Tilray Brands, Inc. — Interim / Quarterly Report 2021

May 10, 2021

Item 2. 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 unaudited financial information and the notes thereto included elsewhere in this Quarterly Report on Form 10-Q, and our Annual Report on Form 10-K 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 Quarterly Report on Form 10-Q, 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 forward-looking statements or forwardlooking information. Factors that could cause or contribute to such differences include, but are not limited to, those identified in this Quarterly Report on Form 10-Q and those discussed in the section titled “Risk Factors” set forth in Part II, Item 1A of this Quarterly Report on Form 10-Q 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 Quarterly Report on Form 10-Q 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 forward-looking statements or forward-looking information as predictions of future events. Furthermore, such forward-looking 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 amounts and per warrant amounts 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 eighteen 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 adultuse 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 three months ended March 31, 2021, we issued 6,254,980 shares of Class 2 common stock for gross proceeds of approximately $159.2 million under our at-the-market equity offering program.

During the three months ended March 31, 2021, we issued 12,791,000 shares of Class 2 common stock related to the exercise of outstanding warrants for gross proceeds of approximately $76.1 million.

On April 30, 2021, we completed an arrangement pursuant to an Arrangement Agreement dated as of December 15, 2020 (as amended, the “Arrangement Agreement”) with Aphria Inc. (“Aphria”), pursuant to which we acquired all of the issued and outstanding common shares of Aphria pursuant to a plan of arrangement (the “Plan of Arrangement”) under the Business Corporations Act (the

“Arrangement”). Each outstanding common share of Aphria outstanding immediately prior to the effective time of the Arrangement was transferred to Tilray in exchange for 0.8381 of a share of Tilray Class 2 common stock. As of March 31, 2021, the

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Arrangement had not yet been completed and as such, this Management’s Discussion and Analysis does not reflect the effect of the Arrangement.

COVID-19

The COVID-19 pandemic and various government steps to reduce the spread of COVID-19 have had and continue to have a significant impact on the way people live, work and interact and have significantly impacted and will likely continue to impact economic activity around the world.

During the COVID-19 pandemic, many of the markets in which we produce and sell our products have experienced unprecedented “lockdowns” or “stay at home” orders, and other government mandated restrictions to try and reduce the spread of COVID-19. The situation continues to be uncertain and varies by market as infection rates of COVID-19 remain high in many regions throughout the world including Canada, Portugal, and Germany where we either have production facilities, sales efforts, or both. Because our products have been deemed essential products, we have been able to continue operating our business. The health, safety and well-being of our employees has been and remains our first priority. Many of our employees continue to work from home. In those instances where our employees cannot perform their work at home, such as in our production facilities, we have implemented additional health and safety measures and social distancing protocols, consistent with government recommendations and requirements, to help to ensure their safety.

During the comparable quarter in 2020, and as a result of the COVID-19 pandemic, we saw an increase in demand for our cannabis products driven by consumer pantry-loading and increased consumption of our products due to concerns about future availability of products and or concerns about whether retail locations that sell our products would remain open. During the quarter ended March 31, 2021 some of our key markets, including Canada and Germany, experienced severe restrictions on patients and consumers and the retail locations at which patients and consumers purchase our products. As a result of these restrictions we believe demand for our products was subdued during the period. Despite the COVID-19 pandemic, we have been able to keep up with fluctuating patient and consumer demand for our products and have continued to introduce new products in the market.

The COVID-19 pandemic and the various government steps to reduce the spread have impacted and may continue to impact our patients’ and consumers’ ability to access and purchase our products. These steps may also inhibit our ability to produce products at our various facilities. While we believe consumer demand for our products remains strong, due to the uncertainties surrounding the COVID-19 and its impact on our patients’ and consumers’ ability to access and purchase our products, as well the uncertainties about whether we will be able to continue operations at our productions facilities, there remains commensurate uncertainty about the overall impact the pandemic may have on our business in the future. We generally expect COVID-19 to continue to impact patient and consumer behavior and access to products and present uncertainty in the markets in which we do business. Despite the uncertainty presented by COVID-19 our current forecasts show our cash balances will be sufficient to satisfy our working capital needs, debt payments, and general liquidity requirements.

