Tilray Brands Inc

Previous wording

This Management’s Discussion and Analysis of Financial Condition and Results of Operations should be read in conjunction with the Condensed Interim Consolidated Financial Statements and the related Notes thereto for the period ended November 30, 2023 contained in this Quarterly Report on Form 10-Q and the Audited Consolidated Financial Statements and the related Notes thereto contained in our Annual Report on Form 10-K for the fiscal year ended May 31, 2023, as well as in conjunction with the sections entitled“Item 1A. Risk Factors”* and*“Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations”* in our Annual Report on Form 10-K* for the fiscal year ended May 31, 2023.Forward looking statements in this Form 10-Q are qualified by the cautionary statement included in this Form 10-Q under the sub-heading“Cautionary Note Regarding Forward-Looking Statements”* in the introduction of this Form 10-Q.*

Current wording

This Management’s Discussion and Analysis of Financial Condition and Results of Operations should be read in conjunction with the Condensed Interim Consolidated Financial Statements and the related Notes thereto for the period ended February 29, 2024 contained in this Quarterly Report on Form 10-Q and the Audited Consolidated Financial Statements and the related Notes thereto contained in our Annual Report on Form 10-K for the fiscal year ended May 31, 2023, as well as in conjunction with the sections entitled“Item 1A. Risk Factors”* and*“Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations”* in our Annual Report on Form 10-K* for the fiscal year ended May 31, 2023 and in the section entitled “Item 1A. Risk Factors” in this Quarterly Report on Form 10-Q. Forward looking statements in this Form 10-Q are qualified by the cautionary statement included in this Form 10-Q under the sub-heading“Cautionary Note Regarding Forward-Looking Statements”* in the introduction of this Form 10-Q.*

Previous wording

We are a leading global cannabis-lifestyle and consumer packaged goods company headquartered in Leamington and New York, with operations in Canada, the United States, Europe, Australia, and Latin America that is changing people’s lives for the better – one person at a time – by inspiring and empowering a worldwide community to live their very best life, enhanced by moments of connection and wellbeing. Tilray’s mission is to be the most responsible, trusted and market leading cannabis consumer products company in the world with a portfolio of innovative, high-quality and beloved brands that address the needs of the consumers, customers and patients we serve.

Current wording

We are a leading global cannabis-lifestyle and consumer products company headquartered in Leamington and New York, with operations in Canada, the United States, Europe, Australia, and Latin America that is changing people’s lives for the better – one person at a time – by inspiring and empowering a worldwide community to live their very best life, enhanced by moments of connection and wellbeing. Tilray’s mission is to be the most responsible, trusted and market leading cannabis and consumer products company in the world with a portfolio of innovative, high-quality and beloved brands that address the needs of the consumers, customers and patients we serve.

Previous wording

The cannabis industry in Canada continues to evolve at a rapid pace during the early periods following the federal legalization of adult-use cannabis. Through analysis of the current market conditions, the following key trends have emerged and are anticipated to influence the near-term future in the industry:

Current wording

The cannabis industry in Canada continues to evolve at a rapid pace given how nascent the industry is with federal legalization of adult-use cannabis occurring just over five years ago. Through analysis of the current market conditions, the following key trends have emerged and are anticipated to influence the near-term future in the Canadian cannabis industry:

Previous wording

The cannabis industry in Europe is in its early stages of development whereby countries within Europe are at different stages of legalization of medical and adult-use cannabis as some countries have expressed a clear political ambition to legalize adult-use cannabis (Germany, Portugal, Luxembourg and Czech Republic), some are engaging in an experiment for adult-use (Germany, Netherlands and Switzerland) and some are debating regulations for cannabinoid-based medicine (France and Spain). In Europe, we believe that, despite continuing recessionary economic conditions and the Russian conflict with Ukraine, cannabis legalization (both medicinal and adult-use) will continue to gain traction albeit more slowly than originally expected. We also continue to believe that Tilray remains uniquely positioned to maintain and gain significant market share in these markets with its infrastructure and its investments, which is comprised of two EU-GMP cultivation facilities within Europe located in Portugal and Germany, our distribution network and our demonstrated commitment to the availability, quality and safety of our cannabinoid-based medical products. Today, Germany remains the largest medical cannabis market in Europe.

