TILRAY BRANDS, INC. This Management's Discussion and Analysis of Financial Condition and Results of Operations should be read in conjunction with the Consolidated Financial Statements and the related Notes thereto for the period endedNovember 30, 2021 contained in this Quarterly Report on Form 10-Q and our Annual Report on Form 10-K for the fiscal year endedMay 31, 2021 . Forward looking statements in this Form 10-Q are qualified by the cautionary statement included in this Form 10-Q under the sub-heading "Cautionary Note Regarding Forward-Looking Statements" in the introduction of this Form 10-Q.
Company Overview
We are a leading global cannabis-lifestyle and consumer packaged goods company headquartered inNew York, New York with the largest global geographic footprint in the industry; including operations inCanada ,the United States ,Europe ,Australia ,New Zealand andLatin America that is changing people's lives for the better - one person at a time - by inspiring and empowering the worldwide community to live their very best life by providing them with products that meet the needs of their mind, body, and soul and invoke a sense of wellbeing.Tilray's mission is to be the trusted partner for its patients and consumers by providing them with a cultivated experience and health and wellbeing through high-quality, differentiated brands and innovative products. In the pursuit of our strategic vision and mission, we continue to leverage our scale, expertise and capabilities to drive brand awareness and market share inCanada ,Europe ,the United States and the rest of world, achieve industry-leading, profitable growth and build sustainable, long-term stockholder value. In order to ensure the long-term sustainable growth of our Company, we continue to focus on developing strong capabilities, including in consumer and patient insights, drive category management leadership and assess growth opportunities with the introduction of innovative new products and the entry into new markets. In addition, we are relentlessly focused on managing our cost of goods and expenses in order to maintain our strong financial position and expand our profit margins. OnApril 30, 2021 , upon consummation of the arrangement with Aphria Inc. ("Aphria") pursuant to a plan of arrangement under the Business Corporations Act (Ontario ) (the "Arrangement"), Aphria stockholders andTilray stockholders owned approximately 61.2% and 38.8%, respectively, of the post-closing outstandingTilray common stock resulting in the reverse acquisition ofTilray , wherebyTilray is the legal acquirer and Aphria is the acquirer for accounting purposes. Accordingly, as reported in our Annual Report and in this Form 10-Q, the assets and liabilities of Aphria are presented at their historical carrying values and the assets and liabilities ofTilray are recognized on the effective date of the business combination transaction and measured at fair value. The operating results for the comparable period, the three and six months endedNovember 30, 2020 , are of those of Aphria. In conjunction with the reverse acquisition, the Company elected to adopt Aphria's fiscal year ofJune 1 to May 31 . Prior to the completion of the Arrangement, our condensed consolidated financial statements were presented under International Financial Reporting Standards ("IFRS") as issued by theInternational Accounting Standards Board and in Canadian Dollars (C$). All prior periods have been recast and are shown in this Form 10-Q under GAAP and inUnited States Dollars ($).
Trends and Other Factors Affecting Our Business
Market Dynamics.
Our cannabis business reporting segment operates in an industry that is still in its early stages of development. InCanada , the industry celebrated its third year of adult-use legalization inOctober 2021 . As the industry continues to mature, there are a number of new entrants into the industry, which has led to increased competition. This competitive environment in the Canadian cannabis industry subjects us to the risk of loss of market share, price discounting by competitors, and to the challenge of acquiring new customers amidst the evolving market changes. The number of licenses granted, and the number of licensed producers ultimately authorized byHealth Canada could have an adverse impact on our ability to compete for market share inCanada . During the three months endedNovember 30, 2021 , we maintained our market leadership withinCanada but experienced a decline in market share percent to 12.8% from the 15.7% market share we maintained atMay 31, 2021 . Prior to the end of our fiscal second quarter, the Company was primarily focused on margin maintenance inCanada . With the current market dynamics and the Company's cost advantages, the Company adjusted its focus to be more price competitive in the value, mainstream and premium plus market categories, particularly, in vape and pre-rolled products. Management continues to explore key partnerships and acquisitions as a strategy to maintain and expand our market share position. 23 -------------------------------------------------------------------------------- The cannabis industry inEurope is also in its early stages of development whereby countries withinEurope are at different stages of legalization of medical and adult-use cannabis as some countries have expressed a clear political ambition to broadly legalize adult-use cannabis (Germany ,Portugal , Luxembourg andMalta ), some are engaging in an experiment for adult-use (Netherlands ,Switzerland ) and some are debating regulations for cannabinoid-based medicine (France ,Spain ,Italy , and theUnited Kingdom ). InEurope , we believe that, despite continuing COVID-19 pressure, cannabis legalization (both medicinal and adult-use) will continue to gain traction, especially following actions of the Maltese and German governments. We also continue to believe thatTilray remains uniquely positioned to win in these markets with its infrastructure being the only company with EU-GMP cultivation facilities in two countries withinEurope and our demonstrated commitment to the consistency, quality and safety of our products. Today,Germany remains the largest medical cannabis market inEurope . We are the market leader in medical cannabis withinGermany with a market share of approximately 19.7% with our dried flower, extracts and Dronabinol products.
The following is a summary of the state of cannabis legalization within
Germany . The new coalition government led by chancellorOlaf Schulz declared its intention to legalize adult-use cannabis use, which aims to regulate the sale of adult-use cannabis.Malta . InDecember 2021 ,Malta now allows its citizens to grow up to six plants at home, possess up to seven grams for personal use, establish a dedicated government authority, and allows the creation of social cannabis clubs. Although commercial sales are still forbidden, such achievement marks an important cornerstone for the cannabis industry inEurope .
Switzerland . InOctober 2021 ,Switzerland announced its intention to legalize cannabis by allowing production, cultivation, trade, and consumption. In the meantime,Zurich, Switzerland's largest city, will be the location of a three-year pilot project starting in the Fall 2022 to conduct scientific studies on the cannabis market and its impact on Swiss society.The Netherlands . The Dutch government aims to initiate an experiment involving the cultivation of cannabis for adult use to determine whether and how regulated cannabis can be legally supplied to coffee shops and what the resulting effects.
United Kingdom . Medical cannabis is legal in theUnited Kingdom , however, there is a need to maximize both clinical research and patient benefit in a safe, cautious and ethical manner so that those patients for whom medical cannabis is shown to be effective can access it. Currently, a new piece of legislation is in discussion, which aims to improve access to cannabinoid-based medicine through two measures: (1) expanding the ability to prescribe these products to General Practitioners (GPs) who are registered with theGeneral Medical Council and (2) establishing a commission for the assessment of cannabinoid-based medicinal products.
