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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, DC 20549

 

FORM 10-Q

 

 

(Mark One)

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

For the quarterly period ended March 31, 2020 

OR

 

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

For the transition period from                       to

Commission File Number: 001-38594

 

Tilray, Inc.

(Exact Name of Registrant as Specified in its Charter)

 

 

Delaware

 

82-4310622

(State or other jurisdiction of

incorporation or organization)

 

(I.R.S. Employer

Identification No.)

 

1100 Maughan Road

Nanaimo, BC, Canada, V9X IJ2

(Address of principal executive offices)

(Zip Code)

Registrant’s telephone number, including area code: (844) 845-7291

 

Securities registered pursuant to Section 12(b) of the Act:

Title of each class

 

Trading

Symbol(s)

 

Name of each exchange on which registered

Class 2 Common Stock, $0.0001 par value per share

 

TLRY

 

The Nasdaq Global Select Market

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes No

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes No

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer

 

 

Accelerated filer

Non-accelerated filer

 

 

Smaller reporting company

Emerging growth company

 

 

 

 

 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes No

 

As of May 11, 2020, the registrant had 16,666,665 shares of Class 1 Common Stock, $0.0001 par value per share, and 108,195,284 shares of Class 2 Common Stock, $0.0001 par value per share, outstanding.

 

 


Table of Contents

 

 

 

 

Page

PART I.

 

FINANCIAL INFORMATION

 

1

Item 1.

 

Condensed Consolidated Financial Statements (Unaudited)

 

1

 

 

Condensed Consolidated Balance Sheets

 

1

 

 

Condensed Consolidated Statements of Net Loss and Comprehensive Loss

 

2

 

 

Condensed Consolidated Statements of Stockholders’ Equity

 

3

 

 

Condensed Consolidated Statements of Cash Flows

 

4

 

 

Notes to Condensed Consolidated Financial Statements

 

5

Item 2.

 

Management’s Discussion and Analysis of Financial Condition and Results of Operations

 

25

Item 3.

 

Quantitative and Qualitative Disclosures About Market Risk

 

39

Item 4.

 

Controls and Procedures

 

40

PART II.

 

OTHER INFORMATION

 

41

Item 1.

 

Legal Proceedings

 

41

Item 1A.

 

Risk Factors

 

42

Item 2.

 

Unregistered Sales of Equity Securities and Use of Proceeds

 

70

Item 3.

 

Defaults Upon Senior Securities

 

70

Item 4.

 

Mine Safety Disclosures

 

70

Item 5.

 

Other Information

 

70

Item 6.

 

Exhibits

 

71

Signatures

 

73

 

 

 

 

 

i


PART I—FINANCIAL INFORMATION

Item 1. Financial Statements.

TILRAY, INC.

Condensed Consolidated Balance Sheets

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

 

 

 

 

 

 

 

 

 

 

 

 

March 31, 2020

 

 

December 31, 2019

 

Assets

 

 

 

 

 

 

 

 

Current assets

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

173,990

 

 

$

96,791

 

Accounts receivable, net of allowance for credit losses of $595 and provision for sales returns of $1,138 (December 31, 2019 - $615 and $1,400, respectively)

 

 

38,324

 

 

 

36,202

 

Inventory

 

 

95,586

 

 

 

87,861

 

Prepayments and other current assets

 

 

31,066

 

 

 

38,173

 

Total current assets

 

 

338,966

 

 

 

259,027

 

Property and equipment, net

 

 

186,970

 

 

 

184,217

 

Operating lease, right-of-use assets

 

 

18,654

 

 

 

17,514

 

Intangible assets, net

 

 

187,892

 

 

 

228,828

 

Goodwill

 

 

150,870

 

 

 

163,251

 

Equity method investments

 

 

8,827

 

 

 

11,448

 

Other investments

 

 

21,250

 

 

 

24,184

 

Other assets

 

 

2,135

 

 

 

7,861

 

Total assets

 

$

915,564

 

 

$

896,330

 

Liabilities

 

 

 

 

 

 

 

 

Current liabilities

 

 

 

 

 

 

 

 

Accounts payable

 

 

23,907

 

 

 

39,125

 

Accrued expenses and other current liabilities

 