Current wording

The cannabis industry in Europe is in its early stages of development whereby countries within Europe are at different stages of legalization of medical and adult-use cannabis as some countries have expressed a clear political ambition to legalize adult-use cannabis (Germany, Portugal, Luxembourg and Czech Republic), some are engaging in an experiment for adult-use (Germany, Netherlands and Switzerland) and some are debating regulations for cannabinoid-based medicine (France and Spain). In Europe, we believe that, despite continuing recessionary economic conditions and the Russian conflict with Ukraine, cannabis legalization (both medicinal and adult-use) will continue to gain traction albeit more slowly than originally expected. This is evidenced by the recently adopted cannabis regulations in Germany, which we believe will serve as a catalyst for continued changes in drug policy throughout Europe. We also continue to believe that Tilray remains uniquely positioned to maintain and gain significant market share in these markets with our vertically-integrated infrastructure and well-placed investments, which is comprised of two EU-GMP cultivation facilities within Europe located in Portugal and Germany, our distribution network and our demonstrated commitment to the availability, quality and safety of our cannabinoid-based medical products.

Previous wording

We expect to see the cornerstone framework for the Pillar Two Regulations governing the model projects in January 2024.

Current wording

We expect to see the cornerstone framework for the Pillar Two Regulations governing the model projects after the implementation of the Cannabis Act.

Previous wording

Switzerland. In October 2021, Switzerland announced its intention to legalize cannabis by allowing production, cultivation, trade, and consumption, and in the meantime, it is commencing pilot projects in various cities, which permits selected participants to purchase cannabis for adult-use in various pharmacies in order to conduct studies on the cannabis market and its impact on Swiss society. It is the first trial for the legal distribution of adult-use cannabis containing THC in Europe. To date, Switzerland has granted several cities, including Basel, Bern, Biel/Bienne, Lucerne, Geneva, and Zurich, the opportunity to start their cannabis pilot projects. Zurich, which has recently been reported to lack cannabis consumers, is currently seeking 400 eligible individuals to participate.

Current wording

Switzerland. In October 2021, Switzerland announced its intention to legalize cannabis by allowing production, cultivation, trade, and consumption, and in the meantime, it is commencing pilot projects in various cities, which permits selected participants to purchase cannabis for adult-use in various pharmacies in order to conduct studies on the cannabis market and its impact on Swiss society. It is the first trial for the legal distribution of adult-use cannabis containing THC in Europe. Switzerland is currently running trials in the cities of Lausanne, Zürich, Liestal, Allschwil, Bern, Bienne, and Lucerne, along with the cantons of Basel-Stadt and Geneva. On March 18, 2024, Switzerland announced a new pilot study in the district of canton Zürich, which is expected to be the largest.

Previous wording

Czech Republic. The Czech Republic has discussed plans to launch a fully regulated adult-use cannabis market and is reviewing in the context of the European regulations.

Current wording

Czech Republic. The Czech Republic has discussed plans to launch a fully regulated adult-use cannabis market. It is understood that there are two separate versions of a bill to legalize adult-use cannabis, one with a fully regulated commercial market and one without. These are expected to be submitted to the Czech government to determine which model it will pursue.

Previous wording

*Netherlands.*The Netherlands launched a pilot program involving the cultivation of cannabis for adult-use. The purpose of the experiment is to determine whether and how controlled cannabis can be legally supplied to coffeeshops and what the effects of this would be. During the experiment, legally produced cannabis will be sold in coffeeshops in 10 municipalities. Coffeeshops in these municipalities may only sell legally produced cannabis. The term of the experiment is set for four years.

Current wording

*Netherlands.*The Netherlands launched a pilot program involving the cultivation of cannabis for adult-use. The purpose of the experiment is to determine whether and how controlled cannabis can be legally supplied to coffeeshops and what the effects of this would be. During the experiment, legally produced cannabis will be sold in coffeeshops in 10 municipalities. Coffeeshops in these municipalities may only sell legally produced cannabis. The term of the experiment is set for four years. On March 5, 2024, the Tweede Kamer, the lower house of Parliament, rejected the bill that aimed to include Amsterdam in the pilot project.

Previous wording

Manitoba Harvest’s branded hemp business continued to expand its U.S. and Canadian leading market share position this quarter with consumption up in both the Natural and Conventional Channels, with the brands top five customers all seeing growth. For the remainder of the year, the Company will look to expand the Happy Flower™ brand with retail distribution into key markets, focusing on U.S. states with established CBD permissibility and sales momentum in future periods.

Current wording

Manitoba Harvest’s branded hemp business continued to expand its U.S. and Canadian leading market share position during the three and nine months ended February 29, 2024, with consumption up in both the Natural and Conventional Channels, with the brands top five customers all seeing growth. The Company continues to focus on value-added innovation within the wellness and food beverage space, with the launch of Bio-Active Fiber and protein rich Oatmeal coming to market during the three months ended February 29, 2024. In addition, during the later half of the quarter we relaunched HiBall energy drinks within the wellness beverages space to complement our recent Happy Flower CBD beverage launch.

