure for
their cannabis growing facilities, including working with the Canadian
operations team, all in an effort to continually lower our per unit costs.
Distribution gross margin: Gross margin of 8% and 10% for the three and nine
months ended February 28, 2022 decreased from 13% and 14% from the same periods
in the prior year. These declines were driven by increased costs as the
Company's primary source of products were unable to ship during border closures
and during periods of peak demand. The Company also experienced higher than
normal discounts and returns in the three months ended February 28, 2022 .
Beverage alcohol gross margin: Gross margin of 59% and 58% for the three and
nine months ended February 28, 2022 increased from 41% and 42% from the same
periods in the prior year. These increases are due to the addition of
Breckenridge , and its higher gross margin, during the period and a resurgence of
SweetWater's on-premises activities from the return of indoor dining.
Additionally, we acquired this segment in the final week of the second quarter
of the prior year, which hinders a representative comparison.
Wellness gross margin: Gross margin of 36% and 30% for the three and nine months
ended February 28, 2022 are consistent with the preceding fiscal quarter. We
acquired the wellness business in the Arrangement and did not operate in this
segment during the same periods during prior year.
Operating expenses
For the three months For the nine months
ended February 28, Change % Change ended February 28, Change % Change
(in thousands of US 2022 2021 2022 vs. 2021 2022 2021 2022 vs. 2021
dollars)
General and $ 38,445 $ 24,491 $ 13,954 57 % $ 121,401 $ 78,736 $ 42,665 54 %
administrative
Selling 8,641 6,155 2,486 40 % 25,283 18,051 7,232 40 %
Amortization 24,590 10,786 13,804 128 % 84,345 19,121 65,224 341 %
Marketing and 7,578 3,259 4,319 133 % 20,163 12,436 7,727 62 %
promotion
Research and 164 127 37 29 % 1,464 472 992 210 %
development
Change in fair value
of contingent (29,065 ) - (29,065 ) NM (29,065 ) - (29,065 ) NM
consideration
Transaction costs 9,238 9,688 (450 ) (5 %) 42,937 30,352 12,585 41 %
Total operating $ 59,591 $ 54,506 $ 5,085 9 % $ 266,528 $ 159,168 $ 107,360 67 %
expenses
Operating expenses are comprised of general and administrative, share-based
compensation, selling, amortization, marketing and promotion, research and
development, and transaction costs. These costs increased by $5.1 million and
$107.4 million for the three and nine months ended February 28, 2022 as compared
to the same periods of the prior year. This increase was primarily due to
reporting full quarters of operating expenses for the acquired SweetWater and
legacy-Tilray in fiscal 2022 and Breckenridge beginning on December 7, 2021 ,
including non-cash amortization charges associated with definite life intangible
assets acquired and general and administrative expenses. These increases were
partially offset by a change in fair value of contingent consideration of $29.1
million as a result of a change in the likelihood of achieving specified
earn-out EBITDA targets.
34
--------------------------------------------------------------------------------General and administrative costs
During the three and nine months ended
For the three months For the nine months
ended February 28, Change % Change
ended
2021 2022 vs. 2021 2022 2021 2022 vs. 2021
dollars)
Executive$ 4,238 $ 1,916 $ 2,322 121 %$ 9,565 $ 6,877 $ 2,688 39 %
compensation
Office and general 4,012 3,446 566 16 % 21,755 12,285 9,470 77 % Salaries and wages 14,076 8,888 5,188 58 % 37,536 27,052 10,484 39 % Stock-based 9,355 3,075 6,280 204 % 27,025 11,414 15,611 137 % compensation Insurance 4,835 3,155 1,680 53 % 14,461 9,265 5,196 56 % Professional fees 3,601 2,679 922 34 % 9,669 8,785 884 10 % Gain on sale of (861 ) - (861 ) NM (631 ) - (631 ) NM capital assets Insurance proceeds (4,032 ) - (4,032 ) NM (4,032 ) - (4,032 ) NM Travel and 1,102 654 448 69 % 2,876 1,906 970 51 %
accommodation
Rent 2,119 678 1,441 213 % 3,177 1,152 2,025 176 %
Total general and
administrative$ 38,445 $ 24,491 $ 13,954 57 %$ 121,401 $ 78,736 $ 42,665 54 % costs Executive compensation increased by 121% and 39% in the three months and nine months endedFebruary 28, 2022 , primarily due to an increase in the number of directors and executive level personnel on our board of directors and executive management team following theTilray and Aphria combination, and an increase in base salaries commensurate with the increased complexity of our Company.
