TLRY US Equity☆

Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations.

You should read the following discussion and analysis of our financial condition and results of operations together with the financial information and the notes thereto included in Part II, Item 8 of this Form 10-K in this Annual Report for the fiscal year ended May 31, 2021 (“Annual Report”).

Amounts are presented in thousands of United States dollars, except for shares, warrants, per share data and per warrant data or as otherwise noted. The Canadian dollar (“C$”) equivalents presented are derived using the average exchange rate during the reporting period. Amounts are individually converted by multiplying the United States dollar to Canadian dollar rate to determine the Canadian dollar amount.

Company Overview

We are a leading global cannabis-lifestyle and consumer packaged goods company headquartered in Leamington and New York, with operations in Canada, the United States, Europe, Australia, and Latin America that is changing people’s lives for the better – one person at a time – by inspiring and empowering 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.

Our overall strategy is to leverage our scale, expertise and capabilities to drive market share in Canada and internationally, achieve industry-leading, profitable growth and build sustainable, long-term shareholder value. In order to ensure the long-term sustainable growth of our Company, we continue to focus on developing strong capabilities in consumer insights, drive category management leadership and assess growth opportunities with the introduction of innovative new products. In addition, we are relentlessly focused on managing our cost of goods and expenses in order to maintain our strong financial position.

Within Canada, we are focused on gaining market share in the Canadian cannabis industry by executing on our strategic priorities through entering new product categories that possess the most consumer demand, while leveraging our expertise to develop brands that are truly differentiated from our competitors and carefully curated to meet patient and consumer demand, investing in brand building and innovation activities and optimizing our production to continue to be the high-quality, low-cost producer we are today.

Internationally, we are focused on business activities that provide a return on investment in the near term without being capital intensive. We intend to continue to maximize the utilization of our existing assets and investments in connection with the development and execution of our international growth plans, while leveraging our cannabis expertise and well-established medical brands. Through our well positioned cultivation facilities in Portugal and Germany, we intend to fuel the demand for our EU GMP certified medical grade cannabis internationally. By building on this foundation, we strive to take a leadership position in the international cannabis industry.

Within the U.S., we are focused on leading the craft beer segment, including growing our SweetWater brand by expanding our distribution footprint, focusing on new product development and innovation and building brand awareness of, and equity in, our existing adult-use cannabis brands in the U.S. ahead of federal legalization of cannabis by leveraging the SweetWater manufacturing and distribution infrastructure. Further complementing this strategy, our Manitoba Harvest brand is a leading manufacturer of hemp-derived CBD and other cannabinoid products to promote the acceptance and mainstream usage of cannabis and hemp-based products ahead of federal legalization.

Aphria – Tilray Business Combination

On December 15, 2020, Tilray entered into an Arrangement Agreement (as amended, the “Arrangement Agreement” with Aphria Inc. (“Aphria”), pursuant to which Tilray acquired all of the issued and outstanding common shares of Aphria pursuant to a plan of arrangement (the “Plan of Arrangement”) under the Business Corporations Act.

On April 30, 2021, upon consummation of the Arrangement, Aphria stockholders and Tilray stockholders owned approximately 61.2% and 38.8%, respectively, of the post-closing outstanding Tilray common stock resulting

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in the reverse acquisition of Tilray, whereby Tilray is the legal acquirer and Aphria is the acquirer for accounting purposes. Accordingly, in this Form 10-K, the assets and liabilities of Aphria are presented at their historical carrying values and the assets and liabilities of Tilray are recognized on the effective date of the business combination transaction and measured at fair value. The operating results for the prior years are of those of Aphria.

As a result of the Arrangement, the sales of Aphria stock that previously traded under the ticker symbol “APHA” ceased trading and were delisted from the Toronto Stock Exchange (“TSX”) on or about May 4, 2021. Our common stock shares commenced trading on the Nasdaq under the ticker symbol “TLRY” on May 3, 2021. In conjunction with the reverse acquisition, the Company elected to adopt Aphria’s fiscal year end of June 1 to May 31. For the year ending May 31, 2021, the Company’s financial information includes the financial results of Aphria for the 12-months ended May 31, 2021 and the one-month operating results of Tilray, as follows:

Years ended May 31,

Net loss per share - basic and diluted $ (1.25 ) $ (0.47 ) $ (0.18 )

The Coronavirus ("COVID-19") Pandemic, Its Impact on Us

Tilray continues to closely monitor and respond, where possible, to the ongoing COVID-19 pandemic. As the global situation continues to change rapidly, ensuring the well-being of our employees remains one of our top priorities. The Company also remains committed to providing best in class care and service to our valued patients and consumers – facilities continue to remain open and operational with heightened measures in place to protect the health and safety of employees, vendors, partners and their families. The Company is committed to enhancing these measures and implementing other necessary practices as the situation warrants.

COVID-19 impact on our Cannabis operations

Leamington, Brampton, Enniskillen and London, Ontario: Our Leamington facilities, Aphria One and Aphria Diamond, Brampton facility, Avanti, London facility, High Park Processing Facility, and Enniskillen facility, High Park Farms, remain open and are currently considered essential businesses by the Ontario government.

Duncan and Nanaimo, British Columbia: Our Duncan facility, Broken Coast, and our Nanaimo Facility, Tilray Canada, in British Columbia ("BC"), remain open and are currently considered essential businesses by the BC government.

Supply chain in Canada: Our supply chain team continues to work closely with our supply chain partners on a day-to-day basis to prevent and minimize any sort of disruption. As of the date of this Annual Report, there do not appear to be any indications of challenges or material delays in our supply chain; however, the Company has undertaken pre-emptive measures to ensure alternate supply sources in different continents.

Cantanhede and Esporão, Portugal: Our Cantanhede and Esporão facilities, Tilray European Union campus and cultivation site, remain open and are considered essential services by the Portuguese government.

Supply chain in Portugal: Our supply chain team continues to work closely with our supply chain partners on a day-to-day basis to prevent and minimize any sort of disruption.

COVID-19 impact on our SweetWater business

Our brewery located in Atlanta, Georgia has remained open during the COVID-19 global pandemic. During the COVID-19 pandemic, the federal, state and local governments at various times imposed restrictions as a result of the pandemic, which include, among others, restricting people from gathering in groups or interacting within a certain physical distance (i.e., social distancing), ordering businesses, particularly bars and restaurants, to close or limit operations or people to stay at home, which have impacted the SweetWater business primarily driven by reductions

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in sales and profit margin. The reduced profit margins are driven by a reduction in keg demand from the on-premises channel, which have higher profit margins than products intended for off-premises consumption. We believe this change in SweetWater’s sales mix and demand may continue as long as the COVID-19 pandemic continues.

COVID-19 impact on our medical and distribution businesses

Our medical distribution businesses located in Densborn, Germany and Buenos Aires, Argentina continue to remain open during the COVID-19 pandemic as they are considered essential services by their local governments. In addition, our Canadian medical cannabis business also continued to operate. The sales and associated EBITDA for these businesses were negatively impacted by government-imposed restrictions, which included, among others, orders for people to stay at home. This resulted in a general decrease in elective medical procedures and surgeries and in-person medical visits, which in turn resulted in, the Company experiencing and may continue to experience decreases in revenue in its Canadian medical cannabis and global distribution businesses. Declining new patient registrations in Canada driven by the decrease in medical visits continue to impact our medical cannabis business. Limitations on elective medical procedures and lower frequency patient visits to physicians and pharmacies continue to impact our global distribution businesses as doctors have less opportunity to write new prescriptions. Further, due to government-imposed restrictions, CC Pharma was not able to source inventory from surrounding countries in sufficient quantities to support its sales demand, which also impacted its revenue.

Increasing COVID-19 case counts in Canada, Germany, Portugal and the United States

We continue to monitor infection rates and the measures taken by various governments to contain the infection and begin providing vaccinations. As of the date of this Annual Report, we note an increase in infection rates with increasingly stronger measures being adopted in those countries in which the Company operates predominately Germany and Portugal. Further, we note a decrease in infection rates, largely as a result of additional efforts to vaccinate, after our year-end, in Canada and the United States.

In Canada, during fiscal 2021 and the last quarter of the fiscal year, individual provinces took increasingly stronger measures to slow infection rates, including the temporary closure of retail outlets, including cannabis stores. Most provinces, however, allowed curbside pick-up or delivery replacing in-person visits to cannabis stores.

In Germany, the duration of lockdown measures that were put in place continue to be extended and became more restrictive and, as a result, the German population became less mobile with patients not visiting their physicians or engaging in elective surgeries.

In Portugal, the lockdown measures continue to be monitored with the country reaching various stages of reopening while maintaining partial capacity in gathering places and limiting nonessential activities. The lockdown caused construction delays in our 3.3-hectare greenhouse expansion at our Cantanhede facility and impacted the schedule of our first harvest by two-months.

In the United States, while lockdown measures have not been as stringent as in Canada and in Germany, certain state and local governments significantly curtailed entertainment activities, including the consumption of alcohol at on-premises locations. The reduction of on-premises consumption was fully been offset by an increase in off-premises consumption.

Depending on the length and severity of these measures to help curtail COVID-19, particularly during periods where defined “lock-downs” are in effect, our revenues may be negatively impacted.

Protection of our employees

We took and continue to take, important steps to protect our employees during this period, including:

• Mandatory mask policy in all common and production areas;

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Giving back to our communities

We are providing multiple programs to seniors and front-line healthcare workers in the local Leamington community to support them during this period, including having:

• Made various donations to Erie Shores Community Hospital;

Effects of COVID -19 on our Adult Use Revenue

This retail sales decline of November impacted the Company in late November / early December, as licensed producers sell to provincial boards who, in turn, sell to retailers who then sell direct to consumers. This can represent a significant lag between sales from the Company and the related retail sale. With the decline in the retail sales in January and February, which were forecasted for growth, the provincial boards took measures to lower their inventory levels through a combination of slower replenishments and product returns.

These measures resulted in the Company receiving product returns of approximately $4,500. The Company was able to partially mitigate the impact of these returns by finding alternative distribution channels to sell these products. We believe these returns were more substantial for the Company than our competitors, as we continue to hold the largest market share in Alberta, which issued the largest returns as a response to the provincial lockdowns.