 

47,032

 

 

 

50,829

 

Accrued lease obligations

 

 

3,370

 

 

 

2,473

 

Senior Facility - current

 

 

4,723

 

 

 

 

Warrant liability

 

 

92,339

 

 

 

 

Total current liabilities

 

 

171,371

 

 

 

92,427

 

Accrued lease obligations

 

 

28,538

 

 

 

29,407

 

Deferred tax liability

 

 

48,019

 

 

 

53,363

 

Convertible notes, net of issuance costs

 

 

432,807

 

 

 

430,210

 

Senior Facility, net of transaction costs

 

 

39,106

 

 

 

 

Other liabilities

 

 

5,415

 

 

 

5,652

 

Total liabilities

 

$

725,256

 

 

$

611,059

 

Commitments and contingencies (refer to Note 17)

 

 

 

 

 

 

 

 

Stockholders’ equity

 

 

 

 

 

 

 

 

Class 1 common stock ($0.0001 par value, 250,000,000 shares authorized;

   16,666,665 shares issued and outstanding)

 

 

2

 

 

 

2

 

Class 2 common stock ($0.0001 par value; 500,000,000 shares authorized;

   107,976,818 and 86,114,560 shares issued and outstanding, respectively

 

 

11

 

 

 

9

 

Additional paid-in capital

 

 

840,436

 

 

 

705,671

 

Accumulated other comprehensive (loss) income

 

 

(6,988

)

 

 

9,719

 

Accumulated deficit

 

 

(643,153

)

 

 

(430,130

)

Total stockholders’ equity

 

 

190,308

 

 

 

285,271

 

Total liabilities and stockholders’ equity

 

$

915,564

 

 

$

896,330

 

 

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

1


TILRAY, INC.

Condensed Consolidated Statements of Net Loss and Comprehensive Loss

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

 

 

 

 

 

 

 

 

 

 

 

Three months ended March 31,

 

 

 

2020

 

 

2019

 

Revenue (inclusive of excise duties of $4,972 and $1,559, respectively)

 

$

52,102

 

 

$

23,038

 

Cost of sales

 

 

 

 

 

 

 

 

Product costs

 

 

37,188

 

 

 

17,329

 

Inventory valuation adjustments

 

 

4,044

 

 

 

324

 

Gross profit

 

 

10,870

 

 

 

5,385

 

General and administrative expenses

 

 

17,776

 

 

 

12,934

 

Sales and marketing expenses

 

 

17,876

 

 

 

7,821

 

Research and development expenses

 

 

1,258

 

 

 

1,048

 

Stock-based compensation expenses

 

 

7,677

 

 

 

5,736

 

Depreciation and amortization expenses

 

 

3,591

 

 

 

1,865

 

Impairment of assets

 

 

29,839

 

 

 

 

Acquisition-related expenses, net

 

 

2,355

 

 

 

4,424

 

Loss from equity method investments

 

 

1,748

 

 

 

 

Operating loss

 

 

(71,250

)

 

 

(28,443

)

Foreign exchange loss, net

 

 

28,069

 

 

 

179

 

Change in fair value of warrant liability

 

 

71,978

 

 

 

 

Interest expenses, net

 

 

9,146

 

 

 

8,744

 

Finance income from ABG

 

 

 

 

 

(135

)

Other expense (income), net

 

 

4,651

 

 

 

(3,845

)

Loss before income taxes

 

 

(185,094

)

 

 

(33,386

)

Deferred income tax recoveries

 

 

(1,272

)

 

 

(3,777

)

Current income tax expenses (benefit)

 

 

301

 

 

 

(240

)

Net loss

 

$

(184,123

)

 

$

(29,369

)

Net loss per share - basic and diluted

 

 

(1.73

)

 

 

(0.31

)

Weighted average shares used in computation of net loss per

   share - basic and diluted

 

 

106,463,352

 

 

 

94,875,351

 

Net loss

 

$

(184,123

)

 

$

(29,369

)

Foreign currency translation loss, net

 

 

(16,633

)

 

 

(475

)

Unrealized (loss) gain on available-for-sale debt securities

 

 

(74

)

 

 

19

 

Other comprehensive loss

 

 

(16,707

)

 

 

(456

)

Comprehensive loss

 

$

(200,830

)

 

$

(29,825

)

 

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

 

 

2


TILRAY, INC.