Acquisitions and synergies.
We have grown, and expect to continue to grow, 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 long-term, sustainable growth, we also evaluate potential acquisitions and other strategic transactions of businesses that we believe complement our existing businesses or provide us with the opportunity to enter attractive new geographic markets and/or expand our products portfolio and capabilities. We incur transaction costs in connection with identifying and completing acquisitions as well as ongoing integration costs as we integrate acquired companies and seek to achieve synergies. For the six months endedNovember 30, 2021 , we incurred$33.7 million of transaction costs. 24 -------------------------------------------------------------------------------- In connection with the Arrangement, we committed to achieving at least$80 million of synergies in connection with the integration ofTilray and Aphria and developed a robust plan and timeline to achieve such synergies. In connection with the development of 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, evaluated contracts and arrangements, and evaluated our supply chain and our strategic partnerships. During the six months endedNovember 30, 2021 , we have executed on a series of synergistic actions which included:
• We entered into a termination and settlement agreement with ABG Intermediate
Holdings 2, LLC ("ABG") and certain of its affiliates whereby we terminated
the license to use certain trademarks and the obligation to pay associated
royalties. Pursuant to this settlement agreement, we terminated
million in remaining guaranteed royalty payments owed to ABG in exchange for
the payment of a
• We concluded our joint venture relationship with
retained the manufacturing equipment associated with CBD and THC beverages,
obtained a royalty-free, perpetual, worldwide license to utilize the
technology related to the manufacture of CBD and THC beverages, which was
developed by the joint venture and negotiated a co-manufacturing arrangement
to manufacture CBD beverages on behalf of Fluent.
• We continued efforts to close down the legacy-Tilray Canadian facilities in
and products in
As of the date of this filing, we have achieved
During the six months ended
• The acquisition of
brand located in
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
infrastructure and a larger footprint in the U.S. market upon federal
cannabis legalization. When federally permissible,
acquisition of
and innovative products through the development of non-alcoholic distilled
spirits, including bourbon whisky, that is infused with cannabis.
• The purchase of the previously leased SweetWater Brewing facility and
taproom located in
ownership of its state-of-the-art brewing facility and integrated restaurant
and live music venue.
• Building upon SweetWaters's strategic plan to expand into all 50 states
within the
acquisition was completed shortly after SweetWater announced plans to move
into a 32,450-square-foot production facility in
recently acquired, which also includes a 10,000-square-foot taproom. We
believe that these initiatives, coupled with SweetWater's new taproom inside
further distribute to the West Coast .
The Coronavirus ("COVID-19") Pandemic, Its Impact on Us
We continuously address the effects of the COVID-19 pandemic, a discussion of
which is available in sections entitled "Risk Factors" in Item 1A of Part I and
"The Coronavirus ("COVID-19") Pandemic, Its Impact on Us" in Item 7 of our
Annual Report on Form 10-K for the fiscal year ended May 31, 2021 .
During the three and six months ended
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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 have previously reported,
consumers shifted their demand behavior to purchasing elections based primarily
on pricing. This consumer model of purchasing eroded the sales of our higher
quality, higher priced brands resulting in our market share reduction during the
period. Our Canadian medical cannabis business experienced a slight uptick in
patient demand. Our international cannabis business continued to experience
delays from regulatory authorities overseeing access to medical cannabis in
several European jurisdictions. In accessible markets, the access to physician
practices remains limited due to protective measures in place throughout
Germany , slowing down the adoption of cannabis as an innovative treatment
option. Our distribution business experienced slight improvement in the global
supply chain disrupted by the COVID-19 pandemic resulting in a modest increase
in net revenue in its base currency but due to the weakening of the US dollar
against the Euro resulted in a decrease in sales from the prior year's
comparable period. Our beer and alcohol business continues to see a decline in
on-premise business primarily as the on-premise industry dealt with a lack of
staffing and a change demand pattern related to after work alcohol consumption.
The continued impact of the COVID-19 pandemic has hampered revenue growth in our
main consumer facing markets. Within the hemp food segment of our business, we
continue to navigate the changes with growth in ecommerce and "click + pickup"
channels offsetting declines in traditional retailer channels as consumer
shopping behaviors shift.
Our business and operating results for the three and six months ended November
30, 2021 continue to be impacted by the COVID-19 pandemic, including Delta and
Omicron variants. The COVID-19 pandemic remains highly volatile, and the
responses of local governments based on numbers of new cases, disease severity,
risk of reinfection, and vaccine performance continue are unpredictable. We
cannot accurately predict the duration or extent of the impact of the COVID-19
virus. We will continue to assess our operations and will continue to consider
the guidance of local governments throughout the world. If economic conditions
caused by the pandemic do not recover as currently estimated by management or
market factors currently in place change, there could be a further impact on our
results of operations, financial condition and cash flows from operations.
Results of Operations
Our consolidated results, in thousands except for per share data, are as
follows:
For the three months For the six months
November 30, Change % Change November 30, Change % Change
(in thousands of U.S. dollars) 2021 2020 2021 vs. 2020 2021 2020 2021 vs. 2020
Net revenue $ 1,55,153 $ 1,29,459 $ 25,694 20 % $ 3,23,176 $ 2,46,949 $ 76,227 31 %
Cost of goods sold 1,22,387 94,176 28,211 30 % 2,39,455 1,76,721 62,734 35 %
Gross profit 32,766 35,283 (2,517 ) (7 %) 83,721 70,228 13,493 19 %
Operating expenses:
General and administrative 33,469 28,273 5,196 18 % 82,956 54,245 28,711 53 %
Selling 9,210 6,079 3,131 52 % 16,642 11,896 4,746 40 %
Amortization 29,016 4,208 24,808 590 % 59,755 8,335 51,420 617 %
Marketing and promotion 7,120 4,252 2,868 67 % 12,585 9,177 3,408 37 %
Research and development 515 225 290 129 % 1,300 345 955 277 %
Transaction costs 8,120 18,206 (10,086 ) (55 %) 33,699 20,664 13,035 63 %
Total operating expenses 87,450 61,243 26,207 43 % 2,06,937 1,04,662 1,02,275 98 %
Operating loss (54,684 ) (25,960 ) (28,724 ) 111 % (1,23,216 ) (34,434 ) (88,782 ) 258 %
Interest expense, net (9,940 ) (4,832 ) (5,108 ) 106 % (20,110 ) (10,568 ) (9,542 ) 90 %
Non-operating (expense) income, 64,750 (72,649 ) 1,37,399 (189 %) 1,13,610 (86,008 ) 1,99,618 (232 %)
net
Income (loss) before income taxes 126 (1,03,441 ) 1,03,567 (100 %) (29,716 ) (1,31,010 ) 1,01,294 (77 %)
Income taxes (recovery) (5,671 ) (14,192 ) 8,521 (60 %) (909 ) (20,017 ) 19,108 (95 %)
Net income (loss) 5,797 (89,249 ) 95,046 (106 %) (28,807 ) (1,10,993 ) 82,186 (74 %)
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Key Operating Metrics
We use the following key operating metrics to evaluate our business and
operations, measure our performance, identify trends affecting our business,
project our future performance, and make strategic decisions. Other companies,
including companies in our industry, may calculate key operating metrics with
similar names differently which may reduce their usefulness as comparative
measures. Certain variances are labeled as not meaningful ("NM") throughout
management's discussion and analysis.