As the company experienced continued reduced sales levels in mid to late January, tied with the expected lifting of lockdown not occurring until late June, we reacted quickly to preserve our operating profit and adjusted EBITDA. During the second half of the fiscal year, the Company modified pricing on some of our products, implemented temporary four-day work weeks at our Canadian cannabis facilities, better managed headcount and reduced planned operating spending. The Company believes these initiatives had a major role in reporting the level of positive adjusted EBITDA. During the last six months of our fiscal year, despite widespread COVID-19 related lockdowns and absent adjustments for recent consolidation in the industry, the Company maintained its leading position, as the top licensed producer in Canada, in terms of consumer sales across all brands for those provinces where such information is available and published. The Company expects that the cannabis retail market will resume the previous trajectory of growth, once these provincial restrictions are lifted and remain lifted.

Use of Non-GAAP Measures

Throughout this Annual Report on Form 10-K, we discuss non-GAAP financial measures, including reference to:

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• adjusted net income (loss),

• free cash flow, and

• adjusted EBITDA.

All 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 in the 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.

Business Acquisitions

Prior to the completion of the Arrangement, our consolidated financial statements were presented under International Financial Reporting Standards (“IFRS”) as issued by the International Accounting Standards Board and in Canadian Dollars (C$). All prior periods have been recast and are shown in this Annual Report in Form 10-K under GAAP and in United States Dollars ($). Accordingly, the assets and liabilities of Aphria are presented at their historical carrying values and the assets and liabilities of Tilray are recognized on the effective date of the business combination and measured at fair value. The operating results for the prior years are of those of Aphria.

Acquisition of Sweetwater

On November 25, 2020, the Company, through its wholly-owned subsidiary Four Twenty Corporation, completed the purchase of all the shares of SW Brewing Company, LLC which is the holding company of 100% of the common shares of SweetWater, one of the largest independent craft brewers in the U.S. The purchase price consisted of cash consideration of $255,543, share consideration of 8,232,810 shares, and additional cash consideration of up to $66,000 contingent on SweetWater achieving specified EBITDA targets. The acquisition of SweetWater gave the Company an opportunity to build brand awareness in the U.S. ahead of federal legalization, amongst other objectives.

The historical business acquisitions consummated by Tilray prior to the completion of the Arrangement are included in the net assets acquired upon completion of the Arrangement.

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Results of Operations

Our consolidated results, in millions except for per share data, are as follows:

For the years ended May 31, % Change

Operating expenses:

Fiscal 2021 reflects the impacts of COVID-19 on our results of operations. Refer to the discussion above on the effects of COVID-19 and discussion of our results below for additional information.

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.

For the years ended May 31,

Net beverage alcohol revenue 28,599 — —

Wellness revenue 5,794 — —

Beverage alcohol cost of sales 12,687 — —

Wellness cost of sales 4,233 — —

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Segment Reporting

Our reporting segments revenue is primarily comprised of revenues from our cannabis, distribution, wellness, beverage alcohol operations and business under development, as follows:

For the year ended May 31,

Business under development — — — — 0% — 0%

Our geographic revenue is, as follows:

For the year ended May 31,

Our geographic capital assets are, as follows:

For the year ended May 31,

Distribution revenue

Revenue from Distribution operations for the year ended May 31, 2021 was $277,300 as compared to $275,430 in the prior year, representing a slight increase of 1% on a year over year basis. Included in distribution revenue is $270,873 of revenue from CC Pharma, and $6,427 of revenue from other distribution companies for the year ended May 31, 2021 versus $270,131 and $5,299 in the prior year. The slight increase in distribution revenue for the year ended May 31, 2021 as compared to prior year was primarily the result of increases in the value of the Euro compared to the US dollar for the year ended May 31, 2021 compared to May 31, 2020. This increase was partially offset by COVID-19 mandatory lockdowns, which resulted in insufficient supply from other European Union countries, fewer workdays from lockdown periods, and limitations on elective medical procedures and lower frequency in-person visits to physicians and pharmacies.

The increase in distribution revenue the year ended May 31, 2020 versus the prior year was primarily driven by only owning CC Pharma for 5 months during the year ended May 31, 2019.

For the three months ended May 31, 2021, as compared to the same quarter prior year, revenue decreased from $73,955 to $66,792 primarily due to difficulties in securing inventory from countries in the European Union that closed their borders due to COVID-19 lockdowns and limitations on elective medical procedures and lower frequency in-person visits to physicians and pharmacies.

Beverage alcohol revenue

Revenue from our Beverage operations for the year ended May 31, 2021 was $28,599 from SweetWater which was acquired on November 25, 2020. SweetWater operates on-premise, wholesale, and specialty sales. Revenues

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were negatively impacted from reduction in keg demand from the on-premises channel, which have higher profit margins than products intended for off-premises consumption.

For the three months ended May 31, 2021, beverage alcohol revenue was $15,947, with no comparable amount as SweetWater was acquired during the current fiscal year.

Wellness revenue

Included in Wellness revenue is $5,794 from Manitoba Harvest, for the year ended May 31, 2021. Manitoba Harvest was part of the assets acquired in the Arrangement. There are no comparable revenues in the prior year being presented.

Cannabis revenue

Year ended May 31,

Revenue from international cannabis products 9,250 — — 9,250 —% — —%

During the year ended May 31, 2021, kilogram equivalents sold increased at a disproportionate rate as compared to the increase in revenue as a result of the decrease in average selling price per gram. We expect continuous pressure on average selling price for at least the first half of the year.

During the year ended May 31, 2020, kilogram equivalents of cannabis sold increased as compared to the year ended May 31, 2019 as a result of the continued growth of our adult-use market.

Revenue from medical cannabis products: Revenue from medical cannabis products for the year ended May 31, 2021 was $25,539 as compared to $28,685 in the prior year, representing a decrease of (11%).

The decrease in revenue from medical cannabis sold during 2021 as compared to 2020 was related to a decrease in average gross retail selling price to medical patients. The decline is a result of specific pricing programs offered to assist patients in need who have been negatively impacted by the COVID-19 pandemic, along with other promotional programs.,

Revenue from adult-use cannabis products: Revenue from adult-use cannabis products for the year ended May 31, 2021 was $222,930 as compared to $112,207 in the prior year, increase almost double the amount in the prior year, or 99% primarily due to increase in market share for the first half of the year, which was offset by lowered replenishment rates and ordering by the provincial boards as a response to the lockdown measures and the decline in the retail cannabis market. In the second half of the year our volumes were consistent with the first half of year, while the average gross selling price to the adult-use market declined. The decrease is primarily related to consumer trends to large-format and price compression in the market, magnified by consumer behavior during the lockdowns to a much heavier focus on price and potency.

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Wholesale cannabis revenue: Revenue from wholesale cannabis products for the year ended May 31, 2021 was $6,615 as compared to $12,585 in the prior year, representing a decrease of (47%). 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 for the year ended May 31, 2021 was $9,250 as compared to nil in the prior year. The increase is largely due to our export of product to Israel, and one month of legacy Tilray’s larger international cannabis business.

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Gross profit and gross margin

Our gross profit and gross margin for the years ended May 31, 2021, 2020 and 2019, is as follows, for our each of our operating segments:

For the year ended May 31,

Adjustments:

Inventory valuation adjustments 19,919 — — 19,919 —

Purchase price accounting step-up — — — — —

Adjusted gross margin (1) 45 % 47 % 48 % (2 %) (0 %)

Distribution

Excise taxes — — — — —

Adjustments:

Inventory valuation adjustments — — — — —

Purchase price accounting step-up — — — — —

Adjusted gross margin (1) 13 % 13 % 13 % (0 %) 0 %

Beverage alcohol

Adjustments:

Inventory valuation adjustments — — — — —

Purchase price accounting step-up 835 — — — —

Adjusted gross margin (1) 59 % 0 % 0 % 59 % 0 %

Wellness

Excise taxes — — — — —

Adjustments:

Inventory valuation adjustments — — — — —

Purchase price accounting step-up — — — — —

Adjusted gross margin (1) 27 % 0 % 0 % 27 % 0 %

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Cannabis gross margin:Gross margin of 35% decreased in 2021 versus 2020 primarily due to an inventory write off of $19,919 from excess inventory quantities of the combined cannabis operations. Adjusted gross margin of 45% decreased in 2021 versus 2020 primarily due to price compressions during the COVID-19 lockdowns, offset by the Company’s improved cost structure.

Distribution gross margin: Gross margin of 13% remained consistent versus 2020.

Beverage alcohol gross margin: Gross margin of 56% is in line with our expectations. This is the first fiscal year in which we operated in this segment. We note that COVID-19 disrupted our product sales mix, resulting in lower than traditional gross margins for SweetWater.

Wellness gross margin: Gross margin of 27% reflects one month of sales. We acquired the wellness business in the Aphria-Tilray business combination.

Operating expenses

For the year ended May 31,

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 $55,291 to $255,353 from $200,062 as compared to prior year. This was primarily due to reporting two full quarters of operating expenses for SweetWater, including increased non-cash amortization charges associated with definite life intangible assets acquired. The remaining increase is from transaction costs associated with the acquisition of SweetWater, the Arrangement, other potential acquisitions and one-time litigation costs.

General and administrative costs

For the year ended May 31,

During the year ended May 31, 2021, the Company incurred higher salaries and wages, executive compensation, and insurance costs as a result of increases to its executive and non-executive headcount, increases in annual compensation rates for cost of living and internal promotions and increases in the basic per unit cost of insurance in the cannabis industry, all offset by lower consulting fees related to a reduction in the number of projects pursued by the business that required an external resource. During the second half of 2021, as provincial lockdowns in Canada remained in force, the Company pro-actively adjusted its cost structure to offset the impact of the decrease in demand,

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including temporary four-day work weeks at our Canadian cannabis facilities, better managed headcount and reduce planned operating spending.

During the year ended May 31, 2020, the Company incurred higher salaries and wages, executive compensation, consulting and insurance costs for the same reasons above plus the changeover of its executive employees all offset by lower professional fees and stock-based compensation as a result of a one-time award to its new Chief Executive Officer in 2019.

For the three months ended May 31, 2021, general and administrative costs were $32,806 as compared to $24,912 for the same period in the prior year which excluded the acquisitions of SweetWater and Tilray.