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.

(financial data is expressed in United States dollars)

		Three months ended March 31,	Three months ended March 31,
	2021	2020	Change	% Change
Kilograms equivalents sold - cannabis	6,277	5,794	483	8%
Kilograms harvested - cannabis	10,969	9,532	1,437	15%
Thousand units sold - hemp products	2,438	1,878	560	30%
Average net selling price per gram - cannabis	$ 5.00	$ 5.28	$ (0.28)	(5)%
Average cost per gram sold - cannabis	$ 3.56	$ 3.97	$ (0.41)	(10)%
Average gross selling price per unit - hemp products	$ 6.82	$ 11.35	$ (4.53)	(40)%

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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 increased 8% for the three months ended March 31, 2021 from the comparable period in 2020 primarily due to growth in our international medical sales. We expect continued increases in kilogram equivalents grams sold as we generate sales growth in our key cannabis businesses; adult-use and international medical.

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

Total kilograms harvested increased by 15% for the three months ended March 31, 2021 from the comparable periods in 2020 primarily due to additional operating capacity at our Portugal facility.

Thousand units sold – hemp products. Our subsidiary, FHF Holdings Ltd. (“Manitoba Harvest”) sells hemp products such as shelled hemp seed, ground hemp, broad spectrum hemp extract containing CBD and hemp seed oil that are tracked by individual units.

Hemp products sold for the three months ended March 31, 2021 increased 30% from the comparable period in 2020. The increase was as a result of our large format retail customers shifting to larger size private label offerings, as well as increased promotional activity within the Club and US Retail channels. Looking forward, the number of units sold is likely to continue to increase as sales volumes rise.

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 decreased by 5% for the three months ended March 31, 2021 from the comparable period in 2020 due to increased competitive pricing in the adult-use segment. Generally, we expect our average net selling price to increase over time as our international medical sales make up a greater percentage of our total sales and we continue to introduce higher-priced Cannabis 2.0 products in our adult-use business.

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 decreased by 10% for the three months ended March 31, 2021 from the comparable period in 2020 primarily as a result of reduced cost structures at our facilities due to our cost cutting efforts during 2020, better throughput and cost absorption at our High Park Holdings processing facility, and partially due to the availability of low cost product from third parties. We expect to see continued improvement in our cost per gram metric as we continue to leverage our cost reductions, including the closure of High Park Gardens which was a relatively high cost facility to operate, and identify additional ways to optimize our production activities.

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 decreased by 40% during the three months ended March 31, 2021 from the comparable period in 2020 primarily due to increased sales of lower priced private label products.

Critical Accounting Policies and Significant Judgments and Estimates

There were no material changes to our critical accounting policies and estimates from the information provided in “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” included in our Annual Report on Form 10-K for the year ended December 31, 2020.

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Results of Operations

Financial data is expressed in thousands of United States dollars, unless otherwise noted.

Condensed Consolidated Statements of Net Loss Data

(in thousands of United States dollars)

	Three months ended March 31,	Three months ended March 31,	Three months ended March 31,	Three months ended March 31,
	2021		2020
Revenue	$ 48,021		$ 52,102
Cost of sales	34,518		41,232
Gross profit	13,503		10,870
General and administrative expenses	25,587		27,269
Sales and marketing expenses	9,739		18,326
Research and development expenses	1,202		1,347
Depreciation and amortization expenses	3,498		3,591
Impairment of assets	—		29,839
Loss from equity method investments	1,787		1,748
Litigation settlement	45,000		—
Operating loss	(73,310)		(71,250)
Foreign exchange (gain) loss, net	(699)		28,069
Change in fair value of warrant liability	263,201		71,978
Interest expenses, net	6,916		9,146
Other (income) expenses, net	(1,516)		4,651
Loss before income taxes	(341,212)		(185,094)
Deferred income tax recoveries	(635)		(1,272)
Current income tax expenses	378		301
Net loss	$ (340,955)		$ (184,123)
Other Financial Data
Adjusted EBITDA(1)	$ (6,283)		$ (18,152)

(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.”

