Tilray Brands, Inc. - Annual Report 2020

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 December 31, 2020 (“Annual Report”). Some of the information contained in this discussion and analysis or set forth elsewhere in this Annual Report on Form 10-K, including information with respect to our plans and strategy for our business and related financing, includes “forward-looking statements” within the meaning of Section 27A of the Securities Act and Section 21E of the Securities Exchange Act of 1934, as amended, or the Exchange Act, or “forward -looking information” within the meaning of Canadian securities laws. These statements are often identified by the use of words such as “anticipate,” “believe,” “continue,” “could,” “estimate,” “expect,” “intend,” “may,” “plan,” “project,” “will,” “would” or the negative or plural of these words or similar expressions or variations. Such forward-looking statements and forward-looking information are subject to a number of risks, uncertainties, assumptions and other factors that could cause actual results and the timing of certain events to differ materially from future results expressed or implied by the forwardlooking statements or forward-looking information. Factors that could cause or contribute to such differences include, but are not limited to, those identified in this Annual Report on Form 10-K and those discussed in the section titled “Risk Factors” set forth in Part I, Item 1A of this Annual Report on Form 10-K and in our other SEC and Canadian public filings. In addition, statements that “we believe” and similar statements reflect our beliefs and opinions on the relevant subject. These statements are based on information available to us as of the date of this Annual Report on Form 10-K and while we believe that information provides a reasonable basis for these statements, that information may be limited or incomplete. Our statements should not be read to indicate that we have conducted an exhaustive inquiry into, or review of, all relevant information. These statements are inherently uncertain, and investors are cautioned not to unduly rely on these statements. You should not rely upon forwardlooking statements or forward-looking information as predictions of future events. Furthermore, such forwardlooking statements or forward-looking information speak only as of the date of this report. Except as required by law, we undertake no obligation to update any forward-looking statements or forward-looking information to reflect events or circumstances after the date of such statements.

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.

Overview

Our vision is to build the world’s most trusted and valuable cannabis and hemp company. We are pioneering the future of medical, wellness and adult-use cannabis and hemp research, cultivation, processing and distribution, globally. We are one of the leading suppliers of adult-use cannabis in Canada, medicinal cannabis in Germany, and a leading supplier of hemp products in North America.

We have supplied high-quality medical cannabis products to tens of thousands of patients in fifteen countries spanning five continents through our subsidiaries in Australia, Canada, Germany, Latin America and Portugal, and through agreements with established pharmaceutical distributors. We cultivate medical and adult-use cannabis in Canada and medical cannabis in Portugal. We only operate in countries where cannabis or hemp-derived cannabinoids are legal, and are permitted under all applicable federal, state, provincial and local laws.

We are witnessing a global paradigm shift regarding regulatory and consumer sentiment about cannabis and hemp. This shift is transforming a multibillion-dollar industry from a state of prohibition to one of legalization. medical cannabis is now authorized at the national or federal level in forty-two countries. The legal market for medical cannabis is still in its early stages and we believe the number of countries with legalized regimes will continue to increase over time. As this transformation occurs, we believe trusted global brands with multinational supply chains will become market leaders by earning the confidence of patients, doctors, governments, and adult consumers around the world.

We are a leader in the Canadian adult-use market. We have agreements to supply certain provinces and territories with our adult-use products for sale through their established retail distribution systems. Adult-use legalization occurred in Canada on October 17, 2018. On October 17, 2019, the Canadian adult-use regulations were amended to permit the sale of new classes of cannabis products including edibles, beverages and vape products.

During the year ended December 31, 2020, in an effort to better align our cost structure with the current business environment, we reduced headcount in different areas of the organization. We eliminated a total of 529 positions with an expected annualized savings impact, net of severance costs, of $40 million. In addition to headcount reductions, we took actions to increase operating efficiencies which will result in additional annualized cost savings of approximately $17 million, for a total of approximately $57 million annualized cost savings versus our Q4 2019 annualized run rate cost structure. We continue to evaluate our cost structure in light of evolving business conditions and COVID-19 and may take additional actions if deemed appropriate.

During the year ended December 31, 2020, we issued 16,131,487 shares of Class 2 common stock for gross proceeds of approximately $127 million under the at-the-market equity offering program.

On February 28, 2020, we entered into a credit agreement for a senior secured credit facility, denominated in Canadian dollars, for a maximum aggregate principal amount of $59.6 million (C$79.8 million) (the “Senior Facility”). An aggregate principal amount equal to $49.7 million (C$66.5 million) was drawn on February 28, 2020.

As a result of COVID-19 related financial market conditions that affected the lender, and not because of any material changes to the business of Tilray or its subsidiaries, the lender requested that we withdraw our then outstanding request for the additional draw of $9.9 million made on May 4, 2020. We agreed and, as a result, on June 5, 2020, we entered into the First Amendment to the Senior Facility (“the First Amendment”). The First Amendment provides that the Senior Facility will only require interest payments for the remainder of its term and all outstanding principal payments will be due at maturity, February 28, 2022. We have been, and currently are, in full compliance with all terms of the Senior Facility and did not incur any fees or penalties in connection with the First Amendment. Additionally, and at such time as the lender’s business may allow, the lender may make the additional proceeds of $9.9 million available during the term of the Credit Agreement, at its sole discretion.

On March 17, 2020, we closed an underwritten registered offering of 7,250,000 shares of Class 2 common stock for $4.76 per share and 11,750,000 pre-funded warrants for $4.7599 (the “pre-funded warrants”) accompanied by 19,000,000 warrants with an exercise price of $5.95. The pre-funded warrants have an exercise price per share of Class 2 common stock of $0.0001 and were exercisable at any time after their original issuance and expire on the fifth anniversary date of issuance. The pre-funded warrants were exercised in full during March 2020. The 19,000,000 warrants (the “warrants”) have an exercise price of $5.95 and allow the holder to purchase 19,000,000 shares of the Company’s Class 2 common stock. All 19,000,000 warrants remained outstanding as of December 31, 2020, and are exercisable at any time after the first trading day following the six-month anniversary of the issuance and will expire on the fifth anniversary date from the date they become exercisable. Our net proceeds (exclusive of any warrant exercise proceeds) from this offering was $85.3 million (gross proceeds of $90.4 million). As of February 19, 2021, 12,666,000 warrants have been exercised, for gross proceeds of $75,362,700.

On May 26, 2020, we announced our decision to close our High Park Gardens Facility, a wholly-owned subsidiary of the Company based in Leamington, Ontario due to the current economic climate and the high cost of production at the facility. At that time, we concluded that the assets attributable to High Park Gardens met the criteria for classification as assets held for sale and that the closure did not represent a strategic shift that would have a major impact on our Company’s business plan or its primary markets, and, therefore, did not qualify as a discontinued operation. On December 16, 2020, we made a decision to discontinue marketing the High Park Gardens Facility and to retain the disposal group for future operations. On December 16, 2020, we reclassified the assets to be held and measured at fair value in the Company’s cannabis segment. No assets were classified as held for sale as of December 31, 2020 or December 31, 2019.

Due to the initial closure of High Park Gardens in June 2020, we incurred termination costs of $0.3 million related to severance, which are included within general and administrative expenses, recorded total non-cash charges of $25.5 million, which included $13.6 million related to the write down of land and buildings upon characterizing them as assets for sale and valuing them at their fair value less normal selling costs, $1.8 million of inventory valuation adjustments related to the destruction of unharvested flower, and $10.2 million related to the write down of the acquired cultivation license. On December, 16 2020, when the Company reclassified the assets of the High Park Gardens facility to held and used, the Company recognized additional impairment charges of $2.9 million relating to land and buildings (refer to Part II, Item 8 of this Form 10-K in the Notes to Consolidated Financial Statements in Note 3, “Assets reclassified from held for sale to held and used”) recorded to impairment of assets within the statements of net loss and comprehensive loss to adjust to the fair values of the respective assets.

On November 24, 2020, we entered into privately negotiated exchange agreements (the “Exchange Agreements”) with certain holders of our 5.00% Convertible Senior Notes due 2023 (the “Notes”). Under the terms of the Exchange Agreements, the holders agreed to exchange an aggregate principal amount of approximately $124.3 million of Notes plus accrued interest held by them in exchange for an aggregate of 10,932,222 shares of our Class 2 common stock. Effectively, we agreed to repurchase a portion of the outstanding Notes at a 36% discount to their face value using shares issued at our most recent closing market price on November 20, 2020 ($7.36 per share).

On November 25, 2020, we entered into additional Exchange Agreements with certain holders of the Notes. Under the terms of the Exchange Agreements, the holders agreed to exchange an aggregate principal amount of approximately $72.9 million of Notes plus accrued interest held by them in exchange for an aggregate of 6,407,355 shares. Effectively, we agreed to repurchase a portion of the outstanding Notes at a 42% discount to their face value, using shares issued at our most recent closing market price on November 23, 2020 ($6.68 per share).

On December 15, 2020, we entered into an Arrangement Agreement (the “Arrangement Agreement” with Aphria Inc. (“Aphria”), pursuant to which Tilray will acquire 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 (the “Arrangement”). Subject to the terms and conditions set forth in the Arrangement Agreement and the Plan of Arrangement, each outstanding common share of Aphria outstanding immediately prior to the effective time of the Arrangement will be transferred to Tilray in exchange for 0.8381 of a share (of Tilray Class 2 common stock). The obligations of Tilray and Aphria to consummate the Arrangement are subject to customary conditions, including, but not limited to, (a) obtaining the required approvals of Tilray’s and Aphria’s shareholders, (b) obtaining an interim order and final order from the Ontario Superior Court of Justice approving the Arrangement, (c) the absence of any injunction or similar restraint prohibiting or making illegal the consummation of the Arrangement or any of the other transactions contemplated by the Arrangement Agreement, (d) the required regulatory approvals having been obtained, (e) no material adverse effect having occurred, (f) subject to certain materiality exceptions, the accuracy of the representations and warranties of each party and (g) the performance in all material respects by each party of its obligations under the Arrangement Agreement. The Arrangement is expected to close in the second quarter of calendar year 2021 following the receipt of such regulatory approvals, as well as court approval of the Arrangement.