Share-based compensation

The Company recognized share-based compensation expense of $17,351 for the year ended May 31, 2021 compared to $18,079 for the same period in the prior year. 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. The Company issued 2,370,862 RSUs in the year-ended May 31, 2021 compared to 137,033 DSUs and 2,159,643 RSUs in the same period of the prior year.

As part of the Arrangement, the Company’s Omnibus Long-Term Incentive Plan no longer includes a provision for DSUs. Also, as part of the Arrangement, all outstanding DSUs were replaced with RSUs, under the same terms and conditions as originally granted.

Selling costs

For the year ended May 31, 2021, the Company incurred selling costs of $26,576 as compared to $18,975 in the prior year. These costs relate to third-party distributor commissions, shipping costs, Health Canada cannabis fees, and patient acquisition and maintenance costs. Patient acquisition and ongoing patient maintenance costs include funding to individual clinics to assist with additional costs incurred by clinics resulting from the education of patients using the Company’s products.

For the year ended May 31, 2020, the Company incurred selling costs of $18,975 as compared to $3,752 in the prior year. The increase in 2020 versus 2019 is primarily due to increased sales volumes and related selling activities, including the addition of our acquired operations in distribution and the legalization of adult-use cannabis in Canada.

For the three months ended May 31, 2021, the Company incurred selling costs of $ 8,525 or 6.5% of net revenue as opposed to $7,320 or 6.0% for the same period in the prior year.

Amortization

The Company incurred non-production related amortization charges of $35,221 for the year ended May 31, 2021 compared to $15,138 and $9,550 in 2020 and 2019, respectively. The increase is largely associated with the amortization on the acquired definite life intangible assets from the SweetWater acquisition.

Marketing and promotion cost

For the year ended May 31, 2021, the Company incurred marketing and promotion costs of $17,539, as compared to $15,266 in the prior year. The current period costs are comprised of $12,147 of cannabis related marketing and promotion or 6.0% of net cannabis revenue, $593 of beverage alcohol marketing and promotion or 2.1% of beverage alcohol net revenue, $600 of wellness products marketing and promotion or 10.3% of wellness revenue, and $3,926 of distribution marketing and promotion or 1.4% of distribution revenue. The 2021 marketing and promotion costs included significant deferrals of costs associated with the COVID-19 pandemic and reduced discretionary spending in the second half of fiscal 2021.

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For the year ended May 31, 2020 the Company incurred marketing and promotion costs of $15,266 or 3.8% of net revenue as opposed to $ 17,400 or 9.7% for the same period in the prior year. The decrease in the overall spend for marketing and promotions was due toa one-time increase in spending in 2019 associated with the legalization of adult-use cannabis in Canada.

For the three months ended May 31, 2021, the Company incurred marketing and promotion costs of $5,103 or 3.6% of net revenue as opposed to $2,874 or 2.5% for the same period in the prior year.

Research and development

Research and development costs of $830 were expensed during the year ended May 31, 2021 compared to $1,916 in the prior year. 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.

For the year ended May 31, 2020 the Company incurred research and development costs of $1,916 as opposed to $1,052 in the prior year.

For the three months ended May 31, 2021, the Company incurred research and development costs of $358 as opposed to $430 for the same period in the prior year.

Transaction costs

Transaction costs of $63,612 were expensed during the year ended May 31, 2021 compared to $4,299 in the prior year. Transaction costs largely relate to costs associated with the Arrangement, the acquisition of SweetWater, non-cash shares issued as part of a legal settlement, with various other one-time litigation costs, restructuring costs and potential acquisitions the Company has considered and abandoned, or is still considering.

Non-operating income (expense), net

Year ended May 31,

Deferred gain on sale of intellectual property — — 257 — imm (257 ) imm

Chane in fair value of warrant liability 1,234 — — 1,234 imm — —%

imm – variance is immaterial and omitted

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For the three months and year ended May 31, 2021, the Company recognized an unrealized gain (loss) on convertible debentures of $113,425 and $(170,453), respectively, driven primarily by the increase in the Company’s share price and the increase in the trading price of the convertible debentures. Furthermore, the Company recognized a gain (loss) of $1,239 and $(22,347), respectively, resulting from the changes in foreign exchange rates during the period, largely associated with the strengthening of the Canadian dollar against the US dollar during the second half of fiscal 2021. The remaining other losses relate to changes in fair value in the Company’s convertible notes receivable and long-term investments.

Year ended May 31,

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 income (loss), plus (minus) income taxes (recovery), plus (minus) finance (income) expense, net, plus (minus) non-operating (income) loss, net, plus amortization, plus share-based compensation, plus impairment, plus transaction costs and certain one-time non-operating expenses, as determined by management, all as follows:

Year ended May 31,

Purchase price accounting step up 835 — — 835 100 % — 0%

The Company’s adjusted EBITDA increased by $32,870 from $5,845 in the prior year.

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Adjusted EBITDA should not be considered in isolation from, or as a substitute for, net loss. There are a number of limitations related to the use of Adjusted EBITDA as compared to net loss, the closest comparable GAAP measure. Adjusted EBITDA excludes:

• Non-cash inventory valuation adjustments;

• Non-cash loss from equity method investments;

• Non-cash change in fair value of warrant liability;

• Costs incurred to start up new facilities;

• Lease expense;

Critical Accounting Policies and Significant Judgments and Estimates

Our consolidated financial statements are prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”). A detailed discussion of our significant accounting policies can be found in Part II, Item 8, Note 3, “Summary of Significant Accounting Policies”, and the impact and risks associated with our accounting policies are discussed throughout this Form 10‐K and in the Notes to the Consolidated Financial Statements. We have identified certain policies and estimates as critical to our business operations and the understanding of our past or present results of operations related to (i) COVID-19 related judgments and estimates, (ii) revenue recognition, (iii) valuation of inventory, (iv) impairment of goodwill and indefinite-lived intangible assets, (v) stock-based compensation, (vi) business combinations and goodwill, (vii) leases, and (viii) warrants. These policies and estimates are considered critical because they had a material impact, or they have the potential to have a material impact, on our consolidated financial statements and because they require us to make significant judgments, assumptions or estimates. We believe that the estimates, judgments and assumptions made when accounting for the items described below were reasonable, based on information available at the time they were made. Actual results could differ materially from these estimates.

(i) Revenue recognition

Revenue is recognized when the control of the promised goods, through performance obligation, is transferred to the customer in an amount that reflects the consideration we expect to be entitled to in exchange for the performance obligations. We generate substantially all our revenue from the sale of our products through contracts with customers, relationships with wholesalers and distributors, and sales of product direct to consumers. Cannabis, wellness and beverage alcohol products are sold through various distribution channels. Revenue is recognized when the control of the goods is transferred to the customer, which occurs at a point in time, typically upon delivery to or receipt by the

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customer, depending on shipping terms. In determining the transaction price for the sale of goods, we consider the effects of variable consideration. Some contracts for the sale of goods may provide customers with a right of return, volume discount, bonuses for volume/quality achievement, or sales allowances. In addition, we may provide in certain circumstances, a retrospective price reduction to a customer based primarily on inventory movement. These items give rise to variable consideration. We use historical evidence, current information and forecasts to estimate the variable consideration. The requirements in ASC 606 on constraining estimates are applied to determine the amount of the variable consideration.

(ii) Valuation of inventory

Refer to Part II, Item 8, Note 3, “Summary of Significant Accounting Policies” for further details on our inventory cost policy. At the end of each reporting period, we perform an assessment of inventory and record inventory valuation adjustments for excess and obsolete inventories based on our estimated forecast of product demand, production requirements, market conditions, regulatory environment, and spoilage. A reserve is estimated to ensure the inventory balance at the end of the year reflects our estimates of product we expect to sell in the next twelve months. Changes in the regulatory structure, lack of retail distribution locations or lack of consumer demand could result in future inventory reserves.

(iii) Impairment of goodwill and indefinite-lived intangible assets

Goodwill and indefinite-lived intangible assets are tested for impairment annually, or more frequently when events or circumstances indicate that impairment may have occurred. As part of the impairment evaluation, we may elect to perform an assessment of qualitative factors. If this qualitative assessment indicates that it is more likely than not that the fair value of the indefinite-lived intangible asset or the reporting unit (for goodwill) is less than its carrying value, a quantitative impairment test to compare the fair value to the carrying value is performed. An impairment charge is recorded if the carrying value exceeds the fair value. The assessment of whether an indication of impairment exists is performed at the end of each reporting period and requires the application of judgment, historical experience, and external and internal sources of information. We make estimates in determining the future cash flows and discount rates in the quantitative impairment test to compare the fair value to the carrying value.

(iv) Stock-based compensation

We measure and recognize compensation expenses for stock options and restricted stock units (“RSUs”) to employees, directors and consultants on a straight-line basis over the vesting period based on their grant date fair values. We estimate the fair value of stock options on the date of grant using the Black-Scholes option pricing model. The fair value of RSUs is based on the share price as at the date of grant. We estimate forfeitures at the time of grant and revise these estimates in subsequent periods if actual forfeitures differ from those estimates.

Determining the estimated fair value at the grant date requires judgment in determining the appropriate valuation model and assumptions, including the fair value of common shares on the grant date, risk-free rate, volatility rate, annual dividend yield and the expected term. Volatility is estimated by using the historical volatility of the accounting acquirer and, other companies that we consider comparable and have trading and volatility history.

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(v) Business combinations and goodwill

We use judgment in applying the acquisition method of accounting for business combinations and estimates to value identifiable assets and liabilities at the acquisition date. Estimates are used to determine cash flow projections, including the period of future benefit, and future growth and discount rates, among other factors. The values allocated to the acquired assets and liabilities assumed affect the amount of goodwill recorded on acquisition. Fair value is typically estimated using an income approach, which is based on the present value of future discounted cash flows. Significant estimates in the discounted cash flow model include the discount rate, rate of future revenue growth and profitability of the acquired business and working capital effects. The discount rate considers the relevant risk associated with the business-specific characteristics and the uncertainty related to the ability to achieve projected cash flows. These estimates and the resulting valuations require significant judgment. Management engages third party experts to assist in the valuation of material acquisitions.

