TILRAY BRANDS, INC. The following Management's Discussion and Analysis of Financial Condition and Results of Operations is intended to help the reader understand our operations and our present business environment from the perspective of management. You should read the following discussion and analysis of our financial condition and results of operations together with the "Cautionary Note Regarding Forward-Looking Statements"; the sections in Part I entitled "Item 1A. Risk Factors" and the financial information and the notes thereto included in Part II, Item 8 of this Form 10-K in this Annual Report for the fiscal year endedMay 31, 2022 ("Annual Report"). We use certain non-GAAP measures that are more fully described below under the caption "-Use of Non-GAAP Measures," which we believe are appropriate supplemental non-GAAP measures to evaluate our business and operations, measure our performance, identify trends affecting our business, project our future performance, and make strategic decisions.
Amounts are presented in thousands of
Company Overview
We are a leading global cannabis-lifestyle and consumer packaged goods company headquartered inLeamington andNew York , with operations inCanada ,the United States ,Europe ,Australia , andLatin 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 inCanada 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, drive category management leadership and assess growth opportunities with the introduction of innovative new products. In addition, we are relentlessly focused on managing our cost of goods and expenses in order to maintain our strong financial position.
Trends and Other Factors Affecting Our Business
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 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. We also continue to believe thatTilray remains uniquely positioned to win in these markets with its infrastructure 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, which aims to regulate the controlled dispensing of cannabis for adult-use consumption. In June, a consultation process initiated by the federal Government entitled "Cannabis - but safe!" marked a first milestone on the way to the first draft of the new law, the publication of which Health MinisterKarl Lauterbach has announced for the Fall of 2022.Tilray is well-positioned inGermany to provide consistent and sustainable cannabis products for the adult-use market whereby we can satisfy any demand in our Aphria RX facility located in Neumunster and our EU-GMP-certified production facility inPortugal .
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Although commercial sales are still forbidden, such achievement marks an
important cornerstone for the cannabis industry in
Luxembourg. The government stated intentions to legalize adult-use cannabis in
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. InJune 2022 , the Lower House justice panel approved a bill legalizing the cultivation of up to four cannabis plants for personal use. The general discussion on the draft law on the self-cultivation of cannabis for personal use and the reduction of penalties for minor offenses in theHouse of Representatives has been ongoing since June. 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. InJune 2022 , the Swiss Government decided to lift the ban on cannabis for medical use fromAugust 1, 2022 , facilitating access to cannabis for medical use for patients who will no longer need to seek exceptional permission from the health ministry.Spain . The Spanish Congress' Health Committee has recently approved a Medical Cannabis Report that paves the way for a government-sponsored bill on medical cannabis. The Report explicitly opens the door to standardized preparations other than the drugs already approved, highlighting their advantages in relation to safety, security, and stability; as well as the possibility to prescribe medical cannabis in community pharmacies and not only in hospitals, favoring the access to the patients that may need it.France .France launched a two-year pilot experiment to supply approximately 3,000 patients with medical cannabis. To date, approximately 1,500 patients are enrolled in the experiment. An official statute for medical cannabis is expected to be issued in the Fall 2022, which will facilitate better access, coverage, and greater inclusion for French patients.Tilray supplies the products for this experiment from its EU-GMP facility inPortugal .
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 in the long-term, sustainable growth and value to our stockholders, we continue to evaluate potential acquisitions and other strategic transactions of businesses that we believe complement our existing portfolio, infrastructure and capabilities or provide us with the opportunity to enter attractive new geographic markets and product categories as well as expand our existing capabilities. 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 year endedMay 31, 2022 , we incurred$31.7 million of transaction costs.
• In connection with the Tilray-Aphria merger, we committed to achieving at
least
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 oursupply chain and our strategic partnerships. Due to the Company's decisive
and impactful actions in connection with the integration of
Aphria, we overachieved the identified
before our fiscal year-end. As of the date of this filing, we achieved
million in cost-savings on a run-rate basis and
cash-savings. Additionally, we have identified an additional
of synergies, bringing the total identified synergies to
which we expect to achieve by the end of our fiscal year ending May 31,
2023 to drive further stockholder value.
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• We continued efforts to close down the legacy-Tilray Canadian facilities
in
brands and products in
extend the lease term of the
pursuant to a lease amendment that is intended to provide the Company with
additional time to facilitate a disposition of the facility.
• 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 repudiating a
Additionally, we sold a vacant land property adjacent to our
for a purchase price of
During the year ended
• The acquisition, through a newly formed limited partnership, Superhero
Acquisition Corp. ("Superhero") of an aggregate principal amount of approximatelyU.S. $165.8 million of outstanding senior secured convertible notes and the associated warrants, all of which were originally issued by MedMen Enterprises Inc.Tilray's interest in Superhero represents rights to senior secured convertible notes and the associated warrants held by the Superhero.
• The acquisition of
brand located in
award-winning bourbon whiskey collection and innovative craft spirits
portfolio.
cornerstones of
the company's 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 Tilray with
additional infrastructure and a larger footprint in the U.S. market upon
federal cannabis legalization. When federally permissible,
the acquisition of
new 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 Atlanta, Georgia , which provides SweetWater with
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
strategic acquisition was completed shortly after SweetWater announced
plans to move into a 32,450-square-foot production facility in Fort
Collins, Co that it recently acquired, which also includes a
10,000-square-foot taproom. We believe that these initiatives, coupled
with SweetWater's new taproom inside Denver International Airport , will
provide a launch pad for SweetWater to further distribute to the West
Coast .
• Lastly, on
alliance with HEXO Corp. ("HEXO"). Through this alliance, both companies
are expected to achieve substantial cost saving initiatives and production
efficiencies, with a target combined saving of $80 million within two
years to be shared equally between the two companies. Additionally, thecompany acquired 100% of the remaining outstanding principal balance of
HTI for the Amended Note was
on the outstanding principal amount. The conversion price of the HEXO Note
of CAD$0.40 per share, implies that, as of filing, Tilray Brands would
have the right to convert into approximately 48% of the outstanding commonstock of HEXO, on a non-diluted basis. The purchase price was satisfied,
in part, by
unsecured note (the "Tilray Convertible Note") and approximately 33.3
million shares in Class 2 common stock of Tilray Brands .