For the three months ended For the six months ended
November 30, November 30,
(in thousands of U.S. dollars) 2021 2020 2021 2020
Net cannabis revenue $ 58,775 $ 54,766 $ 1,29,224 $ 1,05,968
Net beverage alcohol revenue 13,707 710 29,168 710
Distribution revenue 68,869 73,983 1,36,055 1,40,271
Wellness revenue 13,802 - 28,729 -
Cannabis gross margin 23 % 46 % 34 % 48 %
Cannabis adjusted gross margin 43 % 46 % 43 % 48 %
Beverage alcohol gross margin 57 % 60 % 57 % 60 %
Distribution gross margin 11 % 13 % 11 % 14 %
Wellness gross margin 28 % NA 27 % NA
Adjusted EBITDA 13,760 10,139 26,457 18,209
Cash and cash equivalents 3,31,783 1,48,205 3,31,783 1,48,205
Working capital 3,93,350 3,21,904 3,93,350 3,21,904
Free cash flow (24,093 ) (6,863 ) (1,25,940 ) (76,918 )
Adjusted free cash flow (15,973 ) 11,343 (69,430 ) (56,254 )
NA=This reporting segment did not exist in the prior year period. The related acquisition occurred thereafter.
Segment Reporting
Management updated our reporting segments during the six months endedNovember 30, 2021 . While the Company reported "business under development" as a fifth reporting segment in its previous Annual Report, management determined that this no longer met the definition of a reporting segment. Our reporting segments revenue is primarily comprised of revenues from our cannabis, distribution, beverage alcohol operations, and wellness, as follows: For the three months For the six months ended ended November 30, Change November 30, Change (in thousands of U.S. dollars) 2021 2020 2021 vs. 2020 2021 2020 2021 vs. 2020 Cannabis business$ 58,775 $ 54,766 $ 4,009 7 %$ 1,29,224 $ 1,05,968 $ 23,256 22 % Distribution business 68,869 73,983 (5,114 ) (7 %) 1,36,055 1,40,271 (4,216 ) (3 %) Beverage alcohol business 13,707 710 12,997 NM 29,168 710 28,458 NM Wellness business 13,802 - 13,802 NM 28,729 - 28,729 NM Total net revenue$ 1,55,153 $ 1,29,459 $ 25,694 20 %$ 3,23,176 $ 2,46,949 $ 76,227 31 %
Our geographic revenue is, as follows:
For the three months For the six months ended
ended November 30, Change November 30, Change
(in thousands of U.S. dollars) 2021 2020 2021 vs. 2020 2021 2020 2021 vs. 2020
North America $ 72,443 $ 54,475 $ 17,968 33 % $ 1,62,986 $ 1,05,667 $ 57,319 54 %
EMEA 74,916 73,714 1,202 2 % 1,50,925 1,38,791 12,134 9 %
Rest of World 7,794 1,270 6,524 514 % 9,265 2,491 6,774 272 %
Total net revenue $ 1,55,153 $ 1,29,459 $ 25,694 20 % $ 3,23,176 $ 2,46,949 $ 76,227 31 %
27
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Our geographic capital assets are, as follows:
November 30, May 31,
(in thousands of U.S. dollars) 2021 2021 2021 vs. 2020
North America $ 4,67,646 $ 5,04,575 $ (36,929 ) (7 %)
EMEA 1,32,666 1,40,838 (8,172 ) (6 %)
Rest of World 3,937 5,285 (1,348 ) (26 %)
Total capital assets $ 6,04,249 $ 6,50,698 $ (46,449 ) (7 %)
Cannabis revenue
Cannabis revenue based on market channel is, as follows:
For the three months For the six months
ended November 30, Change ended November 30, Change
(in thousands of US dollars) 2021 2020 2021 vs. 2020 2021 2020 2021 vs. 2020
Revenue from Canadian medical
cannabis $ 7,929 $ 6,260 $ 1,669 27 % $ 16,303 $ 12,640 $ 3,663 29 %
products
Revenue from Canadian
adult-use cannabis 49,535 58,175 $ (8,640 ) (15 %) 1,19,128 1,15,123 $ 4,005 3 %
products
Revenue from wholesale
cannabis 2,259 1,440 $ 819 57 % 3,959 5,232 $ (1,273 ) (24 %)
products
Revenue from international
cannabis 13,706 4,280 $ 9,426 220 % 23,972 4,280 $ 19,692 460 %
products
Total cannabis revenue 73,429 70,155 $ 3,274 5 % 1,63,362 1,37,275 $ 26,087 19 %
Excise taxes (14,654 ) (15,389 ) $ 735 (5 %) (34,138 ) (31,307 )
7 % $ 1,29,224 $ 1,05,968 $ 23,256 22 %
Revenue from Canadian medical cannabis products: Revenue from Canadian medical
cannabis products increased 27% to $7.9 million and 29% to $16.3 million for the
three and six months ended November 30, 2021 , compared to revenue of $6.3
million and $12.6 million for the prior year same periods. This increase in
revenue from medical cannabis products is primarily driven by the contributions
of legacy Tilray's medical cannabis business resulting from the business
combination of April 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. There has been some
offset from downward pressure caused by the COVID-19 pandemic from patients
unable or unwilling to see a doctor as well as increased competition from the
adult-rec and the price compression therein.