(vi) Leases

We record operating leases on our Consolidated Statement of Financial Position as right-of-use assets and recognize the related lease liabilities equal to the fair value of the lease payments using our incremental borrowing rate when the implicit rate in the lease agreement is not readily available. As most of our leases do not provide an implicit rate, the incremental borrowing rate is used based on the information available at commencement date in determining the present value of lease payments. We derived our incremental borrowing rate by assessing rates in recent market transactions, as adjusted for security interests and our credit quality.

(vii) Warrants

As part of the Arrangement, we inherited outstanding warrants. As a result, we 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. Our warrants are classified as liabilities and are recorded at fair value. The warrants are subject to remeasurement at each settlement date and at each balance sheet date and any change in fair value is recognized as a component of change in fair value of warrant liability in the statements of net loss and comprehensive loss. Transaction costs allocated to warrants that are presented as a liability are expensed immediately within transaction costs in the statements of net loss and comprehensive loss.

We estimate the fair value of the warrant liability using a Black-Scholes pricing model. We are required to make assumptions and estimates in determining an appropriate risk-free interest rate, volatility, term, dividend yield, discount due to exercise restrictions, and the fair value of common stock. Any significant adjustments to the unobservable inputs would have a direct impact on the fair value of the warrant liability.

New Standards and Interpretations Applicable Effective June 1, 2021

Refer to Part II, Item 8, Note 3, Significant Accounting Policies, of this Form 10-K for additional information on changes in accounting policies. There have been no new standards or interpretations applicable to the Company during the period.

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Liquidity and Capital Resources

The following table sets forth the major components of our statements of cash flows for the periods presented:

For the year ended May 31,

Effect on cash of foreign currency translation 2,124 (6,572 ) (9,570 )

Cash flows from operating activities

The changes in net cash used in operating activities in 2021 compared to 2020 primarily related to increase in non-cash adjustments for losses on convertible debentures from changes in fair value, unrealized foreign exchange losses due to unfavorable movement in our operating currencies against the U.S. dollar, amortization from additional intangible assets acquired in the Aphria-Tilray business combination, as well as an increase in cash used for transactions costs associated to the SweetWater and Aphria-Tilray business combinations. The positive effect of these non-cash adjustments was offset by lower collections of accounts receivable and higher use of cash for prepayment of current assets.

The changes in net cash used in operating activities in 2020 compared to 2019 primarily related to increased inventory as a result of increased licensed capacity at the Company’s facilities.

Cash flows from investing activities

Cash provided by investing activities in 2021 compared to 2020 increased primarily due to cash provided by the Company’s business acquisitions: Aphria-Tilray and SweetWater. This increase was also positively impacted by lower amounts of cash used in the acquisition of capital assets.

The change in net cash used in investing activities in 2020 compared to 2019 decreased due to less capital allocation to facility expansion and ceased passive cannabis investment activities.

Cash flows from financing activities

Cash provided by financing activities in 2021 compared to 2020 increased due to higher share capital issued, higher proceed from long term debt offset by higher amounts paid to non-controlling shareholders.

The change in net cash provided by financing activities during 2020 relates to proceeds from equity offerings, as compared to 2019 in which we also received proceeds from the issuance of our 5.25% Convertible Notes, (“APHA 24”). See Part II, Item 8, Note 19, “Convertible Debentures” of this Annual Report for additional information.

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Free cash flow

Free cash flow is a non-GAAP measure and it is comprised of two GAAP measures deducted from each other which are net cash flow used in operating activities less investments in capital and intangible assets. Our free cash flow was, as follows:

For the year ended May 31,

Cash resources and working capital requirements

The Company constantly monitors and manages its cash flows to assess the liquidity necessary to fund operations. As of May 31, 2021, the Company maintained $488,466 of cash and cash equivalents on hand, compared to $360,646 in cash and cash equivalents at May 31, 2020 or an increase of $127,820 in the period. This increase is primarily as a result cash acquired in the Aphria-Tilray business combination.

Working capital provides funds for the Company to meet its operational and capital requirements. As of May 31, 2021, the Company maintained working capital of $488,466. We primarily financed our operations through the issuance of common stock, sale of convertible notes and revenue generating activities. While we believe we have sufficient cash to meet existing working capital requirements in the short term, we may need additional sources of capital and/or financing, to meet our U.S. growth ambitions or expansion of our international operations.

Contractual obligations

We lease various facilities, under non-cancelable finance and operating leases, which expire at various dates through September 2040:

Year ending May 31,

Operating leases Finance leases

Less: amounts of leases related to interest payments (419 ) (18,759 )

Present value of minimum lease payments 25,691 36,783

Less: current accrued lease obligation (3,613 ) (651 )

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Purchase and other commitments

The Company has payments for long-term debt, convertible debentures, ABG finance liability, material purchase commitments and constructions commitments, as follows:

Construction commitments 1,814 1,814 — — — — —

Except as disclosed elsewhere in this Part II, Item 7, Management’s Discussion and Analysis of Financial Condition and Results of Operations, there have been no material changes with respect to the contractual obligations of the Company during the year-to-date period except for those related to the Company’s acquisitions.

Off-Balance Sheet Financing

As of May 31, 2021, the Company has no off-balance sheet financing.

Contingencies

In the normal course of business, we may receive inquiries or become involved in legal disputes regarding various litigation matters. In the opinion of management, any potential liabilities resulting from such claims would not have a material adverse effect on our consolidated financial statements.

Item 7A. Quantitative and Qualitative Disclosures About Market Risk.

The Company has exposure to the following risks from its use of financial instruments: credit; liquidity; currency rate; and, interest rate price.

(a) Credit risk

Credit risk is the risk of financial loss to the Company if a customer or counterparty to a financial instrument fails to meet its contractual obligations. The maximum credit exposure at May 31, 2021, is the carrying amount of cash and cash equivalents, accounts receivable, prepaids and other current assets, promissory notes receivable and convertible notes receivable. All cash and cash equivalents are placed with major financial institutions in Canada, Australia, Portugal, Germany, Colombia, Argentina and the United States.To date, the Company has not experienced any losses on its cash deposits. Accounts receivable are unsecured, and the Company does not require collateral from its customers.

(b) Liquidity risk

As at May 31, 2021, the Company’s financial liabilities consist of bank indebtedness and accounts payable and accrued liabilities, which have contractual maturity dates within one-year, long-term debt, and convertible debentures which have contractual maturities over the next five years.

The Company maintains a debt service charge covenant on certain loans secured by its Aphria One facilities that is measured at year-end only. The Company maintains debt service charge and leverage covenants on certain loans secured by its Aphria Diamond facilities and 420 that are measured quarterly. The Company believes that it has sufficient operating room with respect to its financial covenants for the next fiscal year and does not anticipate being in breach of any of its financial covenants.

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The Company manages its liquidity risk by reviewing its capital requirements on an ongoing basis. Based on the Company’s working capital position at May 31, 2021, management regards liquidity risk to be low.

(c) Currency rate risk

As at May 31, 2021, a portion of the Company’s financial assets and liabilities held in Canadian dollars and Euros consist of cash and cash equivalents, convertible notes receivable, and long-term investments. The Company’s objective in managing its foreign currency risk is to minimize its net exposure to foreign currency cash flows by transacting, to the greatest extent possible, with third parties in the functional currency. The Company is exposed to currency rate risk in other comprehensive income, relating to foreign subsidiaries which operate in a foreign currency. The Company does not currently use foreign exchange contracts to hedge its exposure of its foreign currency cash flows as management has determined that this risk is not significant at this point in time.

(d) Interest rate price risk

The Company’s exposure to changes in interest rates relates primarily to the Company’s outstanding debt. The Company manages interest rate risk by restricting the type of investments and varying the terms of maturity and issuers of marketable securities. Varying the terms to maturity reduces the sensitivity of the portfolio to the impact of interest rate fluctuations.

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Item 8. Financial Statements and Supplementary Data.

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

Consolidated Statement of Financial Position as of May 31, 2021 and 2020 75

Notes to Consolidated Financial Statements 79

Report of Independent Registered Public Accounting Firm 124

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Tilray, Inc.

Consolidated Statements of Financial Position

(In thousands of U.S. dollars)

Assets

Current assets

Interest in equity investees 8,106 —

Liabilities

Current liabilities

Contingent consideration 60,657 —

Warrant liability 78,168 —

Current portion of lease liabilities 4,264 954

Current portion of long-term debt 36,622 6,141

Long - term liabilities

Other liabilities 3,907 —

Commitments and contingencies (refer to Note 30) — —

Shareholders' equity

Accumulated other comprehensive income (loss) 152,668 (5,434 )

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

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Tilray, Inc.

Consolidated Statements of Loss and Comprehensive Loss

(In thousands of U.S. dollars, except share and per share amounts)

For the years ended May 31,

Operating expenses:

Total net income (loss) attributable to:

Other comprehensive (loss) income, net of tax

Foreign currency translation (loss) gain 156,649 (858 ) (90 )

Unrealized loss on convertible notes receivables (3,824 ) (5,476 ) (2,570 )

Total other comprehensive (loss) income, net of tax 152,825 (6,334 ) (2,660 )

Total comprehensive income (loss) attributable to:

Earnings (Loss) per share - basic $ (1.25 ) $ (0.47 ) $ (0.18 )

Earnings (Loss) per share - diluted $ (1.25 ) $ (0.47 ) $ (0.18 )

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

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Tilray, Inc.

Consolidated Statements of Changes in Equity

(In thousands of U.S. dollars, except share amounts)

Additional share issuance - Broken Coast acquisition 16,731 — 225 — — — 225

Share issuance - DSUs exercised 86,324 — — — — — —

Income tax recovery on share issuance cost — — 2,591 — — — 2,591

Elimination of CTA on disposal — — — 606 (606 ) — —

Non-controlling interests — — — — — 7,138 7,138

Share issuance - RSUs exercised 559,456 — — — — — —

Share issuance - DSUs exercised 333,606 — — — — — —

Expired warrants — — (728 ) — 728 — —

Nuuvera Malta acquisition — — — — (61 ) 61 —

Non-controlling interests — — — — — (6,610 ) (6,610 )

Share issuance - RSUs exercised 450,709 — — — — — —

Settlement of convertible notes receivable — — — 5,277 (5,277 ) — —

Dividends paid to non-controlling interests — — — — — (11,855 ) (11,855 )

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

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Tilray, Inc.