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The Tilray Convertible Note bears interest at a rate of 4.00% per annum,
calculated and paid on a quarterly basis and matures on
The Coronavirus ("COVID-19") Pandemic, Its Impact on Us
Tilray continues to closely monitor and respond, where possible, to the ongoing COVID-19 pandemic. As the global situation continues to change rapidly, ensuring the well-being of our employees remains one of our top priorities. The Company also remains committed to providing best in class care and service to our valued patients and consumers - facilities continue to remain open and operational with heightened measures in place to protect the health and safety of employees, vendors, partners and their families. The Company is committed to enhancing these measures and implementing other necessary practices as the situation warrants.
COVID-19 impact on our distribution businesses
Our medical distribution businesses located in Densborn,Germany andBuenos Aires, Argentina continue to remain open during the COVID-19 pandemic as they are considered essential services by their local governments. The sales and associated EBITDA for these businesses were negatively impacted by government-imposed restrictions, which included, among others, orders for people to stay at home. This resulted in a general decrease in elective medical procedures and surgeries and in-person medical visits, which in turn resulted in, the Company experiencing and potentially continuing to experience decreases in revenue in its global distribution businesses. Limitations on elective medical procedures and lower frequency patient visits to physicians and pharmacies continue to impact our global distribution businesses as doctors have less opportunity to write new prescriptions. Further, due to government-imposed restrictions, during the course of the fiscal year, there were periods when CC Pharma was not able to source inventory from surrounding countries in sufficient quantities to support its sales demand, which also impacted its revenue.
COVID-19 impact on our cannabis businesses
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 year. 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. Business Acquisitions Acquisition of Sweetwater OnNovember 25, 2020 , the Company, through its wholly-owned subsidiaryFour Twenty Corporation , completed the purchase of all the shares ofSW Brewing Company, LLC which is the holding company of 100% of the common shares of SweetWater, one of the largest independent craft brewers in theU.S. The purchase price consisted of cash consideration of$255,543 , share consideration of 8,232,810 shares, and additional cash consideration of up to$66,000 contingent on SweetWater achieving specified EBITDA targets. The acquisition of SweetWater gave the Company an opportunity to build brand awareness in theU.S. ahead of federal legalization, amongst other objectives.
Acquisition of
On
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Breckenridge, Colorado , known for its award-winning bourbon whiskey collection
and innovative craft spirits portfolio (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.
Results of Operations
Our consolidated results, in millions except for per share data, are as follows:
For the year ended May 31, % Change
2022 2021 2020 2022 vs. 2021 2021 vs. 2020
Net revenue $ 628,372 $ 513,085 $ 405,326 22% 27%
Cost of goods sold 511,555 389,903 309,273 31% 26%
Gross profit 116,817 123,182 96,053 (5%) 28%
Operating expenses:
General and administrative 162,801 111,575 93,789 46% 19%
Selling 34,926 26,576 18,975 31% 40%
Amortization 115,191 35,221 15,138 227% 133%
Marketing and promotion 30,934 17,539 15,266 76% 15%
Research and development 1,518 830 1,916 83% (57%)
Change in fair value of contingent -
consideration (44,650 ) - NM NM
Impairment 378,241 - 50,679 NM (100%)
Litigation costs 16,518 3,251 1,834 408% 77%
Transaction costs 31,739 60,361 2,465 (47%) 2,349%
Total operating expenses 727,218 255,353 200,062 185% 28%
Operating loss (610,401 ) (132,171 ) (104,009 ) 362% 27%
Interest expense, net (27,944 ) (27,977 ) (19,371 ) (0%) 44%
Non-operating income (expense), net 197,671 (184,838 ) 14,195 (207%) (1,402%)
Loss before income taxes (440,674 ) (344,986 ) (109,185 ) 28% 216%
Income taxes (recovery) (6,542 ) (8,972 ) (8,352 ) (27%) 7%
Net loss $ (434,132 ) $ (336,014 ) $ (100,833 ) 29% 233%
Use of Non-GAAP Measures
Throughout this Management's Discussion and Analysis of Financial Condition and
Results of Operations in this Annual Report on Form 10-K, we discuss non-GAAP
financial measures, including reference to:
• gross profit (excluding inventory valuation adjustments and purchase price
allocation ("PPA") step up) and adjusted gross profit,
• cannabis gross margin (excluding inventory valuation adjustments and PPA
step-up) and adjusted cannabis gross profit and margin,
• beverage alcohol gross margin (excluding inventory valuation adjustments
and PPA step-up) and adjusted beverage alcohol gross profit and margin,
• distribution gross margin (excluding inventory valuation adjustments and
PPA step-up) and adjusted distribution gross profit and margin,
• wellness gross margin (excluding inventory valuation adjustments and PPA
step-up) and adjusted wellness gross profit and margin,
• adjusted net income (loss),
• adjusted earnings per share, and
• adjusted EBITDA.
51-------------------------------------------------------------------------------- All these non-GAAP financial measures should be considered in addition to, and not in lieu of, the financial measures calculated and presented in accordance with accounting principles generally accepted 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. Please see "Reconciliation of Non-GAAP Financial Measures to GAAP Measures" below for a reconciliation of such non-GAAP Measures to the most directly comparable GAAP financial measures.
Operating Metrics and Non-GAAP Measures
We use the following operating metrics and non-GAAP measures to evaluate our
business and operations, measure our performance, identify trends affecting our
business, project our future performance, and make strategic decisions. Other
companies, including companies in our industry, may calculate non-GAAP measures
and operating metrics with similar names differently which may reduce their
usefulness as comparative measures.