		Three months ended March 31,	Three months ended March 31,	Three months ended March 31,
		2021		2020
(as a percentage of revenue)
Cost of sales		72%		79%
Gross profit		28%		21%
General and administrative expenses		53%		52%
Sales and marketing expenses		20%		35%
Research and development expenses		3%		3%
Depreciation and amortization expenses		7%		7%
Impairment of assets		0%		57%
Loss from equity method investments		4%		3%
Litigation settlement		94%		0%
Operating loss		(153)%		(137)%
Foreign exchange (gain) loss, net		(1)%		54%
Change in fair value of warrant liability		548%		138%
Interest expenses, net		14%		18%
Other (income) expenses, net		(3)%		9%
Loss before income taxes		(711)%		(355)%
Deferred income tax recoveries		(1)%		(2)%
Current income tax expenses		1%		1%
Net loss		(710)%		(353)%
Other Financial Data

Adjusted EBITDA[(1)]

(13)% (35)%

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(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.”

Revenue

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. We also evaluate revenue by product channel.

Revenue by product channel

(in thousands of United States dollars)

		Three months ended March 31,	Three months ended March 31,
	2021	2020	$ Change		% Change
Cannabis
Adult-use	$ 19,440	$ 20,919	$ (1,479)		(7)%
Canada - medical	3,217	4,051	(834)		(21)%
International - medical	8,600	5,806	2,794		48%
Bulk	129	—	129		100%
Total Cannabis revenue	31,386	30,776	610		2%
Hemp	16,635	21,326	(4,691)		(22)%
Total	$ 48,021	$ 52,102	$ (4,081)		(8)%
Excise duties included in revenue	$ 4,646	$ 4,972	$ (326)		(7)%

Revenue. Revenue decreased by 8% to $48.0 million for the three months ended March 31, 2021 compared to revenue of $52.1 million for the same period in 2020. The reduction was primarily driven by reduced revenue from the hemp category as a result of delays in the switch from branded product to private label product with certain customers during the quarter and reduced promotional activity in 2021 versus 2020. Adult-use sales and Canada medical sales were negatively impacted by COVID related lockdowns throughout Canada during the quarter, while international medical sales increased as we expanded our customer base in existing and new markets.

Cannabis. Cannabis segment revenue increased 2% to $31.4 million for the three months ended March 31, 2021 compared to $30.8 million for the same period in 2020. The increase was primarily driven by increased sales in our international medical markets which was partially offset by reduction in the adult-use and Canada medical categories.

Hemp. Hemp segment revenue decreased 22% to $16.6 million for the three months ended March 31, 2021 compared to $21.3 million for the same period in 2020. The decrease was primarily due to delays in the switch from branded product to private label product with certain customers during the quarter.

Revenue by product category

(in thousands of United States dollars)

		Three months ended March 31,	Three months ended March 31,
	2021	2020	$ Change		% Change
Dried cannabis	$ 21,086	$ 19,696	$ 1,390		7%
Cannabis extracts	10,270	10,545	(275)		(3)%
Hemp products	16,635	21,326	(4,691)		(22)%
Accessories and other	30	535	(505)		(94)%
Total	$ 48,021	$ 52,102	$ (4,081)		(8)%
Excise duties included in revenue	$ 4,646	$ 4,972	$ (326)		(7)%

We also analyze our sales mix by dried cannabis, extracts, hemp and accessories. Cannabis as a whole represented 65% of total revenue for the three months ended March 31, 2021 versus 59% for the comparable period in 2020. Dried cannabis represented 67% of cannabis revenue for the three months ended March 31, 2021 compared to 64% for the comparable period in 2020. Cannabis extracts represented 33% of cannabis revenue for the three months ended March 31, 2021 compared to 34% for the comparable period in 2020. Hemp products represented 35% of total revenue for the three months ended March 31, 2021 compared to 41% for the comparable period in 2020. In the future, we expect our cannabis products to grow at a faster rate and make up a larger portion of sales than our Hemp products as we generally see higher growth rate opportunities in international medical cannabis markets.