Office and general increased by 16% and 77% during the three and nine months
ended
Salaries and wages increased 58% and 39% in the three months and nine months endedFebruary 28, 2022 . The increase is primarily due to additions associated with the aforementioned acquisitions from the prior year. The Company's headcount increased to approximately 1,700 employees as a result of the Arrangement compared to 1,000 employees as ofFebruary 28, 2021 . The Company recognized stock-based compensation expense of$9.4 million and$27.0 million for the three and nine months endedFebruary 28, 2022 compared to$3.1 million and$11.4 million for the same periods in the prior year. The increase is primarily driven by the increased number of employees and the accelerated vesting of certain elements of our stock-based compensation awards related to the Arrangement. Insurance expenses increased by 53% and 56% for the three and nine months endedFebruary 28, 2022 due primarily to our revised directors and officers' insurance policy. This increase reflects an increase in premium rates, as the Company continued with legacy-Tilray's rating history. The Company recognized$4.0 million for the three and nine months endedFebruary 28, 2022 related to insurance recoveries under the Business Interruption and Extra Expense portions of CC Pharma's property insurance.
Selling costs
For the three months endedFebruary 28, 2022 , the Company incurred selling costs of$8.6 million or 5.7% of revenue as compared to$6.2 million and 5.3% of revenue in the prior year same period. For the nine months endedFebruary 28, 2022 , the Company incurred selling costs of$25.3 million or 5.3% of revenue as compared to$18.1 million and 4.9% of revenue in the prior year same 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 increase in selling costs as a percent of revenue in both the three and nine-month periods resulted from incurred costs associated with having both Great North Distributors and Rose Lifesciences as distributors inCanada , a strategic decision intended to increase Canadian cannabis revenue. The increase is mainly driven by the combination of legacy-Tilray . 35 --------------------------------------------------------------------------------
Amortization
The Company incurred non-production related amortization charges of$24.6 million and$84.3 million for the three and nine months endedFebruary 28, 2022 compared to$10.8 million and$19.1 million in the prior year same periods. The increase is associated with the amortization on the acquired definite life intangible assets from SweetWater, legacy-Tilray andBreckenridge .
Marketing and promotion costs
For the three and nine months endedFebruary 28, 2022 , the Company incurred marketing and promotion costs of$7.6 million and$20.2 million as compared to$3.3 million and$12.4 million in the prior year same periods. The increase is mainly driven by the combination of legacy-Tilray .
Research and development
Research and development costs were$0.2 million and$1.5 million during the three and nine months endedFebruary 28, 2022 compared to$0.1 million and$0.5 million in the prior year same periods. These relate to external costs associated with the development of new products. Although the Company spends a significant amount on research and development, the majority of these costs remain in costs of sales, as the Company does not reclassify research and development costs related to the cost of products consumed in research and development activities.
Transaction costs
The three months decrease of 5% is associated with the closing of the SweetWater acquisition in the prior period. The nine months increase of 41% is associated with the solicitation of stockholder votes supporting an increase in the number of authorized common stock shares, transaction closing costs related to the Arrangement, the MedMen Transaction, theBreckenridge transaction and the evaluation of other potential acquisitions and one-time litigation costs.