Consolidated Statements of Cash Flows

(In thousands of U.S. dollars, except share amounts)

For the year ended May 31,

Cash used in operating activities:

Adjustments for:

Unrealized foreign exchange loss (gain) 49,342 (451 ) (194 )

Loss (gain) on sale of capital assets (1,523 ) 8,075 (42 )

Loss on promissory notes receivable — 9,698 —

Transaction costs associated with business acquisitions 59,917 — 11,660

Loss (gain) on long-term investments & equity investments 1,624 24,295 (59,051 )

Cash used in investing activities:

Proceeds from disposal of marketable securities — 14,816 18,667

Proceeds from disposal of capital and intangible assets 6,608 1,411 42

Promissory notes advances (2,419 ) — (14,746 )

Investment in long-term investments and equity investees — (451 ) (54,724 )

Net cash acquired (paid) on business acquisitions 66,608 (25,902 ) (17,814 )

Cash provided by (used in) financing activities:

Proceeds from warrants and options exercised 144 3,918 5,157

Proceeds from convertible debentures — — 343,607

Repayment of convertible debentures — (812 ) —

Repayment of lease liabilities (1,058 ) (126 ) —

Increase in bank indebtedness 8,328 401 —

Amounts paid to non-controlling interest (23,895 ) — —

Effect of foreign exchange on cash and cash equivalents 2,124 (6,572 ) (9,570 )

Supplementary disclosure of cash flow information

Cash paid during the year:

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

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Tilray, Inc.

Notes to the Consolidated Financial Statements

(In thousands of U.S. dollars, except share and per share amounts)

1. Description of business

Tilray, Inc., a Delaware corporation, and its wholly owned subsidiaries (collectively “Tilray”, the “Company”, “we”, “us” or the “Successor”) is a global 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 hemp-based food products and ingredients that are sold through retailers and websites globally.

On April 30, 2021 Tilray acquired all of the issued and outstanding common shares of Aphria Inc. (“Aphria”), an international organization with a focus on building a global cannabis-lifestyle consumer packaged goods company and involved in the manufacturing and distribution of beer and beer derivative products in the United States, and in the distribution of (non-Cannabis) pharmaceutical products in Germany, pursuant to a plan of arrangement (the “Arrangement”) under the Ontario Business Corporations Act.

Under the terms of the Arrangement, stockholders of Aphria received 0.8381 (the “Exchange Ratio”) of a share of Tilray common stock for each Aphria share held. Tilray stockholders continued to hold their Tilray common stock, which remains outstanding. The Exchange Ratio resulted in Aphria stockholders and Tilray stockholders owning 61.2% and 38.8%, respectively, of the post-closing outstanding Tilray common stock (on a fully diluted basis), resulting in the reverse acquisition of Tilray under the acquisition method, whereby Aphria is deemed to be the acquiring entity from an accounting perspective. Following the completion of the Arrangement, Tilray is the consolidated parent of Aphria and the resulting company operates under the Tilray corporate name.

2. Basis of preparation

The policies applied in these consolidated financial statements are prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) and pursuant to the rules and regulations of the United States Securities and Exchange Commission (“SEC”).

Based on the determination that Aphria was the accounting acquirer in the Arrangement, Aphria’s historical financial statements became the historical financial statements of the Company. The acquired assets and liabilities of Tilray are included in the Company’s consolidated balance sheets as of April 30, 2021 and the results of its operations and cash flows are included in the Company’s consolidated statement of income (loss) and comprehensive income (loss) and cash flows for periods beginning after April 30, 2021. In conjunction with the reverse acquisition, the Company elected to adopt Aphria’s fiscal year end of June 1 to May 31.

Prior to April 30, 2021 Aphria was a foreign private issuer reporting its financial statements under International Financial Reporting Standards (“IFRS”) as issued by the International Accounting Standard Boards. These consolidated financial statements, for all periods, are presented in accordance with GAAP.

These consolidated financial statements have been prepared on the going concern basis which assumes that the Company will continue in operation for the foreseeable future and, accordingly, will be able to realize its assets and discharge its liabilities in the normal course of operations as they come due, under the historical cost convention except for certain financial instruments that are measured at fair value, as detailed in the Company’s accounting policies. For the fiscal year ended May 31, 2021 the Company reported a consolidated net loss of $336,014 and a consolidated net loss of $100,833 and $36,093 for the years ending May 31, 2020 and May 31, 2019, respectively.

For the years ended May 31, 2021, 2020 and 2019, the Company had cash flows used in operating activities of $44,717, $100,627 and $42,049, respectively. As of May 31, 2021 and 2020, the Company had working capital of $482,368 and $ 461,732 respectively.

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Current management forecasts and related assumptions support the view that the Company can adequately manage the operational needs of the business with the current cash on hand for the next twelve months from the date of issuance of these financial statements.

These financial statements reflect all adjustments, which, in the opinion of management, are necessary for a fair presentation of the Company’s financial position and results of operations.

Foreign currency

These consolidated financial statements are presented in U.S. dollars (“USD”), which is the Company’s reporting currency; however, the functional currency of the entities in these financial statements are their respective local currencies, including Canadian dollar, USD, Euro, Australian dollar, and Great Britain pound.

Foreign currency transactions are remeasured to the respective functional currencies of the Company’s entities at the exchange rates in effect on the date of the transactions. Monetary assets and liabilities denominated in foreign currencies are remeasured to the functional currency at the foreign exchange rate applicable at the statement of financial position date. Non-monetary items carried at historical cost denominated in foreign currencies are remeasured to the functional currency at the date of the transactions. Non-monetary items carried at fair value denominated in foreign currencies are remeasured to the functional currency at the date when the fair value was determined. Realized and unrealized exchange gains and losses are recognized through profit and loss.

On consolidation, the assets and liabilities of foreign operations reported in their functional currencies are translated into USD, the Group’s presentation currency, at period-end exchange rates. Income and expenses, and cash flows of foreign operations are translated into USD using average exchange rates. Exchange differences resulting from translating foreign operations are recognized in other comprehensive income (loss) and accumulated in equity.

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Basis of consolidation

Subsidiaries are entities controlled by the Company. Control exists when the Company either has a controlling voting interest or is the primary beneficiary of a variable interest entity. The financial statements of subsidiaries are included in the consolidated financial statements from the date that control commences until the date that control ceases. The following is a list of the Company’s operating subsidiaries:

Subsidiaries Jurisdiction of incorporation Ownership interest

Natura Naturals Inc. Canada 100%

Tilray, Inc. United States 100%

Manitoba Harvest USA LLC United States 100%

Tilray Canada, Ltd. Canada 100%

Dorada Ventures, Ltd. Canada 100%

FHF Holdings Ltd. Canada 100%

High Park Farms Ltd. Canada 100%

Tilray Deutschland GmbH Germany 100%

Pardal Holdings, Lda. Portugal 100%

Tilray Portugal Unipessoal, Lda. Portugal 100%

Tilray Australia New Zealand Pty. Ltd. Australia 100%

Tilray Ventures Ltd. Ireland 100%

Manitoba Harvest Japan K.K. Japan 100%

High Park Holdings, Ltd. Canada 100%

Fresh Hemp Foods Ltd. Canada 100%

Natura Naturals Holdings Inc. Canada 100%

National Cannabinoid Clinics Pty Ltd. Australia 100%

Tilray Latin America SpA Chile 100%

Tilray Portugal II, Lda. Portugal 100%

High Park Gardens Inc. Canada 100%

High Park Shops Inc. Canada 100%

Privateer Evolution, LLC United States 100%

Tilray France SAS France 100%

High Park Holdings B.V. Netherlands 100%

High Park Botanicals B.V. Netherlands 100%

Broken Coast Cannabis Ltd. British Columbia, Canada 100%

SweetWater Brewing Company, LLC United States 100%

SweetWater Colorado Brewing Co. United States 100%

ARA – Avanti Rx Analytics Inc. Ontario, Canada 100%

FL Group S.r.l. Italy 100%

ABP, S.A. Argentina 100%

Aphria Germany GmbH Germany 100%

Aphria RX GmbH Germany 100%

CC Pharma GmbH Germany 100%

CC Pharma Research and Development GmbH Germany 100%

Aphria Wellbeing GmbH Germany 100%

CC Pharma Luxemburg GmbH Luxemburg 100%

ASG Pharma Ltd. Malta 100%

ColCanna S.A.S. Colombia 90%

CC Pharma Nordic ApS Denmark 75%

Intragroup balances, and any unrealized gains and losses or income and expenses arising from transactions with jointly controlled entities are eliminated to the extent of the Company’s interest in the entity.

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A Variable Interest Entity (“VIE”) is a legal entity that does not have sufficient equity at risk to finance its activities without additional subordinated financial support, is structured such that equity investors lack the ability to make significant decisions relating to the entity’s operations through voting rights, or do not substantively participate in the gains and losses of the entity. Upon inception of a contractual agreement, the Company performs an assessment to determine whether the arrangement contains a variable interest in a legal entity and whether that legal entity is a VIE. The primary beneficiary has both the power to direct the activities of the VIE that most significantly impact the entity’s economic performance and the obligation to absorb losses or the right to receive benefits from the VIE entity that could potentially be significant to the VIE. Where the Company concludes it is the primary beneficiary of a VIE, the Company consolidates the accounts of that VIE. When the Company is not the primary beneficiary, the VIE is accounted for using the equity method and is included in equity method investments on the balance sheets. At May 31, 2021, 2020, and 2019, the Company had no consolidated VIEs. Refer to Note 13 Interest in equity investees for the Company’s VIEs accounted for using the equity method.

The Company regularly reviews and reconsiders previous conclusions regarding whether it is the primary beneficiary of a VIE. The Company also reviews and reconsiders previous conclusions regarding whether the Company holds a variable interest in a potential VIE, the status of an entity as a VIE, and whether the Company is required to consolidate such a VIE in the financial statements when a change occurs.

The Company treats transactions that do not result in a loss of control as equity transactions and generally no gain or loss is recognized. A change in ownership interest results in an adjustment between the carrying amounts of the controlling and non-controlling interests to reflect their relative interests in the subsidiary. Any difference between the amount of the adjustment to non-controlling interests and any consideration paid or received is recognized in a separate reserve within equity attributable to the owners of the Company.