Previous wording

We strive to continue to expand our business on a consolidated basis, through a combination of organic growth and acquisition. While we continue to execute against our strategic initiatives that we believe will result in the long-term, sustainable growth and value to our stockholders, we continue to evaluate potential acquisitions and other strategic transactions of businesses that we believe complement our existing portfolio, infrastructure and capabilities or provide us with the opportunity to enter attractive new geographic markets and product categories as well as expand our existing capabilities. In addition, we have exited certain businesses and continue to evaluate certain businesses within our portfolio that are dilutive to profitability and cash flow. As a result, we incur transaction costs in connection with identifying and completing acquisitions and strategic transactions, as well as ongoing integration costs as we combine acquired companies and continue to achieve synergies, which is offset by income generated in connection with the execution of these transactions. For the three and six months ended November 30, 2023, we incurred $1.1 million and $9.6 million of transaction expenses, discussed further below.

Current wording

We strive to continue to expand our business on a consolidated basis, through a combination of organic growth and acquisition. While we continue to execute against our strategic initiatives that we believe will result in the long-term, sustainable growth and value to our stockholders, we continue to evaluate potential acquisitions and other strategic transactions of businesses that we believe complement our existing portfolio, infrastructure and capabilities or provide us with the opportunity to enter attractive new geographic markets and product categories as well as expand our existing capabilities. In addition, we have exited certain businesses and continue to evaluate certain businesses within our portfolio that are dilutive to profitability and cash flow. As a result, we incur transaction costs in connection with identifying and completing acquisitions and strategic transactions, as well as ongoing integration costs as we combine acquired companies and continue to achieve synergies, which is offset by income generated in connection with the execution of these transactions. For the three and nine months ended February 29, 2024, we incurred $3.5 million and $13.1 million of transaction expenses, discussed further below.

Previous wording

On June 22, 2023, Tilray acquired HEXO Corp. (“HEXO”) as discussed in Note 7 (Business acquisitions). With the HEXO Acquisition, Tilray initially expected to achieve additional cost savings of $27 million on an annualized pre-tax basis and has subsequently increased this target to between $30 to $ 35 million. These synergies will be realized across production, sales, marketing, distribution, and corporate savings, with incremental upside resulting from consolidating packaging, procurement, freight, and logistics. This builds on Tilray’s substantial progress optimizing its Canadian cannabis operations discussed below. During the three and six months ended November 30, 2023, we have achieved $22.0 million of our synergy plan on an annualized run-rate basis, of which $14.0 million represented actual cost savings during the period. As discussed in our trends section, these cost savings initiatives take time to implement, resulting in related benefits being realized over time.

Current wording

On June 22, 2023, Tilray acquired HEXO Corp. (“HEXO”) as discussed in Note 7 (Business acquisitions). With the HEXO Acquisition, Tilray initially expected to achieve additional cost savings of $27 million on an annualized pre-tax basis and has subsequently increased this target to between $30 to $35 million. These synergies will be realized across production, sales, marketing, distribution, and corporate savings, with incremental upside resulting from consolidating packaging, procurement, freight, logistics in addition to our facility rationalization in Quebec. This builds on Tilray’s substantial progress optimizing its Canadian cannabis operations discussed below. During the three and nine months ended February 29, 2024, we have achieved $27.5 million of our synergy plan on an annualized run-rate basis, of which $15.6 million represented actual cost savings during the period. As discussed in our trends section, these cost savings initiatives take time to implement, resulting in related benefits being realized over time.

Previous wording

In addition to acquisitions completed above, the Company has also completed the following cost saving strategies during the quarter:

Current wording

In addition to acquisitions completed above, the Company has also completed the following cost saving strategies during the second quarter which impact results for the nine months ended February 29, 2024:

Previous wording

During the fourth quarter of our fiscal year ended May 31, 2022, the Company launched a $30 million cost optimization plan of our existing cannabis business to solidify our position as an industry leading low-cost producer. To date as of November 30, 2023, we have achieved $22.3 million against the plan. The Company now considers this plan fulfilled, owing to a strategic shift in our Cannabis beverage strategy. The Company's original targets involved repurposing our beverage facility; however, this initiative was altered following the Truss acquisition, which required additional capacity from our existing infrastructure.

Current wording

During the fourth quarter of our fiscal year ended May 31, 2022, the Company launched a $30 million cost optimization plan of our existing cannabis business to solidify our position as an industry leading low-cost producer. As of the date of the conclusion of the plan, we achieved $22.3 million against the plan. The Company now considers this plan fulfilled, owing to a strategic shift in our Cannabis beverage strategy. The Company's original targets involved repurposing our beverage facility; however, this initiative was altered following the Truss acquisition, which required additional capacity from our existing infrastructure.