For the years ended May 31,
2022 2021 2020
Net cannabis revenue $ 237,522 $ 201,392 $ 129,896
Net beverage alcohol revenue 71,492 28,599 -
Distribution revenue 259,747 277,300 275,430
Wellness revenue 59,611 5,794 -
Cannabis cost of sales 194,834 130,511 68,551
Beverage alcohol cost of sales 32,033 12,687 -
Distribution cost of sales 243,231 242,472 240,722
Wellness cost of sales 41,457 4,233 -
Gross profit (excluding inventory valuation
adjustments and step-up) 186,031 143,936 96,053
Cannabis gross margin (excluding inventory
valuation adjustments and step-up) 43.0 % 45.1 % 47.2 %
Beverage gross margin (excluding inventory
valuation adjustments and step-up) 58.3 % 58.6 % -
Distribution gross margin (excluding inventory
valuation adjustments and step-up) 9.2 % 12.6 % 12.6 %
Wellness gross margin (excluding inventory
valuation adjustments and step-up) 30.5 % 26.9 % -
Adjusted EBITDA 48,047 40,771 5,845
Cash and cash equivalents 415,909 488,466 360,646
Working capital 523,161 482,368 461,732
Segment Reporting
Our reportable segments revenue is primarily comprised of revenues from our
cannabis, distribution, wellness and beverage alcohol operations, as follows:
For the year ended May 31,
Change Change
2022 2021 2020 2022 vs. 2021 2021 vs. 2020
Cannabis business $ 237,522 $ 201,392 $ 129,896 $ 36,130 18% $ 71,496 55%
Distribution business 259,747 277,300 275,430 (17,553 ) (6)% 1,870 1%
Beverage alcohol business 71,492 28,599 - 42,893 150% 28,599 0%
Wellness business 59,611 5,794 - 53,817 929% 5,794 0%
$ 628,372 $ 513,085 $ 405,326 $ 115,287 22% $ 107,759 27%
Our geographic revenue is, as follows:
For the year ended May 31,
Change Change
2022 2021 2020 2022 vs. 2021 2021 vs. 2020
North America $ 314,132 $ 229,120 $ 129,663 $ 85,012 37% $ 99,457 77%
EMEA 296,911 279,062 271,291 17,849 6% 7,771 3%
Rest of World 17,329 4,903 4,372 12,426 253% 531 12%
Total $ 628,372 $ 513,085 $ 405,326 $ 115,287 22% $ 107,759 27%
Our geographic capital assets are, as follows:
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For the year ended May 31,
Change
2022 2021 2022 vs. 2021
North America $ 464,370 $ 504,575 $ (40,205 ) (8)%
EMEA $ 119,409 $ 140,838 $ (21,429 ) (15)%
Rest of World $ 3,720 $ 5,285 $ (1,565 ) (30)%
Total $ 587,499 $ 650,698 $ (63,199 ) (10)%
Cannabis revenue
Cannabis revenue based on market channel is, as follows:
Year ended May 31, Change Change
Cannabis revenue by market 2022 2021 2020 2022 vs. 2021
2021 vs. 2020
Revenue from medical cannabis
products $ 30,599 $ 25,539 $ 28,685 $ 5,060 20% $ (3,146 ) (11%)
Revenue from adult-use
cannabis products 209,501 222,930 112,207 (13,429 ) (6)% 110,723 99%
Revenue from wholesale
cannabis products 6,904 6,615 12,585 289 4% (5,970 ) (47)%
Revenue from international
cannabis products 53,887 9,250 - 44,637 483% 9,250 -%
Total cannabis revenue by
market 300,891 264,334 153,477 36,557 14% 110,857 72%
Excise taxes (63,369 ) (62,942 ) (23,581 ) (427 ) 1% (39,361 ) 167%
Total cannabis net revenue by
market $ 237,522 $ 201,392 $ 129,896 $
36,130 18%
Revenue from medical cannabis products: Revenue from Canadian medical cannabis products increased 20% to$30.6 million for the year endedMay 31, 2022 , compared to revenue of$25.5 million for the year endedMay 31, 2021 . 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 onApril 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. On a constant currency basis, medical cannabis revenue would have increased by 22%, or$5.5 million from the prior year. Revenue from adult-use cannabis products: During the year ended,May 31, 2022 , our gross revenue from Canadian adult-use cannabis product decreased 6% to$209.5 million compared to revenue of$222.9 million for the prior year. The decrease in gross revenue from Canadian adult-use cannabis is primarily driven by the following series of factors:
• 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
combat the Omicron variant, as well as vaccine passportrequirements
to shop in retail stores in Quebec , reducing consumer'saccessibility
to our products;
• We also experienced additional declines in average gross selling price
due to increased price-based competition due to the high volume of new
entrants in the market. Due to this increased competition in the
market, we maintained our market leadership for the year, but
experienced a decline in market share to 11.7%, as reported by Hifyre
data; and
• The decrease is also attributable to the decline in the Canadian
dollar from the prior year ended May 31, 2021 . On a constant currency
basis, adult-use cannabis revenue would have decreased by 5%, or $10.4
million from the prior year.
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 of fiscal 2022, 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 now represents 53
-------------------------------------------------------------------------------- the entireTilray portfolio inQuebec . In addition, we expanded our partnership withGreat North Distributors, Inc. to represent the entireTilray portfolio and cover all ofCanada , except forQuebec , using its established network. We also completed the strategic alliance with HEXO onJuly 12, 2022 . We plan to leverage this relationship to allow us to identify production efficiencies and generate cost savings. The alliance will also allowTilray to enter into new product categories by utilizing the manufacturing capabilities of both parties. It is our expectation that as the Canadian adult-use cannabis market continues to mature, there will be consolidation and or reduction in our competitors enabling us to reclaim our market share. We believe that as a market leader, our capabilities will enable us to outlast the competition and successfully evolve with the industry. Wholesale cannabis revenue: Revenue from wholesale cannabis products for the year endedMay 31, 2022 , was$6.9 million as compared to$6.6 million in the year endedMay 31, 2021 . The Company continues to believe that wholesale cannabis revenue will remain subject to quarter-to-quarter variability and is based on opportunistic sales. On a constant currency basis, medical cannabis revenue would have increased by 6%, or$0.4 million from the prior year. International cannabis revenue: Revenue from international cannabis products for the year endedMay 31, 2022 , was$53.9 million compared to$9.3 million in the year endedMay 31, 2021 , an increase of 483%. On a constant currency basis, international cannabis revenue would have increased by 505%, or$47.0 million from the prior year. The increase is, in part, due to the fact that the prior year only included one month of legacyTilray's larger international cannabis business, while the current year reflects a full 12 months of operations. Overall, inEurope , we believe that, despite continuing COVID-19 pressure, cannabis legalization (both medicinal and adult-use) will continue to gain traction. 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 with CC Pharma and our demonstrated commitment to the consistency, quality and safety of our products.Germany . For the year endedMay 31, 2022 , we continued to experience deceleration in the growth of innovative therapy options like medical cannabis caused by the COVID-19 pandemic, which resulted in some patients being unable or unwilling to see a doctor.