Equity method investments

In accordance with ASC 323, Investments – Equity Method and Joint Ventures, investments in entities over which the Company does not have a controlling financial interest but has significant influence are accounted for using the equity method, with the Company’s share of earnings or losses reported in earnings or losses from equity method investments on the statements of net loss and comprehensive loss. Equity method investments are recognized initially at cost, which includes transaction costs. After initial recognition, the consolidated financial statements include the Company’s share of undistributed earnings or losses, and impairment, if any, until the date on which significant influence ceases.

If the Company’s share of losses in an equity investment equals or exceeds its interest in the entity, including any net advances, the group does not recognize further losses, unless it has guaranteed obligations of the investee or is otherwise committed to provide further financial support for the investee.

Unrealized gains on transactions between the Company and its equity-method investees are eliminated only to the extent of the Company’s interest in these entities. Unrealized losses are also eliminated, except to the extent that the underlying asset is impaired.

3. Significant accounting policies

The significant accounting policies used by the Company are as follows:

Cash and cash equivalents

Cash and cash equivalents are comprised of cash and highly liquid investments that are both readily convertible into known amounts of cash with original maturities of three months or less. Cash and cash equivalents include amounts held in United States dollar, Canadian dollar, Euro, Australian dollar, Great Britain pound, Colombian peso, Argentine peso, and corporate bonds, commercial paper, treasury bills and money market funds.

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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 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.

Inventory

Inventory consists of our cannabis, wellness, beverage, and distribution inventory, as follows:

Cannabis inventory consists of our plants, dried cannabis, cannabis trim, cannabis derivatives such as oils, and vape products. Cannabis inventory costs include pre-harvest, post-harvest, shipment and fulfillment, as well as costs related to accessories. Pre-harvest costs include labor and direct materials to grow cannabis, which includes water, electricity, nutrients, integrated pest management, growing supplies and allocated overhead. Post-harvest costs include costs associated with drying, trimming, blending, extracting, purifying, quality testing and allocated overhead. Shipment and fulfillment costs include the costs of packaging, labelling, courier services, and allocated overhead.

Wellness inventory cost includes hemp seeds, packaging and co-packing. Seed costs include commodity cost paid to farmers, genetic seed cost to provide and manage contracted farmers, hulling and processing costs, including labor and overhead. Packaging costs include packaging materials, labor and overhead to run machinery. Co-packing cost are generally for products not manufactured by the Company directly and would include all costs to produce the products.

Beverage inventory cost includes materials we incur to make and ship beer beverages. These costs include brewing materials, such as barley, hops and various grains. Packaging materials such as glass bottles, aluminum cans, cardboard and paperboard are also included in the cost of our beverage inventory. Additionally, our cost of goods sold include both direct and indirect labor, shipping and handling including freight costs, utilities, maintenance costs, warehousing costs, purchasing and receiving costs, amortization, promotional packaging, and other manufacturing overheads

Distribution inventory includes costs related to procurement of pharmaceutical products for re-sale in entities’ respective markets.

Inventory is valued at the lower of cost and net realizable value, determined using weighted average cost. All direct and indirect costs related to inventory are capitalized as they are incurred, and they are subsequently recorded in cost of goods sold on the statements of loss and comprehensive loss at the time inventory is sold. Net realizable value is defined as the estimated selling price in the ordinary course of business, less reasonably predictable costs of completion, disposal and transportation. At the end of each reporting period, the Company performs an assessment of inventory and records write-downs for excess and obsolete inventories based on the Company’s estimated forecast of product demand, production requirements, market conditions, regulatory environment, and spoilage. Actual inventory losses may differ from management’s estimates and such differences could be material to the Company’s statements of financial position, statements of loss and comprehensive loss and statements of cash flows.

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Capital assets

Capital assets are recorded at cost, net of accumulated amortization and impairment, if any. Amortization for the properties included in our capital assets is calculated using the following terms and methods:

Asset type Depreciation method Depreciation term (estimated useful life)

Land Not depreciated No term

Production facility Straight-line 20 – 30 years

Equipment Straight-line 3 – 25 years

Construction in progress Not depreciated No term

The estimated residual values and useful lives are reviewed at the end of each reporting period, with the effect of any changes in estimate being accounted for on a prospective basis.

When assets are retired or disposed of, the cost and accumulated amortization are removed from the respective accounts and any related gain or loss is recognized. Maintenance and repairs are charged to expenses as incurred. Significant expenditures, which extend the useful lives of assets or increase productivity, are capitalized. When significant parts of one of our capital assets have different useful lives, they are accounted for as separate items or components of capital assets.

Construction in progress includes construction progress payments, deposits, engineering costs and other costs directly related to the construction of the facilities. Expenditures are capitalized during the construction period and construction in progress is transferred to the relevant class of capital assets when the assets are available for use, at which point in time the amortization of the asset commences.

Intangible assets

Intangible assets include intangible assets acquired as part of business combinations, asset acquisitions and other business transactions. The Company records intangible assets at cost, net of accumulated amortization and accumulated impairment losses, if any. Cost is measured based on the fair values of cash consideration paid and equity interests issued. The cost of an intangible asset acquired is its acquisition date fair value.

Amortization of definite life intangible assets is calculated on a straight -line basis over the estimated useful lives of the assets using the following terms:

Asset type Amortization term

Customer relationships and distribution channel 14 – 16 years

Licences, permits & applications 90 months – indefinite

Brands, intellectual property and trademarks 15 months – 25 years

Non-compete agreements Over term of non-compete

Know how 5 years

When there is no foreseeable limit on the period of time over which an intangible asset is expected to contribute to the cash flows of the Company, an intangible asset is determined to have an indefinite-lived. Indefinite-lived intangible assets are not amortized but tested for impairment annually or more frequently when indicators of impairment exist. If the carrying value of an individual indefinite-lived intangible asset exceeds its fair value, such individual indefinite-lived intangible asset is impaired by the amount of the excess.

The estimated useful lives are reviewed at the end of each reporting period, with the effect of any changes in estimate being accounted for on a prospective basis.

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Impairment of long-lived assets

The Company reviews long-lived assets, including capital assets and definite life intangible assets for impairment whenever events or changes in circumstances indicate that the carrying value of an asset may not be recoverable. In order to determine if assets have been impaired, assets are grouped and tested at the lowest level for which identifiable independent cash flows are available (“asset group”). An impairment loss is recognized when the sum of projected undiscounted cash flows is less than the carrying value of the asset group. The measurement of the impairment loss to be recognized is based on the difference between the fair value and the carrying value of the asset group. Fair value may be determined using a market approach or income approach. The reversal of impairment losses is prohibited.

Business combinations and goodwill

The Company accounts for business combinations using the acquisition method in accordance with Accounting Standards Codification, ASC 805, Business Combinations which requires recognition of assets acquired and liabilities assumed, including contingent assets and liabilities, at their respective fair values on the date of acquisition.

Contingent consideration is measured at its acquisition-date fair value and included as part of the consideration transferred in a business combination. Contingent consideration that is classified as equity is not remeasured at subsequent reporting dates and its subsequent settlement is accounted for within equity. Contingent consideration that is classified as an asset or liability is remeasured at subsequent reporting dates, with the corresponding gain or loss recognized in profit or loss.

Non-controlling interests in the acquiree are measured at fair value on acquisition date. Acquisition-related costs are recognized as expenses in the periods in which the costs are incurred and the services are received (except for the costs to issue debt or equity securities which are recognized according to specific requirements).

Purchase price allocations may be preliminary and, during the measurement period not to exceed one year from the date of acquisition, changes in assumptions and estimates that result in adjustments to the fair value of assets acquired and liabilities assumed are recorded in the period the adjustments are determined.

Goodwill represents the excess of the consideration transferred for the acquisition of subsidiaries over the net of the acquisition-date amounts of the identifiable assets acquired and the liabilities assumed. Following initial recognition, goodwill is measured at cost less any accumulated impairment losses.

Impairment of goodwill and indefinite-lived intangible assets

Goodwill is allocated to the reporting unit in which the business that created the goodwill resides. A reporting unit is an operating segment, or a business unit one level below that operating segment, for which discrete financial information is prepared and regularly reviewed by segment management. We operate in five operating segments which are our reporting units, and goodwill is allocated at the operating segment level. The Company reviews goodwill and indefinite-lived intangible assets annually for impairment in the fourth quarter, or more frequently, if events or circumstances indicate that the carrying amount of an asset may not be recoverable.

Leases

The Company determines if an arrangement is a lease at inception. The Company has operating and finance leases for facilities, office spaces, production equipment and vehicles. Operating leases are included in right‐of‐use (“ROU”) assets and finance lease ROU assets are included in capital assets in the statements of financial position. The lease liabilities are included in lease liabilities (current and non-current) in the statements of financial position.

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ROU assets represent the Company’s right to use an underlying asset for the lease term and lease liabilities represent the Company’s obligation to make lease payments arising from the lease. ROU assets are classified as a finance lease or an operating lease. A finance lease is a lease in which:

The Company classifies a lease as an operating lease when it does not meet any one of these criteria.

The ROU asset is initially measured at cost, which is primarily comprised of the initial amount of the lease liability, plus initial direct costs and lease payments at or before the commencement date, less any lease incentives received. All ROU assets are reviewed periodically for impairment.

The lease liability is initially measured at the present value of the lease payments, discounted using the interest rate implicit in the lease or, if that rate cannot be readily determined, the incremental borrowing rate. The incremental borrowing rate is defined as the rate of interest that a lessee would have to pay to borrow on a collateralized basis over a similar term an amount equal to the lease payments in a similar economic environment.

Lease payments included in the measurement of the lease liability comprise:

For finance leases, lease expenses are the sum of interest on the lease obligations and amortization of the ROU assets. Finance lease ROU assets are amortized based on the lesser of the lease term and the useful life of the leased asset according to the capital asset accounting policy. If ownership of the ROU assets transfers to the Company at the end of the lease term or if the Company is reasonably certain to exercise a purchase option, amortization is calculated using the estimated useful life of the leased asset.