Revenue from Canadian adult-use cannabis products: During the three and six
months ended November 30, 2021 , our gross revenue from Canadian adult-use
cannabis product decreased 15% to $49.5 million and increased 3% to $119.1
million for the three and six months ended November 30, 2021 compared to revenue
of $58.2 million and $115.1 million for the prior year same periods. The three
month decreases in gross revenue is primarily due to a series of factors, as
follows:
• We continued to experience the residual impact related to the COVID-19
pandemic in relation to consumer behaviors and to a much heavier focus on
price;
• We continued to experience a shift in retail cannabis demand to price-based
brands during the COVID-19 pandemic. The decline is primarily due to
shifting consumer trends to price compression in the market, magnified by
consumer behavior during the lockdowns; and
• We also experienced additional declines in average gross selling price due
to increased price-based competition in the more recent months from
increased competition in the market. During the three months ended November
30, 2021, we maintained our market leadership but experienced a decline in
market share percent to 12.8% from 15.7% at
We continue to focus on expanding our product offerings to accommodate the changes in our adult-use customers, During the first quarter, we completed our first shipments toNunavut . In the second quarter we expanded the terms of our distribution partnership with Rose LifeScience, which will now represent the entireTilray portfolio; and expanded our partnership withGreat North Distributors, Inc. to cover all ofCanada , except forQuebec , using its established network.
The six months increase in gross revenue is attributable to the inclusion of
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Wholesale cannabis revenue: Revenue from wholesale cannabis products increased
57% to $2.3 million and decreased 24% to $4.0 million for the three and six
months ended November 30, 2021 compared to revenue of $1.4 million and $5.2
million for the prior year same periods. The Company continues to believe that
wholesale cannabis revenue will remain subject to quarter-to-quarter variability
and is based on opportunistic sales.
International cannabis revenue: Revenue from international cannabis products
increased 220% to $13.7 million and 460% to $24.0 million for the three and six
months ended November 30, 2021 compared to revenue of $4.3 million and $4.3
million for the prior year same periods. The increase is due to the
contributions of legacy Tilray's larger international cannabis business as well
as newly obtained business to business transactions. In Europe , we believe that,
despite continuing COVID-19 pressure, cannabis legalization (both medicinal and
adult-use) will continue to gain traction, especially following actions of the
German and Maltese governments. We also continue to believe that Tilray remains
uniquely positioned to win in these markets with its infrastructure being the
only company with EU-GMP cultivation facilities in two countries within Europe
and our demonstrated commitment to the consistency, quality and safety of our
products.
Germany . During the three and six months ended November 30, 2021 , we continued
to experience some deceleration in the growth of our business caused by the
COVID-19 pandemic, which resulted in some patients unable or unwilling to see a
doctor. Despite these impacts,
• We generated 16% revenue growth in connection with our medical cannabis
extract products when compared to the prior quarter.
• We generated 10% revenue growth on our dried flower products when compared
to the prior quarter.
• We are a market leader in medical cannabis within
market share of approximately 19.7% with our dried flower, extracts and
Dronabinol products.
United Kingdom . In the quarter, we completed a shipment of a wide range of dried flower products with high, medium and balanced potencies into theUK medical cannabis market.
Australia . We continue to strengthen the reputation of ourTilray medical brand whereby, through a contract with theDepartment of Health inVictoria , 90 children are now participating in a government funded seizure program utilizing our cannabinoid-based medical products, which will continue to the end of calendar year 2024.
Distribution revenue
Revenue from Distribution operations decreased 7% to$68.9 million and 3% to$136.1 million for the three and six months endedNovember 30, 2021 compared to revenue of$74.0 million and$140.3 million for the prior year same periods. Included in distribution revenue is$68.0 million and$133.0 million of revenue from CC Pharma, and$0.9 million and$3.1 million of revenue from other distribution companies for the three and six months endedNovember 30, 2021 versus$72.0 million and$136.2 million from CC Pharma and$2.0 million and$4.1 million from other distribution companies, respectively, in the prior year same periods. 29
-------------------------------------------------------------------------------- The decrease in revenue during the three-months endedNovember 30, 2021 is primarily due to the impact of changes in the exchange rate between the Euro and USD totaling a$5.3 million reduction to the comparable prior period. Additionally, the decrease in revenue during the six-months endedNovember 30, 2021 was also the result of the negative impact of an isolated weather event in Densborn,Germany . Specifically, heavy flooding impacted CC Pharma and forced a business closure for approximately five days leading to a decrease in net revenue in the period of almost$5.0 million .
Beverage alcohol revenue
Revenue from our Beverage operations increased to$13.7 million and$29.2 million for the three and six months endedNovember 30, 2021 compared to revenue of$0.7 million for the prior year same periods. SweetWater operates on-premises, wholesale, and specialty sales. Revenues continued to be negatively affected by the COVID-19 pandemic impacting on-premise consumers. The increase is substantially related to our acquisition of SweetWater onNovember 20, 2020 . Earlier in the year, our beverage operations began operating our new brewing facility inColorado and opened a new taproom at theDenver International Airport in connection with its strategic expansion initiative. In addition, we released an extensive new line of innovative products, including seltzers, as well as a new beer offering developed in collaboration with our Canadian cannabis Broken Coast brand and a new vodka soda offering developed in collaboration with our Canadian cannabis Riff brand asTilray continues to strengthen its strategic position in theU.S. by expanding its presence through acquisitions and collaboration with otherTilray cannabis brands. This strategy of leveraging our growing portfolio of brands enables the company to launch THC-based product adjacencies upon federal legalization in theU.S.