COVID-19

The public health crisis caused by COVID-19 and the measures taken and continuing to be taken by governments, businesses and the public have, and we expect will continue to have, certain negative impacts on our business operations, and could have a material adverse effect on our business, results of operations and financial condition. Due to COVID-19, governments have imposed restrictions on travel and business operations, temporarily closed businesses, and implemented quarantines and shelter-in-place orders. Consequently, the COVID-19 pandemic has negatively impacted global economic activity, caused significant volatility and disruption in global financial markets, and generally introduced significant uncertainty and unpredictability throughout the world.

We believe the restrictions on, or temporary closure of, retail cannabis outlets in response to COVID-19 negatively impacted sales of adult-use cannabis products in 2020. However, this was likely offset by the increase in retail outlets in Canada and our introduction of new products which resulted in a net increase in annual revenue for this product channel in 2020. As a result of ongoing COVID-19 related restrictions on retail cannabis stores we may experience declining demand for adult-use products and may not be able to offset the impact in other ways. Due to the COVID-19 related challenges faced by patients accessing clinics and doctors for prescriptions for our medical products, we experienced a drop in new registrations for medical cannabis products in Canada. Declining demand for medical cannabis products may continue to impact our medical cannabis business in Canada and internationally.

We continue to operate our manufacturing facilities at normal production levels while the administrative offices remain largely closed, with staff working remotely. We have taken all recommended actions to protect public health and the health and safety of employees and will re-open our administrative offices subject to, and in accordance with, local rules and regulations.

During the year ended December 31, 2020, we did not apply nor receive any COVID-19 related government funding or incur charges that are clearly relatable to COVID-19.

Due to the ongoing developments and uncertainty related to COVID-19, we are unable to predict the continuing impacts on our operational and financial performance. The nature and extent of the impacts depend on many factors outside our control, including, the timing, extent, and duration of the pandemic, the development and

availability of effective treatments and vaccines, the imposition of protective public safety measures, and the impact of the pandemic on the global economy and demand for our products. Our current forecasts show our cash balances will be sufficient to satisfy our working capital needs, debt payments, and general liquidity requirements.

Business Segments

We report our operating results in two segments: (i) Cannabis (licensed) and (ii) Hemp (unlicensed). The business segments reflect how our operations are managed, how resources are allocated, how operating performance is evaluated by senior management and the structure of our internal financial reporting. Our Cannabis segment sales consists of adult-use, medical, and bulk sales of cannabis under regulated licenses. Our products are sold to retailers, wholesalers, pharmacies, governments, and direct to patients. Our Hemp segment sales consist of hemp seed, hemp foods, and broad-spectrum hemp extract containing CBD that are sold to retailers, wholesalers, and direct to consumers.

We evaluate the financial results of these segments focusing primarily on segment revenue and gross profit or loss. We utilize segment revenue, gross profit, and segment income (loss) from operations, because we believe they provide useful metrics for effectively allocating our resources between segments, evaluating the health of our business segments and providing management information it can use to actively manage the business.

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.

	Year Ended December 31,	Year Ended December 31,	Year Ended December 31,	2020 Ch	vs 2019 ange	2019 vs 2018 Change	2019 vs 2018 Change

	2020	2019	2018	Qty/$	%	Qty/$	%
Kilogram equivalents sold- cannabis	29,232	35,380	6,478	(6,148 )	(17 )%	28,902	446 %
Kilograms harvested - cannabis	32,690	50,144	11,022	(17,454 )	(35 )%	39,122	355 %
Thousand units sold - hemp products	9,864	7,826	—	2,038	26 %	N/A	N/A
Average net selling price per gram	$ 4.57	$ 3.01	$ 6.63	$ 1.56	51 %	$ (3.62 )	(55 )%
- cannabis
Average costpergram sold - cannabis	$ 3.24	$ 2.36	$ 3.73	$ 0.88	37 %	$ (1.37 )	(37 )%
Average gross selling price per unit	$ 7.79	$ 7.65	$ —	$ 0.14	2 %	N/A	N/A
-hemp products

Kilogram equivalents sold - cannabis . We sell two product categories: (1) dried cannabis, which includes whole flower, ground flower and pre-roll products, and (2) cannabis extracts, which includes full-spectrum and purified oil drops and capsules, and product formats infused with cannabis extract such as edibles and vape products. Cannabis extracts are converted to flower equivalent grams based on the type and number of dried cannabis grams required to produce extracted cannabis in the form of cannabis oils infused into the final product. This conversion ratio is based on the amount of active cannabinoids in the products rather than the volume of the final product.

Total kilogram equivalents sold decreased 17% during 2020 compared to 2019 generally due to a reduction in bulk sales which was partially offset by increases in all other segments. We expect continued increases in kilogram equivalents grams sold as we generate sales growth in our key cannabis businesses; adult-use and international medical. Going forward we will pursue opportunistic bulk sales as we manage our product mix and optimize margins. Total kilogram equivalents sold increased in 2019 from 2018, primarily due to increased bulk, adult-use, and international medical sales.

Kilograms harvested - cannabis . Kilograms harvested represents the weight of dried whole plants postharvest, drying and curing. This operating metric is used to measure the production efficiency of our facilities and production team.

Total kilograms harvested decreased by 35% during 2020 compared to 2019 partially due to the closure of our High Park Gardens cannabis greenhouse production operation and partially due to the timing of harvests in

Portugal during 2020 compared to 2019. It is our expectation that harvested quantities for comparable facilities will fluctuate as we continually work to align production with sales growth, optimize the use of each of our facilities based on market demand, and as we continue to realize efficiencies in our growing processes resulting from our capital investments.

After the June 2020 shut down of our facility at High Park Gardens, a licensed cannabis facility in Leamington, Ontario, our current production and manufacturing footprint in Canada is approximately 0.7 million square feet and our footprint in Portugal is approximately 2.6 million square feet, for a total of 3.3 million square feet worldwide. Our current growing space in Portugal is made up of 20 hectares of outdoor growing space in Alentejo, 1 hectare of greenhouse and 4 hectares of outdoor growing space in Cantanhede, and 65,000 square feet of manufacturing, processing, research, and office space in Cantanhede. We are currently under construction to complete an additional 3.4 hectares of greenhouse in Cantanhede during early 2021. Due to COVID-19, we have experienced minor construction delays and there is some uncertainty about the final completion date of the additional growing space. If we are unable to complete construction in a timely manner due to COVID-19, we may not achieve all our expected harvests and production which may negatively impact our international sales. We are actively working with our contractors to maintain appropriate COVID-19 protections at our construction site in an effort to complete construction in a timely manner.

Total kilograms harvested increased during 2019 compared to 2018 by 355% primarily due to ramping up additional operational capacity at new production facilities and the acquisition of Natura Naturals Holdings Inc. (“Natura”).

Thousand units sold – hemp products. As a result of the acquisition of FHF Holdings Ltd. (“Manitoba Harvest”) in February 2019, we sell hemp products such as shelled hemp seed, ground hemp, and broad spectrum hemp extract containing CBD, and hemp seed oil, all of which are tracked by individual units.

Hemp products sold during 2020 increased 26% from 2019. The increase was partially due to increased promotional activity and partially attributable to the fact that the 2019 period only reflected the post-acquisition ten months activity while the 2020 period reflects a full year of hemp products sold. Looking forward, the number of units sold is likely to decline as some of our large format retail customers shift to larger size private label offerings.

Average net selling price per gram - cannabis. The average net selling price per gram is an indicator of our pricing trends over time on a gram equivalent basis and is impacted by sales mix, channel and product type. We exclude revenue associated with hemp products, accessories, and freight sales, to arrive at cannabis-related revenue. We calculate average net selling price per gram by dividing total cannabis-related revenue by total kilogram equivalents sold. As Cannabis 2.0 products become a larger percentage of our mix, and because Cannabis 2.0 products include more value-added activities and the cannabis inputs will be a lower portion of the overall cost and value of the products, we may change this operating metric from per gram to per unit measures in the future.

The average net selling price per gram increased 51% in 2020 compared to 2019 due to a shift in distribution channels and product mix. International medical markets sales generally command a higher price per gram than adult use and medical sales in Canada and we experienced an increase in the proportion of international medical sales during the year; 23% versus 12% compared to the same period in 2019. Additionally, higher-priced Cannabis 2.0 products, which did not exist in the comparable period in 2019, continued to grow as a percentage of our adult-use business.

We generally expect our average selling price per gram to continue to increase over time as our international medical cannabis sales continue to grow. However, due to COVID-19, if international sales are not realized or if construction of our new greenhouse space in Portugal is delayed we may not fully realize our expected increase in sales price because we may not have sufficient scale or product at the potency level needed to supply our growing international medical sales business.

The average net selling price per gram increased during 2019 compared to 2018 due to a shift in distribution channels and product mix.

Average cost per gram sold - cannabis . The average cost per gram sold measures the efficiency of our cultivation, manufacturing and fulfillment operations. We exclude hemp products, inventory valuation adjustments and the cost of sales related to accessories from total cost of sales to arrive at cannabis-related cost of sales. Cannabis-related cost of sales is then divided by total kilogram equivalents sold to calculate the average cost per gram sold. As Cannabis 2.0 products become a larger percentage of our mix, and because the Cannabis 2.0 products

include other input costs that can be a greater portion of the unit cost than the cannabis ingredients, we may change this operating metric from per gram to per unit measures in the future.

The average cost per gram sold increased 37% during 2020 compared to 2019 partially due to fewer kilograms sold as a result of reduced bulk sales, increased sales of Cannabis 2.0 products that have higher costs than dried flower, and partially due to limited absorption of costs at our facility in Portugal as we brought new growing capacity on line. We expect to see improvement in our cost per gram as the full benefit of our cost reductions, including the closure of growing operations at High Park Gardens which was a relatively high cost facility to operate, are realized and as we generate more throughput and cost absorption at our facility in Portugal. However, as Cannabis 2.0 products become a larger portion of our mix, and while these products will result in better throughput and cost absorption at our High Park Holdings processing facility, we may see fluctuations in our cost per gram as our product mix changes in order to meet customer demand.