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Gross margin by product category

(in thousands of United States dollars)

	For	For	For	For	the three months ended March 31,	the three months ended March 31,	the three months ended March 31,	the three months ended March 31,	the three months ended March 31,	the three months ended March 31,	the three months ended March 31,	the three months ended March 31,
	Cannabis				Hemp				Total
	2021		2020		2021		2020		2021		2020
Revenue	$ 31,386		$ 30,776		$ 16,635		$ 21,326		$ 48,021		$ 52,102
Cost of sales
Product costs	20,323		24,603		12,133		12,585		32,456		37,188
Inventory valuation adjustments	1,720		3,247		342		797		2,062		4,044
Gross profit (loss)	9,343		2,926		4,160		7,944		13,503		10,870
Inventory valuation adjustments	1,720		3,247		342		797		2,062		4,044
Gross profit, excluding inventory valuation adjustments(1)	$ 11,063		$ 6,173		$ 4,502		$ 8,741		$ 15,565		$ 14,914
Gross margin, excluding inventory valuation adjustments(1)		35%		20%		27%		41%		32%		29%

(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 and gross margin – Cannabis

(in thousands of United States dollars)

	Three months ended March 31,	Three months ended March 31,	2021 vs 2020 Change	2021 vs 2020 Change
	2021	2020	$	%
Cost of sales - product costs	$ 20,323	$ 24,603	$ (4,280)	(17)%
Cost of sales - inventory valuation adjustments	1,720	3,247	(1,527)	(47)%
Total Cannabis cost of sales	$ 22,043	$ 27,850	$ (5,807)	(21)%
Gross profit	$ 9,343	$ 2,926	$ 6,417	219%
Gross profit (excluding inventory valuation adjustments)(1)	$ 11,063	$ 6,173	$ 4,890	79%
Gross margin percentage	30%	10%	20%	200%
Gross margin percentage (excluding inventory valuation adjustments)(1)	35%	20%	15%	75%

(2) 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. Cost of sales decreased for the three months ended March 31, 2021 from the comparable period in 2020 mainly due to improved operational efficiencies as we realized the benefits of cost reductions implemented throughout our supply chain during 2020. Additionally, we have improved our supply and demand planning efforts which resulted in reduced inventory adjustments versus the comparable period. We incur inventory valuation adjustments generally due to the write off of aged product or products that are unlikely to be sold.

Gross margin. Gross margin of 30% for the three months ended March 31, 2021 increased from the comparable period in 2020 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 35%, from 20% in 2020. The improvement resulted from reduced costs, increased sales in higher margin international medical markets, and the introduction of 2.0 products in the adult use market.

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Cost of sales and gross margin – Hemp

(in thousands of United States dollars)

	Three months ended March 31,	Three months ended March 31,	2021 vs 2020 Change	2021 vs 2020 Change
	2021	2020	$	%
Cost of sales - product costs	$ 12,133	$ 12,585	$ (452)	(4)%
Cost of sales - inventory valuation adjustments	342	797	(455)	(57)%
Total Hemp cost of sales	$ 12,475	$ 13,382	$ (908)	(7)%
Gross profit	$ 4,160	$ 7,944	$ (3,784)	(48)%
Gross profit (excluding inventory valuation adjustments)(1)	$ 4,502	$ 8,741	$ (4,239)	(48)%
Gross margin percentage	25%	37%	(12)%	(32)%
Gross margin percentage (excluding inventory valuation adjustments)(1)	27%	41%	(14)%	(34)%

(1) Gross profit (excluding inventory valuation adjustments and purchase accounting step-up) and gross margin percentage (excluding inventory valuation adjustments and purchase accounting 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 decreased for the three months ended March 31, 2021 from the comparable period in 2020 primarily due to lower sales volumes and a shift to larger format private label products for certain customers.