Non-operating (expense) income, net
Non-operating (expense) income is comprised of:
For the three months For the nine months
ended February 28, Change %
Change ended
2020 2022 vs. 2021 2022 2021 2022 vs. 2021
dollars)
Change in fair value of$ 56,128 $ (213,538 ) $ 269,666 (126 %)$ 151,851 $ (283,881 ) $ 435,732 (153 %) convertible debenture Change in fair value of 21,089 - 21,089 NM 58,802 - 58,802 NM warrant liability Foreign exchange loss (2,548 ) (3,884 ) 1,336 (34 %) (18,452 ) (23,586 ) 5,134 (22 %) Loss on long-term (3,326 ) (2,733 ) (593 ) 22 % (6,834 ) (4,252 ) (2,582 ) 61 % investments Other non-operating 1,376 (185 ) 1,561 (844 %) 962 5,371 (4,409 ) (82 %) (losses) gains, net Total non-operating$ 72,719 $ (220,340 ) $ 293,059 (133 %)$ 186,329 $ (306,348 ) $ 492,677 (161 %) income (expense) For the three and nine months endedFebruary 28, 2022 , the Company recognized a change in fair value of its APHA 24 convertible debentures of$56.1 million and$151.9 million , compared to a change in fair value of$(213.5) million and$(283.9) million for the prior year same periods. The change is driven primarily by the changes in the Company's share price and the change in the trading price of the convertible debentures. Additionally, for the three and nine months endedFebruary 28, 2022 , the Company recognized a change in fair value of its warrants, resulting in a gain of$21.1 million and$58.8 million acquired as part of the Arrangement, also as a result of the change in our share price. Furthermore, for three and nine months endedFebruary 28, 2022 , the Company recognized a loss of$(2.5) million and$(18.5) million , resulting from the changes in foreign exchange rates during the period, compared to losses of$(3.9) million and$(23.6) million for the prior year same periods, largely associated with the strengthening of the US dollar against the Canadian dollar. The remaining other losses relate to changes in fair value in the Company's convertible notes receivable and long-term investments. 36 --------------------------------------------------------------------------------
Use of Non-GAAP Measures
We have included in this report measures of financial performance that are not defined by GAAP. We believe that these measures provide useful information to investors and include these measures in other communications to investors. These non-GAAP measures include: • adjusted gross profit (excluding inventory valuation adjustments), • adjusted gross margin percentage, • adjusted net income (loss), • free cash flow, • adjusted free cash flow, and • adjusted EBITDA. For each of these non-GAAP financial measures, we have provided above or are providing below a reconciliation of the differences between the non-GAAP measure and the most directly comparable GAAP measure, an explanation of why our management and Board of Directors believe the non-GAAP measure provides useful information to investors and any additional purposes for which our management and Board of Directors use the non-GAAP measures. These non-GAAP measures should be viewed in addition to, and not in lieu of, the comparable GAAP measures. All of these non-GAAP financial measures should be considered in addition, and not in lieu of, the financial measures calculated and presented in accordance with accounting principles generally accepted inthe 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.
Reconciliation of Non-GAAP Financial Measures to GAAP Measures
Adjusted net income (loss) and adjusted EBITDA
For the three months For the nine months
ended February 28, Change % Change ended February 28, Change % Change
2022 2021 2022 vs. 2021 2022 2021 2022 vs. 2021
Net income (loss) $ 52,475 $ (258,643 ) $ 311,118 (120 %) $ 23,668 $ (369,636 ) $ 393,304 (106 %)
Adjusted net income (loss)
15 % $ (115,636 ) $ (20,403 ) $ (95,233 ) 467 %
Adjusted EBITDA $ 10,086 $ 9,367 $ 719 8 % $ 36,543 $ 27,576 $ 8,967 33 %
Adjusted net income (loss)
Adjusted net loss represents a non-GAAP financial measure that does not have any
standardized meaning prescribed under GAAP and may not be comparable to similar
measures presented by other companies. Adjusted net income is calculated as net
(loss) income plus (minus) the unrealized loss (gain) on convertible debentures,
a non-cash item, share-based compensation, foreign exchange (loss) gain, all
non-cash items, and transaction costs, costs which will not necessarily continue
in future periods depending on the frequency of additional M&A considered by the
Company. It represents a measure management uses in evaluating operating results
to reduce the impact of the volatility caused by fair value accounting of
instruments associated with our capital structure, that have no impact on
operations. The increase in adjusted net loss is primarily driven by higher net
loss stemming from higher amortization costs associated with the definite lived
assets acquired during the year, the additional general and administrative costs
associated with Tilray for the full quarter and increased non-cash unrealized
loss on changes to the fair value of our convertible debentures.