Wellness revenue
Included in Wellness revenue is$13.8 million and$28.7 million fromManitoba Harvest, for the three and six months endedNovember 30, 2021 . Manitoba Harvest was part of the assets acquired in the Arrangement. There are no comparable revenues in the prior year being presented. 30 --------------------------------------------------------------------------------
Gross profit, gross margin and adjusted gross margin for our reporting segments
Our gross profit and gross margin for the three and six months ended
(in thousands of For the three months ended For the six months ended
U.S. dollars) November 30, Change % Change November 30, Change % Change
Cannabis 2021 2020 2021 vs. 2020
2021 2020 2021 vs. 2020
Revenue $ 73,429 $ 70,155 $ 3,274 5 % $ 163,362 $ 137,275 $ 26,087 19 %
Excise taxes (14,654 ) (15,389 ) 735 (5 %) (34,138 ) (31,307 ) (2,831 ) 9 %
Net revenue 58,775 54,766 4,009 7 % 129,224 105,968 23,256 22 %
Cost of goods sold 45,259 29,632 15,627 53 % 85,450 55,407 30,043 54 %
Gross profit 13,516 25,134 (11,618 ) (46 %) 43,774 50,561 (6,787 ) (13 %)
Gross margin 23 % 46 % (23 %) (50 %) 34 % 48 % (14 %) (29 %)
Inventory
valuation 12,000 - 12,000 (0%) 12,000 - - (0%)
adjustments
Adjusted gross 25,516 25,134 382 10 % 55,774 50,561 5,213 22 %
profit (1)
Adjusted gross 43 % 46 % 10 % (3 %) 43 % 48 % 22 % 47 %
margin (1)
Distribution
Revenue $ 68,869 $ 73,983 $ (5,114 ) (7 %) $ 136,055 $ 140,271 $ (4,216 ) (3 %)
Excise taxes - - - NM - - - NM
Net revenue 68,869 73,983 (5,114 ) (7 %) 136,055 140,271 (4,216 ) (3 %)
Cost of goods sold 61,237 64,263 (3,026 ) (5 %) 120,527 121,033 (506 ) (0 %)
Gross profit 7,632 9,720 (2,088 ) (21 %) 15,528 19,238 (3,710 ) (19 %)
Gross margin 11 % 13 % (2 %) (2 %) 11 % 14 % (2 %) (17 %)
Beverage alcohol
Revenue $ 14,544 $ 754 $ 13,790 NM $ 31,027 $ 754 $ 30,273 NM
Excise taxes (837 ) (44 ) (793 ) NM (1,859 ) (44 ) (1,815 ) NM
Net revenue 13,707 710 12,997 NM 29,168 710 28,458 NM
Cost of goods sold 5,921 281 5,640 NM 12,583 281 12,302 NM
Gross profit 7,786 429 7,357 NM 16,585 429 16,156 NM
Gross margin 57 % 60 % (4 %) NM 57 % 60 % (4 %) NM
Wellness
Revenue $ 13,802 $ - $ 13,802 NM $ 28,729 $ - $ 28,729 NM
Excise taxes - - - NM - - - NM
Net revenue 13,802 - 13,802 NM 28,729 - 28,729 NM
Cost of goods sold 9,970 - 9,970 NM 20,895 - 20,895 NM
Gross profit 3,832 - 3,832 NM 7,834 - 7,834 NM
Gross margin 28 % - % 28 % NM 27 % - % 27 % NM
Total
Revenue $ 170,644 $ 144,892 $ 25,752 18 % $ 359,173 $ 278,300 $ 80,873 29 %
Excise taxes (15,491 ) (15,433 ) (58 ) 0 % (35,997 ) (31,351 ) (4,646 ) 15 %
Net revenue 155,153 129,459 25,694 20 % 323,176 246,949 76,227 31 %
Cost of goods sold 122,387 94,176 28,211 30 % 239,455 176,721 62,734 35 %
Gross profit 32,766 35,283 (2,517 ) (7 %) 83,721 70,228 13,493 19 %
Gross margin 21 % 27 % (6 %) (1 %) 26 % 28 % (3 %) 62 %
Inventory
valuation 12,000 - 12,000 (0%) 12,000 - - (0%)
adjustments
Adjusted gross 44,766 35,283 9,483 27 % 95,721 70,228 25,493 36 %
profit (1)
Adjusted gross 29 % 27 % 37 % 2 % 30 % 28 % 33 % 118 %
margin (1)
(1) Gross profit (excluding inventory valuation adjustments) and gross margin
percentage (excluding inventory valuation adjustments) are non-GAAP
financial measures.
Cannabis gross margin: Gross margin decreased during the three and six months
ended November 30, 2021 to 23% and 34% from 46% and 48% versus the prior year
same periods, reflecting the addition of sales of Tilray brands that have higher
costs to produce than our legacy brands and a non-cash inventory write down of
$12 million in November 2021 . Significant efforts have been taken to reduce the
Company's cultivation costs at its legacy Tilray Canadian facilities, including
announcing the shutdown of both the Enniskillen and Nanaimo facilities. In the
interim and until the inventory cultivated at these facilities work their way
through inventory, we expect to report lower gross margins until all inventory
is cultivated at legacy Aphria facilities. Our European operations continue to
work to optimize the cost structure for their cannabis growing facilities,
including working with the Canadian operations team, all in an effort to
continually will lower our per unit costs.
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Distribution gross margin: Gross margin of 11% and 11% for the three and six
months ended November 30, 2021 slightly decreased versus the same periods in the
prior year 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.
Beverage alcohol gross margin: Gross margin of 57% and 57% for the three and six
months ended November 30, 2021 are in line with our expectations. We did not
operate in this segment until the final week of the second quarter of the prior
year.
Wellness gross margin: Gross margin of 28% and 27% for the three and six months
ended November 30, 2021 are in line with our expectations and consistent with
the preceding fiscal quarter. We acquired the wellness business in the
Arrangement and did not operate in this segment during the same periods during
prior year.
Operating expenses
For the three months For the six months ended
ended November 30, Change November 30, Change
(in thousands of 2021 2020 2021 vs. 2020 2021 2020 2021 vs. 2020
US dollars)
General and $ 33,469 $ 28,273 $ 5,196 18 % $ 82,956 $ 54,245 $ 28,711 53 %
administrative
Selling 9,210 6,079 3,131 52 % 16,642 11,896 4,746 40 % Amortization 29,016 4,208 24,808 590 % 59,755 8,335 51,420 617 % Marketing and 7,120 4,252 2,868 67 % 12,585 9,177 3,408 37 %
promotion
Research and 515 225 290 129 % 1,300 345 955 277 %
development
Transaction costs 8,120 18,206 (10,086 ) (55 %) 33,699 20,664 13,035
63 %
Total operating $ 87,450 $ 61,243 $ 26,207 $ 2,06,937 $ 1,04,662 $ 1,02,275
expenses
Operating expenses are comprised of general and administrative, share-based
compensation, selling, amortization, marketing and promotion, research and
development, and transaction costs. These costs increased by $26.2 million and
$102.3 million for the three and six months ended November 30, 2021 as compared
to prior year same periods. This was primarily due to reporting full quarters of
operating expenses for SweetWater and Tilray , including non-cash amortization
charges associated with definite life intangible assets acquired and general and
administrative expenses. The remaining increase is from transaction costs
related to non-recurring expenses associated with our current acquisitions and
evaluation of future potential acquisition, and one-time litigation costs
associated with the acquired net assets.