Condensed Consolidated Statements of Stockholders’ Equity

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

 

 

 

Preferred shares

 

 

Common stock

 

 

Additional

 

 

Accumulated other

 

 

 

 

 

 

Total

 

 

 

Number of

shares

 

 

Amount

 

 

Number of

shares

 

 

Amount

 

 

paid-in

capital

 

 

comprehensive (loss)

income

 

 

Accumulated

deficit

 

 

stockholders' equity

(deficit)

 

Balance as of December 31, 2018

 

 

 

 

$

 

 

 

93,170,867

 

 

$

10

 

 

$

302,057

 

 

$

3,763

 

 

$

(108,177

)

 

$

197,653

 

Cumulative effect adjustment from transition to ASU 2016-01

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

803

 

 

 

(803

)

 

 

 

Cumulative effect adjustment from transition to ASC 842

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

19

 

 

 

19

 

Shares issued for Natura acquisition

 

 

 

 

 

 

 

 

180,332

 

 

 

 

 

 

15,100

 

 

 

 

 

 

 

 

 

15,100

 

Shares issued for Manitoba Harvest acquisition

 

 

 

 

 

 

 

 

1,209,946

 

 

 

 

 

 

96,844

 

 

 

 

 

 

 

 

 

96,844

 

Shares issued for ABG Profit Participation Agreement

 

 

 

 

 

 

 

 

1,680,214

 

 

 

 

 

 

125,097

 

 

 

 

 

 

 

 

 

125,097

 

ABG finance receivable, net of finance income of $2,700

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(30,292

)

 

 

 

 

 

 

 

 

(30,292

)

Shares issued under stock-based compensation plans

 

 

 

 

 

 

 

 

545,000

 

 

 

 

 

 

931

 

 

 

 

 

 

 

 

 

931

 

Shares issued for employee compensation

 

 

 

 

 

 

 

 

11,868

 

 

 

 

 

 

649

 

 

 

 

 

 

 

 

 

649

 

Stock-based compensation expenses

 

 

 

 

 

 

 

 

 

 

 

 

 

 

5,736

 

 

 

 

 

 

 

 

 

5,736

 

Other comprehensive income

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(456

)

 

 

 

 

 

(456

)

Net loss

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(29,369

)

 

 

(29,369

)

Balance as of March 31, 2019

 

 

 

 

$

 

 

 

96,798,227

 

 

$

10

 

 

$

516,122

 

 

$

4,110

 

 

$

(138,330

)

 

$

381,912

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance at December 31, 2019

 

 

 

 

$

 

 

 

102,781,225

 

 

$

11

 

 

$

705,671

 

 

$

9,719

 

 

$

(430,130

)

 

$

285,271

 

Proceeds from ABG Profit Participation Arrangement

 

 

 

 

 

 

 

 

 

 

 

 

 

 

1,353

 

 

 

 

 

 

 

 

 

1,353

 

Write-off of ABG finance receivable

 

 

 

 

 

 

 

 

 

 

 

 

 

 

28,900

 

 

 

 

 

 

(28,900

)

 

 

 

Escrow shares released from downstream merger

 

 

 

 

 

 

 

 

(7,659

)

 

 

 

 

 

(151

)

 

 

 

 

 

 

 

 

(151

)

Shares issued for common stock at-the-market, net of issuance costs

 

 

 

 

 

 

 

 

2,265,115

 

 

 

 

 

 

27,027

 

 

 

 

 

 

 

 

 

27,027

 

Shares issued for investments

 

 

 

 

 

 

 

 

6,934

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Shares issued under stock-based compensation plans

 

 

 

 

 

 

 

 

597,868

 

 

 

 

 

 

1,079

 

 

 

 

 

 

 

 

 

1,079

 

Stock-based compensation expenses

 

 

 

 

 

 

 

 

 

 

 

 

 

 

7,677

 

 

 

 

 

 

 

 

 

7,677

 

Shares issued under registered offering, net of issuance costs

 

 

 

 

 

 

 

 

7,250,000

 

 

 

1

 