37
--------------------------------------------------------------------------------
For the three months For the nine months
ended February 28, Change % Change ended February 28, Change % Change
Adjusted net loss reconciliation: 2022 2021 2022 vs. 2021 2022 2021 2022 vs. 2021
Net income (loss) $ 52,475 $ (258,643 ) $ 311,118 (120 %) $ 23,668 $ (369,636 ) $ 393,304 (106 %)
Unrealized (gain) loss on
convertible
debentures (56,128 ) 213,538 (269,666 ) (126 %) (151,851 ) 283,881 (435,732 ) (153 %)
Foreign exchange loss (gain) 2,548 3,884 (1,336 ) (34 %) 18,452 23,586 (5,134 ) (22 %)
Change in fair value of warrant
liability (21,089 ) - (21,089 ) NM (58,802 ) - (58,802 ) NM
Stock-based compensation 9,355 3,075 6,280 204 % 27,025 11,414 15,611 137 %
Change in fair value of contingent
consideration (29,065 ) - (29,065 ) NM (29,065 ) - (29,065 ) NM
Inventory write down - - - NM 12,000 - 12,000 NM
Transaction costs 9,238 9,688 (450 ) (5 %) 42,937 30,352 12,585 41 %
Adjusted net loss $ (32,666 ) $ (28,458 ) $ (4,208 ) 15 % $ (115,636 ) $ (20,403 ) $ (95,233 ) 467 %
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) income before income taxes, net interest expense, depreciation and
amortization, equity in net loss of equity-method investees, inventory write
downs, stock-based compensation, integration activities, transaction costs,
unrealized currency gains and losses and other adjustments.
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 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.
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 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 the period ended February 28, 2022 , adjusted EBITDA increased primarily from
favorable effects of new lines of business, offset by the inclusion of legacy
Tilray's cannabis business, while we work to achieve our synergies plan, as
follows:
For the three months For the nine months
ended February 28, Change % Change ended February 28, Change % Change
Adjusted EBITDA reconciliation: 2022 2021 2022 vs. 2021 2022 2021 2022 vs. 2021
Net income (loss) $ 52,475 $ (258,643 ) $ 311,118 (120 %) $ 23,668 $ (369,636 ) $ 393,304 (106 %)
Income taxes (1,830 ) 6,310 (8,140 ) (129 %) (2,739 ) (13,707 ) 10,968 (80 %)
Interest expense, net 2,312 7,943 (5,631 ) (71 %) 22,422 18,511 3,911 21 %
Non-operating expense (income), (72,719 ) 220,340 (293,059 ) (133 %) (186,329 ) 306,348 (492,677 ) (161 %)
net
Amortization 37,020 20,282 16,738 83 % 113,824 43,292 70,532 163 %
Stock-based compensation 9,355 3,075 6,280 204 % 27,025 11,414 15,611 137 %
Change in fair value of contingent (29,065 ) - (29,065 ) NM (29,065 ) - (29,065 ) NM
consideration
Facility start-up and closure 2,500 - 2,500 NM 10,400 - 10,400 NM costs Lease expense 800 372 428 115 % 2,400 1,002 1,398 140 % Inventory write down - - - NM 12,000 - 12,000 NM Transaction costs 9,238 9,688 (450 ) (5 %) 42,937 30,352 12,585 41 % Adjusted EBITDA$ 10,086 $ 9,367 $ 719 8 %$ 36,543 $ 27,576 $ 8,967 33 % 38
-------------------------------------------------------------------------------- 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:
• 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.
• Interest expense and loss on disposal of property and equipment to reflect
ongoing operating activities;
• 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;
• Non-cash amortization and 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, which has been, and will continue to be
for the foreseeable future, a significant recurring expense in our
business and an important part of our compensation strategy;
• Non-cash inventory valuation adjustments;
• Non-cash loss from equity method investments;
• Costs incurred to start up new facilities and/or to close facilities in
Nanaimo, Canada andEnniskillen, Canada ; • Lease expense; • Non-cash inventory write down; and
• Transaction costs associated with current and future business acquisitions.