For operating leases, the lease expenses are generally recognized on a straight-line basis over the lease term and recorded to general and administrative expenses in the statements of loss and comprehensive loss.

The Company has elected to apply the practical expedient, for each class of underlying asset, to not separate non-lease components from the associated lease components of the lessee’s contract and account for both components as a single lease component.

The Company has elected not to recognize right-of-use assets and lease liabilities for short-term leases (defined as leases with a lease term of 12 months or less that do not include an option to purchase the underlying asset that the Company is reasonably certain to exercise). Short-term leases include real estate and vehicles and are not significant in comparison to the Company’s overall lease portfolio. For these leases, the Company recognizes the leases as an operating expense on a straight-line basis over the term of the lease.

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Convertible notes receivable

Convertible notes receivables include various investments in which the Company has the right to convert the indenture into common stock shares of the investee and are classified as available-for-sale and are recorded at fair value. Unrealized gains and losses during the year, net of the related tax effect, are excluded from income and reflected in other comprehensive income (loss), and the cumulative effect is reported as a separate component of shareholders’ equity until realized. The Company assesses its convertible notes receivables for impairment at each measurement date. Convertible notes receivables are impaired when a decline in fair value is determined to be other-than-temporary. If the cost of an investment exceeds its fair value, the Company evaluates, among other factors, general market conditions, credit quality of debt instrument issuers, and the duration and extent to which the fair value is less than cost. Once a decline in fair value is determined to be other-than-temporary, an impairment charge is recorded in the statements of loss and comprehensive loss and a new cost basis for the investment is established. The Company also evaluates whether there is a plan to sell the security or it is more likely than not that the Company will be required to sell the security before recovery. If neither of the conditions exist, then only the portion of the impairment loss attributable to credit loss is recorded in the statements of net loss and the remaining amount is recorded in other comprehensive income (loss).

Long-term investments

Long-term investments include investments in equity securities of entities over which the Company does not have a controlling financial interest or significant influence and are accounted for at fair value. Equity investments without readily determinable fair values are measured at cost with adjustments for observable changes in price or impairments (referred to as the “measurement alternative”). In applying the measurement alternative, the Company performs a qualitative assessment on a quarterly basis and recognizes an impairment if there are sufficient indicators that the fair value of the equity investments is less than carrying values. Changes in value are recorded in non-operating income (loss).

Equity method investments

Investments in entities over which the Company does not have a controlling financial interest but has significant influence, are accounted for using the equity method, with the Company’s share of losses reported in loss from equity method investments on the statements of loss and comprehensive loss. Equity method investments are recorded at cost, plus the Company’s share of undistributed earnings or losses, and impairment, if any, within interest in equity investees on the statements of financial position.

Convertible debentures

The Company accounts for its convertible debentures in accordance with ASC 470-20 Debt with Conversion and Other Options, which requires the liability and equity components of convertible debt instruments that may be settled in cash upon conversion, including partial cash settlement, to be separately accounted for in a manner that reflects the issuer’s nonconvertible debt borrowing rate. The initial proceeds from the sale of convertible notes are allocated between a liability component and an equity component in a manner that reflects interest expense at the rate of similar nonconvertible debt that could have been issued at such time. The equity component represents the excess initial proceeds received over the fair value of the liability component of the notes as of the date of issuance. The resulting debt discount is amortized over the period during which the convertible notes are expected to be outstanding as additional non-cash interest expenses.

Upon repurchase of convertible debt instruments, ASC 470-20 requires the issuer to allocate total settlement consideration, inclusive of transaction costs, amongst the liability and equity components of the instrument based on the fair value of the liability component immediately prior to repurchase. The difference between the settlement consideration allocated to the liability component and the net carrying value of the liability component, including unamortized debt issuance costs, would be recognized as gain (loss) on extinguishment of debt in the statements of loss and comprehensive loss. The remaining settlement consideration allocated to the equity component would be recognized as a reduction of additional paid-in capital in the statements of financial position.

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For convertible debentures with an embedded conversion feature that did not meet the equity scope exception from derivative accounting pursuant to ASC 815-15, the Company elected the fair value option under ASC 825 Fair Value Measurements. When the fair value option is elected, the convertible debenture is initially recognized at fair value on the statements of financial position and all subsequent changes in fair value, excluding the impact of the change in fair value related to instrument-specific credit risk are recorded in non-operating income (loss). The changes in fair value related to instrument-specific credit risk is recorded through other comprehensive income (loss). Transaction costs directly attributable to the issuance of the convertible debenture is immediately expensed in the statements of loss and comprehensive loss.

Warrants

Warrants are accounted for in accordance with applicable accounting guidance provided in ASC 815 Derivatives and Hedging – Contracts in Entity's Own Equity, as either liabilities or as equity instruments depending on the specific terms of the warrant agreement. Warrants classified as liabilities are recorded at fair value and are remeasured at each reporting date until settlement. Changes in fair value is recognized as a component of change in fair value of warrant liability in the statements of loss and comprehensive loss. Transaction costs allocated to warrants that are presented as a liability were immediately expensed in the statements of loss and comprehensive loss. Warrants classified as equity instruments are initially recognized at fair value and are not subsequently remeasured.

Fair value measurements

Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. The carrying values of accounts receivable, prepaids and other current assets, bank indebtedness and accounts payable and accrued liabilities approximate their fair values due to their short periods to maturity. The Company calculates the estimated fair value of financial instruments, including convertible notes receivable, long-term investments, warrant liability, contingent consideration, and convertible debentures, using quoted market prices when available. When quoted market prices are not available, fair value is determined based on valuation techniques using the best information available and may include quoted market prices, market comparables, and discounted cash flow projections.

Income taxes

Income taxes are recognized in the consolidated statements of loss and comprehensive loss and are comprised of current and deferred taxes. Current tax is recognized in connection with income for tax purposes, unrealized tax benefits and the recovery of tax paid in a prior period and measured using enacted tax rates and laws applicable to the taxation period during which the income for tax purposes arose. Deferred tax assets and liabilities are determined based on the differences between the financial reporting and the tax basis of assets and liabilities and are measured using the enacted tax rates and laws that will be in effect when the differences are expected to reverse. Management makes an assessment of the likelihood that a deferred tax asset will be realized, and a valuation allowance is provided to the extent that it is more likely than not that all or a portion of a deferred tax asset will not be realized.

The Company recognizes uncertain income tax positions at the largest amount that is more likely than not to be sustained upon audit by the relevant tax authority. An uncertain income tax position will not be recognized if it has less than a 50% likelihood of being sustained. A change in the recognition or measurement of an unrealized tax benefit is reflected in the period during which the change occurs.

Revenue

Revenue is recognized when the control of the promised goods, through performance obligation, is transferred to the customer in an amount that reflects the consideration we expect to be entitled to in exchange for the performance obligations.

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Excise taxes remitted to tax authorities are government-imposed excise taxes on cannabis and beer. Excise taxes are recorded as a reduction of sales in net revenue in the consolidated statements of operations and recognized as a current liability within accounts payable and other current liabilities on the consolidated balance sheets, with the liability subsequently reduced when the taxes are remitted to the tax authority.

In addition, amounts disclosed as net revenue are net of excise taxes, sales tax, duty tax, allowances, discounts and rebates.

In determining the transaction price for the sale of goods, the Company considers the effects of variable consideration and the existence of significant financing components, if any.

Some contracts for the sale of goods may provide customers with a right of return, volume discount, bonuses for volume/quality achievement, or sales allowance. In addition, the Company may provide in certain circumstances, a retrospective price reduction to a customer based primarily on inventory movement. These items give rise to variable consideration. The Company uses the expected value method to estimate the variable consideration because this method best predicts the amount of variable consideration to which the Company will be entitled. The Company uses historical evidence, current information and forecasts to estimate the variable consideration. The Company reduces revenue and recognizes a contract liability equal to the amount expected to be refunded to the customer in the form of a future rebate or credit for a retrospective price reduction, representing its obligation to return the customer’s consideration. The estimate is updated at each reporting period date.

The Company may receive short-term advances from its customers. Using the practical expedient in ASC 606, the Company does not adjust the promised amount of consideration for the effects of a significant financing component if the Company expects, at contract inception, that the period between when the Company transfers a promised good to a customer and when the customer pays for that good or service will be one year or less. The Company has not, nor expects to receive long-term advances from customers.

Cost of goods sold

Cost of goods sold represents costs directly related to manufacturing and distribution of the Company’s products. Primary costs include raw materials, packaging, direct labor, overhead, shipping and handling, the amortization of manufacturing equipment and production facilities and tariffs. Manufacturing overhead and related expenses include salaries, wages, employee benefits, utilities, maintenance and property taxes. Cost of goods sold also includes inventory valuation adjustments. The Company recognizes the cost of goods sold as the associated revenues are recognized.

General and administrative

General and administrative expenses are comprised primarily of (i) personnel related costs such as salaries, benefits, annual employee bonus expense and stock-based ‘compensation costs for personnel in corporate, finance, legal, and other administrative positions; (ii) legal, accounting, consulting and other professional fees; and (iii) corporate insurance and other facilities costs associated with our corporate and administrative locations.

Selling

Selling expenses are comprised direct selling costs which primarily consist of (i) commissions paid to our third-party workforce, (ii) patient acquisition and maintenance fees, (iii) Health Canada’s cannabis fees and (iv) freight.

Marketing and promotion

Marketing and promotion expenses are comprised primarily of marketing and advertising expenses.

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Research and development

Research and development costs are expensed as incurred. Research and development are comprised primarily of costs for personnel, clinical study costs, contracted research, consulting services, materials and supplies, milestones, an allocation of our occupancy costs and other expenses incurred to sustain our overall research and development programs.

Stock-based compensation

The Company has an omnibus plan which includes issuances of stock options, restricted stock units (“RSUs”) and stock appreciation rights (“SARs”) in place. The Company estimates the fair value of stock options on the date of grant using the Black-Scholes option pricing model. The fair value of RSUs is based on the share price as at date of grant and no SARs were issued to date. The share-based compensation expense is based on the fair value of the stock-based awards at the grant date and the expense is recognized over the related service period following a straight-line vesting expense schedule. The Company estimates forfeitures at the time of grant and revises these estimates in subsequent periods if actual forfeitures differ from those estimates. Any revisions are recognized in the consolidated statements of loss and comprehensive loss such that the cumulative expense reflects the revised estimate.