 

 

19,827

 

 

 

 

 

 

 

 

 

19,828

 

Shares issued for exercise of pre-funded warrants

 

 

 

 

 

 

 

 

11,750,000

 

 

 

1

 

 

 

49,053

 

 

 

 

 

 

 

 

 

49,054

 

Other comprehensive loss

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(16,707

)

 

 

 

 

 

(16,707

)

Net loss

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(184,123

)

 

 

(184,123

)

Balance at March 31, 2020

 

 

 

 

$

 

 

 

124,643,483

 

 

$

13

 

 

$

840,436

 

 

$

(6,988

)

 

$

(643,153

)

 

$

190,308

 

 

 

 

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

 

3


TILRAY, INC.

Condensed Consolidated Statements of Cash Flows

(in thousands of United States dollars, unaudited)

 

 

 

Three months ended March 31,

 

 

 

2020

 

 

2019

 

Operating activities

 

 

 

 

 

 

 

 

Net loss

 

$

(184,123

)

 

$

(29,369

)

Adjusted for the following items:

 

 

 

 

 

 

 

 

Inventory valuation adjustments

 

 

4,044

 

 

 

324

 

Depreciation and amortization expenses

 

 

4,561

 

 

 

2,772

 

Impairment of assets

 

 

29,839

 

 

 

 

Stock-based compensation expenses

 

 

7,677

 

 

 

5,736

 

Change in fair value of warrant liability

 

 

71,978

 

 

 

 

Loss from equity method investments

 

 

1,748

 

 

 

 

Loss (gain) from equity investments measured at fair value

 

 

1,534

 

 

 

(1,389

)

Loss from sale of investment

 

 

65

 

 

 

 

Interest on debt securities

 

 

(221

)

 

 

 

Deferred taxes

 

 

(1,272

)

 

 

(3,777

)

Amortization of discount on convertible notes

 

 

2,597

 

 

 

2,501

 

Amortization of transaction costs on Senior Facility

 

 

131

 

 

 

 

Foreign currency (gain) loss

 

 

28,069

 

 

 

(214

)

Accretion related to obligations under finance leases

 

 

151

 

 

 

25

 

Issuance costs on registered offering recorded to net loss

 

 

3,953

 

 

 

 

Credit loss expenses

 

 

46

 

 

 

536

 

Provision for sales returns

 

 

(262

)

 

 

 

Loss on disposal of property and equipment

 

 

457

 

 

 

111

 

Other non-cash items

 

 

138

 

 

 

(322

)

Changes in non-cash working capital:

 

 

 

 

 

 

 

 

Accounts receivable

 

 

(1,906

)

 

 

3,030

 

Inventory

 

 

(11,594

)

 

 

(13,307

)

Prepayments and other current assets

 

 

6,749

 

 

 

(2,143

)

Accounts payable

 

 

(15,218

)

 

 

(1,015

)

Accrued expenses and other current liabilities

 

 

(3,172

)

 

 

11,660

 

Net cash used in operating activities

 

 

(54,031

)

 

 

(24,841

)

Investing activities

 

 

 

 

 

 

 

 

Business combinations, net of cash acquired

 

 

 

 

 

(124,140

)

Investment in ABG Profit Participation Arrangement

 

 

 

 

 

(33,333

)

Change in deposits and other assets

 

 

(927

)

 

 

 

Purchases of short-term and other investments

 

 

 

 

 

(2,914

)

Proceeds from the sale of other investments

 

 

437

 

 

 

 

Purchases of property and equipment

 

 

(18,290

)

 

 

(9,017

)

Proceeds from disposal of property and equipment

 

 

661

 

 

 

 

Purchases of intangible assets

 

 

 

 

 

(92

)

Net cash used in investing activities

 

 

(18,119

)

 

 

(169,496

)

Financing activities

 

 

 

 

 

 

 

 

Proceeds from at-the-market equity offering, net of costs

 

 

27,027

 

 

 

 

Proceeds from ABG Profit Participation Arrangement

 

 

1,353

 

 

 

 

Proceeds from issuance of registered offering, net of issuance costs

 

 

85,465

 

 

 

 

Payment of ABG finance liability

 

 

(1,000

)

 