Gross margin. Gross margin of 25% for the three months ended March 31, 2021 declined from 37% in the comparable period in 2020 due to increased sales of lower margin private label products versus higher margin branded products and lower absorption rates in our facilities due to reduced production volumes.

Operating expenses

(in thousands of United States dollars)

			Three months ended March 31,	Three months ended March 31,	Three months ended March 31,	Three months ended March 31,
	2021		2020		Change			% Change
General and administrative expenses	$ 25,587		$ 27,269		$ (1,682)			(6)%
Sales and marketing expenses	9,739		18,326		(8,587)			(47)%
Research and development expenses	1,202		1,347		(145)			(11)%
Depreciation and amortization expenses	3,498		3,591		(93)			(3)%
Impairment of assets	—		29,839		(29,839)			100%
Loss from equity method investments	1,787		1,748		39			2%
Litigation settlement	45,000		—		45,000			100%
Total operating expenses	$ 86,813		$ 82,120		$ 4,693			6%
(as a percentage of revenue)
General and administrative expenses		53%		52%
Sales and marketing expenses		20%		35%
Research and development expenses		3%		3%
Depreciation and amortization expenses		7%		7%
Impairment of assets		0%		57%
Loss from equity method investments		4%		3%
Litigation settlement		94%		0%
Total operating expenses		181%		158%

N/A: Not a meaningful percentage

General and administrative. General and administrative expenses decreased for the three months ended March 31, 2021 from the comparable period in 2020 generally due to the realization of cost savings initiatives implemented in 2020 designed to better align our business with market conditions.

Sales and marketing. Sales and marketing expenses decreased for the three months ended March 31, 2021 compared to 2020 partially due to headcount reductions and our efforts to optimize trade and market spend.

Depreciation and amortization. Depreciation and amortization expenses was relatively flat for the three months ended March 31, 2021 from the comparable period in 2020, primarily because asset purchases in Portugal were not yet put into use.

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Research and development. Research and development expenses decreased for the three months ended March 31, 2021 from the comparable periods in 2020 primarily due to rightsizing and optimizing the departmental structure and focusing on more near term innovations.

Impairment of assets. No impairments were recorded for the three months ended March 31, 2021.

Loss from equity method investments. Losses from equity method investments for the three months ended March 31, 2021 remained flat and were $1.8 million compared to $1.7 million for the comparable 2020 period.

Litigation settlement. Litigation settlement for the three months ended March 31, 2021 was due to a one-time settlement related to the termination of a purchase agreement.

Non-operating income and expenses

(in thousands of United States dollars)

	Three months ended March 31,	Three months ended March 31,	2021 vs 2020 Change	2021 vs 2020 Change
	2021	2020	$	%
Foreign exchange (gain) loss, net	$ (699)	$ 28,069	$ (28,768)	N/A
Change in fair value of warrant liability	263,201	71,978	191,223	266%
Interest expenses, net	6,916	9,146	(2,230)	(24)%
Other (income) expense, net	(1,516)	4,651	(6,166)	(133)%
Total	$ 267,902	$ 113,844	$ 154,059	N/A

N/A: Not a meaningful percentage

Foreign exchange (gain) loss, net. The impact of foreign exchange for the three months ended March 31, 2021 was a gain of $0.7 million, versus a loss of $28.1 million for the comparable period in 2020. Because a significant portion of our balances are in Canadian dollars, the strengthening of the Canadian dollar relative to the United States dollar in the first quarter of 2021 drove the gain compared to the loss in the comparative 2020 period.

Change in fair value of warrant liability . Due to the increase in the market price of our stock since the offering closed, and despite the exercise of a significant portion of the warrants, the fair value of the warrant liability increased by $191.2 million for the three months ended March 31, 2021 from the comparable 2020 period.