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Australia . We continue to strengthen the reputation of our Tilray medical brand
whereby, through a contract with the Department of Health in Victoria , 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 in Malta
during the year ended May 31, 2022 , and in March, we expanded the offering and
launched the first EU GMP medical cannabis oil products in Malta . Our EU-GMP
medical cannabis products are now available in pharmacies across Malta ,
providing patients with safe and reliable access to high-quality medical
cannabis.
Distribution revenue
Revenue from Distribution operations for the year endedMay 31, 2022 was$259.7 million as compared to$277.3 million in the prior year, representing a decrease of 6% on a year over year basis. The decrease in distribution revenue for the year ended as compared to prior year was primarily the result of the decrease in the value of the Euro compared to the US dollar totaling a$28.3 million reduction for the year endedMay 31, 2022 compared toMay 31, 2021 in our CC Pharma business. On a constant currency basis, distribution revenue would have increased by 4% or$10.7 million from the prior year. Revenue for the year endingMay 31, 2022 , was also impacted by heavy flooding impacted CC Pharma which 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 Alcohol operations increased to$71.5 million for the year endedMay 31, 2022 , compared to revenue of$28.6 million in the year endedMay 31, 2021 . The increase is largely driven by the fact that we entered the beverage alcohol space onNovember 25, 2020 , through the acquisition of SweetWater, and thus the prior year comparative only includes 6 months of operations. Further enhancing this increase, the company also acquiredBreckenridge distillery onDecember 7, 2021 , which partially contributed to the year over year increase. Sweetwater revenue increased in the year endedMay 31, 2022 , as we began operating our new brewing facility inColorado and opened a new taproom at theDenver International Airport in connection with our 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 we believe will enable the Company to launch THC-based product adjacencies upon federal legalization in theU.S. Wellness revenue Our wellness revenue consists of$59.6 million from Manitoba Harvest, for the year endedMay 31, 2022 , which is compared to$5.8 million for the prior year ended ofMay 31, 2021 . Manitoba Harvest was part of the assets acquired in the Arrangement onApril 30, 2021 . As a result, the prior period only included one month of operations and thus the large increase in revenue year over year is a result the realization of a full year of operations in the current year. 55 --------------------------------------------------------------------------------
Gross profit and gross margin
Our gross profit and gross margin for the years ended
For the year ended May 31,
Change Change
Cannabis 2022 2021 2020 2022 vs. 2021 2021 vs. 2020
Revenue $ 300,891 $ 264,334 $ 153,477 $ 36,557 $ 110,857
Excise taxes (63,369 ) (62,942 ) (23,581 ) (427 ) (39,361 )
Net revenue 237,522 201,392 129,896 36,130 71,496
Cost of goods sold 194,834 130,511 68,551 64,323 61,960
Gross profit 42,688 70,881 61,345 (28,193 ) 9,536
Gross margin 18 % 35 % 47 % (17 %) (12 %)
Adjustments:
Inventory valuation adjustments 59,500 19,919 - 39,581 19,919
Purchase price accounting step-up - - - - -
Adjusted gross profit (1) 102,188 90,800 61,345 11,388 29,455
Adjusted gross margin (1) 43 % 45 % 47 % (2 %) (2 %)
Distribution
Revenue $ 259,747 $ 277,300 $ 275,430 $ (17,553 ) $ 1,870
Excise taxes - - - - -
Net revenue 259,747 277,300 275,430 (17,553 ) 1,870
Cost of goods sold 243,231 242,472 240,722 759 1,750
Gross profit 16,516 34,828 34,708 (18,312 ) 120
Gross margin 6 % 13 % 13 % (7 %) 0 %
Adjustments:
Inventory valuation adjustments 7,500 - - 7,500 -
Purchase price accounting step-up - - - - -
Adjusted gross profit (1) 24,016 34,828 34,708 (10,812 ) 120
Adjusted gross margin (1) 9 % 13 % 13 % (4 %) 0 %
Beverage alcohol
Revenue $ 74,959 $ 29,661 $ - $ 45,298 $ 29,661
Excise taxes (3,467 ) (1,062 ) - (2,405 ) (1,062 )
Net revenue 71,492 28,599 - 42,893 28,599
Cost of goods sold 32,033 12,687 - 19,346 12,687
Gross profit 39,459 15,912 - 23,547 15,912
Gross margin 55 % 56 % 0 % (1 )% 56 %
Adjustments:
Inventory valuation adjustments - - - - -
Purchase price accounting step-up 2,214 835 - 1,379 835
Adjusted gross profit (1) 41,673 16,747 - 24,926 16,747
Adjusted gross margin (1) 58 % 59 % 0 % (1 )% 59 %
Wellness
Revenue $ 59,611 $ 5,794 $ - $ 53,817 $ 5,794
Excise taxes - - - - -
Net revenue 59,611 5,794 - 53,817 5,794
Cost of goods sold 41,457 4,233 - 37,224 4,233
Gross profit 18,154 1,561 - 16,593 1,561
Gross margin 31 % 27 % 0 % 4 % 27 %
Adjustments:
Inventory valuation adjustments - - - - -
Purchase price accounting step-up - - - - -
Adjusted gross profit (1) 18,154 1,561 - 16,593 1,561
Adjusted gross margin (1) 31 % 27 % 0 % 4 % 27 %
(1) Adjusted gross profit (excluding inventory valuation adjustments) and
adjusted gross margin percentage (excluding inventory valuation adjustments)
are non-GAAP financial measures. For information on how we define and
calculate these non-GAAP financial measures, refer to "Non-GAAP Financial
Measures"
Cannabis gross margin: Gross margin of 18% in the year ended
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inventory quantities of the combined cannabis operations in the prior year
compared to $59.5 million in the current year. Adjusted gross margin of 43%
decreased in the year ended May 31, 2022 , from 45% in the prior year ended May
31, 2021 . This was primarily related to a single wholesale cannabis sale in Q3
of fiscal 2022, resulting in revenue of $3.0 and negative gross profit of $2.6
million , lowering the cannabis gross margin by 1.6% solely related to the single
transaction.