The average cost per gram sold decreased during 2019 compared to 2018 primarily the result of improved harvest quantities. In 2018, all the products sold were primarily from Tilray Canada, a GMP indoor grow facility, compared to three greenhouses in operation during 2019.

Average gross selling price per unit – hemp products . The average gross selling price per unit is an indicator of our pricing trends over time on a unit basis for our hemp products and is impacted by sales mix, channel and product type. We exclude revenue associated with cannabis, accessories and freight sales to arrive at hemp product-related revenue. We calculate average gross selling price per unit by dividing hemp product-related revenue by units sold.

The average gross selling price per unit for hemp products increased by 2% during 2020 from 2019, as the mix of products sold favored larger sizes and organic product sales versus non-organic. Going forward, this trend may continue as some large format retail customers shift to larger size private label offerings.

Factors Impacting our Business

We believe our future success will primarily depend on the following factors:

Global medical market expansion. We have a significant opportunity to capitalize on cannabis markets globally as medical cannabis becomes legal in more markets. Medical cannabis is now authorized at the national or federal level in 42 countries. We have a production footprint in North American and Europe that will allow us to efficiently respond to the expansion of the medical cannabis market globally. We have also established regional offices in Portugal, Germany and Australia and invested significant resources in personnel, partnerships and incountry sales and marketing to build the foundation for new and existing export channels. Our products have been made available in 17 countries, and we will continue to explore market expansion opportunities as more countries legalize medical cannabis.

Adult-use expansion in Canada. The legalization of the adult-use cannabis market in Canada, and the expansion of the adult-use cannabis market to include new form factors (edibles, beverages and vape products), represents another significant opportunity. We have invested, and will continue to invest, significant resources into production capacity, brand development, business development and corporate infrastructure so we can serve the current and future adult-use market in Canada.

Expanding Household Penetration. We acquired the Manitoba Harvest business in February 2019, which is a leading provider of hemp seeds and related food products that are sold in over 16,000 retail locations in the United States and Canada. The household penetration of hemp seed products is approximately 4.5% in Canada and roughly 1.5% in the United States. Hemp seed products have been available in Canada for a longer period of time relative to the United States and we believe that creating awareness of the wellness benefits of these products provides an opportunity to increase household penetration in the United States. Additionally, the household penetration of broad-spectrum hemp oil containing CBD in the United States is at its early stages and we believe there is significant opportunity to expand our presence in this relatively new product category.

Expanding capacity. At this early stage of the industry, we believe it is beneficial to be vertically integrated and control our entire production process to generate consistency and quality on a large scale. As we expand into new and existing markets, we may need to invest additional resources into cultivation and production facilities, which may require us to raise additional capital.

New product innovation. We believe there is a significant market opportunity for non-combustible products as global medical markets mature. In certain developed cannabis markets, non-combustible products have surpassed dried flower on a market share basis. We believe our success will depend on our ability to continually develop, introduce, and leverage non-combustible products and brands, which we believe will have higher gross profits compared to combustible products.

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 (“U.S. GAAP”). A detailed discussion of our significant accounting policies can be found in Part II, Item 8 of this Form 10-K in the Notes to Consolidated Financial Statements in Note 2, “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 life 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) COVID-19 related judgments and estimates

The unprecedented nature of the COVID-19 pandemic and its impact results in uncertainty about future market conditions, the impacts on our business, and consequently, the assumptions we use to develop forecasts of business performance. As a result, significant judgments and estimates have been made in the qualitative and quantitative impairments and the going concern assessments at December 31, 2020. There is no guarantee that our total revenues will grow or remain at similar levels during 2021. Depending on conditions, we may have to review our assumptions which may result in additional adjustments or impairments of assets. Additionally, if COVID-19 continues to negatively impact business conditions around the globe and in our key markets, we may need to further adjust our operations and headcount during the coming periods.

(ii) 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 cannabis and hemp products through contracts with customers, relationships with wholesalers and distributors, and sales of product direct to consumers. Cannabis and hemp 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 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.

(iii) Valuation of inventory

Inventory is comprised of raw materials, work-in-progress and finished goods. Cannabis and hemp costs include expenditures directly related to the manufacturing process as well as suitable portions of related production overheads, based on normal operating capacity. Refer to Part II, Item 8 of this Form 10-K in the Notes to Consolidated Financial Statements in Note 2, “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 twevle months. Changes in the regulatory structure, lack of retail distribution locations or lack of consumer demand could result in future inventory reserves.

(iv) Impairment of goodwill and indefinite life intangible assets

Goodwill and indefinite life 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. 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.

(v) Stock-based compensation

We measure and recognize compensation expenses for stock options and restricted stock units (“RSUs”) to employees and non-employees 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. For stock options and RSUs granted in 2018, prior to the Company’s initial public offering, the fair value of common stock at the date of grant was determined by the Board of Directors with assistance from third-party valuation specialists. 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 of 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 Tilray and, for periods prior to the Company’s initial public offering, other companies that we consider comparable and have trading and volatility history.

(vi) 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.

(vii) Leases

ASC 842 requires leases to be accounted for using a right-of-use model, which recognizes that, at the date of commencement, a lessee has a financial obligation to make lease payments to the lessor for the right to use the underlying asset during the lease term. The lessee recognizes a corresponding right-of-use asset related to this right. The most significant impact is the recognition of right-of-use assets and lease liabilities for operating leases, while the accounting for finance leases remains substantially unchanged.

We apply judgment in determining whether a contract contains a lease and if a lease is classified as an operating lease or a finance lease. We determine 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 we will exercise that option. We have several lease contracts that include extension and termination options. We apply judgment in evaluating

whether it is reasonably certain whether or not to exercise the option to renew or terminate the lease and estimate the lease term applicable to lease contracts. That is, we consider all relevant factors that create an economic incentive to exercise a renewal or termination. After the commencement date, we reassess the lease term if there is a significant event or change in circumstance that is within our control and affects our ability to exercise or not to exercise the option to renew or terminate. We also apply judgment in allocating the consideration in a contract between lease and non-lease components. We consider whether we can benefit from the right-of-use asset either on its own or together with other resources and whether the asset is highly dependent on or highly interrelated with another right-of-use asset.

Right-of-use assets and liabilities are recognized at the commencement date based on the present value of the lease payments over the term. 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 make estimates in determining the incremental borrowing rates.

(viii) Warrants

In March 2020, we closed on a registered offering including Class 2 common stock that included warrants and pre-funded warrants. As a result, we have 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 other expenses (income) in the statements of net loss and comprehensive loss.

We estimate the fair value of the warrant liability using a Monte Carlo 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.

Recent Accounting Pronouncements Not Yet Adopted

Refer to Part II, Item 8 of this Form 10-K in the Notes to Consolidated Financial Statements in Note 2, “Summary of Significant Accounting Policies”, for a description of recent accounting pronouncements not yet adopted related to income taxes, investments and convertible debt. We are currently evaluating the effect of adopting recent accounting pronouncements on our financial statements.

Components of Results of Operations

Revenue - cannabis

Revenue is comprised of sales to patients through the medical program under the Cannabis Regulations, wholesale of bulk and finished product to other Licensed Producers under the Cannabis Regulations, wholesale of finished product to provinces and provincially regulated distributors under the Cannabis Act and applicable provincial legislation, and export sales to third-party distributors, hospitals, pharmacies and patients. Our products currently include: whole flower, ground flower, edibles, broad-spectrum cannabis oils and capsules, purified cannabis oils and capsules and accessories. Revenue is net of incentives, after discounts, returns and allowances for our assurance program and veterans coverage program.

Revenue - hemp

Revenue is comprised of sales to retailers, wholesalers or direct to consumers of finished product and export sales to third-party distributors or retailers. Our products currently include hemp: seeds, protein powder, oil, granola, bars, milk, and broad spectrum hemp extract containing CBD in tincture and capsule form.

Cost of sales - cannabis

Cost of sales is mainly comprised of three categories: pre-harvest, post-harvest and shipment and fulfillment. 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, manufacturing, extracting, purifying, quality testing, and any associated allocated overhead. Shipment and fulfillment costs include the costs of packaging, labelling, courier services and any associated allocated overhead. Total cost of sales also includes cost of sales associated with accessories and inventory adjustments.

Cost of sales - hemp

Cost of sales is mainly comprised of three categories: seeds, packaging and co-packing. Seed costs include commodity costs from farmers, genetic seed costs to provide and manage contracted farmers, hulling and processing costs, and any associated labor and overhead. Packaging costs include packaging materials and labor and overhead costs associated with running machinery. Co-packing costs are generally associated with products not manufactured directly by us and include all costs related to the finished product. Total cost of sales also includes cost associated with managing the facilities and inventory adjustments.

General and administrative expenses

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 and other professional fees; (iii) corporate insurance and other facilities costs associated with our corporate and administrative locations; depreciation and amortization expenses associated with our corporate assets, and (iv) severance and other costs associated with headcount reductions.

Sales and marketing expenses

Sales and marketing 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 sales and marketing; (ii) commissions paid to our third-party workforce; and (iii) marketing and advertising expenses.

Research and development expenses

Research and development expenses are comprised primarily of costs for personnel, including salaries, benefits, employee bonus, stock-based compensation; 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.

Depreciation and amortization expenses

Depreciation and amortization expenses represents the depreciation and amortization recognized on the Company’s tangible and intangible assets.

Impairment of assets

Impairment of assets represents impairment of indefinite and definite-lived intangible assets.

Acquisition-related expenses (income), net

Acquisition-related (income) expenses, net, represents costs associated with the evaluation, negotiation, closing, and ongoing legal activities, related to acquisition activities.

Loss from equity method investments

Loss from equity method investments represents the Company’s share of losses from the investments in entities over which the Company has significant influence but not a controlling financial interest and are accounted for using the equity method.