Previous wording

During our fiscal year ended May 31 2023, the Company launched an $8.0 million cost optimization plan for our international cannabis business to adapt to changing market dynamics and slower than anticipated legalization in Europe. In the current period ended November 30, 2023, the Company achieved an annualized run-rate basis of $7.6 million of cost savings. The Company concluded this savings plan as of November 30, 2023. The Company concluded this savings plan as of November 30, 2023. The remaining portion of the savings target was tied to an assumed temporary decrease in demand. However, the assumed temporary reduction did not occur rather demand for our European cannabis products increased, rendering the cost savings associated with that part of the plan unnecessary.

Current wording

During our fiscal year ended May 31, 2023, the Company launched an $8.0 million cost optimization plan for our international cannabis business to adapt to changing market dynamics and slower than anticipated legalization in Europe. As of the date of the conclusion of the plan, we achieved an annualized run-rate basis of $7.6 million of cost savings. The Company concluded this savings plan as of November 30, 2023. Approximately $1.3 million of cost savings identified in connection with the $8.0 million cost optimization plan were associated with a temporary furlough of certain cultivation employees, which did not occur due to an increase in the demand for our medical cannabis products thereby rendering such action not necessary. Additional cost savings were identified in order to offset the unrealized savings associated with the planned furlough.

Previous wording

We use the following operating metrics and non-GAAP measures 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 operating metrics and non-GAAP measures with similar names differently which may reduce their usefulness as comparative measures. Certain variances are labeled as not meaningful ("NM") throughout management's discussion and analysis.

Current wording

We use the operating metrics and non-GAAP measures set forth in the table below 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 operating metrics and non-GAAP measures with similar names differently which may reduce their usefulness as comparative measures. Certain variances are labeled as not meaningful ("NM") throughout management's discussion and analysis.

Previous wording

(1)Adjusted EBITDA, adjusted gross profit (excluding PPA step-up) and adjusted gross margin (excluding PPA step-up) for each of our segments, and cash and marketable securities are non-GAAP financial measures. See“Use of Non-GAAP Measures”* above for a reconciliation of these Non-GAAP Measures to our most comparable GAAP measure.*

Current wording

(1)Adjusted EBITDA, adjusted gross profit (excluding PPA step-up) and adjusted gross margin (excluding PPA step-up) and inventory valuation adjustments for each of our segments, and cash and marketable securities are non-GAAP financial measures. See“Use of Non-GAAP Measures” above for a discussion of these Non-GAAP measures and “Reconciliation of Non-GAAP Financial Measures to GAAP Measures” below for a reconciliation of these Non-GAAP Measures to our most comparable GAAP measure.

Previous wording

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

Current wording

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

Previous wording

***Revenue from Canadian adult-use cannabis:***During the three and six months ended November 30, 2023, our revenue from Canadian adult-use cannabis increased to $72.0 million and $143.2 million, compared to revenue of $52.4 million and $110.7 million and for the prior year same period. Further, the prior year revenue includes advisory fees in the amount of $7.9 million and $15.6 million for the three and six months ended November 30, 2022, compared to $nil and $1.5 million for the three and six months ended November 30, 2023. Excluding these advisory service fees, revenue increased by $27.4 million and $46.6 million for the three and six months ended November 30, 2023. The increase in adult-use revenue was driven by continuous launches of new product innovations from our existing brand portfolios as well as the increased revenue from the acquisition of HEXO on June 22, 2023, and Truss on August 3, 2023. Additionally, excluding the decline in the Canadian dollar, on a constant currency basis, our revenue from Canadian adult-use cannabis increased to $73.0 million and $146.1 million for the three and six months ended November 30, 2023.

Current wording

***Revenue from Canadian adult-use cannabis:***During the three and nine months ended February 29, 2024, our revenue from Canadian adult-use cannabis increased to $62.1 million and $205.4 million, compared to revenue of $45.3 million and $156.1 million for the prior year period. Further, the prior year revenue includes advisory fees in the amount of $8.7 million and $24.3 million for the three and nine months ended February 28, 2023, compared to $nil and $1.5 million for the three and nine months ended February 29, 2024. Excluding these advisory service fees, revenue increased by $25.5 million and $72.1 million for the three and nine months ended February 29, 2024. The increase in adult-use revenue is due to the acquisitions of HEXO on June 22, 2023 and Truss on August 3, 2023, and our robust innovation pipeline from existing brands. On a constant currency basis, our revenue from Canadian adult-use cannabis increased to $61.6 million and $207.7 million for the three and nine months ended February 29, 2024.