Distribution gross margin: Gross margin of 6% for the year ended May 31, 2022 ,
decreased from 13% the year ended May 31, 2021 . The decrease in gross margin was
primarily due to a write-off of $7.5 million from excess inventory related to
medicines purchased during the peak of the pandemic. These declines were further
driven by increased costs as the Company's primary source of products were
unable to ship during border closures and during periods of peak demand. The
Company also experienced higher than normal discounts and returns during the
year.
Beverage alcohol gross margin: Gross margin of 55% for the year ended May 31,
2022 , decreased from 56% the prior year ended May 31, 2021 . Adjusted gross
margin of 58% decreased in the year ended May 31, 2022 , from 59% in the year
ended May 31, 2021 . Overall, the gross margin and adjusted gross margin was
consistent year over year as COVID-19 impacts have become less prevalent
throughout the year allowing for a more consistent sales mix.
Wellness gross margin: Gross margin of 31% for the year ended May 31, 2022 ,
increased from a gross margin of 27% for the year ended May 31, 2021 . We
acquired the wellness business in the Arrangement on April 30, 2021 , and thus
the prior period comparison only included one month of operations and was less
representative than the full year of operations.
Operating expenses
For the year ended May 31,
Change Change
2022 2021 2020 2022 vs. 2021 2021 vs. 2020
General and administrative
51,226 46 %$ 17,786 19 % Selling 34,926 26,576 18,975 8,350 31 % 7,601 40 % Amortization 115,191 35,221 15,138 79,970 227 % 20,083 133 % Marketing and promotion 30,934 17,539 15,266 13,395 76 % 2,273 15 % Research and development 1,518 830 1,916 688 83 % (1,086 ) (57 %) Change in fair value of contingent consideration (44,650 ) - - (44,650 ) NM - NM Impairment 378,241 - 50,679 378,241 NM (50,679 ) (100 %) Litigation costs 16,518 3,251 1,834 13,267 408 % 1,417 77 % Transaction costs 31,739 60,361 2,465 (28,622 ) (47 %) 57,896 2,349 %$ 727,218 $ 255,353 $ 200,062 $ 471,865 185 %$ 55,291 28 % Total operating expenses for the year endedMay 31, 2022 , increased by$471.9 million to$727.2 million from$255.4 million as compared to prior year. This increase was primarily due to a non-cash impairment of goodwill and intangible assets for$378.2 million . The impact was related to changes in market opportunities, causing a shift in our strategic priorities, and market conditions inclusive of higher rates of borrowing and lower foreign exchange rates. The remaining increase was due to reporting full quarters of operating expenses for the acquired SweetWater and legacy-Tilray business in fiscal 2022 andBreckenridge beginning onDecember 7, 2021 , including non-cash amortization charges associated with definite life intangible assets acquired and general and administrative expenses compared to the year endedMay 31, 2021 . These increases were partially offset by a change in fair value of contingent consideration of$44.7 million as a result of a change in the likelihood of achieving specified earn-out EBITDA targets. 57
--------------------------------------------------------------------------------
General and administrative costs
For the year ended May 31,
Change Change
2022 2021 2020 2022 vs. 2021 2021 vs. 2020
Executive compensation $ 14,128 $ 8,645 $ 6,777 $ 5,483 63 % $ 1,868 28 %
Office and general 27,153 19,503 12,351 7,650 39 % 7,152 58 %
Professional fees 13,047 11,779 14,190 1,268 11 % (2,411 ) (17 %)
Salaries and wages 51,693 37,126 28,252 14,567 39 % 8,874 31 %
Stock-based compensation 35,994 17,351 18,079 18,643 107 % (728 ) (4 %)
Insurance 17,536 12,257 9,370 5,279 43 % 2,887 31 %
Travel and accommodation 4,203 2,711 2,798 1,492 55 % (87 ) (3 %)
Gain on sale of capital assets (682 ) - - (682 ) NM - NM
Insurance proceeds (4,032 ) - - (4,032 ) NM - NM
Rent 3,761 2,203 1,972 1,558 71 % 231 12 %
$ 162,801 $ 111,575 $ 93,789 $ 51,226 46 % $ 17,786 19 %
Executive compensation increased by 63% in the year ended May 31, 2022 compared
to the prior year, primarily due to an increase in the number of directors and
executive level personnel on our board of directors and executive management
team following the Tilray and Aphria combination, and an increase in base
salaries commensurate with the increased complexity of our Company.
Office and general increased by 39% in the year ended May 31, 2022 compared to
the prior year, primarily due to the inclusion of the acquired SweetWater and
legacy-Tilray entities, and the additional one-time costs associated with the
upcoming closure of our Nanaimo, Canada , facility in the amount of $5.0
million .
Salaries and wages increased 39% in the year ended May 31, 2022 compared to the
prior year. 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 which
were included in the Company only for one month in the prior year.
The Company recognized stock-based compensation expense of $36.0 million in the
year ended May 31, 2022 compared to $17.4 million to 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 43% in the year ended May 31, 2022 compared to
the prior year, 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 in the year ended May 31, 2022 related to
insurance recoveries under the business interruption and extra expense portions
of CC Pharma's property insurance.
Selling costs
For the year endedMay 31, 2022 , the Company incurred selling costs of$34.9 million as compared to$26.6 in the prior year. 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 the year 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 . 58 --------------------------------------------------------------------------------
Amortization
The Company incurred non-production related amortization charges of$115.2 million for the year endedMay 31, 2022 compared to$35.2 million in 2021. The increase is largely associated with the amortization on the acquired definite life intangible assets from the SweetWater, legacy-Tilray andBreckenridge acquisitions.
Marketing and promotion cost
For the year endedMay 31, 2022 , the Company incurred marketing and promotion costs of$30.9 million , as compared to$17.5 in the prior year. The increase is mainly driven by the Arrangement.