Foreign exchange (gain) loss, net

Foreign exchange gains and losses represent the gains or losses resulting from foreign currency transactions. Revenues and expenses denominated in foreign currencies are translated into United States dollars at the monthly average exchange rate for the period.

Interest expenses, net

Interest expenses, net is related to our senior debt facility, convertible notes, interest on lease liabilities and other finance liabilities, and for prior years, a third-party mortgage on our Tilray Canada Ltd. Property.

Other expense (income), net

Other income, net includes realized and unrealized gains and losses on equity investments measured at fair value, realized gains and losses on debt securities classified as available-for-sale, and other miscellaneous nonoperating income and expenses.

Income taxes

We are subject to income taxes in the jurisdictions where we operate or otherwise have a taxable presence. Consequently, income tax expenses are driven by the allocation of taxable income to those jurisdictions. Activities performed in each jurisdiction impact the magnitude and timing of taxable events.

Results of Operations

Financial data is expressed in thousands of United States dollars.

Consolidated Statements of Net Loss Data

(in thousands of United States dollars)

(in thousands of United States dollars)
	Year Ended December 31,
	2020	2019	2018
Revenue	$ 210,482	$ 166,979	$ 43,130
Cost of sales	185,827	190,475	28,855
Grossprofit(loss)	24,655	(23,496 )	14,275
General and administrative expenses	85,883	110,903	48,577
Sales and marketingexpenses	54,666	63,813	15,828
Research and development expenses	4,411	9,172	5,864
Depreciation and amortization expenses	13,722	11,607	1,598
Impairment of assets	61,114	112,070	—
Acquisition-related(income)expenses,net	—	(31,427 )	248
Loss from equitymethod investments	5,983	4,504	—
Operatingloss	(201,124 )	(304,138 )	(57,840 )
Foreign exchange(gain)loss,net	(13,169 )	(5,944 )	7,234
Change in fair value of warrant liability	100,286	—	—
Gain on debt conversion	(61,118 )	—	—
Interest expenses,net	39,219	34,690	9,110
Finance income from ABG	—	(764 )	—
Other expenses(income),net	10,333	(2,501 )	(2,010 )
Loss before income taxes	(276,675 )	(329,619 )	(72,174 )
Deferred income tax recoveries	(5,376 )	(8,847 )	(4,485 )
Current income tax(recoveries)expenses	(226 )	397	34
Net loss	$ (271,073 )	$ (321,169 )	$ (67,723 )
*Other Financial Data*
Adjusted EBITDA(1)	$ (30,283 )	$ (89,829 )	$ (28,291 )

(1) Adjusted EBITDA is a non-GAAP financial measure. For information on how we define and calculate Adjusted EBITDA, and a reconciliation of net loss to Adjusted EBITDA, refer to “Non-GAAP Financial Measures”.

	Year	Ended December 31,	Ended December 31,
	2020	2019	2018
*(as apercentage of revenue)*
Cost of sales	88 %	114 %	67 %
Grossprofit(loss)	12 %	(14 %)	33 %
General and administrative expenses	41 %	66 %	113 %
Sales and marketingexpenses	26 %	38 %	37 %
Research and development expenses	2 %	5 %	14 %
Depreciation and amortization expenses	7 %	7 %	4 %
Impairment of assets	29 %	67 %	0 %
Acquisition-related(income)expenses,net	0 %	(19 %)	1 %
Loss from equitymethod investments	3 %	3 %	0 %
Operatingloss	(96 %)	(182 %)	(134 %)
Foreign exchange(gain)loss,net	(6 %)	(4 %)	17 %
Change in fair value of warrant liability	48 %	0 %	0 %
Gain on debt conversion	(29 %)	0 %	0 %
Interest expenses,net	19 %	21 %	21 %
Finance income from ABG	0 %	(0 %)	0 %
Other expenses(income),net	5 %	(1 %)	(5 %)
Loss before income taxes	(133 %)	(197 %)	(167 %)
Deferred income tax recoveries	(3 %)	(5 %)	(10 %)
Current income tax(recoveries)expenses	(0 %)	0 %	0 %
Net loss	(130 %)	(192 %)	(157 %)
*Other Financial Data*
Adjusted EBITDA¹	(14 )%	(54 )%	(66 )%

Revenue

We evaluate revenue by product channel and category.

Revenue by product channel

(in thousands of United States dollars)

	For theyear ended December 31,	For theyear ended December 31,	For theyear ended December 31,	For theyear ended December 31,	For theyear ended December 31,	For theyear ended December 31,	For theyear ended December 31,	For theyear ended December 31,	For theyear ended December 31,
	2020	2019	$ Change		%Change	2019	2018	$ Change	%Change
Cannabis
Adult-use	$ 83,828	$ 55,763	$ 28,065		50 %	$ 55,763	$ 3,521	$ 52,242	1484 %
Canada - medical	15,489	12,556		2,933	23 %	12,556	18,052	(5,496 )	(30 )%
International - medical	33,886	13,378		20,508	153 %	13,378	2,912	$ 10,466	359 %
Bulk	402	25,450		(25,048 )	(98 )%	25,450	18,645	6,805	36 %
Total cannabis revenue	133,605	107,147		26,458	25 %	107,147	43,130	64,017	148 %
Hemp	76,877	59,832		17,045	28 %	59,832	—	59,832	N/A
Total revenue	210,482	$ 166,979	$ 43,503		26 %	$ 166,979	$ 43,130	$ 123,849	287 %
Excise duties included in	$ 19,143	$ 13,136	$ 6,007		N/A	$ 13,136	$ 1,200	$ 11,936	N/A
revenue

N/A: Not a meaningful percentage.

Revenue. Revenue increased 26% to $210.5 million during 2020 from $167.0 million in 2019. The increase was driven by $26.5 million or 25% growth in the Cannabis segment, and $17.0 million or 28% growth in the hemp segment. The hemp segment increase was partially due to the timing of the acquisition of Fresh Hemp Foods in 2019 that resulted in the inclusion of 10 months of sales in 2019 compared to 12 months in 2020.

2019 revenue increased to $167.0 million from $43.1 million in 2018. The increase was driven by $64 million in the Cannabis segment and the addition of the hemp segment resulting from the acquisition of Manitoba Harvest in 2019 which provided $59.8 million in revenues during 2019.

Cannabis . Cannabis segment revenue increased 25% to $133.6 million in 2020 from $107.1 million during 2019. The increase was primarily driven by increased sales in our adult-use and international medical markets and modest increases in Canada-medical, all of which were partially offset by a significant planned reduction in bulk sales. The bulk sales reduction was a strategic decision to move away from low margin selling efforts. Excluding bulk sales, the cannabis segment revenues grew by 63%. In the future we may engage in bulk sales as a way to balance certain inventory levels.

Cannabis segment revenue increased 148% to $107.1 million in 2019 from $43.1 million in 2018. The increase was primarily driven by the Canadian adult-use market, which began in October of 2018, the acceleration of international medical sales, and to a lesser extent an increase in bulk sales to other licensed producers. This growth was slightly offset by a decline in Canadian medical sales, which were the result of supply constraints in the first half of 2019.

Hemp . Hemp segment revenue increased 28% to $76.9 million in 2020 from $59.8 million during 2019. The increase was the result of a full twelve months of operations in 2020 versus ten months in 2019, increased promotional activity at larger format stores, as well as growth in sales through ecommerce channels as customers shifted buying behavior to online platforms.

Hemp segment revenue began upon the acquisition of Manitoba Harvest on February 28, 2019 and contributed $59.8 million in revenue in 2019.

Revenue by product category

(in thousands of United States dollars)

(in thousands of United States	dollars)	dollars)	dollars)	dollars)
	For theyear ended December 31,				For theyear ended December 31,
	2020	2019	$ Change	%Change	2019	2018	$ Change	%Change
Dried cannabis	92,781	82,753	10,028	12 %	82,753	21,674	61,079	282 %
Cannabis extracts	39,986	24,139	15,847	66 %	24,139	21,179	2,960	14 %
Hemp products	76,877	59,832	17,045	28 %	59,832	—	N/A	N/A
Accessories and other	838	255	583	229 %	255	277	(22 )	(8 )%
Total revenue	$ 210,482	$ 166,979	$ 43,503	26 %	$ 166,979	$ 43,130	$ 123,849	287 %
Excise duties included in	$ 19,143	$ 13,136	$ 6,007	N/A	$ 13,136	$ 1,200	$ 11,936	N/A
revenue

N/A: Not a meaningful percentage.

We also analyze our sales mix by dried cannabis, extracts, hemp and accessories. Dried cannabis represented 44% of revenue in 2020 and 50% in 2019. Cannabis extracts represented 19% of revenue in 2020 compared to 14% in 2019. Hemp products represented 37% of revenues in 2020 versus 36% in 2019. We expect our cannabis products to grow at a faster rate than our other product categories due to the development of the Canadian adult-use market and continued sales growth in international medical markets.

Dried cannabis represented 50% of revenue in both 2019 and 2018. Cannabis extracts represented 14% of revenue in 2019 compared to 49% in 2018. Extracts generally provide for higher margins and the reduction in mix was primarily due to legalization of adult-use cannabis in Canada for a full year in 2019, which limited extract products based on the regulatory framework. Hemp products represented 36% of revenues in 2019 driven by our acquisition of Manitoba Harvest in February 2019.

Cost of sales and gross margin – Cannabis

(in thousands of United States dollars)

(in thousands of United States dollars)
			31,	2020 vs	2019 ge		2019 vs 2018 Change
	Year Ended December			Chan
	2020	2019	2018	$		%	$	%
Cost of sales -product costs	$ 102,801	$ 85,917	$ 24,294	$ 16,884		20 %	$ 61,622	254 %
Cost of sales - inventory valuation						(46 )%
	34,379	63,532	4,561	(29,153 )			58,971	N/A
adjustments

Total Cannabis cost of sales	$ 137,180	$ 149,449	$ 28,855	$ (12,269 )		(8 )%	$ 120,593	N/A
Gross(loss) profit	$ (3,575 )	$ (42,302 )	$ 14,275	$ 38,727		(92 )%	$ (56,577 )	N/A
Gross profit (excluding inventory
	30,804	21,231	18,836	9,573		45 %	2,395	N/A
valuation adjustments)(1)

Gross marginpercentage	(3 )%	(39 )%	33 %	36 %		(91 )%	(72 )%	N/A
Gross margin percentage (excluding	23 %	20 %					(24 )%
			44 %	3 %		16 %		N/A
inventory valuation adjustments)(1)

N/A: Not a meaningful percentage.