General and administrative costs
During the three and six months ended
For the three months For the six months ended
ended November 30, Change November 30, Change
(in thousands of 2021 2020 2021 2020
US dollars) 2021 vs. 2020 2021 vs. 2020
Executive $ 2,237 $ 2,711 $ (474 ) (17 %) $ 5,327 $ 4,961 $ 366 7 %
compensation
Office and 5,206 4,418 788 18 % 17,973 8,839 9,134 103 %
general
Salaries and 8,149 8,821 (672 ) (8 %) 23,460 18,164 5,296 29 %
wages
Stock-based 8,253 5,489 2,764 50 % 17,670 8,339 9,331 112 %
compensation
Insurance 4,995 2,904 2,091 72 % 9,626 6,110 3,516 58 %
Professional fees 3,355 3,171 184 6 % 6,068 6,106 (38 ) (1 %)
Travel and 982 525 457 87 % 1,774 1,252 522 42 %
accommodation
Rent 292 234 58 25 % 1,058 474 584 123 %
Total general and
administrative $ 33,469 $ 28,273 $ 5,196 18 % $ 82,956 $ 54,245 $ 28,711 53 %
costs
Executive compensation decreased in the three months and increased the six
months ended November 30, 2021 . The slight decrease in the three months compared
to the prior period is primarily related to one-time changes in the overall
compensation structure. The increase for the six month period compared to the
prior period is primarily due to an increase in the number of directors and
executive level personnel on our board of directors and executive management
team, respectively, and an increase in base salaries commensurate with the
increased complexity of our Company.
32
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Office and general increased during the three and six months ended November 30,
2021 primarily due to reporting SweetWater and Tilray for the periods and the
additional one-time costs associated with the upcoming closure of our Nanaimo
facility.
Salaries and wages decreased in the three months and increased the six months
ended November 30, 2021 . The slight decrease from the prior period is primarily
related to one-time changes in the overall compensation structure. The increase
is primarily due to additions associated with new acquisitions from prior year.
The Company's headcount increased to approximately 1,800 employees as a result
of the Arrangement compared to 1,000 employees as of November 30, 2020 .
The Company recognized stock-based compensation expense of $8.3 million and
$17.7 million for the three and six months ended November 30, 2021 compared to
$5.5 million and $8.3 million for the same periods in the prior year. The
increase is primarily due to increased number of employees and the accelerated
vesting of certain of our stock-based compensation awards tied to the
Arrangement. Stock options are valued using the Black-Scholes valuation model
and represents a non-cash expense, restricted share units ("RSUs") are valued
based on the graded vesting and the grant date fair value.
Insurance expense for the three and six months ended November 30, 2021 increased
due primarily to our directors and officers' insurance policy. This increase
reflects an increase in premium rates, as the Company continued with legacy
Tilray's rating history.
Selling costs
For the three months endedNovember 30, 2021 , the Company incurred selling costs of$9.2 million or 5.9% of revenue as compared to$6.1 million and 4.2% of revenue in the prior year same period. For the six months endedNovember 30, 2021 , the Company incurred selling costs of$16.6 million or 5.1% of revenue as compared to$11.9 million and 4.3% of revenue in the prior year same period. These costs relate to third-party distributor commissions, shipping costs,Health Canada cannabis fees, and patient acquisition and maintenance costs. Patient acquisition and ongoing patient maintenance costs include funding to individual clinics to assist with additional costs incurred by clinics resulting from the education of patients using the Company's products. The increase in selling costs as a percent of revenue in both the three and six-month periods resulted from incurred costs associated with multiple distributors in the same location, which represent a duplication of costs that will be reduced upon achievement of synergies. The increase is mainly driven by the combination of legacyTilray . Amortization The Company incurred non-production related amortization charges of$29.0 million and$59.8 million for the three and six months endedNovember 30, 2021 compared to$4.2 million and$8.3 million in the prior year same periods. The increase is associated with the amortization on the acquired definite life intangible assets from SweetWater andTilray .
Marketing and promotion costs
For the three and six months endedNovember 30, 2021 , the Company incurred marketing and promotion costs of$7.1 million and$12.6 million as compared to$4.3 million and$9.2 million in the prior year same periods. The increase is mainly driven by the combination of legacyTilray .
Research and development
Research and development costs were$0.5 million and$1.3 million during the three and six months endedNovember 30, 2021 compared to$0.2 million and$0.3 million in the prior year same periods. These relate to external costs associated with the development of new products. Although the Company spends a significant amount on research and development, the majority of these costs remain in costs of sales, as the Company does not reclassify research and development costs related to the cost of products consumed in research and development activities.
Transaction costs
The three month decrease is associated with the closing of the SweetWater acquisition in the prior period. This six month increase is associated with the solicitation of shareholder votes supporting an increase in the number of authorized common stock shares, transaction closing costs related to the Arrangement, the MM Transaction and the evaluation of other potential acquisitions and one-time litigation costs.
33
--------------------------------------------------------------------------------Non-operating (expense) income, net
Non-operating (expense) income is comprised of:
For the three months For the six months ended
ended November 30, Change November 30, Change(in thousands of 2021 2020 2021 2020 US dollars) 2021 vs. 2020 2021 vs. 2020 Change in fair value of$ 56,353 $ (70,683 ) $ 1,27,036 (180 %)$ 95,723 $ (70,343 ) $ 1,66,066 (236 %) convertible debenture Change in fair value of 20,178 - 20,178 NM 37,713 - 37,713 NM warrant liability Foreign exchange (10,180 ) (3,371 ) (6,809 ) 202 % (15,904 ) (19,702 ) 3,798 (19 %) loss Loss on long-term (1,833 ) (399 ) (1,434 ) 359 % (3,508 ) (1,519 ) (1,989 ) 131 % investments Gain from equity - - - NM 1,356 - 1,356 NM investees Other non-operating 232 1,804 (1,572 ) (87 %) (1,770 ) 5,556 (7,326 ) (132 %) (losses) gains, net Total non-operating$ 64,750 $ (72,649 ) $ 1,37,399 $ 1,13,610 $ (86,008 ) $ 1,99,618 income (expense) For the three and six months endedNovember 30, 2021 , the Company recognized a change in fair value of its APHA 24 convertible debentures of$56.4 million and$95.7 million , compared to a decrease in value of$70.7 million and$70.3 million for the prior year same periods. The change is driven primarily by the changes in the Company's share price and the change in the trading price of the convertible debentures. Additionally, for the three and six months endedNovember 30, 2021 Company recognized a change in fair value of its warrants of resulting in a gain of$20.2 million and$37.7 million acquired as part of the Arrangement, also as a result of the decrease in our share price. Furthermore, for three and six months endedNovember 30, 2021 the Company recognized a loss of$9.5 million and$15.2 million , resulting from the changes in foreign exchange rates during the period, compared to losses of$3.4 million and$19.7 million for the prior year same periods, largely associated with the strengthening of the US dollar against the Canadian dollar. The remaining other losses relate to changes in fair value in the Company's convertible notes receivable and long-term investments.