For performance-based stock options and RSUs, the Company records compensation expense over the estimated service period adjusted for a probability factor of achieving the performance-based milestones. At each reporting date, the Company assesses the probability factor and records compensation expense accordingly, net of estimated forfeitures.

Earnings (loss) per share

Basic earnings (loss) per share is computed by dividing reported net income (loss) by the weighted average number of common shares outstanding during the year. Diluted earnings (loss) per share is computed by dividing reported net income (loss) by the sum of the weighted average number of common shares and the number of dilutive potential common share equivalents outstanding during the period. Potential dilutive common share equivalents consist of the incremental common shares issuable upon the exercise of vested share options, warrants, and RSUs and the incremental shares issuable upon conversion of the convertible debentures and similar instruments.

In computing diluted earnings (loss) per share, common share equivalents are not considered in periods in which a net loss is reported, as the inclusion of the common share equivalents would be anti-dilutive.

Critical accounting estimates and judgments

The preparation of the Company’s financial statements requires management to make judgments, estimates and assumptions that affect the application of policies and reported amounts of assets, liabilities, revenues and expenses. These estimates and judgements are subject to change based on experience and new information which could result in outcomes that require a material adjustment to the carrying amounts of assets or liabilities affecting future periods. Actual results may differ from these estimates. The estimates and underlying assumptions are reviewed on an ongoing basis. Revisions to accounting estimates are recognized prospectively.

Financial statement areas that require significant judgement are as follows:

Leases– The Company applies judgement in determining whether a contract contains a lease and if a lease is classified as an operating lease or a finance lease. The Company determines the lease term as the non-cancellable term of the lease, which may include options to extend or terminate the lease when it is reasonably certain that the Company will exercise that option. That is, it considers all relevant factors that create an economic incentive for it to exercise either the renewal or termination. After the commencement date, the Company reassesses the lease term if there is a significant event or change in circumstances that is within its control and affects its ability to exercise or not to exercise the option to renew or to terminate (e.g., construction of significant leasehold improvements or significant customization to the leased asset).

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Long-term investments and convertible notes receivable– The determination of fair value of the Company’s long-term investments and convertible notes receivable at other than initial cost is subject to certain limitations. Financial information for private companies in which the Company has investments may not be available and, even if available, that information may be limited and/or unreliable.

Use of the valuation approach described below may involve uncertainties and determinations based on the Company’s judgment and any value estimated from these techniques may not be realized or realizable.

Company-specific information is considered when determining whether the fair value of a long-term investment or convertible notes receivable should be adjusted upward or downward at the end of each reporting period. In addition to company-specific information, the Company will consider trends in general market conditions and the share performance of comparable publicly traded companies when valuing long-term investments and convertible notes receivable.

The fair value of long-term investments and convertible notes receivable may need to be adjusted if:

• The investee company is placed into receivership or bankruptcy;

Adjustment to the fair value of a long-term investment and convertible notes receivable will be based upon management’s judgment and any value estimated may not be realized or realizable. The resulting values for non-publicly traded investments may differ from values that would be realized if a ready market existed.

Estimated useful lives, impairment considerations and amortization of capital and intangible assets – Amortization of capital and intangible assets is dependent upon estimates of useful lives based on management’s judgment.

Goodwill and indefinite-lived intangible asset impairment testing require management to make estimates in the impairment testing model. On at least an annual basis, the Company tests whether goodwill and indefinite-lived intangible assets are impaired. Impairment of definite long-lived assets is influenced by judgment in defining a reporting unit and determining the indicators of impairment, and estimates used to measure impairment losses

The reporting unit’s fair value is determined using discounted future cash flow models, which incorporate assumptions regarding future events, specifically future cash flows, growth rates and discount rates. The uncertainties of coronavirus’ (“COVID-19”) impact on the future cash flow estimates are further described in Note 10 Business acquisitions and goodwill.

Stock-based compensation – The fair value of stock-based compensation expenses are estimated using the Black-Scholes option pricing model and rely on a number of assumptions including the fair value of common shares on the grant date, risk-free rate, volatility rate, annual dividend yield, the expected term, and the estimated rate of forfeiture of options granted. Volatility is estimated by using the historical volatility of the Company.

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Business combinations– Judgement is used in determining a) whether an acquisition is a business combination or an asset acquisition. We use judgement in applying the acquisition method of accounting for business combinations and estimates to value identifiable assets and liabilities at the acquisition date. Estimates are used to determine cash flow projections, including the period of future benefit, and future growth and discount rates, among other factors. The values allocated to the acquired assets and liabilities assumed affect the amount of goodwill recorded on acquisition. Fair value of assets acquired and liabilities assumed is typically estimated using an income approach, which is based on the present value of future discounted cash flows. Significant estimates in the discounted cash flow model include the discount rate, rate of future revenue growth and profitability of the acquired business and working capital effects. The discount rate considers the relevant risk associated with the business-specific characteristics and the uncertainty related to the ability to achieve projected cash flows. These estimates and the resulting valuations require significant judgment. Management engages third party experts to assist in the valuation of material acquisitions.

Convertible debentures – The fair value of Convertible Debentures where the Company had elected the fair value option are determined using the Black-Scholes option pricing model. Assumptions and estimates are made in determining an appropriate conversion price, volatility, dividend yield, and the fair value of common stock. There is judgement in assessing what portion of the gain or loss, if any, relates to the change in the instrument-specific credit risk.

Warrant liability – The fair value of the warrant liability is measured using a Black Scholes pricing model. Assumptions and estimates are made in determining an appropriate risk-free interest rate, volatility, term, dividend yield, discount due to exercise restrictions, and the fair value of common stock. Any significant adjustments to the unobservable inputs would have a direct impact on the fair value of the warrant liability.

New 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. The standard is effective for annual reporting periods beginning after December 15, 2021 and including interim periods within those fiscal years, which means that it will be effective for the Company in the first quarter of our year beginning June 1, 2021. The Company is currently evaluating the effect of adopting this ASU on the Company’s financial Statements. We do not expect the adoption of ASU 2019-12 to have a material impact on our consolidated financial statements.

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 June 1, 2021. The Company is currently evaluating the effect of adopting this ASU.

In August 2020, the FASB issued ASU 2020-06, Debt—Debt with Conversion and Other Options (Subtopic 470-20) and Derivatives and Hedging—Contracts in Entity’s Own Equity (Subtopic 815-40): Accounting for Convertible Instruments and Contracts in an Entity’s Own Equity (“ASU 2020-06”), which amends and simplifies existing guidance in an effort to reduce the complexity of accounting for convertible instruments and to provide financial statement users with more meaningful information. ASU 2020-06 is effective for the Company beginning June 1, 2022. This update may be applied retrospectively or on a modified retrospective basis with the cumulative effect recognized as an adjustment to the opening balance of retained earnings on the date of adoption. The Company is currently evaluating the effect of adopting this ASU.

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4. Prepaids and other current assets

Prepaids and other current assets are comprised of:

Prepaid corporate taxes — 4,670

Included within prepaid assets are insurance, deposits, advanced payments on contracts, and other prepayments that will result in future benefit.

5. Inventory

Inventory is comprised of:

Wellness inventory 15,171 —

Beverage alcohol inventory 5,402 —

Inventory is written down for any obsolescence, spoilage and excess inventory or when the net realizable value of inventory is less than the carrying value. During the year ended May 31, 2021, the Company recorded charges for inventory and inventory-related write downs as a component of cost of sales. Cannabis products were written down by $19,919 for the year ended May 31, 2021 and there were no write downs for the years ended May 31, 2020 and 2019.

6. Related party transactions

In the normal course of business, the Company enters into related party transactions with certain entities under common control and joint ventures as detailed below.

Leafly Holdings, Inc. (“Leafly”)

The Company has an agreement with Leafly providing for data licensing activities. During the year ended May 31, 2021, 2020, and 2019 operational expenses were nil, respectively was recorded within general and administrative expenses in the statements of loss and comprehensive loss.

Docklight LLC (“Docklight”) royalty and management services

The Company pays Docklight a royalty fee pursuant to a brand licensing agreement which provides the Company with exclusive rights in Canada for the use of certain adult-use brands. During the year ended May 31, 2021, 2020 and 2019 royalty fees of were $125, nil, and nil, respectively were recorded within general and administrative expenses in the statements of loss and comprehensive loss.

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Fluent and Cannfections

The Company has joint venture arrangements with a 50% ownership and voting interest in each of Fluent and Cannfections. Refer to Note 13 for details over transactions with these entities for the year ended May 31, 2021, 2020 and 2019.

7. Capital assets

Capital asset consisted of the following:

Cost:

ROU Amortization — — — — (827 ) — (827 )

Accumulated amortization:

Net book value:

8. Leases

The Company has operating and finance leases for facilities, office spaces, production equipment and vehicles.

Leases have varying terms with remaining lease terms of up to approximately 20 years. Certain of our lease arrangements provide us with the option to extend or to terminate the lease early.

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The table below presents the lease-related assets and liabilities recorded on the balance sheet.

Assets

Operating lease, right-of- use assets Right of use assets $ 18,267 $ 5,356

Finance lease, right-of-use assets Capital assets 34,726 —

Liabilities

Current:

Operating lease liability Accrued lease obligations - current $ 3,613 $ 954

Finance lease liability Accrued lease obligations - current 651 —

Non-current:

Operating lease liability Accrued lease obligations - non-current 18,465 4,227

Finance lease liability Accrued lease obligations - non-current 35,481 —

The table below presents certain information related to the lease costs for finance and operating leases.

Finance lease cost:

Amortization of right-of-use assets $ 806 $ —

Interest on lease liabilities 765 —

The Company does not have short term lease expense or sublease income for the year ending May 31, 2021.

The table below presents supplemental cash flow information related to leases.

Cash paid for amounts included in the measurement of lease liabilities

Operating cash flows from operating leases $ 1,466 $ 994

Operating cash flows from finance leases 774 —

Financing cash flows from finance leases 231 —

The following table presents the future undiscounted payment associated with lease liabilities as of May 31, 2021:

Year ending May 31,

Operating leases Finance leases

Less: amounts of leases related to interest payments (419 ) (18,759 )