(1) Gross profit (excluding inventory valuation adjustments) and gross margin percentage (excluding inventory valuation adjustments) are non-GAAP financial measures. For information on how we define and calculate these non-GAAP financial measures, refer to “Non-GAAP Financial Measures”.

Cost of sales. Total cost of sales decreased in 2020 compared to 2019 mainly due to reduced inventory adjustments. We incurred inventory valuation adjustments generally due the write off of aged product or products that were unlikely to be sold. Cost of sales related to product costs increased over the comparable period generally due to increased sales and the limited absorption of costs at our facility in Portugal. We implemented cost reductions throughout our supply chain during 2020 and anticipate more favorable product costs on a volume weighted basis.

Cost of sales increased in 2019 from the comparable period in 2018 primarily due to greater sales, the addition of our acquisition and start-up of Natura, the start-up of High Park Farms and Portugal cultivation facilities. Additionally, we purchased third-party cannabis supply at higher prices than our own production costs. We incurred inventory valuation adjustments primarily for cannabis oil products, which did not have the sell through opportunity, as many cannabis derivative products were not available for sale under the regulatory framework until December 2019, resulting in a significant accumulation of cannabis oil and cannabis by-product to be converted into oil.

Gross margin. Gross margin of (3%) in 2020 improved from the comparable period in 2019 primarily due to reduced inventory valuation adjustments and overall improvements in our cost of production related to our cost cutting efforts. Excluding inventory valuation adjustments, gross margin increased to 23%, from 20% in 2019. The improvement resulted from increased sales in international medical markets, the introduction of 2.0 products in the adult use market, and the realization of cost reduction measures implemented throughout the year.

Gross margin of (39%) in 2019 decreased from the comparable period in 2018 primarily due to inventory valuation adjustments. Excluding inventory valuation adjustments, gross margin was 20%, which was impacted by the change in product mix from 2018 as well as the need to purchase high priced third-party supply for the Canadian adult-use market.

Cost of sales and gross margin – Hemp

(in thousands of United States dollars)

(in thousands of United States dollars)
	Year Ended December 31,			2020 vs 2	019 e	2019 vs 2018
				Chang		Change
	2020	2019	2018	$	%	$	%
Cost of sales -product costs	$ 44,607	$ 35,976	$ —	$ 8,631	24 %	$ 35,976	N/A
Cost of sales - inventory valuation	4,040	5,050	—	$ (1,010 )	(20 )%	5,050
							N/A
adjustments

Total Hempcost of sales	$ 48,647	$ 41,026	$ —	$ 7,621	19 %	$ 41,026	N/A
Grossprofit	$ 28,230	$ 18,806	$ —	$ 9,424	50 %	$ 18,806	N/A
Gross profit (excluding inventory
valuation adjustments and purchase
	32,270	25,898	—	6,372	25 %	25,898	N/A
accounting value

step-up)(1)
Gross marginpercentage	37 %	31 %	—	6 %	18 %	(72 )%	N/A
Gross margin percentage (excluding				(1 )%		43 %
inventory valuation adjustments and	42 %	43 %	—		(2 )%		N/A
purchase accounting value step-up)(1)

N/A: Not a meaningful percentage.

(1) Gross profit (excluding inventory valuation adjustments and purchase accounting value step-up) and gross margin percentage (excluding inventory valuation adjustments and purchase accounting value step-up) are non-GAAP financial measures. For information on how we define and calculate these non-GAAP financial measures, refer to “Non-GAAP Financial Measures”.

Cost of sales . Cost of sales increased in 2020 compared to 2019 primarily due to sales volume increases, and the inclusion of 12 months of sales in 2020 compared to 10 months (the period after our acquisition of Fresh Hemp Foods) during 2019.

Cost of sales were $41 million in 2019 which included inventory valuation adjustments for certain CBD and protein powder inventory in the amount of $5.1 million (C$6.6 million). Additionally, we reported non-cash charge due to the one-time purchase accounting step-up in inventory value in the amount of $2.0 million for 2019.

Gross margin. Gross margin of 37% in 2020 increased compared to 2019 due to reduced inventory adjustments. Gross margin (excluding inventory valuation adjustments and purchase accounting value step-up) of 42% represented a (1%) decrease from 2019 generally due to increased promotional activity on certain products with certain customers. 2019 was our first financial year reporting hemp product activity and we have no gross margin data for 2018.

Operating expenses

(in thousands of United States dollars)

(in thousands of United States dollars)
	Year Ended December 31,			2020 vs	2019 ge		2019 vs 2018 Change
				Chan
	2020	2019	2018	$		%	$	%
General and administrative expenses	$ 85,883	$ 110,903	$ 48,577	$ (25,020 )		(23 )%	$ 62,326	128 %
Sales and marketingexpenses	54,666	63,813	15,828	(9,147 )		(14 )	47,985	303
Research and development expenses	4,411	9,172	5,864	(4,761 )		(52 )	3,308	56
Depreciation and amortization expenses	13,722	11,607	1,598	2,115		18	10,009	N/A
Impairment of assets	61,114	112,070	—	(50,956 )		(45 )	112,070	—
Acquisition-related (income) expenses,
net	—	(31,427 )	248	31,427		N/A	(31,675 )	N/A
Loss from equitymethod investments	5,983	4,504	—	1,479		33	4,504	—
Total	$ 225,779	$ 280,642	$ 72,115	$ (54,863 )		(20 )%	$ 208,527	289 %
(as apercentage of revenue)
General and administrative expenses	41 %	66 %	113 %
Sales and marketingexpenses	26 %	38 %	37 %
Research and development expenses	2 %	5 %	14 %
Depreciation and amortization expenses	7 %	7 %	4 %
Impairment of assets	29 %	67 %	0 %
Acquisition-related (income) expenses,	0 %	(19 )%	1 %
net
Loss from equitymethod investments	3 %	3 %	0 %
Total	108 %	167 %	167 %

N/A: Not a meaningful comparison

General and administrative . General and administrative expenses decreased 23% in 2020 compared to 2019 generally due to the partial realization of implemented cost savings initiatives. During 2020, and in order to better align our business with market conditions, we reduced general and administrative headcount by 258 positions and incurred approximately $4.8 million of non-recurring costs primarily associated with severance payments.

General and administrative expenses increased in 2019 and 2018 compared to prior years due to costs incurred for the startup of the operations of our subsidiaries High Park Farms, Ltd., High Park Holdings, Ltd. and Tilray Portugal Unipessoal, Lda., higher employee costs to support a larger business from the acquisition of Manitoba Harvest, increases in professional fees related to legal, audit, human resources and IT services to support our growth, and public company costs. In 2019, we also incurred $8.4 million related to tax equalization expenses for cross-border executives on stock benefits.

Sales and marketing . Sales and marketing expenses decreased in 2020 compared to 2019 primarily due to headcount reductions and other cost savings measures as well our efforts to optimize trade and market spend.

Sales and marketing expenses increased in 2019 from the comparable period in 2018 primarily due to the acquisition of Manitoba Harvest, development of our Canadian adult-use sales and marketing team, and the development of our European leadership team. In addition, High Park developed a comprehensive portfolio of new brands and products for the next phase of the adult-use market.

Research and development . Research and development expenses decreased in 2020 compared to 2019 primarily due to rightsizing and optimizing the departmental structure. These initiatives delivered cost savings and also resulted in a more agile R&D team capable of developing future innovations.

Research and development expenses increased year over year in 2019 and 2018 as compared to the prior years, primarily due to our continued support in advancing cannabinoid-based science to further understand the potential benefits of medical cannabis as a treatment.

Depreciation and Amortization . Depreciation and amortization expenses increased in 2020 compared to 2019, partially due to having a full twelve months of Manitoba Harvest operations, and partially due to the ongoing

expansion and commissioning of our production facilities in Portugal. We expect depreciation and amortization to continue to increase as our capital projects are completed and assets are put into service.

Depreciation and amortization expenses increased in 2019 compared to 2018 primarily due to increased investment in new cultivation and production facilities as well as investment in acquisitions, resulting in greater fixed assets as well as intangible assets.

Impairment of assets. During 2020, we incurred non-cash impairment charges of $61.1 million.

In the first quarter of 2020, due to the lack of clarity from the FDA regarding CBD products in the United States, COVID-19 related negative impacts on retail shopping, and a commensurate decrease in demand projections for CBD products, we incurred non-cash impairment charges of:

$16.8 million and $6.1 million representing the full net book values of the intangible assets relating to the ABG Profit Participation Agreement and ABG Prince Agreement respectively, and
$7.0 million related to the derecognition of the ABG finance receivable.

In the second quarter of 2020, and primarily related to our decision to close the High Park Gardens facility, we incurred additional non-cash impairment charges of $25.1 million which included impairment charges of:

$13.6 million relating to land and buildings
$10.2 million relating to the write-down of the cultivation license at the facility, and $1.2 million relating to foreign currency translation adjustments.

On June 30, 2020 we completed the separation from Smith & Sinclair, a previously consolidated entity, and recognized impairment charges of $3.3 million generally related to the write-offs of certain trademarks and patents.

In addition, in December 2020, we re-classified the land and buildings at our High Park Gardens facility from assets held for sale to assets held and used and have recorded a $2.9 million impairment charge to record the assets at their fair value.

In 2019, an impairment of $112.1 million was recognized on our ABG Profit Participation Agreement, due to the analysis of cash flows which had been reduced due to the delayed clarity from the FDA regarding CBD products in the United States.