 

 

Proceeds from exercise of stock options

 

 

1,813

 

 

 

931

 

Payment of obligations under finance lease

 

 

(105

)

 

 

(187

)

Payment on the settlement of stock options

 

 

(748

)

 

 

 

Proceeds from issuance of Senior Facility, net of transaction costs

 

 

46,395

 

 

 

 

Repayment of Senior Facility

 

 

(414

)

 

 

 

Net cash provided by financing activities

 

 

159,786

 

 

 

744

 

Effect of foreign currency translation on cash and cash equivalents

 

 

(10,437

)

 

 

543

 

Cash and cash equivalents

 

 

 

 

 

 

 

 

Increase (decrease) in cash and cash equivalents

 

 

77,199

 

 

 

(193,050

)

Cash and cash equivalents, beginning of period

 

 

96,791

 

 

 

487,255

 

Cash and cash equivalents, end of period

 

$

173,990

 

 

$

294,205

 

 

 

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

4


Tilray, Inc.

Notes to Condensed Consolidated Financial Statements

(in thousands of United States dollars, except for shares, warrants, per share amounts and per warrant amounts, unaudited)

1.

Summary of Significant Accounting Policies

Description of the business

Tilray, Inc. and its wholly owned subsidiaries (collectively “Tilray”, the “Company”, “we”, “our”, or “us”) is a medical cannabis research, cultivation, processing and distribution organization, and is one of the leading suppliers of adult-use cannabis in Canada. The Company also markets and distributes food products from hemp seed, offering a broad range of natural and organic food products and ingredients that are sold through retailers and websites globally.

Basis of presentation and going concern

The accompanying unaudited condensed consolidated financial statements (the “financial statements”) reflect the accounts of the Company. The financial statements were prepared in accordance with generally accepted accounting principles in the United States of America (“U.S. GAAP”) and pursuant to the rules and regulations of the United States Securities and Exchange Commission (“SEC”) for interim financial information. The information included in this Form 10-Q should be read in conjunction with the audited consolidated financial statements included in the Company’s annual report on Form 10-K for the year ended December 31, 2019 (the “Annual Financial Statements”). These financial statements reflect all adjustments, which, in the opinion of management, are necessary for a fair presentation of the results for the interim periods presented. Interim results are not necessarily indicative of results for a full year.

These financial statements have been prepared on a going concern basis, which assumes that the Company will continue in operation for the foreseeable future and, accordingly, will be able to realize its assets and discharge its liabilities in the normal course of operations as they come due. The Company’s ability to continue as a going concern is dependent upon obtaining additional financing to meet anticipated cash needs for working capital and capital expenditures through the next twelve months.

For the three months ended March 31, 2020, the Company reported a consolidated net loss of $184,123 and a net loss of $29,369 for the three months ending March 31, 2019.

For the three months ended March 31, 2020, the Company had negative cash flows used in operating activities of $54,031 and negative cash flows used in operating activities of $24,841 for the three months ended March 31, 2019.

As at March 31, 2020 and December 31, 2019 the Company had working capital of $167,595 and $166,600, respectively, reflecting an increase of $995 for the three months ended March 31, 2020.

Current management forecasts and related assumptions support the view that the Company can adequately manage the operational needs of the business with the additional debt financing of $59,600 secured on February 28, 2020 (refer to Note 12) and net proceeds of $85,289 ($90,439 of gross proceeds) from the registered equity offering on March 17, 2020 (refer to Note 13).

The warrants issued as part of the registered offering prohibit the Company’s ability to issue any additional Class 2 common stock prior to receipt of stockholder approval of the anti-dilution price protection feature, at any price lower than $11.90 per share (as adjusted for stock splits, stock dividends, stock combinations, recapitalizations and similar events).  Unless and until the Company receives stockholder approval of the anti-dilution price protection feature, which will be sought at the Company’s Annual Meeting on May 28, 2020, and not prior to June 30, 2020, subject to certain exceptions or warrant holder consent, the Company is generally prohibited from issuing securities for capital raising purposes (including under the at-the-market offering program) or in connection with mergers and acquisitions. Additionally, assuming approval by the Company’s stockholders and so long as the warrants remain outstanding, the Company may only issue up to $20,000 in aggregate gross proceeds under the Company’s at-the-market offering program at prices less than the exercise price of the warrants (currently $5.95 per share), and in no event more than $6,000 per quarter at prices below the exercise price of the warrants, without triggering the warrant’s anti-dilution price protection feature. If the Company’s stockholders do not approve the anti-dilution price protection features, the Company could be prevented from issuing additional securities altogether, which could have a materially adverse effect to the Company’s business. While the Company anticipates receiving approval of the anti-dilution price protection feature at the Annual Meeting of Stockholders on May 28, 2020, at this time, the Company cannot be assured of such approval.