Research and development
Research and development costs were
Impairment
We incurred impairment expense of$378.2 million on our goodwill and intangible assets during the year endedMay 31, 2022 . The impact was related to changes in market opportunities, causing a shift in our strategic priorities, and market conditions inclusive of higher rates of borrowing and lower foreign exchange rates. The company used a discount rate of 11.21%, terminal growth rate of 5%, and an average revenue growth rate of 46% over 5 years as a result of anticipated federal legalization in various countries. A 1% increase in the discount rate would result in an additional$587 million in impairment, a 1% decrease in the terminal growth rate would result in an additional$457 million in impairment and a 5% decrease in the average revenue growth rate would result in an additional$553 million in impairment. Refer to Part II, Item 8 note 10 "Goodwill" for further details.
Litigation costs
Litigation costs of$16.5 million were expensed during the year endedMay 31, 2022 compared to$3.3 million in the prior year. Litigation costs include fees and expenses incurred in connection with defending and settling ongoing litigation matters, net of any judgments or settlement recoveries received from third parties. See Part I, Item 3 - Legal Proceedings for additional information on significant litigation matters.
Transaction costs
Transaction costs of$31.7 million were expensed during the year endedMay 31, 2022 compared to$60.4 million in the prior year. Transaction costs largely relate to costs associated with solicitation of stockholder votes supporting an increase in the number of authorized common stock shares, transaction closing costs related to the Arrangement, the investment in MedMen Enterprises Inc., theBreckenridge acquisition, the HEXO transaction and the evaluation of other potential acquisitions and integration costs largely associated with these acquisitions.
Non-operating income (expense), net
Year ended May 31,
Change Change
Non-operating items 2022 2021 2020 2022 vs. 2021 2021 vs. 2020
Change in fair value of
convertible debenture $ 163,670 $ (170,453 ) $ 53,611 $ 334,123 (196%) $ (224,064 ) (418%)
Change in fair value of
warrant liability 63,913 1,234 - 62,679 5,079% 1,234 NMForeign exchange (loss) gain (28,383 ) (22,347 ) 6,145
(6,036 ) 27% (28,492 ) (464%)
Loss on long-term investments (6,737 ) (2,352 ) (24,295 )
(4,385 ) 186% 21,943 (90%)
Other non-operating (losses)
gains, net 5,208 9,080 (21,266 ) (3,872 ) (43%) 30,346 (143%)
$ 197,671 $ (184,838 ) $ 14,195 $ 382,509 (207%) $ (199,033 ) (1,402%)
59-------------------------------------------------------------------------------- For the year endedMay 31, 2022 , the Company recognized a gain on the change in fair value of its APHA 24 convertible debentures of$163.7 million , compared to a loss on the change in fair value of$170.5 million for the prior year. 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. For the year endedMay 31, 2022 , the Company recognized a change in fair value of its warrants of$63.9 million compared to a change in fair value of$1.2 million for the prior year. The large increase is a result of the warrant liability being assumed as part of the Arrangement, which is driven also as a result of the change in our share price. Furthermore, for the year endedMay 31, 2022 , the Company recognized a loss of$28.4 million , resulting from the changes in foreign exchange rates during the period, compared to a loss of$22.3 million for the prior year, largely associated with the strengthening of the US dollar against the Canadian dollar. The remaining other losses relate to changes in fair value in the Company's convertible notes receivable and long-term investments.
Reconciliation of Non-GAAP Financial Measures to GAAP Measures
Adjusted net income (loss)
Adjusted net loss represents a non-GAAP financial measure that does not have any standardized meaning prescribed under GAAP and may not be comparable to similar measures presented by other companies. It represents a measure management uses in evaluating operating results to reduce the impact of the volatility caused by fair value accounting of instruments associated with our capital structure, that have no impact on operations. The increase in adjusted net loss is primarily driven by higher amortization costs associated with the definite lived assets acquired during the year, the additional general and administrative costs associated withTilray for the full year and the acquisition ofBreckenridge , increase in marketing and promotion associated withTilray for the full year all offset by higher gross profit. Year ended May 31, Adjusted net income Change Change reconciliation: 2022 2021 2020 2022 vs. 2021 2021 vs. 2020 Net loss$ (434,132 ) $ (336,014 ) $ (100,833 ) $ (98,118 ) 29%$ (235,181 ) 233% Unrealized loss (gain) on convertible debentures (163,670 ) 170,453 - (334,123 ) (196%) 170,453 NM Change in fair value of warrant liability (63,913 ) (1,234 ) - (62,679 ) 5,079% (1,234 ) NM Change in fair value of contingent consideration (44,650 ) - - (44,650 ) NM - NM Foreign exchange loss (gain) 28,383 22,347 (6,145 ) 6,036 27% 28,492 (464%) Inventory valuation adjustment 67,000 19,919 - 47,081 236% 19,919 NM Impairment 378,241 - 50,679 378,241 NM (50,679 ) (100%) Stock-based compensation 35,994 17,351 18,079 18,643 107% (728 ) (4%) Litigation costs 16,518 3,251 1,834 13,267 408% 1,417 77% Transaction costs 31,739 60,361 2,465 (28,622 ) (47%) 57,896 2,349% Adjusted net loss (1)$ (148,490 ) $ (43,566 ) $ (33,921 ) $ (104,924 ) 241%$ (9,645 ) 28% Adjusted net loss per share - basic (1)$ (0.31 ) $ (0.16 ) $ (0.16 ) $ (0.15 ) 91%$ (0.00 ) 3%
(1) Adjusted net loss and adjusted net loss per share - basic represent non-GAAP
financial measures that do not have any standardized meaning prescribed under
GAAP and may not be comparable to similar measures presented by other
companies. It represents a measure management uses in evaluating operating
results. Adjusted net loss per share - basic is calculated by dividing the
adjusted net loss by the weighted average number of common shares - basic.
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, interest expense, net, non-operating expense (income), net, amortization, stock-based compensation, change in fair value of contingent consideration, impairment, inventory valuation adjustments, purchase price accounting step up, facility start-up and closure costs, lease expense, litigation costs and transaction costs.