Loss from equity method investments . Losses from equity method investments for 2020 was $6.0 million compared to $4.5 million in 2019 based on our proportionate share of the operating (gains) losses from our equity method investments.

Non-operating income and expenses

(in thousands of United States dollars)

(in thousands of United States dollars)
	Year Ended December 31,			2020 v	s 2019 nge		2019 vs 2018 Change
				Cha
	2020	2019	2018	$		%	$	%
Foreign exchange(gain)loss,net	$ (13,169 )	$ (5,944 )	$ 7,234	$ (7,225 )		122 %	$ (13,178 )	(182 )%
Change in fair value of warrant liability	100,286	—	—	100,286		N/A	—	N/A
Gain on debt conversion	(61,118 )	—	—	(61,118 )		N/A	—	N/A
Interest expenses,net	39,219	34,690	9,110	4,529		13 %	25,580	281 %
Finance income from ABG	—	(764 )	—	764		N/A	(764 )	N/A
Other loss(income),net	10,333	(2,501 )	(2,010 )	12,834		(513 )%	(491 )	24 %
Total	$ 75,551	$ 25,481	$ 14,334	$ 50,070		196 %	$ 11,148	92 %

Foreign exchange (gain) loss, net. The impact of foreign exchange for the year ended December 31, 2020 was a gain of $13.2 million, compared to a gain of $5.9 million in 2019. We hold a significant portion of our assets in Canadian dollars and the Euro, the fluctuations in foreign exchange rates between Canadian dollars, the Euro, and United States dollars drove the foreign exchange gain for 2020.

Foreign exchange in 2019 was a $5.9 million gain compared to $7.2 million loss in 2019. As we hold a significant portion of assets in Canadian dollars, the appreciation of foreign exchange rates between Canadian dollars and United States dollars drove the foreign exchange gain in 2019.

Change in fair value of warrant liability. In March 2020 we closed an equity offering which resulted in a warrant liability recorded at fair value. The warrant liability is marked to market, with the primary underlying input into the warrant valuation being our own stock price. Due to the movements in the market price of our stock since the offering closed, the fair value of the warrant liability increased by $100.2 million during 2020.

Interest expenses, net. Interest expense, net in 2020 was $39.2 million, compared to $34.7 million in 2019. The increase was primarily attributable to the Senior Facility which was entered into on February 28, 2020. We expect a decrease in interest expense in 2021 to reflect the reduction of total outstanding debt instruments resulting from the conversion into equity of $197.1 million convertible notes.

Interest expenses, net in 2019 was $34.7 million compared to $9.1 million in 2018. The increase in expense in 2019 from 2018 was primarily due to the addition of the $475 million in convertible notes that were issued in October 2018. In 2018 interest expense was related to loans from a third-party mortgage on Tilray Canada, Ltd. and Privateer Holdings debt facilities.

Finance income from ABG. Finance income from ABG decreased in 2020 as the ABG finance receivable was written-off during the first quarter of 2020.

Finance income from ABG represents interest income from ABG Profit Participation Arrangement which was entered into in 2019.

Other loss (income), net. Other loss (income), net decreased in 2020 compared to 2019 due to declines in the fair value of certain equity investments as well as the realization of losses on the sale of certain equity investments during Q4 2020. Additionally, we incurred other expense of $4.0 million related to issuance costs associated with the March 2020 equity offering.

Other loss (income), net increased in 2019 compared to 2018 due to gains on the sale of short-term investments during the year ended December 31, 2019, offset by unrealized losses on equity investments recorded at fair value. In 2018, prior to the adoption of ASU 2016-01, unrealized gains and losses on equity investments recorded at fair value were recorded to other comprehensive income.

Net loss and Adjusted EBITDA[(1) ]

(in thousands of United States dollars)

(in thousands of United States dollars)
	Year Ended December 31,			2020 vs	2019 ge	2019 vs 2018 Change
				Chan
	2020	2019	2018	$	%	$	%
Net loss	$ (271,073 )	$ (321,169 )	$ (67,723 )	$ 50,096	(16 )%	$ (253,446 )	374 %
Adjusted EBITDA(1)	$ (30,283 )	$ (89,829 )	$ (28,291 )	$ 59,546	(66 )%	$ (61,538 )	218 %

Net loss decreased in 2020 from the comparable periods in 2019 and 2018 primarily due to reduced operating expenses resulting from the cost optimization measures undertaken by us during 2020, accompanied by reduced inventory valuation adjustments and asset impairments, and our ability to leverage sales growth with a reduced cost structure.

Net loss increased in 2019 from 2018 due to the impairment of assets, inventory valuation adjustments, an increase in operating expenses related to continued growth, the expansion of our international teams, interest related to our convertible notes, and the results of the Manitoba Harvest and Natura businesses acquired.

Adjusted earnings before interest, tax, depreciation and amortization (“Adjusted EBITDA”) increased in 2020 from 2019 primarily due to cost reduction measures undertaken during 2020, and our ability to leverage sales growth with a reduced cost structure.

Adjusted EBITDA decreased in 2019 from 2018 primarily due to increases in operating expenses related to continued growth as well as expansion and development into new markets.

Non-GAAP Financial Measures

To supplement our financial statements, which are prepared and presented in accordance with United States generally accepted accounting principles, or GAAP, we use certain measures, as described below, to understand and evaluate our operating performance. These measures, which may be different than similarly titled measures used by other companies, is 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.

Adjusted EBITDA

(in thousands of United States dollars)

(in thousands of United States dollars)
	Year Ended December 31,
	2020	2019	2018
Adjusted EBITDA reconciliation:
Net loss	$ (271,073 )	$ (321,169 )	$ (67,723 )
Inventoryvaluation adjustments	38,419	68,583	4,561
Severance costs	4,864	—	—
Depreciation and amortization expenses	18,654	15,849	3,562
Stock-based compensation expenses	29,716	31,842	20,988
Other stock-based compensation related expenses	—	8,411	—
Gain on debt conversion	(61,118 )	—	—
Impairment of assets	61,114	112,070	—
Loss from equitymethod investments	5,983	4,504	—
Foreign exchange(gain)loss,net	(13,169 )	(5,944 )	7,234
Change in fair value of warrant liability	100,286	—	—
Interest expenses,net	39,219	34,690	9,110
Finance income from ABG	—	(764 )	—
Loss from disposal ofpropertyand equipment	1,851	2,436	190
Other expenses(income),net	20,573	(33,928 )	(1,762 )
Amortization of inventorystep-up	—	2,041	—
Deferred income tax recoveries	(5,376 )	(8,847 )	(4,485 )
Current income tax(recoveries)expenses	(226 )	397	34
Adjusted EBITDA	$ (30,283 )	$ (89,829 )	$ (28,291 )

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;
Severance costs;
Non-cash depreciation and amortization expenses and, although these are non-cash charges, the assets being depreciated and amortized may have to be replaced in the future;
Stock-based compensation expenses, which has been, and will continue to be for the foreseeable future, a significant recurring expense in our business and an important part of our compensation strategy;
Other stock-based compensation expenses included within general and administrative expenses, relating to tax equalization expenses for cross-border executives on stock benefits.
Non-cash gain on extinguishment of convertible debt, as this is not expected to be a recurring business activity;
Non-cash impairment charges, as the charges are not expected to be a recurring business activity;
Non-cash loss from equity method investments;

Non-cash foreign exchange gains or losses, which accounts for the effect of both realized and unrealized foreign exchange transactions. Unrealized gains or losses represent foreign exchange revaluation of foreign denominated monetary assets and liabilities;
Non-cash change in fair value of warrant liability;
Interest expense, finance income from ABG, and loss on disposal of property and equipment to reflect ongoing operating activities;
Other expenses (income), net includes acquisition related expenses, which vary significantly by transactions and are excluded to evaluate ongoing operating results;
Amortization of purchase accounting step-up in inventory value included in costs of sales - product costs; and
Current and deferred income tax expenses and recoveries, which could be a significant recurring expense or recovery in our business in the future and reduce or increase cash available to us.

Gross profit (excluding inventory valuation adjustments)

Gross profit (excluding inventory valuation adjustments) is a non-GAAP measure calculated in the cannabis segment. It is calculated as revenue less cost of sales, adjusted to add back inventory valuation adjustments.

Gross margin percentage (excluding inventory valuation adjustments)

Gross margin percentage (excluding inventory valuation adjustments) is a non-GAAP measure calculated in the cannabis segment. It is calculated as the gross profit (excluding inventory valuation adjustments), as described above, divided by revenue.

Gross profit (excluding inventory valuation adjustments and purchase accounting value step-up)

Gross profit (excluding inventory valuation adjustments and purchase accounting value step-up) is a nonGAAP measure calculated in the hemp segment. It is calculated as revenue less cost of sales, adjusted to add back inventory valuation adjustments and purchase accounting value step-up of $0 for 2020 (2019 - $2,041).

Gross margin percentage (excluding inventory valuation adjustments and purchase accounting value step-up)

Gross margin percentage (excluding inventory valuation adjustments and purchase accounting value stepup) is a non-GAAP measure calculated in the hemp segment calculated as the gross profit (excluding inventory valuation adjustments and purchase accounting value step-up), as defined above, divided by revenue.

Income Taxes

Benefit for income taxes, effective tax rate and statutory federal income tax rate for 2020, 2019 and 2018 were as follows:

(in thousands of United States dollars)

(in thousands of United States dollars)
	Year Ended December 31,
	2020	2019 2018
Benefit for income taxes	$ (5,602 )	$ (8,450 ) $ (4,451 )
Effective tax rate	2.05 %	2.57 % 6.17 %
Statutory federal income tax rate	21.00 %	21.00 % 21.00 %

On December 22, 2017, the United States enacted the Tax Cuts and Jobs Act (the “Act”), which significantly changed United States tax law. The Act lowered the United States statutory federal income tax rate from 35% to 21% effective January 1, 2018. On March 27, 2020, the Coronavirus Aid, Relief and Economic Security (“CARES”) Act was enacted and signed into law in the U.S. The CARES Act, among other things, permits U.S. net operating loss ("NOL") carryovers and carrybacks to offset 100% of U.S. taxable income for taxable years

beginning before 2021. The CARES Act also contains modifications to increase the allowable business interest deduction.