Previous wording

Wholesale cannabis revenue: Revenue from wholesale cannabis increased to $4.3 million and $9.6 million for the three and six months ended November 30, 2023, compared to revenue of $0.2 million and $0.6 million for the prior year same period. On a constant currency basis, revenue from wholesale cannabis increased to $$4.3 million and $9.8 million for the three and six months ended November 30, 2023 compared to revenue of $0.2 million and $0.6 million. The Company continues to believe that wholesale cannabis revenue will remain subject to quarter-to-quarter variability and is based on opportunistic sales. The wholesale transactions that occurred in the current year periods aided with our liquidity initiatives to increase our cash flow from operations despite having unfavorable impacts on our gross margin and EBITDA of $(0.2) million and $(2.9) million for the three and six months ended November 30, 2023.

Current wording

Wholesale cannabis revenue: Revenue from wholesale cannabis increased to $2.8 million and $12.3 million for the three and nine months ended February 29, 2024, compared to revenue of $0.1 million and $0.7 million for the prior year period. On a constant currency basis, revenue from wholesale cannabis increased to $2.8 million and $12.6 million for the three and nine months ended February 29, 2024 compared to revenue of $0.1 million and $0.7 million. The Company continues to believe that wholesale cannabis revenue will remain subject to quarter-to-quarter variability and is based on opportunistic sales. The wholesale transactions that occurred in the current year periods aided with our liquidity initiatives to increase our cash flow from operations despite having unfavorable impacts on our gross margin and EBITDA.

Previous wording

International cannabis revenue:** **Revenue from international cannabis increased to $11.9 million and $26.2 million for the three and six months ended November 30, 2023, compared to revenue of $7.7 million and $18.1 million for the prior year same period. Given the increase of the Euro against the U.S. Dollar when compared to the prior year quarter, on a constant currency basis, revenue from international cannabis was $11.4 million and $25.2 million compared to $7.7 million and $18.1 million in the prior year same period for the three and six months ended November 30, 2023. The increase in the period is largely driven by expansion into emerging international medical markets. Additionally, in the prior period the Company recognized a one-time return adjustment of $3.1 million related to a former customer in Israel that commenced bankruptcy proceedings.

Current wording

International cannabis revenue:** **Revenue from international cannabis increased to $14.0 million and $40.2 million for the three and nine months ended February 29, 2024, compared to revenue of $9.7 million and $27.8 million for the prior year period. On a constant currency basis, given the changes in the Euro against the U.S. Dollar when compared to the prior year quarter, revenue from international cannabis was $14.4 million and $39.6 million compared to $9.7 million and $27.8 million in the prior year period (during the nine months ended February 28, 2023, the Company recognized a one-time return adjustment of $3.1 million related to a former customer in Israel that commenced bankruptcy proceedings). The increase in the period is largely driven by revenue growth in existing markets and expansion into new international medical markets.

Previous wording

Our gross profit and gross margin for the three and six months ended November 30, 2023 and 2022, is as follows:

Current wording

Our gross profit and gross margin for the three and nine months ended February 29, 2024 and February 28, 2023, is as follows:

Previous wording

Beverage alcohol gross margin: Gross margin of 34% and 41% for the three and six months ended November 30, 2023 decreased from 47% and 47% from the same period in the prior year. Adjusted gross margin of 38% and 44% for the three and six months ended November 30, 2023 decreased from 52% and 52% from the same periods in the prior year. The decrease in the adjusted beverage alcohol gross margin was a result of the newly acquired Craft Acquisition brands, which currently have lower margins than our historical business, primarily due to the current under utilization of the breweries we acquired.

Current wording

Beverage alcohol gross margin: Gross margin of 34% and 38% for the three and nine months ended February 29, 2024 decreased from 48% and 47% from the same period in the prior year. Adjusted gross margin of 38% and 42% for the three and nine months ended February 29, 2024 decreased from 53% and 53% from the periods in the prior year. The decrease in the adjusted beverage alcohol gross margin was a result of the newly acquired Craft Acquisition brands, which have lower margins than our historical business, primarily driven by the temporary excess capacity within the acquired breweries, which we are actively evaluating for future optimization and enhanced utilization. Additionally, during the three month period this decrease was offset by a $2.5 million volume commitment reimbursement in our spirits business, which did not have any costs associated with it.