Interest expense, net. Interest expense, net for the three months ended March 31, 2021 was $6.9 million compared to $9.1 million for the comparable period in 2020. The decrease was primarily attributable to the conversion of a portion of our convertible debt into equity in November 2020.

Other (income) expense, net. Other (income) expense, net was in an income position for the three months ended March 31, 2021 from the comparable period in 2020, primarily due to unrealized gains on investments exceeding losses in 2021, and because we recognized $4.0 million of issuance costs in March 2020 associated with our registered offering.

Net Loss and Adjusted EBITDA[(1)]

		Three months ended March 31,	Three months ended March 31,
	2021	2020	Change	% Change
Net loss	$ (340,955)	$ (184,123)	$ (156,832)	(85)%
Adjusted EBITDA(1)	$ (6,283)	$ (18,152)	$ 11,869	65%

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

Net loss increased for the three months ended March 31, 2021 from the comparable period in 2020 primarily due to the impact of the change in the fair value of our warrant liability, the charge associated with our litigation settlement, and reduced sales and margin in our Hemp segment.

Adjusted earnings before interest, tax and depreciation (“Adjusted EBITDA”) increased for the three months ended March 31, 2021 from the comparable period in 2020 primarily due to cost reduction measures undertaken during 2020, and our ability to leverage sales growth with a reduced cost structure.

Non-GAAP Financial Measures

To supplement our financial statements, which are prepared and presented in accordance with United States generally accepted accounting principles (“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, are presented to help investors’

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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)

	Three months ended March 31,	Three months ended March 31,
	2021	2020
Adjusted EBITDA reconciliation:
Net loss	$ (340,955)	$ (184,123)
Inventory valuation adjustments	2,062	4,561
Severance costs	5	1,861
Depreciation and amortization expenses (1)	4,908	4,600
Stock-based compensation expenses	7,193	7,677
Impairment of assets	—	29,839
Restructuring costs	2,713	—
Loss from equity method investments	1,787	1,748
Litigation settlement	45,000	—
Foreign exchange (gain) loss, net	(699)	28,069
Change in fair value of warrant liability	263,201	71,978
Interest expenses, net	6,916	9,146
Loss from disposal of property and equipment	83	457
Other expenses, net	1,760	7,006
Deferred income tax recoveries	(635)	(1,272)
Current income tax expenses	378	301
Adjusted EBITDA	$ (6,283)	$ (18,152)

• 1) The Company revised its Adjusted EBITDA reconciliation for the three months ended March 31, 2020 to reflect a correction in depreciation and amortization expense amount applied to this non-GAAP financial measures. Non-cash depreciation and amortization expenses includes depreciation expense related to both manufacturing and non-manufacturing assets. In the three months ended March 31, 2020 we incorrectly reported $3.6 million which excluded the portion of the depreciation expense related to the Company’s manufacturing assets. The corrected amount in Adjusted EBITDA reconciliation for the three months ended March 31, 2020 is $4.6 million and is correct as reported above within the three months ended March 31, 2020 results.

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; which although these are non-cash charges, the assets being depreciated and amortized may have to be replaced in the future;

• Stock-based compensation expenses, which has been, and will continue to be for the foreseeable future, a significant recurring expense in our business and an important part of our compensation strategy;

• Non-cash impairment charges, as the charges are not expected to be a recurring business activity;

• Restructuring costs;

• Non-cash loss from equity method investments;

• Litigation settlement;

• 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;

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

• Interest expense, on disposal of property and equipment and other expenses, net, to reflect ongoing operating activities;

• Other (income) expenses, net includes acquisition related expenses, which vary significantly by transactions and are excluded to evaluate ongoing operating results;

• 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.

Liquidity and Capital Resources

As of March 31, 2021, we had cash and cash equivalents of $416.3 million which were held for working capital and general corporate purposes. This represents an overall increase of $226.6 million since December 31, 2020. 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 conditions and financial, business and other factors.

During the three months ended March 31, 2021, we issued 6,254,980 shares of Class 2 common stock for gross proceeds of approximately $159.2 million under our at-the-market equity offering program. In addition, 12,791,000 warrants were exercised for 12,791,000 shares of Class 2 common stock resulting in gross proceeds to us of approximately $76.2 million.