The Company’s effective tax rate for 2020 was lower than the 2020 United States tax rate primarily due to non-deductible unrealized losses associated with the warrant liability, non-deductible share-based compensation, and minimal taxes in foreign tax jurisdictions and no United States current taxes due to net operating losses. Income tax benefit in 2020 was $5.6 million compared to $8.5 million in 2019. The decrease in tax benefit in 2020 from 2019 was primarily due to lower recognition of tax benefit from operating losses.

The Company’s effective tax rate for 2019 was lower than the 2019 United States tax rate primarily due to minimal taxes in foreign tax jurisdictions and no United States current taxes due to net operating losses. Income tax benefit in 2019 was $8.5 million compared to $4.5 million in 2018. The increase in tax benefit in 2019 from 2018 was primarily due to tax attributes related to acquisitions in 2019.

As of December 31, 2020, we had United States net operating loss carryforwards of approximately $140 million that can be carried forward indefinitely and generally limited in annual use to 80% of current year taxable income starting 2020. We have Canadian net operating loss carry-forwards of approximately $259 million that can be carried forward 20 years and begin to expire in 2028. We believe that it is more-likely-than-not that the benefit from certain United States and foreign net operating loss carryforwards will not be realized. In recognition of this risk, the change in the total valuation allowance was an increase of $62 million and $70 million for the years ended December 31, 2020 and 2019, respectively. We continually evaluate the amount of the valuation allowance, if any, by assessing the realizability of deferred tax assets.

Liquidity and Capital Resources

As at December 31, 2020, we had cash and cash equivalents of $189.7 million, which were held for working capital and general corporate purposes. This represents an overall increase of $92.9 million since December 31, 2019. Our primary need for liquidity is to fund working capital requirements, capital expenditures, debt service obligations and for general corporate purposes. Our ability to fund operations and make planned capital expenditures and debt service obligations depends on future operating performance and cash flows which are subject to prevailing economic, business, and financial conditions, and other factors.

During the year ended December 31, 2020, we successfully raised funds with the following financing activities:

On February 28, 2020, we entered into a credit agreement for a senior secured credit facility, denominated in Canadian dollars, for a maximum aggregate principal amount of $59.6 million (C$79.8 million). An aggregate principal amount equal to $49.7 million (C$66.5 million) was drawn on February 28, 2020.
On March 17, 2020, we closed an underwritten registered offering of 7,250,000 shares of Class 2 common stock for $4.76 per share and 11,750,000 pre-funded warrants for $4.7599 accompanied by 19,000,000 warrants with an exercise price of $5.95 per warrant. The pre-funded warrants had an exercise price per share of Class 2 common stock of $0.0001. All the pre-funded warrants have been exercised. The 19,000,000 total accompanying warrants allow the holder to purchase 19,000,000 shares of the Company’s Class 2 common stock. The warrants have an exercise price per share of Class 2 common stock of $5.95 and are exercisable at any time after the first trading day following the six-month anniversary of the issuance and will expire on the fifth anniversary date from the date they become exercisable. Our net proceeds from this offering (excluding the exercise price of any warrants) was $85.3 million (gross proceeds of $90.4 million);
During the year ended December 31, 2020, we issued 16,131,487 shares of Class 2 common stock for gross proceeds of approximately $127 million under the at-the-market equity offering program.

During the year ended December 31, 2020, we have experienced certain impacts to our business due to COVID-19. In particular, we believe the impacts of COVID-19 on customer and patient behavior in our key markets, the temporary closure or restrictions on cannabis retail outlets in the Canadian market, and the impact on retail markets in general, have introduced unexpected challenges and suppressed sales of our products. We have largely been able to maintain satisfactory production levels at our facilities and have not experienced any outbreaks of COVID-19 among our employees. While we have been able to mitigate many of the impacts of COVID-19, there

remain uncertainties about the future impact on consumer and patient behaviors, cannabis and retail markets in general, our selling and manufacturing operations, and capital markets. Any of these negative impacts, alone or in combination, may require us to raise additional capital on potentially unattractive terms and or significantly reduce our costs in order to fully fund our business. Currently, we do not anticipate having to take these actions but, due to our inability to assess the full future impact of COVID-19 on our customers, financial markets, and our own business, we are continually evaluating many factors that will help us make decisions in a timely manner.

On June 5, 2020, we entered into the First Amendment to the Senior Facility. The First Amendment provides that the Senior Facility will only require interest payments for the remainder of its term and all outstanding principal payments will be due at maturity, February 28, 2022. We have been, and currently are, in full compliance with all terms of the Senior Facility and will not incur any fees or penalties in connection with the First Amendment. Additionally, and at such time as the lender’s business may allow, the lender may make the additional proceeds of $9.9 million (C$13.3 million) available during the term of the Credit Agreement, at its sole discretion. Concurrently, with the First Amendment, the lender also approved our ability to sell the High Park Gardens facility, if and when we desire. As part of any sale of the High Park Gardens facility, the Lender has agreed that we may retain 60% of any sales proceeds (net of all expenses, fees and taxes), and that the lender shall receive 40% of all sales proceeds (net of all expenses, fees and taxes). All sales proceeds to the lender will be applied as a repayment of principal on the Senior Facility, without any prepayment penalties or fees.

The warrants issued as part of the registered offering contain anti-dilution price protection features which, so long as the warrants remain outstanding, allow us to only issue up to $20.0 million in aggregate gross proceeds under our at-the-market offering program at prices less than the $5.95 per share exercise price of the warrants, and in no event more than $6.0 million per quarter, at prices below the $5.95 per share exercise price of the warrants, without triggering the price protection features.

The warrants are to be settled in registered shares, and the registration statement is required to be active, unless such shares may be subject to an applicable exemption from registration requirements. The holders, at their sole discretion, may elect to a cashless exercise, and be issued un-registered shares in accordance with Section 3(a)(9) of the 1933 Act. In the event we do not maintain an effective registration statement, we may be required to pay a daily cash penalty equal to 1% of the number of shares of Class 2 common stock due to be issued multiplied by any trading price of the Class 2 common stock between the exercise date and the share delivery date, as selected by the holder. Alternatively, we may deliver registered Class 2 common stock purchased in the open market. We may also be required to pay cash if we do not have sufficient authorized shares to deliver to the holders upon exercise, which could have a material impact to our business.

During November 2020, we entered into two privately negotiated exchange agreements (the “Exchange Agreements”) with certain holders of our 5.00% Convertible Senior Notes due 2023 (the “Notes”). Under the terms of the Exchange Agreements, the holders agreed to exchange an aggregate principal amount of approximately $197.2 million of Notes plus accrued interest held by them in exchange for an aggregate of 17,339,577 shares of our Class 2 common stock. Effectively, we agreed to repurchase a portion of our Notes at discounts of 36% and 42%, respectively, to their face value, using shares issued at our most recent closing market price on November 20, 2020 and November 23, 2020 (which is equivalent to a conversion price of $7.36 per share and $6.68 per share, respectively).

Due to uncertainties we may face in raising additional equity financing in the future, which may be further impacted by the economic downturn and unprecedented conditions due to COVID-19, there remains uncertainty what impact this may have on managements assumptions used to develop these forecasts. Given our cash position and current operating plan, management believes there is not significant doubt about the entity’s ability to continue as a going concern for the next twelve months.

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

(in thousands of United States dollars)

(in thousands of United States dollars)
	Year Ended December 31,
	2020	2019 2018
Net cash used in operatingactivities	$ (129,351 )	$ (258,065 ) $ (46,248 )
Net cash used in investingactivities	(41,680 )	(253,181 ) (98,620 )
Net cashprovided byfinancingactivities	264,847	114,700 630,998
Effect of foreign currencytranslation	(905 )	6,082 (1,198 )
Cash and cash equivalents,beginningofyear	96,791	487,255 2,323
Cash and cash equivalents,endingofyear	189,702	96,791 487,255
Increase (decrease) in cash and cash equivalents	$ 92,911	$ (390,464 ) $ 484,932

Cash flows from operating activities

The changes in net cash used by operating activities in 2020 compared to 2019 primarily related to changes in our cost structure, and improvements in working capital.

The changes in net cash used by operating activities in 2019 compared to 2018 was primarily due to an increase in operating costs to expand cultivation facilities, enter new markets and public company costs.

Cash flows from investing activities

The change in net cash used in investing activities in 2020 compared to 2019 increased due to a reduction in acquisition based activities compared to 2019 during which we acquired Manitoba Harvest and Natura Naturals, made our investment in the ABG Profit Participation Arrangement, and made purchases of significant property and equipment related to our expansion projects in Canada and Portugal.

The change in net cash used in investing activities in 2019 compared to 2018 primarily related to our acquisitions of Manitoba Harvest, Natura and S&S, investment in the ABG Profit Participation Arrangement, and purchase of property and equipment related to our expansion projects in Canada and Portugal.

Cash flows from financing activities

The change in net cash provided by financing activities during 2020 relates to proceeds from equity offerings, including our at-the-market program, and debt financing. The change in net cash provided by financing activities in 2019 compared to 2018 primarily related to proceeds from our at-the-market equity offering program, exercise of stock options, and ABG Profit Participation Arrangement.

The table below sets out the cash and cash equivalents and inventory:

(in thousands of United States dollars)

(in thousands of United States dollars)
	As at December 31, As at December 31,
	2020 2019
Cash and cash equivalents	$ 189,702 $ 96,791
Inventory	93,645 87,861

We primarily financed our operations through the issuance of common stock, sale of convertible notes and revenue generating activities. We believe our existing cash will be sufficient to meet our working capital requirements.