Use of Non-GAAP Measures
We have included in this report measures of financial performance that are not defined by GAAP. We believe that these measures provide useful information to investors and include these measures in other communications to investors. These non-GAAP measures include:
• gross profit (excluding inventory valuation adjustments),
• cannabis gross profit and margin (excluding inventory valuation adjustments),
• adjusted net income (loss), • free cash flow, • adjusted free cash flow, and • adjusted EBITDA. For each of these non-GAAP financial measures, we are providing below a reconciliation of the differences between the non-GAAP measure and the most directly comparable GAAP measure, an explanation of why our management and Board of Directors believe the non-GAAP measure provides useful information to investors and any additional purposes for which our management and Board of Directors use the non-GAAP measures. These non-GAAP measures should be viewed in addition to, and not in lieu of, the comparable GAAP measures. All of these non-GAAP financial measures should be considered in addition, and not in lieu of, the financial measures calculated and presented in accordance with accounting principles generally accepted inthe United States of America , ("GAAP"). These measures, which may be different than similarly titled measures used by other companies, are presented to help investors' overall understanding of our financial performance and should not be considered a substitute for, or superior to, the financial information prepared and presented in accordance with GAAP. 34
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Reconciliation of Non-GAAP Financial Measures to GAAP Measures
Adjusted net income (loss) and adjusted EBITDA
For the three months For the six months
ended November 30, Change ended November 30, Change
2021 2020 2021 vs. 2020 2021 2020 2021 vs. 2020
Net income (loss) $ 5,797 $ (89,249 ) $ 95,046 (106 %)
(479 %)$ (82,970 ) $ 8,055 $ (91,025 ) (1,130 %) Adjusted EBITDA$ 13,760 $ 10,139 $ 3,621 36 %$ 26,457 $ 18,209 $ 8,248 45 %
Adjusted net income (loss)
Adjusted net loss represents a non-GAAP financial measure that does not have any standardized meaning prescribed under GAAP and may not be comparable to similar measures presented by other companies. Adjusted net income is calculated as net (loss) income plus (minus) the unrealized loss (gain) on convertible debentures, a non-cash item, share-based compensation, foreign exchange (loss) gain, all non-cash items, and transaction costs, costs which will not necessarily continue in future periods depending on the frequency of additional M&A considered by the Company. It represents a measure management uses in evaluating operating results to reduce the impact of the volatility caused by fair value accounting of instruments associated with our capital structure, that have no impact on operations. The increase in adjusted net loss is primarily driven by higher net loss stemming from higher amortization costs associated with the definite lived assets acquired during the year, the additional general and administrative costs associated withTilray for the full quarter and increased non-cash unrealized loss on changes to the fair value of our convertible debentures. For the three months For the six months ended November 30, Change ended November 30, Change Adjusted net loss 2021 2020 2021 vs. 2020 2021 2020 reconciliation: 2021 vs. 2020 Net income (loss)$ 5,797 $ (89,249 ) $ 95,046 (106 %)$ (28,807 ) $ (1,10,993 ) $ 82,186 (74 %) Unrealized (gain) loss on convertible debentures (56,353 ) 70,683
(1,27,036 ) (180 %) (95,723 ) 70,343 (1,66,066 ) (236 %) Foreign exchange loss (gain)
10,180 3,371 6,809 202 % 15,904 19,702 (3,798 ) (19 %)
Change in fair value of warrant
liability (20,178 ) - (20,178 ) NM (37,713 ) - (37,713 ) NM
Stock-based compensation 8,253 5,489 2,764 50 % 17,670 8,339 9,331 112 %
Inventory write down 12,000 - 12,000 NM 12,000 - 12,000 NM
Transaction costs 8,120 18,206
(10,086 ) (55 %) 33,699 20,664 13,035 63 %
Adjusted net income (loss)
$ (82,970 ) $ 8,055 $ (91,025 ) Adjusted EBITDA Adjusted EBITDA is a non-GAAP financial measure that does not have any standardized meaning prescribed by GAAP and may not be comparable to similar measures presented by other companies. The Company calculates adjusted EBITDA as net (loss) income before income taxes, net interest expense, depreciation and amortization, equity in net loss of equity-method investees, inventory write downs, stock-based compensation, integration activities, transaction costs, unrealized currency gains and losses and other adjustments. The Company's management believes that this presentation provides useful information to management, analysts and investors regarding certain additional financial and business trends relating to its results of operations and financial condition. In addition, management uses this measure for reviewing the financial results of the Company and as a component of performance-based executive compensation. We do not consider Adjusted EBITDA in isolation or as an alternative to financial measures determined in accordance with GAAP. The principal limitation of Adjusted EBITDA is that it excludes certain expenses and income that are required by GAAP to be recorded in our consolidated financial statements. In addition, Adjusted EBITDA is subject to inherent limitations as this metric reflects the exercise of judgment by management about which expenses and income are excluded or included in determining Adjusted EBITDA. In order to compensate for these limitations, management presents Adjusted EBITDA in connection with GAAP results. 35
-------------------------------------------------------------------------------- For the period endedNovember 30, 2021 , adjusted EBITDA increased primarily from favorable effects of new lines of business, offset by the inclusion of legacyTilray's cannabis business, while we work to achieve our synergies plan, as follows: For the three months For the six months ended November 30, Change ended November 30, Change Adjusted EBITDA reconciliation: 2021 2020 2021 vs. 2020 2021 2020 2021 vs. 2020 Net income (loss)$ 5,797 $ (89,249 ) $ 95,046 (106 %)$ (28,807 ) $ (1,10,993 ) $ 82,186 (74 %) Income taxes (5,671 ) (14,192 ) 8,521 (60 %) (909 ) (20,017 ) 19,108 (95 %) Interest expense, net 9,940 4,832 5,108 106 % 20,110 10,568 9,542 90 % Non-operating expense (income), net (64,750 ) 72,649 (1,37,399 ) (189 %) (1,13,610 ) 86,008 (1,99,618 ) (232 %) Amortization 37,471 12,031 25,440 211 % 76,804 23,010 53,794 234 % Stock-based compensation 8,253 5,489 2,764 50 % 17,670 8,339 9,331 112 % Facility start-up and closure costs 1,700 - 1,700 NM 7,900 - 7,900 NM Lease expense 900 373 527 141 % 1,600 630 970 154 % Inventory write down 12,000 - 12,000 NM 12,000 - 12,000 NM Transaction costs 8,120 18,206 (10,086 ) (55 %) 33,699 20,664 13,035 63 % Adjusted EBITDA$ 13,760 $ 10,139 $ 3,621 $ 26,457 $ 18,209 $ 8,248 Adjusted EBITDA should not be considered in isolation from, or as a substitute for, net loss. There are a number of limitations related to the use of Adjusted EBITDA as compared to net loss, the closest comparable GAAP measure. Adjusted EBITDA adjusts for the following:
• Current and deferred income tax expenses and recoveries, which could be a
significant recurring expense or recovery in our business in the future
and reduce or increase cash available to us.