On May 4, 2020, the Company submitted an irrevocable 30-day notice for the Additional Draw on the Senior Facility pursuant to the terms of the Senior Facility for $9,900 (refer to Note 12 and Note 25).

Due to uncertainties the Company may face in raising additional equity financing in the future, which may be further impacted by the economic downturn and COVID-19, an additional evaluation of management’s forecasts and plans was conducted to assess the Company’s ability to meet its contractual commitments and obligations over the next twelve months. There remains uncertainty given the unprecedented nature of the COVID-19 pandemic and the impact this may have on management’s assumptions used to develop these forecasts. Currently, management’s forecasts support the Company’s ability to meet all covenant compliance and its contractual obligations in the next twelve months such as payment of interest on the 5% convertible notes (refer to Note 11 and Note 17), payment of principal and interest on the Senior Facility (refer to Note 12 and Note 17), non-cancelable minimum purchase

5


commitments for inventory (refer to Note 17), payment of the ABG finance liability (refer to Note 17), payment of the Company’s lease commitments (refer to Note 17) and payment of the Company’s Portugal construction commitments (refer to Note 17).

Should there be additional constraints on access to capital under the at-the-market program, the Company can manage cash-outflows through reduced capital expenditures and managing the operational expenses of the business that pertain to future investments that are discretionary in nature. Accordingly, the Company has concluded it is probable it can implement plans that would effectively mitigate the conditions and events that raise substantial doubt about the entity’s ability to continue as a going concern for the next twelve months.

These financial statements do not include any adjustments to the carrying amount and classification of reported assets, liabilities, revenues or expenses that might be necessary should the Company not be successful with the aforementioned initiatives. Any such adjustments could be material.

Change in comparative presentation

The Company lost its emerging growth company status effective December 31, 2019 and therefore reported as a large accelerated filer in the Annual Financial Statements. As a result, the Company complies with new and revised accounting standards applicable to public companies. In the fourth quarter of 2019, the Company adopted the following accounting pronouncements issued by FASB: ASU 2016-01, Financial Instruments – Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities (“ASU 2016-01”); ASU 2016-02, Leases, codified as ASC 842 (“ASC 842”); ASU 2014-09 Revenue from Contracts with Customers and all subsequent amendments to the ASU, codified as ASC 606 (“ASC 606”); and ASU 2018-07, Compensation – Stock Compensation (Topic 718): Improvements to Nonemployee Share-Based Payment Accounting (“ASU 2018-07”), as described in the Annual Financial Statements, with an effective date of January 1, 2019. The comparative three months ended March 31, 2019 included in the financial statements reflects the new and revised accounting standards and therefore does not mirror the March 31, 2019 interim period condensed consolidated financial statements previously filed. The impact to statements of net loss and comprehensive loss for the three months ended March 31, 2019 is as follows:

 

 

 

Net loss

 

 

Other comprehensive (loss) income

 

Unadjusted

 

$

(30,301

)

 

$

933

 

Impact of adoption of accounting standards:

 

 

 

 

 

 

 

 

    ASU 2016-01

 

 

1,389

 

 

 

(1,389

)

    ASC 842

 

 

(27

)

 

 

 

    ASU 2018-07

 

 

(430

)

 

 

 

    ASC 606

 

 

 

 

 

 

Adjusted

 

$

(29,369

)

 

$

(456

)

 

The statement of net loss and comprehensive loss for the three months ended March 31, 2019 was reclassified to conform to the current period’s presentation. Cost of sales, which was formerly presented as a single line item, is now broken out between product costs and inventory valuation adjustments. Loss on disposal of property and equipment, formerly presented in other expenses (income) is now presented in general and administrative expenses.