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 make acquisitions. OnMarch 3, 2021 , we entered into an at the market offering arrangement (the ATM Program) pursuant to which we may offer and sell common stock having an aggregate offering price of up to$400 million . The ATM Program is intended to strengthen our balance sheet and improve our liquidity position (refer to Part I, Financial Information, Note 24 Subsequent Events of this interim report). In addition, the Company may from time to time use excess cash to repurchase its outstanding convertible debentures in open market transactions. We believe that existing cash, cash equivalents, short-term investments and cash generated by operations, together with expected proceeds from the ATM Program and access to external sources of funds, will be sufficient to meet our domestic and foreign capital needs in the foreseeable future.
The following table sets forth the major components of our statements of cash flows for the periods presented:
For the nine months
ended February 28,
2022 2021
Net cash used in operating activities $ (156,738 ) $ (52,966 )
Net cash used in investing activities $ (16,618 ) $ (303,082 )
Net cash (used in) provided by financing activities $ (33,612 ) $ 187,184
Effect on cash of foreign currency translation $ (2,284 ) $ 18,809
Cash and cash equivalents, beginning of period $ 488,466 $ 360,646
Cash and cash equivalents, end of period $ 279,214 $ 210,591
Decrease in cash and cash equivalents$ (209,252 ) $ (150,055 )
Cash flows from operating activities
The change in net cash used in operating activities during the nine months endedFebruary 28, 2022 compared to the prior year same period is primarily related to payments associated with the Arrangement, income taxes at Aphria Diamond, investments in inventory and settlement of accounts payable and accrued liabilities in the period. 39 --------------------------------------------------------------------------------
Cash flows from investing activities
The change in net cash used in investing activities in the first three fiscal quarters of 2022 as compared to the first three fiscal quarters of 2021 is primarily due to the disbursement of cash used for the SweetWater acquisition in fiscal year 2021.
Cash flows from financing activities
The change in cash used in financing activities in the first three fiscal quarters of 2022 as compared to the first three fiscal quarters of 2021 is primarily due to an early payment on SweetWater's term loan facility in fiscal year 2022, and the share capital and debt financings completed in fiscal year 2021 that did not recur in fiscal year 2022.
Free cash flow and adjusted free cash flow
Free cash flow and adjusted free cash flow are non-GAAP measures. Free cash flow
is relevant to management and investors, because it represents the cash flow
available to the Company to repay creditors or potentially make distributions to
investors. The measure is comprised of two GAAP amounts deducted from each other
which are net cash flow used in operating activities less investments, net of
proceeds from disposals, in capital and intangible assets. Adjusted free cash
flow removes the cash impact of acquisitions from free cash flow. Our free cash
flow and adjusted free cash flow were, as follows:
For the three months For the nine months
ended February 28, Change % Change ended February 28, Change % Change
Free cash flow 2022 2021 2022 vs. 2021 2022 2021 2022 vs. 2021
Net cash provided by (used in)
operating
activities $ (46,390 ) $ 696 $ (47,086 ) (6,765 %) $ (156,738 ) $ (52,966 ) $ (103,772 ) 196 %
Less: investments in capital
and intangible
assets, net (1,352 ) (4,068 ) 2,716 (67 %) (16,944 ) (27,324 ) 10,380 (38 %)
Free cash flow $ (47,742 ) $ (3,372 ) $ (44,370 )
1,316 %
12,142 9,688 2,454 25 % 68,652 30,352 38,300 126 %acquisitions
Adjusted free cash flow$ (35,600 ) $ 6,316 $ (41,916 ) (664 %)$ (105,030 ) $ (49,938 ) $ (55,092 ) 110 %
Subsequent Events
Refer to Part I, Financial Information, Note 24 Subsequent Events of this interim report.
Off Balance Sheet Arrangements
At
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 Policies
Our financial statements are prepared in accordance with accounting principles generally accepted inthe 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 policies 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 endedMay 31, 2021 . 40 --------------------------------------------------------------------------------
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 2 - 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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