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 consolidated results of
60
--------------------------------------------------------------------------------operations and financial condition before non-controlling interests. 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 year ended
Year ended May 31,
Change Change
Adjusted EBITDA reconciliation: 2022 2021 2020 2022 vs. 2021 2021 vs. 2020
Net loss $ (434,132 ) $ (336,014 ) $ (100,833 ) $ (98,118 ) 29 % $ (235,181 ) 233 %
Income taxes (6,542 ) (8,972 ) (8,352 ) 2,430 (27 %) (620 ) 7 %
Interest expense, net 27,944 27,977 19,371 (33 ) (0 %) 8,606 44 %
Non-operating expense (income),
net (197,671 ) 184,838 (14,195 ) (382,509 ) (207 %) 199,033 (1402 )%
Amortization 154,592 67,832 35,669 86,760 128 % 32,163 90 %
Stock-based compensation 35,994 17,351 18,079 18,643 107 % (728 ) (4 )%
Change in fair value of
contingent consideration (44,650 ) - - (44,650 ) NM - NM
Impairment 378,241 - 50,679378,241 NM (50,679 ) (100 )% Inventory valuation adjustments 67,000 19,919
- 47,081 236 % 19,919 NM Purchase price accounting step up
2,214 835 - 1,379 165 % 835 NM
Facility start-up and closure
costs 13,700 2,056 - 11,644 566 % 2,056 NM
Lease expense 3,100 1,337 1,128 1,763 132 % 209 19 %
Litigation costs 16,518 3,251 1,834 13,267 408 % 1,417 77 %
Transaction costs 31,739 60,361 2,465 (28,622 ) (47 %) 57,896 2349 %
Adjusted EBITDA $ 48,047 $ 40,771 $ 5,845 $ 7,276 18% $ 34,926 598%
The Company's adjusted EBITDA increased by
61
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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 excludes:
• Non-cash inventory valuation adjustments;
• 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 impairment charges, as the charges are not expected to be a
recurring business activity;
• Non-cash foreign exchange gains or losses, which accounts for the effect
of both realized and unrealized foreign exchange transactions. Unrealized
gains or losses represent foreign exchange revaluation of foreign
denominated monetary assets and liabilities;
• Non-cash change in fair value of warrant liability;
• Interest expense, net;
• Costs incurred to start up new facilities;
• Lease expense, to conform with competitors who report under IFRS;
• Transaction costs includes acquisition related expenses, which vary
significantly by transactions and are excluded to evaluate ongoing
operating results;
• Litigation costs includes costs related to ongoing litigations, legal
settlements and recoveries which are excluded to evaluate ongoing
operating results;
• Amortization of purchase accounting step-up in inventory value included
in costs of sales - product costs; and
• Current and deferred income tax expenses and recoveries, which could be a
significant recurring expense or recovery in our business in the future
and reduce or increase cash available to us.
Critical Accounting Policies and Significant Judgments and Estimates
Our consolidated financial statements are prepared in accordance with accounting principles generally accepted inthe United States of America ("GAAP"). A detailed discussion of our significant accounting policies can be found in Part II, Item 8, Note 3, "Summary of Significant Accounting Policies", and the impact and risks associated with our accounting policies are discussed throughout this Form 10K and in the Notes to the Consolidated Financial Statements. We have identified certain policies and estimates as critical to our business operations and the understanding of our past or present results of operations related to (i) long-term investments and convertible notes receivable, (ii) estimated useful lives, impairment consideration and amortization of capital and intangible assets, (iii) stock-based compensation, (iv) business combinations, (v) convertible debentures and (vi) warrant liability. These policies and estimates are considered critical because they had a material impact, or they have the potential to have a material impact, on our consolidated financial statements and because they require us to make significant judgments, assumptions or estimates. We believe that the estimates, judgments and assumptions made when accounting for the items described below were reasonable, based on information available at the time they were made. Actual results could differ materially from these estimates.
(i) Revenue recognition
Revenue is recognized when the control of the promised goods, through performance obligation, is transferred 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
62
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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, the Company considers the effects of variable consideration and the existence of significant financing components, if any.
Some contracts for the sale of goods 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.
(ii) Valuation of inventory
Refer to Part II, Item 8, Note 3, "Summary of Significant Accounting Policies" for further details on our inventory cost policy. At the end of each reporting period, the Company performs an assessment of inventory and records write-downs for excess and obsolete inventories based on the Company's estimated forecast of product demand, production requirements, market conditions, regulatory environment, and spoilage. Actual inventory losses may differ from management's estimates and such differences could be material to the Company's statements of financial position, statements of loss and comprehensive loss and statements of cash flows. Changes in the regulatory structure, lack of retail distribution locations or lack of consumer demand could result in future inventory reserves.
(iii) Impairment of goodwill and indefinite-lived intangible assets
Goodwill and indefinite-lived intangible assets are tested for impairment annually, or more frequently when events or circumstances indicate that impairment may have occurred. As part of the impairment evaluation, we may elect to perform an assessment of qualitative factors. If this qualitative assessment indicates that it is more likely than not that the fair value of the indefinite-lived intangible asset or the reporting unit (for goodwill) is less than its carrying value, a quantitative impairment test to compare the fair value to the carrying value is performed. An impairment charge is recorded if the carrying value exceeds the fair value. The assessment of whether an indication of impairment exists is performed at the end of each reporting period and requires the application of judgment, historical experience, and external and internal sources of information. We make estimates in determining the future cash flows and discount rates in the quantitative impairment test to compare the fair value to the carrying value.
(iv) Stock-based compensation
We measure and recognize compensation expenses for stock options and restricted
stock units ("RSUs") to employees, directors and consultants on a straight-line
basis over the vesting period based on their grant date fair values. We estimate
the fair value of stock options on the date of grant using the Black-Scholes
option pricing model. The fair value of RSUs is based on the share price as at
the date of grant. We estimate forfeitures at the time of grant and revise these
estimates in subsequent periods if actual forfeitures differ from those
estimates.
Determining the estimated fair value at the grant date requires judgment in
determining the appropriate valuation model and assumptions, including the fair
value of common shares on the grant date, risk-free rate, volatility rate,
annual dividend yield and the expected term. Volatility is estimated by using
the historical volatility of the accounting acquirer and, other companies that
we consider comparable and have trading and volatility history.