Allowance for credit losses

 

In June 2016, the FASB issued ASU 2016-13, Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments. This guidance was subsequently amended by ASU 2018-19, Codification Improvements, ASU 2019-04, Codification Improvements, ASU 2019-05, Targeted Transition Relief, ASU 2019-10, Effective Dates, and ASU 2019-11, Codification Improvements. These ASUs are referred to collectively as the new guidance on current expected credit loss (“CECL”). As a result of the adoption of the new CECL guidance on January 1, 2020, the Company has changed its accounting policy for the allowance for credit losses, as it relates to accounts receivable and available-for-sale debt securities. The adoption of the CECL guidance did not have a material impact on the consolidated financial statements at January 1, 2020. 

 

Accounts receivable

 

The Company maintains an allowance for credit losses at an amount sufficient to absorb losses inherent in its accounts receivable portfolio as of the reporting dates based on the projection of expected credit losses.

 

The Company applies the aging method to estimate the allowance for expected credit losses.  The aging method is applied to accounts receivables at the business unit level to reflect shared risk characteristics, such as receivable type, customer type and geographical location.  The aging method assigns accounts receivables to a level of delinquency and applies loss rates to each class based on historical loss experience. The Company also considers relevant qualitative and quantitative factors to assess whether historical loss experience should be adjusted to better reflect the risk characteristics of the current classes and the expected future loss. This assessment incorporates all available information relevant to considering the collectability of its current classes, including

6


considering economic and business conditions, default trends, changes in its class composition, among other internal and external factors. The expected credit loss estimates are adjusted for current conditions and reasonable supportable forecasts.

 

As part of the Company’s analysis of expected credit losses, it may analyze contracts on an individual basis in situations where such accounts receivables exhibit unique risk characteristics and are not expected to experience similar losses to the rest of their class.

 

Available-for-sale debt securities

 

The Company assesses its available-for-sale debt securities for impairment at each measurement date. When the fair value is less than the amortized cost, the Company assesses whether it intends to sell the security. When it is assessed that the Company will sell the security or the Company will be required to sell before recovery, the difference between the fair value and amortized cost is recorded as an impairment of assets in the statements of net loss and comprehensive loss. When the Company does not intend to sell and it is not more likely than not that the Company will be required to sell before recovery, the Company assesses whether a portion of the unrealized loss is a result of a credit loss. The Company recognizes the portion related to credit loss as credit loss expenses in general and administrative expenses within the statements of net loss and comprehensive loss and the portion of unrealized loss related to factors other than credit losses in other comprehensive loss. The Company determines the best estimate of the present value of cash flows expected to be collected from the available-for-sale debt securities on an individual basis based on past events, current conditions and forecasts relevant to the individual securities. 

 

Disclosure framework - fair value measurement

 

In August 2018, the FASB issued ASU 2018-13, Disclosure Framework - Changes to the Disclosure Requirements for Fair Value Measurement (Topic 820) (“ASU 2018-13”). ASU 2018-13 removes (a) the prior requirement to disclose the amount and reason for transfers between Level 1 and Level 2 of the fair value hierarchy contained in ASC Topic 820, (b) the policy for timing of transfers between levels, and (c) the valuation process used for Level 3 fair value measurements. ASU 2018-13 also adds, among other items, a requirement to disclose the range and weighted average of significant unobservable inputs used in Level 3 fair value measurements. The Company adopted ASU 2018-13 effective January 1, 2020 and such adoption did not have a material effect on its financial statements.

 

Warrants

In March 2020, the Company closed on a registered offering including Class 2 common stock, warrants and pre-funded warrants (refer to Note 13). As a result, the Company has adopted an accounting policy for 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. The Company's warrants are classified as liabilities and are recorded at fair value. The warrants are subject to remeasurement at each balance sheet date until settlement 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 other expenses (income) in the statements of net loss and comprehensive loss.