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.

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 Condensed Consolidated Statements of Cash Flows for the periods presented:

(in thousands of United States dollars)

	Three months ended March 31,	Three months ended March 31,
	2021	2020
Net cash used in operating activities	$ (13,008)	$ (54,031)
Net cash used in investing activities	(69)	(18,119)
Net cash provided by financing activities	234,081	159,786
Effect of foreign currency translation on cash and cash equivalents	5,664	(10,437)
Increase in cash and cash equivalents	$ 226,668	$ 77,199

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Cash flows from operating activities

The change in net cash used by operating activities primarily related to changes in working capital and changes in non-cash expenses, all of which are highly variable.

Cash flows from investing activities

During the three months ended March 31, 2021 we did not have significant investing activities compared to the same period in 2020 a time during which we purchased 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 the three months ended March 31, 2021 relates to proceeds from our ATM equity offerings and the exercise of outstanding warrants.

Subsequent Events

A cannabinoid supplier (“supplier”) to Tilray, and Tilray had been engaged in binding arbitration, which commenced in March 2020 and related to a supply agreement dispute between the parties. On April 29, 2021, the parties mutually agreed to settle this matter. Pursuant to a settlement agreement and release, Tilray (i) paid $20.0 million in cash and $5.0 million in Class 2 Common Stock to the supplier on April 29, 2021, and (ii) agreed to pay either $15.0 million in Class 2 Common Stock or $20.0 million in cash, depending on certain circumstances, to the supplier within nine months of the settlement date, in each case subject to certain upward adjustments based on the trading price and resale registration status of the Class 2 Common Stock. The parties also agreed to, among other things, withdraw from the arbitration proceeding and to release the other party from any and all claims arising out of or relating to the arbitration or the supply agreement. As of March 31, 2021, the Company recorded the litigation settlement expense in its statement of net loss and comprehensive loss to reflect the outcome of this settlement. The litigation liability is payable in a combination of cash and shares of the Company’s class 2 common stock. The initial payments made on April 29, 2021 are reflected in accounts payable and the remaining future payment is reflected in accrued expenses. The Company also removed $59.7 million of purchase commitments (refer to Note 16) from its commitments and contingencies as of March 31, 2021.

On April 25, 2021, the Company notified its senior secure credit facility lender that it intends to (i) terminate the commitments under the Senior Facility, and (ii) repay all outstanding loans and other obligations under the Senior Facility. On May 4, 2021, the Company repaid in full all outstanding indebtedness under its Senior Facility agreement. The Senior Facility and related security interests were terminated in conjunction with the repayment in full of $52.1 million (C$64 million) of principal, as well as accrued and unpaid interest and fees of $0.5 million (C$0.6 million), plus a prior notice prepayment fee of $1.1 million (C$1.3 million).

As disclosed previously, on April 30, 2021 the Arrangement with Aphria was completed (refer to Note 1 for additional information regarding the Arrangement) and we paid the financial advisor transaction fee of $9.2 million.

Contractual Obligations

During the three months ended March 31, 2021, we reached a settlement and release agreement related to one of our supply contracts which resulted in the reduction of the total value of future commitments by $59.7 million. We do not believe the termination of this contract will have any negative impact on our ability to competitively source products required to conduct our business.

	Total	2021 (remaining nine months)	2022	2023	2024	2025	Thereafter
Purchase commitments	$ 17,359	$ 17,359	$ —	$ —	$ —	$ —	$ —
Total	$ 17,359	$ 17,359	$ —	$ —	$ —	$ —	$ —

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.

Recently Issued Accounting Pronouncements

A description of recently issued accounting pronouncements that may potentially impact our financial position and results of operations is disclosed in “Part I, Item 1. Note 1 – Summary of Significant Accounting Policies” to our financial statements appearing elsewhere in this Quarterly Report on Form 10-Q.

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