63
--------------------------------------------------------------------------------(v) Business combinations and goodwill
We use judgement in applying the acquisition method of accounting for business combinations and estimates to value contingent consideration, identifiable assets and liabilities assumed at the acquisition date. Estimates are used to determine cash flow projections, including the period of future benefit, and future growth and discount rates, among other factors. The values allocated to the acquired assets and liabilities assumed affect the amount of goodwill recorded on acquisition. Fair value of assets acquired and liabilities assumed is typically estimated using an income approach, which is based on the present value of future discounted cash flows. Significant estimates in the discounted cash flow model include the discount rate, rate of future revenue growth and profitability of the acquired business and working capital effects. The discount rate considers the relevant risk associated with the business-specific characteristics and the uncertainty related to the ability to achieve projected cash flows. These estimates and the resulting valuations require significant judgment. Management engages third party experts to assist in the valuation of material acquisitions.
(vi) 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. If the cost of an investment exceeds its fair value, we evaluate, among other factors, general market conditions, credit quality of debt instrument issuers, and the duration and extent to which the fair value is less than cost. Once 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).
(vii) Warrants
Warrants are accounted for in accordance with applicable accounting guidance
provided in ASC Topic 815, Derivatives and Hedging - Contracts in Entity's Own
Equity ("ASC 815"), as either liabilities or as equity instruments depending on
the specific terms of the warrant agreement. Our warrants are classified as
liabilities and are recorded at fair value. The warrants are subject to
remeasurement at each settlement date and at each balance sheet date and any
change in fair value is recognized as a component of change in fair value of
warrant liability in the statements of net loss and comprehensive loss.
Transaction costs allocated to warrants that are presented as a liability are
expensed immediately within transaction costs in the statements of net loss and
comprehensive loss.
We estimate the fair value of the warrant liability using a Black-Scholes
pricing model. We are required to make assumptions and estimates in determining
an appropriate risk-free interest rate, volatility, term, dividend yield,
discount due to exercise restrictions, and the fair value of common stock. Any
significant adjustments to the unobservable inputs would have a direct impact on
the fair value of the warrant liability.
New Standards and Interpretations Applicable Effective
Refer to Part II, Item 8, Note 3, Significant Accounting Policies, of this Form
10-K for additional information on changes in accounting policies. There have
been no new standards or interpretations applicable to the Company during the
period.
64--------------------------------------------------------------------------------
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. In addition, the Company may from time to time use available 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 year
ended
2022 2021 2020
Net cash used in operating activities $ (177,262 ) $ (44,717 ) $ (100,627 )
Net cash provided by (used in) investing activities (21,533 ) 46,105 (69,946 )
Net cash provided by financing activities 128,196 124,308 130,606
Effect on cash of foreign currency translation (1,958 ) 2,124 (6,572 )
Increase (decrease) in cash and cash equivalents (72,557 ) 127,820 (46,539 )
Cash and cash equivalents, beginning of year 488,466 360,646 407,185
Cash and cash equivalents, end of year $ 415,909 $ 488,466 $ 360,646 Cash flows from operating activities
The change in net cash used in operating activities during the year endedMay 31, 2022 , compared to the prior year same period is primarily related to payments associated with the Tilray Aphria merger, litigation costs, income taxes at Aphria Diamond, investments in inventory and settlement of accounts payable and accrued liabilities in the period.
Cash flows from investing activities
Cash (used in) provided by investing activities in 2022 compared to 2021 changed primarily due to the cash acquired in connection with the reverse acquisition ofTilray and the acquisition of SweetWater in the year endedMay 31, 2021 .
Cash flows from financing activities
The change in cash provided by financing activities in 2022 compared to 2021 is primarily due to the ATM financing completed in fiscal year 2022, offset by the early payment on the Company's convertible debentures in fiscal year 2022, and the debt financings completed in fiscal year 2021 that did not recur in fiscal year 2022.
Cash resources and working capital requirements
The Company constantly monitors and manages its cash flows to assess the
liquidity necessary to fund operations. As of
Working capital provides funds for the Company to meet its operational and capital requirements. As ofMay 31, 2022 , the Company maintained working capital of$523.2 million . During the year, the Company amended its bank agreement to remove certain financial covenants in return for maintaining a minimum balance ofC$7.1 million ($5.6 million ) andC$1.4 million ($1.1 million ) in certain Canadian cash operating accounts. We historically financed our operations through the issuance of common stock, sale of convertible notes and revenue generating activities. While we believe we have sufficient cash to meet existing working capital requirements in the short term, we may 65 --------------------------------------------------------------------------------
need additional sources of capital and/or financing, to meet our
Contractual obligations
We lease various facilities, under non-cancelable finance and operating leases,
which expire at various dates through
Year ending May 31 ,
Operating
leases
2023 4,115
2024 3,377
2025 2,782
2026 3,047
Thereafter 6,891
Total minimum lease payments $ 20,212
Less: amounts of leases related to interest payments (2,180 ) Present value of minimum lease payments
18,032
Less: current accrued lease obligation (6,703 ) Obligation recognized $ 11,329
Purchase and other commitments
The Company has payments for long-term debt, convertible debentures, material purchase commitments and constructions commitments, as follows:
Total 2023 2024 2025 2026 2027 Thereafter
Long-term debt repayment $ 187,152 67,823 82,400 4,494 4,092 4,380 23,963
Convertible notes, principal
and interest 489,029 23,102 206,613 259,314 - - -
Material purchase
obligations 32,356 26,948 4,527 881 - - -
Construction commitments 1,108 1,108 - - - - -
Total $ 709,645 $ 118,981 $ 293,540 $ 264,689 $ 4,092 $ 4,380 $ 23,963
Except as disclosed elsewhere in this Part II, Item 7, Management's Discussion
and Analysis of Financial Condition and Results of Operations, there have been
no material changes with respect to the contractual obligations of the Company
during the year-to-date period except for those related to the Company's
acquisitions.
Off Balance Sheet Arrangements
As of
Contingencies
In the normal course of business, we may receive inquiries or become involved in legal disputes regarding various litigation matters. In the opinion of management, any potential liabilities resulting from such claims would not have a material adverse effect on our consolidated financial statements.
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