Use of estimates and significant estimates

Allowance for credit losses – The Company’s projections of expected credit losses are inherently uncertain, and as a result the Company cannot predict with certainty the amount of such losses. Changes in economic conditions, the risk characteristics and composition of the portfolio, bankruptcy laws, and other factors could impact the actual and projected expected credit losses and the related allowance for credit losses. Actual losses may vary from current estimates. Due to potential COVID-19 disruptions in the marketplace it is possible the Company may experience unforeseen and greater credit losses than anticipated or experienced historically.

Warrant liability – The Company estimates the fair value of the warrant liability using a Monte Carlo pricing model. The Company is required to make assumptions and estimates in determining an appropriate risk-free interest rate, volatility, term, dividend yield and discount due to exercise restrictions and fair value of common stock.

Net loss per share

Basic net loss per share is computed by dividing reported net loss by the weighted average number of common shares outstanding for the reported period. Diluted net loss per share reflects the potential dilution that could occur if securities or other contracts to issue common stock were exercised or converted into common stock of the Company during the reporting period. Diluted net loss per share is computed by dividing net loss by the sum of the weighted average number of common shares and the number of potential dilutive common share equivalents outstanding during the period. Potential dilutive common share equivalents consist of the incremental common shares issuable upon the exercise of vested share options and the incremental shares issuable upon conversion of the convertible notes. Potential dilutive common share equivalents consist of warrants, stock options, restricted stock units (“RSUs”) and restricted stock awards.

7


In computing diluted earnings per share, common share equivalents are not considered in periods in which a net loss is reported, as the inclusion of the common share equivalents would be anti-dilutive. As of March 31, 2020, there were 21,266,707 common share equivalents with potential dilutive impact (March 31, 2019 – 8,266,509). Since the Company is in a net loss for all periods presented in these financial statements, there is no difference between the Company’s basic and diluted net loss per share for the periods presented.

 

New accounting pronouncements not yet adopted

In December 2019, the FASB issued ASU 2019-12, Income Taxes (Topic 740) - Simplifying the Accounting for Income Taxes (“ASU 2019-12”), which is intended to simplify various aspects related to accounting for income taxes. ASU 2019-12 removes certain exceptions to the general principles in Topic 740 and also clarifies and amends existing guidance to improve consistent application. ASU 2019-12 is effective for the Company beginning January 1, 2021. The Company is currently evaluating the effect of adopting this ASU.

In January 2020, the FASB issued ASU 2020-01, Investments - Equity Securities (Topic 321), Investments - Equity Method and Joint Ventures (Topic 323), and Derivatives and Hedging (Topic 815) (“ASU 2020-01”), which is intended to clarify the interaction of the accounting for equity securities under Topic 321 and investments accounted for under the equity method of accounting in Topic 323 and the accounting for certain forward contracts and purchased options accounted for under Topic 815. ASU 2020-01 is effective for the Company beginning January 1, 2021. The Company is currently evaluating the effect of adopting this ASU.

2.

ABG Profit Participation Arrangement

The Company entered into a Profit Participation Arrangement (“ABG Arrangement”) with ABG Intermediate Holdings 2, LLC (“ABG”) on January 14, 2019 as described in the Annual Financial Statements.

On January 24, 2020, the Company entered into (i) an Amended and Restated Profit Participation Agreement (the “A&R Profit Participation Agreement”) with ABG, which amended and restated in its entirety the Profit Participation Agreement, dated January 14, 2019, and (ii) the First Amendment to Payment Agreement with ABG (the “Payment Agreement Amendment”), which amends the Payment Agreement, dated January 14, 2019. The Company and ABG agreed that Tilray no longer has any obligation to pay the additional consideration with an aggregate value of $83,333 in cash or in shares of Class 2 common stock. In addition, the Company is not entitled to any guaranteed minimum participation rights and beginning January 1, 2020 through December 31, 2028, the Company agreed that it is not entitled to any participation rights until such participation rights with respect to each contract year exceeds $10,000, and in the event the participation rights are achieved, the Company is entitled to the full 49% participation rights.

As a result of entering into the A&R Profit Participation Agreement and the Payment Agreement Amendment, the Company derecognized the ABG finance receivable of $7,011 recorded to impairment of assets through the statements of net loss and comprehensive loss and $28,900 through accumulated deficit in January 2020.

 

3.

Inventory

Inventory is comprised of the following items:

 

 

 

March 31, 2020