Previous wording

Cannabis gross margin: Gross margin decreased during the three and six months ended November 30, 2023 to 31% and 29% from 43% and 47% for the prior year same period. Excluding the impact of the non-cash fair value purchase price accounting step-up, adjusted gross margin during the three and six months ended November 30, 2023 decreased to 35% and 35% from 43% and 47% when comparing the same prior year period. A portion of the decrease is a result of the termination of the HEXO advisory services agreement which contributed $nil and $1.5 million of gross profit in the current year compared to $7.9 and $15.6 million in the prior year, which if excluded would decrease adjusted gross margin to 32% and 38% for the three and six months ended November 30, 2022. Further, in the prior year second quarter the Company's international cannabis revenue section recognized a one-time return that reduced our top line revenue as well as a one-time inventory disposals incurred as exit costs from Israel for a combined impact of reducing gross profit by $1.4 million. Lastly, significant wholesale transactions with negative gross profit of $(0.2) and $(2.9) million, were entered into to optimize our inventory levels and prioritize the generation of positive operating cash flow. Combining the aforementioned factors, adjusted gross cannabis margin would have been 37% and 38% compared 33% and 38% in the prior period comparative period.

Current wording

Cannabis gross margin: Gross margin increased during the three and nine months ended February 29, 2024 to 33% and 31% from (69)% and 12% for the prior year same period. Excluding the impact of the non-cash fair value purchase price accounting step-up and inventory valuation adjustments, adjusted gross margin during the three and nine months ended February 29, 2024 decreased to 33% and 34% from 47% and 47% when comparing the same prior year period. A portion of the decrease is a result of the termination of the HEXO advisory services agreement which contributed $nil and $1.5 million of gross profit in the current year compared to $8.7 and $24.3 million in the prior year, which if excluded would decrease adjusted gross margin to 35% and 37% for the three and nine months ended February 28, 2023. The remaining decline in gross margin for the three and nine month periods was a result of a change in sales mix with a higher percentage of sales coming from wholesale.

Previous wording

Distribution gross margin: Gross margin of 11% and 11% for the three and six months ended November 30, 2023 decreased from 13% and 11% for the same periods in the prior year. While consistent for the six month period comparison, the decrease in the gross margin for the three month period is attributed to product mix.

Current wording

Distribution* gross margin:* Gross margin of 10% and 11% for the three and nine months ended February 29, 2024 decreased from 11% and 11% for the prior year period. While consistent for the nine month period comparison, the decrease in the gross margin for the three month period is attributed to product mix.

Previous wording

Wellness gross margin: Gross margin of 29% and 29% for the three and six months ended November 30, 2023 decreased from 31% and 28% from the same period in the prior year. The decrease in the three month period was a result of a change in sales mix towards more bulk retail sales which have a lower margin. Wellness gross margin stayed consistent during the six month period.

Current wording

Wellness gross margin: Gross margin of 30% and 29% for the three and nine months ended February 29, 2024 decreased from 31% and 29% from the same period in the prior year. The decrease in the three month period was a result of a change in sales mix towards more bulk retail sales which have a lower margin. Wellness gross margin stayed consistent during the nine month period.

Previous wording

Operating expenses are comprised of general and administrative, share-based compensation, selling, amortization, marketing and promotion, research and development, change in fair value of contingent consideration, impairments, litigation costs, net of recoveries, restructuring costs and transaction (income) costs. These costs decreased by ($5.5) and increased by $3.2 million to $89.2 and $167.7 million for the three and six months ended November 30, 2023 as compared to $94.7 and $164.5 million for the same period of the prior year. These changes period over period are described below.

Current wording

Operating expenses are comprised of general and administrative, selling, amortization, marketing and promotion, research and development, change in fair value of contingent consideration, impairments, other than temporary change in fair value of convertible notes receivable, litigation costs, net of recoveries, restructuring costs and transaction (income) costs. These costs decreased by ($1,063.5) and ($1,060.3) million to $131.5 and $299.2 million for the three and nine months ended February 29, 2024 as compared to $1,195.0 and $1,359.5 million for the same period of the prior year. These changes period over period are described below.

Previous wording

During the three and six months ended November 30, 2023, the changes in general and administrative costs when compared to the prior year same periods are described as follows:

Current wording

During the three and nine months ended February 29, 2024, the changes in general and administrative costs when compared to the prior year periods are described as follows:

Previous wording

Office and general increased by 9% and 23% during the three and six months ended November 30, 2023. The increase for the three month period is a result of the acquisition of the newly acquired beverage alcohol business portfolio, Montauk and HEXO, which did not occur in the prior period.

Current wording

Office and general decreased by 38% and 2% during the three and nine months ended February 29, 2024. The decrease for the three month period is a result of $4.4 million of bad debt recoveries on a previously recognized credit loss provision, see Note 19 (Commitments and contingencies). The decrease is offset by the acquisition of the newly acquired beverage alcohol business portfolio and HEXO, which did not occur in the prior period.