• Interest expense and loss on disposal of property and equipment to reflect
ongoing operating activities;
• Non-cash foreign exchange gains or losses, which accounts for the effect
of both realized and unrealized foreign exchange transactions. Unrealized
gains or losses represent foreign exchange revaluation of foreign
denominated monetary assets and liabilities;
• Non-cash change in fair value of warrant liability;
• Non-cash amortization and amortization expenses and, although these are
non-cash charges, the assets being depreciated and amortized may have to
be replaced in the future;
• Stock-based compensation expenses, which has been, and will continue to be
for the foreseeable future, a significant recurring expense in our
business and an important part of our compensation strategy;
• Non-cash inventory valuation adjustments;
• Non-cash loss from equity method investments;
• Costs incurred to start up new facilities and/or to close facilities in
Nanaimo, Canada andEnniskillen, Canada ; • Lease expense; • Non-cash inventory write down; and
• Transaction costs associated with current and future business acquisitions.
36
--------------------------------------------------------------------------------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. We believe that existing cash, cash equivalents, short-term investments and cash generated by operations, together with 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 six months ended
November 30,
2021 2020
Net cash used in operating activities $ (110,348 ) $ (53,662 )
Net cash used in investing activities $ (15,592 ) $ (294,570 )
Net cash (used in) provided by financing activities $ (28,047 ) $ 105,938
Effect on cash of foreign currency translation $ (2,696 ) $ 29,853
Cash and cash equivalents, beginning of period
$ 331,783 $
148,205
Decrease in cash and cash equivalents$ (156,683 ) $ (212,441 )
Cash flows from operating activities
The changes in net cash used in operating activities during the six months endedNovember 30, 2021 compared to the prior year same period is primarily related to payments associated with the Arrangement, income taxes at Aphria Diamond and accounts payable and accrued liabilities decreases in the period. This net cash used in operating activities was positively impacted by reductions in inventory and collections of accounts receivable.
Cash flows from investing activities
The change in net cash used in investing activities in the first two fiscal quarters of 2022 as compared to the first two fiscal quarters of 2021 is primarily due to cash paid for the SweetWater acquisition in fiscal year 2021.
Cash flows from financing activities
Cash used in financing activities in the first two fiscal quarters of 2022 as compared to the first two fiscal quarters of 2021 is primarily due to an early payment on SweetWater's term loan facility and the share capital financing completed in fiscal year 2021 that did not recur in fiscal year 2022.
Free cash flow and adjusted free cash flow
Free cash flow and adjusted free cash flow are non-GAAP measures. Free cash flow
is relevant to management and investors, because it represents the cash flow
available to the Company to repay creditors or potentially make distributions to
investors. The measure is comprised of two GAAP amounts deducted from each other
which are net cash flow used in operating activities less investments, net of
proceeds from disposals, in capital and intangible assets. Adjusted free cash
flow removes the cash impact of acquisitions from free cash flow. Our free cash
flow and adjusted free cash flow were, as follows:
For the three months For the six months
ended November 30, Change ended November 30, ChangeFree cash flow 2021 2020 2021 vs. 2020 2021 2020 2021 vs. 2020 Net cash provided by (used in) operating activities$ (17,121 ) $ 2,438 $ (19,559 ) (802 %)$ (1,10,348 ) $ (53,662 ) $ (56,686 ) 106 % Less: investments in capital and intangible assets, net (6,972 ) (9,301 ) 2,329 (25 %) (15,592 ) (23,256 ) 7,664 (33 %) Free cash flow$ (24,093 ) $ (6,863 ) $ (17,230 ) 251 %$ (1,25,940 ) $ (76,918 ) $ (49,022 ) 64 % Cash expended related to 8,120 18,206 (10,086 ) (55 %) 56,510 20,664 173 % acquisitions 35,846 Adjusted free cash flow$ (15,973 ) $ 11,343 $ (27,316 ) (241 %)$ (69,430 ) $ (56,254 ) $ (13,176 ) 23 % 37
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Subsequent Events
Refer to Part I, Financial Information, Note 24 Subsequent Events of this interim report.
Off Balance Sheet Arrangements
At
Contingencies
In addition to the litigation described in the Part II, Item 1 - Legal Proceedings, the Company is and may be a defendant in lawsuits from time to time in the normal course of business. While the results of litigation and claims cannot be predicted with certainty, the Company believes the reasonably possible losses of such matters, individually and in the aggregate, are not material. Additionally, the Company believes the probable final outcome of such matters will not have a material adverse effect on the Company's consolidated results of operations, financial position, cash flows or liquidity.
Critical Accounting Policies
Our financial statements are prepared in accordance with accounting principles generally accepted inthe United States . The accounting principles we use require us to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements and amounts of income and expenses during the reporting periods presented. We believe in the quality and reasonableness of our critical accounting policies; however, materially different amounts may be reported under different conditions or using assumptions different from those that we have applied. The accounting policies that have been identified as critical to our business operations and to understanding the results of our operations pertain to revenue recognition, valuation of inventory, valuation of long-lived assets, goodwill and intangible assets, stock-based compensation and valuation allowances for deferred tax assets. The application of each of these critical accounting policies and estimates is discussed in Part II, Item 7, Management's Discussion and Analysis of Financial Condition and Results of Operations, of our Annual Report on Form 10-K for the fiscal year endedMay 31, 2021 .
Recently Issued Accounting Pronouncements
A description of recently issued accounting pronouncements that may potentially impact our financial position and results of operations is disclosed in "Part I, Item 1. Note 2 - Basis of presentation and summary of significant accounting policies" to our financial statements appearing elsewhere in this Quarterly Report on Form 10-Q.
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