We manage our liquidity risk by preparing budgets and cash forecasts to ensure we have sufficient funds to meet obligations. In managing working capital, we may limit the amount of our cash needs by selling inventory at wholesale rates, pursuing additional financing sources, and managing the timing of capital expenditures. While we believe we have sufficient cash to meet working capital requirements in the short term, we may need additional sources of capital and/or financing, to meet planned growth requirements and to finalize construction activities at our cultivation and processing facilities in Portugal.

Subsequent Events

In January and February of 2021, holders of the Company’s warrants exercised 12,666,000 shares at the value of $5.95 per share, resulting in proceeds to the Company of $75.4 million as well as a reduction of the company’s outstanding warrant liability for $80 million.

On February 9, 2021, the Company reached an agreement with the issuer of a convertible note to collect $2.5 million as a prepayment and early termination. Payment in full was received on February 12, 2021.

Contractual Obligations and Commitments

Lease commitments

We lease various facilities, under non-cancelable finance and operating leases, which expire at various dates through September 2027.

Maturities of lease liabilities:

Maturities of lease liabilities:
Year ending December 31,	Operating Leases	Finance Leases
2021	$ 3,792	$ 1,051
2022	3,436	5,960
2023	3,290	12,438
2024	2,704
2025	2,151	—
Thereafter	6,401	—
Total minimum leasepayments	21,774	19,449
Less: amounts of leases related to interestpayments	3,515	4,172
Present value of minimum leasepayments	18,259	15,277
Less: current accrued lease obligation	2,913	—
Obligations recognized	$ 15,346	$ 15,277

Purchase commitments

The following table reflects our future non-cancellable minimum contractual commitments as at December 31, 2020:

31, 2020:
	Total	2021	2022	2023		2024	2025	Thereafter
Purchase commitments	$ 84,094	$ 84,094	$ —	$ —	$ —		$ —	$ —
Total	$ 84,094	$ 84,094	$ —	$ —	$ —		$ —	$ —

As a result of changing industry dynamics, we successfully renegotiated or terminated, and continue to renegotiate the terms of supply agreements, including quantities and pricing, related to CBD, cannabis extracts/oils, and hemp flower. The remaining re-negotiations are ongoing and there can be no assurance that terms satisfactory to us can be reached on a timely basis, or at all. The failure of re-negotiations could result in us being contractually obligated to purchase significant amounts of products, some of which may be priced above then-current market prices, or litigation against us, or interruption of the supply of inputs for the manufacturing of our products, all of which could have a material adverse effect on our business, results of operations, financial condition, liquidity and prospects. In addition, any litigation or arbitration resulting in an adverse judgment or award against us could result in a default under our Senior Facility and convertible notes.

In 2018, the Company signed an agreement with Rose Lifescience Inc. (“Rose”) for distribution and marketing of product in Quebec in exchange for a minimum fee of $384 per annum for an initial term of five years, and agreed to purchase the lesser of 2,000 Kg per year or 40% of the production of Cannabis at a rate of 115% of cost of goods sold from the Rose facility. In September 2020, the Company signed an amendment to this agreement under which the Company is no longer obligated to purchase product from Rose nor pay the minimum fee. Instead, the amendment requires the Company to make approximately 40,000 kilograms equivalent of Tilray product available in the province of Quebec through 2023 for Rose to sell and for the Company to pay Rose a compensation fee based on net revenues of product sold in Quebec. The estimated total compensation fee is approximately $8.0

million through 2023. Because there is no firm commission fee these amounts are not included in the above schedule. Compensation fee expense is recorded as incurred.

In 2018, we entered into a Product and Trademark License Agreement with Docklight LLC, a related party, to use certain intellectual property rights in exchange for payment of royalty fees depending upon specified percentages of licensed product net sales, this deal was amended in 2020. Because the purchase commitment is an undeterminable variable amount, it is excluded from the above schedule.

Other commitments

The Company has payments on the Convertible Notes, the Senior Facility, ABG finance liability, and Portugal construction as follows:

	Total	2021	2022	2023		2024	2025	Thereafter
Convertible Notes, principal and interest	$ 319,535	$ 13,893	$ 13,893	$ 291,749	$ —		$ —	$ —
Senior Facility, principal and interest	56,683	5,302	51,381	—		—	—	—
ABG finance liability	7,500	1,500	1,500	1,500		1,500	1,500	$ —
Portugal construction commitments	2,778	2,778	—	—		—	—	—
Total	$ 386,496	$ 23,473	$ 66,774	$ 293,249	$ 1,500		$ 1,500	$ —

In the event the Company consummates the announced merger with Aphria Inc., the Company has agreed to pay its financial advisor a non-refundable $9,000 transaction fee on the date of closing.

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.

Off-Balance Sheet Arrangements

We did not have during the periods presented, and we do not currently have, any off-balance sheet arrangements, as defined in the rules and regulations of the SEC.

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

Interest Rate Risk

Interest rate risk is the risk that the value or yield of available-for-sale debt securities may decline if interest rates decline or that the value of financial liabilities will increase if interest rates increase. Fluctuations in interest rates may impact the level of income and expense recorded on these financial instruments. A 1% change in the interest rate in effect on December 31, 2020 would not have a material effect on i) the fair value of our available-forsale debt securities as the majority of the portfolio consists of convertible debt instruments with a fixed interest rate of 10%, or ii) the convertible note financial liabilities as they bear interest at a fixed rate of 5% and are not publicly traded. The Senior Facility bears interest on the outstanding principal balance at an annual rate equal to the Canadian prime rate plus 8.05%. A hypothetical 1% increase in the Canadian prime rate would result in an increase of $0.4 million recorded in interest expense for the year ended December 31, 2020.

Equity Price Risks

As of December 31, 2020, we held long-term equity investments at fair value and equity investments under the measurement alternative. These investment in equities were acquired as part of our strategic transactions. Accordingly, the changes in fair values of investment in equities measured at fair value or under the measurement alternative are recognized through other expense (income), net in the statements of net loss and comprehensive loss. Because of the uncertainty surrounding the COVID-19 outbreak, there is increased risk of declines in fair values of our equity investments if conditions have not been significantly improved and global stock markets have not recovered from recent declines. Based on the fair value of investment in equities held as of December 31, 2020, a hypothetical decrease of 10% in the prices for these companies would reduce the fair values of the investments and result in unrealized loss recorded in other expense (income), net by $0.05 million. Similarly, based on the fair value of our warrant liability as of December 31, 2020, a hypothetical increase of 10% in the price for our common stock would increase the change in fair value of warrant liability by $5.8 million.

Foreign Currency Risk

Our consolidated financial statements are expressed in United States dollars. However, a significant portion of our business and assets and liabilities are denominated in a variety of currencies, the most significant of which are the Canadian dollar and the Euro. As a result, we are exposed to foreign currency transaction and translation gains and losses. The statements of net loss and comprehensive loss and statements of cash flows are translated to USD by applying the average foreign exchange rate in effect during the reporting period. Assets and liabilities are translated into US dollars using the exchange rate in effect at the balance sheet date. Appreciating foreign currencies relative to the United States dollar will positively impact operating income and net earnings, and increase the value of assets and liabilities, while depreciating foreign currencies relative to the United States dollar will negatively impact operating income and net earnings and reduce the value of assets and liabilities.

A 10% change in the exchange rates for the Canadian dollar would affect the carrying value of net assets by approximately $45.9 million as of December 31, 2020, with a corresponding impact to accumulated other comprehensive loss. We are also exposed to risk related to changes in the value of the Euro due to our one construction commitment in Portugal. We have not historically engaged in hedging transactions and do not currently contemplate engaging in hedging transactions to mitigate foreign exchange risks. As we continue to recognize gains and losses in foreign currency transactions, depending upon changes in future currency rates, such gains or losses could have a significant, and potentially adverse, effect on our results of operations.

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Tilray Brands, Inc. — Annual Report 2020

47621_rns_2021-02-19_23701a12-6078-41da-a8d4-37e66d740fb9.pdf

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

Overview

COVID-19

Business Segments

Key Operating Metrics

Factors Impacting our Business

Critical Accounting Policies and Significant Judgments and Estimates

(i) COVID-19 related judgments and estimates

(ii) Revenue recognition

(iii) Valuation of inventory

(iv) Impairment of goodwill and indefinite life intangible assets

(v) Stock-based compensation

(vi) Business combinations and goodwill

(vii) Leases

(viii) Warrants

Recent Accounting Pronouncements Not Yet Adopted

Components of Results of Operations

Revenue - cannabis

Revenue - hemp

Cost of sales - cannabis

Cost of sales - hemp

General and administrative expenses

Sales and marketing expenses

Research and development expenses

Depreciation and amortization expenses

Impairment of assets

Acquisition-related expenses (income), net

Loss from equity method investments

Foreign exchange (gain) loss, net

Interest expenses, net

Other expense (income), net

Income taxes

Results of Operations

Consolidated Statements of Net Loss Data

Revenue

Revenue by product channel

N/A: Not a meaningful percentage.

Revenue by product category

(in thousands of United States dollars)

N/A: Not a meaningful percentage.

Cost of sales and gross margin – Cannabis

Cost of sales and gross margin – Hemp

N/A: Not a meaningful percentage.

Operating expenses

N/A: Not a meaningful comparison

Non-operating income and expenses

Net loss and Adjusted EBITDA[(1) ]

Non-GAAP Financial Measures

Adjusted EBITDA

Gross profit (excluding inventory valuation adjustments)

Gross margin percentage (excluding inventory valuation adjustments)

Gross profit (excluding inventory valuation adjustments and purchase accounting value step-up)

Gross margin percentage (excluding inventory valuation adjustments and purchase accounting value step-up)

Income Taxes

(in thousands of United States dollars)

Liquidity and Capital Resources

(in thousands of United States dollars)

Cash flows from operating activities

Cash flows from investing activities

Cash flows from financing activities

Subsequent Events

Contractual Obligations and Commitments

Lease commitments

Maturities of lease liabilities:

Purchase commitments

Other commitments

Contingencies

Off-Balance Sheet Arrangements

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

Interest Rate Risk

Equity Price Risks

Foreign Currency Risk

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Tilray Brands, Inc. Annual Report 2020