Previous wording

Salaries and wages increased by 56% and 17% during the three and six months ended November 30, 2023. The increase is primarily due to the inclusion of newly acquired beverage alcohol business portfolio, Montauk and HEXO employees, which were not in the prior period.

Current wording

Salaries and wages increased by 44% and 36% during the three and nine months ended February 29, 2024. The increase is primarily due to the inclusion of newly acquired beverage alcohol business portfolio and HEXO employees, which were not in the prior period.

Previous wording

The Company recognized stock-based compensation expense of $8.2 and $16.5 million for the three and six months ended November 30, 2023 compared to $10.9 and $20.1 million for the same period in the prior year. The balance is based on the time-based vesting schedules and varies according to the assumptions used in the vesting model. During the quarter, as a result of a change in the probability of achievement of stock price targets for certain grants issued in 2021, as well as an increased forfeiture rate, stock based compensation decreased period over period.

Current wording

The Company recognized stock-based compensation expense of $8.1 and $24.5 million for the three and nine months ended February 29, 2024 compared to $9.6 and $29.8 million for the same period in the prior year. Stock based compensation expense is based on the time-based vesting schedules and varies according to the assumptions used in the vesting model. During the three and nine months ended February 29, 2024, as a result of a change in the probability of achievement of stock price targets for certain grants issued in 2021, as well as an increased forfeiture rate, stock-based compensation decreased period over period.

Previous wording

Insurance expenses decreased by 8% and increased by 17% for the three and six months ended November 30, 2023 to $2.5 and $6.3 million from $2.7 and $5.4 million for the same period in the prior year. The decrease for the three months ended November 30, 2023, was driven by the Company's decision to self-insure certain of its property risks. The increase for the six months ended November 30, 2023, was driven by the expanded polices required for our newly acquired beverage alcohol business portfolio, HEXO and Montauk entities.

Current wording

Insurance expense increased by 13% and increased by 15% for the three and nine months ended February 29, 2024 to $3.6 and $9.9 million from $3.2 and $8.6 million for the same period in the prior year. The increase for the three and nine months ended February 29, 2024, was driven by the expanded polices required for our newly acquired beverage alcohol business portfolio, and HEXO entities, partially offset by the Company's decision to self-insure certain of its property risks.

Previous wording

Rent expenses increased by 113% and 52% for the three and six months ended November 30, 2023 to $1.6 and $2.4 million from $0.7 and $1.6 million for the same period in the prior year. This increase was driven by the expanded polices required for our newly acquired beverage alcohol business portfolio, HEXO and Montauk entities.

Current wording

Rent expense increased by 31% and 45% for the three and nine months ended February 29, 2024 to $1.0 and $3.5 million from $0.8 and $2.4 million for the same period in the prior year. This increase was driven by the newly acquired beverage alcohol business portfolio and HEXO.

Previous wording

For the three and six months ended November 30, 2023, the Company incurred selling costs of $7.6 and $14.4 million or 3.9% and 3.9% of net revenue as compared to $9.7 and $19.3 million and 6.7% and 6.5% of net revenue in the prior year period. These costs relate to third-party distributor commissions, shipping costs, Health Canada cannabis fees, and patient acquisition and maintenance costs. Patient acquisition and ongoing patient maintenance costs include funding to individual clinics to assist with additional costs incurred by clinics resulting from the education of patients using the Company’s products. The decrease in the three month period was related to the renegotiation of terms in one of our distributor relationships resulting in reduced variable fees. This impact was also emphasized in the three month period as a portion of our selling fees related to our Canadian adult-use cannabis with fixed components and did not increase with the increase in our revenue during the quarter.

Current wording

For the three and nine months ended February 29, 2024, the Company incurred selling costs of $10.0 and $24.4 million or 5.3% and 4.4% of net revenue as compared to $6.5 and $25.8 million and 4.4% and 5.8% of net revenue in the prior year period. These costs relate to third-party shipping costs for all segments, with the majority of the selling costs relating to the cannabis segment from distributor commissions, Health Canada cannabis fees, and patient acquisition and maintenance costs. Patient acquisition and ongoing patient maintenance costs include funding to individual clinics to assist with additional costs incurred by clinics resulting from the education of patients using the Company’s products. The increase for the three month period is a result of the increase in sales from the prior year period. The decrease in the nine month period was related to the renegotiation of terms in one of our distributor relationships resulting in reduced variable fees.

Previous wording

The Company incurred non-production related amortization charges of $21.9 and $44.1 million for the three and six months ended November 30, 2023 compared to $24.0 and $48.4 million in the prior year period. The decreased amortization in the period is a result of the reduced intangible asset levels, as a result of prior year impairments.

Current wording

The Company incurred non-production related amortization charges of $21.6 and $65.7 million for the three and nine months ended February 29, 2024 compared to $23.5 and $71.9 million in the prior year period. The decreased amortization in the period is a result of the reduced intangible asset levels, as a result of prior year impairments.

Previous wording

For the three and six months ended November 30, 2023, the Company incurred marketing and promotion costs of $9.2 and $17.7 million as compared to $8.5 and $15.8 million for the prior year period. The increase is due to the acquisition of the newly acquired beverage alcohol business portfolio, HEXO and Montauk.

Current wording

For the three and nine months ended February 29, 2024, the Company incurred marketing and promotion costs of $11.2 and $28.9 million as compared to $7.4 and $23.1 million for the prior year period. The increase is due to the acquisition of the newly acquired beverage alcohol business portfolio, and HEXO.

Previous wording

Research and development costs were $0.1 and $0.1 million during the three and six months ended November 30, 2023 compared to $0.2 and $0.3 million in the prior year period. These relate to external costs associated with the development of new products.

Current wording

Research and development costs were $0.1 and $0.2 million during the three and nine months ended February 29, 2024 compared to $0.2 and $0.5 million in the prior year period. These relate to external costs associated with the development of new products.

Previous wording

The Company measures contingent consideration at fair value classified as Level 3, as discussed in Note 25 (Fair value measurements). The Company currently has three contingent consideration liabilities of $3.0 million, $13.3 million and $4.4 million for the Sweetwater, Montauk, and Truss acquisitions, respectively, as of November 30, 2023 compared to $16.2 million, $10.9 million and $nil respectively as of May 31, 2023. The decrease in fair value of $10.8 million was driven by the lowered probability of achieving the incentive targets, primarily relating to Sweetwater, which was offset by an increase related to the increased probability of achieving the contingent consideration from the Montauk acquisition as well as the newly acquired contingent consideration from the Truss acquisition.

Current wording

The Company measures contingent consideration at fair value classified as Level 3, as discussed in Note 25 (Fair value measurements). During the three months ended February 29, 2024, the contingent consideration liability that arose from the Truss acquisition of $4.2 million was settled for $0.7 million. The contingent consideration liability from the Montauk acquisition, increased to $14.0 million as of February 29, 2024 from $10.9 million as of May 31, 2023. The contingent consideration liability from the Sweetwater acquisition elapsed and there are no further obligations. The decrease in fair value of $16.8 million was driven by the conclusion of the Sweetwater obligation, the favorable cash settlement for the Truss contingent consideration, and was offset by an increase related to the increased probability of achieving the contingent consideration from the Montauk acquisition.

Previous wording

For the three and six months ended November 30, 2023, the Company recorded $3.0 and $5.1 million of litigation settlements costs, net of favorable recoveries, and the third party fees associated with defending these claims, compared to an expense of $2.8 and $3.3 million for the prior period comparative. The increase is related to period to period variability as litigation is non-recurring in nature.

Current wording

For the three and nine months ended February 29, 2024, the Company recorded $3.4 and $8.4 million of litigation settlements costs, net of favorable recoveries, and the third party fees associated with defending these claims, compared to a net benefit of ($5.2) and ($2.0) million for the prior period comparative. The increase is related to period to period variability as litigation is non-recurring in nature. Included in the three and nine months ended February 28, 2023, is proceeds of $39.9 million related to the SLC litigation settlement, offset by judgments, probable and estimable losses as well as ongoing litigation costs and fees.

Previous wording

In connection with the execution of our acquisition strategy and strategic transactions, the Company has incurred non-recurring restructuring and exit costs associated with the integration efforts of these transactions. For the three and six months ended November 30, 2023, the Company incurred $2.7 and $3.6 million of restructuring costs compared to $8.1 and $8.1 million for the prior period comparative.

Current wording

In connection with the execution of our acquisition strategy and strategic transactions, the Company has incurred non-recurring restructuring and exit costs associated with the integration efforts of these transactions. For the three and nine months ended February 29, 2024, the Company incurred $5.2 and $8.7 million of restructuring costs compared to $2.7 and $10.7 million for the prior period comparative.

Previous wording

The Company approves detailed restructuring initiative plans at the executive level and recognizes these expenses in the period in which the plan has been committed to. The detailed breakdown of the restructuring plans in place, inclusive of their expected timeline for completion, for the three and six months ended November 30, 2023, is as follows:

Current wording

The Company approves detailed restructuring initiative plans at the executive level and recognizes these expenses in the period in which the plan has been committed to. The detailed breakdown of the restructuring plans in place, inclusive of their expected timeline for completion, for the three and nine months ended February 29, 2024, is as follows: