| Summary of Significant Accounting Policies | 1. Summary of Significant Accounting
Policies
Basis of presentation The accompanying unaudited condensed consolidated
financial statements (the “financial statements”)
reflect the accounts of Tilray, Inc. and its wholly owned
subsidiaries (collectively “Tilray”, the
“Company”, “we”, “our”, or
“us”). The financial statements have been prepared in
accordance with generally accepted accounting principles in the
United States of America (“U.S. GAAP”) and pursuant to
the rules and regulations of the United States Securities and
Exchange Commission (“SEC”) for interim financial
information. Accordingly, these financial statements do not include
all the information and footnotes required for annual financial
statements and should be read in conjunction with the audited
consolidated financial statements included in the Company’s
annual report on Form 10-K These financial statements reflect all adjustments,
consisting solely of normal recurring adjustments, which, in the
opinion of management, are necessary for a fair presentation of the
Company’s financial position and results of operations. The
results of operations for the three and six months ended
June 30, 2019 and 2018 are not necessarily indicative of
results that can be expected for the full year. The Condensed Consolidated Statement of Net Loss
and Comprehensive Loss for the three and six months ended
June 30, 2018 were reclassified to conform to the current
year’s presentation. Specifically, depreciation and
amortization expense as well as acquisition and integration
expenses, which were formerly presented as part of general and
administrative expenses, are now presented separately. Other than as described below, there have been no
changes to our significant accounting policies described in our
Annual Financial Statements that had a material impact on our
financial statements and related notes.
Emerging growth company status The Company is an emerging growth company under the
JOBS Act and has elected to take advantage of the extended
transition period for complying with new or revised accounting
standards applicable to public companies. Because the market value
of our Class 2 common stock held by non-affiliates
Business combinations and goodwill The Company accounts for business combinations
using the acquisition method in accordance with ASC 805
“Business Combinations,” which requires recognition of
assets acquired and liabilities assumed, including contingent
assets and liabilities, at their respective fair values on the date
of acquisition. Any excess of the purchase consideration over the
net fair value of tangible and identified intangible assets
acquired less liabilities assumed is recorded as goodwill. The
costs of business acquisitions, including fees for accounting,
legal, professional consulting and valuation specialists, are
expensed as incurred. Purchase price allocations may be preliminary
and, during the measurement period not to exceed one year from the
date of acquisition, changes in assumptions and estimates that
result in adjustments to the fair value of assets acquired and
liabilities assumed are recorded in the period the adjustments are
determined. For business combinations achieved in stages, the
Company’s previously held interest in the acquiree is
remeasured at its acquisition date fair value, with the resulting
gain or loss recorded in the Consolidated Statements of Net Loss
and Comprehensive Loss. For a pre-existing The estimated fair value of acquired assets and
assumed liabilities are determined primarily by using a discounted
cash flow approach, with estimated cash flows discounted at a rate
that the Company believes a market participant would determine to
be commensurate with the inherent risks associated with the asset
and related estimated cash flow streams. Contingent consideration
in a business combination is remeasured at fair value each
reporting period until the contingency is resolved and any change
in the fair value from either the passage of time or events
occurring after the acquisition date, is recorded within other
(income) expense, net on the Consolidated Statements of Net Loss
and Comprehensive Loss.
Intangible assets The Company records intangible assets acquired at
cost, net of accumulated amortization and accumulated impairment
losses, if any. Cost is measured based on the fair values of cash
consideration paid and equity interests issued. The cost of an
intangible asset acquired in a business combination is its
acquisition date fair value. Amortization of definite life intangible assets is
calculated on a straight-line basis over the estimated useful lives
of the assets as follows:
Customer relationships
14 to 16 years
Developed technology 10 years
Website 3 years
Supply contract 3 years
Licenses 2 years The Company has rights under the ABG Profit
Participation Arrangement, trademarks and a cultivation license
with indefinite life. Intangible assets that are determined to have
an indefinite life are not amortized, but tested for impairment
annually or more frequently when indicators of impairment exist. If
the carrying value of an individual indefinite-lived intangible
asset exceeds its fair value, such individual indefinite-life
intangible asset is impaired by the amount of the excess.
Equity method investments Investments in entities over which the Company has
significant influence but not a controlling interest are accounted
for using the equity method, with the Company’s share of
earnings or losses reported in (gain) loss on equity method
investments on the Consolidated Statements of Net Loss and
Comprehensive Loss. The equity method investment is recorded at
cost, plus the Company’s share of undistributed earnings or
losses. The Company assesses investment in equity method
investments if there is reason to believe an impairment may have
occurred including, but not limited to, ongoing operating losses,
projected decreases in earnings, increases in the weighted-average
cost of capital, or significant business disruptions. The
significant assumptions used to estimate fair value include revenue
growth and profitability, capital spending, depreciation and taxes,
foreign currency exchange rates, and a discount rate. By their
nature, these projections and assumptions are uncertain. If it is
determined that the current fair value of an investment is less
than the carrying value of the investment, the Company will assess
if the shortfall is of a temporary or permanent nature and write
down the investment to its fair value if it is concluded the
impairment is other than temporary.
Stock-based payments Fully vested, non-forfeitable - non-forfeitable paid-in
Impairment of goodwill and indefinite life intangible
assets Goodwill and indefinite life intangible assets are
tested for impairment annually, or more frequently when events or
circumstances indicate that impairment may have occurred. As part
of the impairment evaluation, the Company may elect to perform an
assessment of qualitative factors. If this qualitative assessment
indicates that it is more likely than not that the fair value of
the indefinite-lived intangible asset or the reporting unit (for
goodwill) is less than its carrying value, a quantitative
impairment test to compare the fair value to the carrying value and
record an impairment charge if the carrying value exceeds the fair
value is conducted.
Significant estimates and judgments The preparation of the Company’s financial
statements requires management to make estimates, assumptions and
judgments that affect the reported amounts of revenue, expenses,
assets, liabilities, accompanying disclosures and the disclosure of
contingent liabilities. These estimates and judgments are subject
to change based on experience and new information. Uncertainty
about these assumptions and estimates could result in outcomes that
require a material adjustment to the carrying amounts of assets or
liabilities affecting future periods. Estimates and judgments are
reviewed on an ongoing basis. Revisions to estimates are recognized
prospectively. Financial statement areas that require significant
estimates and judgments are as follows: Business combinations – The Company uses
judgment in applying the acquisition method of accounting for
business combinations and estimates to value identifiable assets
and liabilities at the acquisition date. Estimates are used to
determine cash flow projections, including the period of future
benefit, and future growth and discount rates, among other factors.
The values allocated to the acquired assets and liabilities assumed
affect the amount of goodwill recorded on acquisition. Fair value
is typically estimated using the present value of future discounted
cash flows, an income approach. Significant estimates in the
discounted cash flow model primarily include the discount rate,
rates of future revenue growth and profitability of the acquired
business, and working capital effects. The discount rate considers
the relevant risk associated with business-specific characteristics
and the uncertainty related to the ability to achieve the projected
cash flows. These estimates and the resulting valuations require
significant judgment. Contingent consideration – Contingent
consideration is subject to measurement uncertainty as the
financial impact will only be confirmed by the outcome of a future
event. The assessment of contingent consideration involves a
significant amount of judgment, including determining a reliable
estimate of the amount of cash outflow required to settle the
obligation based on significant unobservable inputs as well as
estimates around the probability and timing of satisfying the
future events on which the contingent consideration is based. Asset impairment – Asset impairment tests
require the allocation of assets to asset groups, which requires
significant judgment and interpretation with respect to the
integration between the assets and shared resources. Asset
impairment tests require the determination of whether there is an
indication of impairment. The assessment of whether an indication
of impairment exists is performed at the end of each reporting
period and requires the application of judgment, historical
experience, and external and internal sources of information.
Stock-based payments – Stock-based payment
transactions are measured and recognized based on estimated fair
value, which requires judgment in determining the appropriate
valuation model and assumptions, including discount for shares not
registered with the Securities Exchange Commission
(“SEC”) subject to transfer restrictions. Imputed interest for loans receivable – In
connection with the loans obtained as part of the ABG Profit
Participation Arrangement, judgment is required to estimate the
prevailing market interest rate at each time a loan is issued.
New accounting pronouncements not yet adopted In May 2014, the Financial Accounting Standards
Board (“FASB”) issued Accounting Standard Update
(“ASU”) 2014-09, ASU 2015-14, ASU 2014-09 ASU 2014-09 In January 2016, the FASB issued ASU 2016-01, 825-10) 2016-01 2016-01 ASU 2016-01 In February 2016, the FASB issued ASU 2016-02, 2016-02
In June 2016, the FASB issued ASU 2016-13, 2016-13 2016-13 available-for-sale 2016-13 In August 2018, the FASB issued ASU 2018-13, 2018-13 2018-13 2018-13 | 2. Summary of Significant Accounting Policies
Basis of presentation The accompanying consolidated financial statements
(the “financial statements”) have been prepared in
accordance with accounting principles generally accepted in the
United States of America (“U.S. GAAP”). To the extent
relevant, the financial statements include expense allocations for
certain corporate functions historically provided by Privateer
Holdings. The assumptions underlying the financial statements,
including the assumptions regarding allocated expenses, reasonably
reflect the utilization of services provided to or the benefit
received by the Company during the periods presented. The
allocations may not however reflect the expenses the Company has
incurred or will incur as a stand-alone company for the periods
presented. Actual costs that may have been incurred if the Company
had been a stand-alone company would depend on a number of factors,
including the chosen organizational structure, which functions were
outsourced or performed by employees and strategic decisions made
in areas such as treasury, information technology, financial
reporting and oversight. The Company is an “emerging growth
company,” as defined in Section 2(a) of the Securities
Act of 1933, as amended, as modified by the Jumpstart Our Business
Start-ups
Basis of consolidation These financial statements include the accounts of
the following entities wholly owned by the Company as of
December 31, 2018:
Name of entity
Date of formation
Place of incorporation
Tilray Canada, Ltd.
September 6, 2013
British Columbia, Canada
Dorada Ventures, Ltd. October 18, 2013
British Columbia, Canada
High Park Farms, Ltd. February 19, 2016
British Columbia, Canada
Tilray Deutschland GmbH November 3, 2016
Germany
Tilray Portugal Unipessoal, Lda. April 5, 2017
Portugal
Pardal Holdings, Lda. April 24, 2017
Portugal
Tilray Australia New Zealand Pty. Ltd. May 9, 2017
Australia
High Park Holdings, Ltd. February 8, 2018
British Columbia, Canada
National Cannabinoid Clinics Pty Ltd. September 19, 2018
Australia
Tilray Latin America SpA November 5, 2018
Chile
Tilray Portugal II, Lda. December 11, 2018
Portugal Tilray, Inc. was incorporated in Delaware in
January 2018. Prior to January 2018, we operated our business under
Decatur, which was formed in March 2016. Decatur was
incorporated under the laws of the Netherlands on March 8,
2016 as a wholly owned subsidiary of Privateer Holdings to hold a
100% ownership interest in the underlying entities included
above. Decatur has been dissolved as of December 31,
2018. The entities listed above are wholly owned by the Company and
have been formed to support the intended operations of the Company
and all intercompany transactions and balances have been eliminated
in the financial statements of the Company.
Use of estimates The preparation of the financial statements in
conformity with U.S. GAAP requires management to make judgments,
estimates and assumptions that affect the reported amounts in the
financial statements and accompanying notes. Actual results may
differ from these estimates. Key estimates in these financial
statements include the allowance for doubtful accounts, inventory
write-downs, capitalization of internally developed software costs,
estimated useful lives of property, plant and equipment and
intangible assets, valuation allowance on deferred income tax
assets, fair value of stock options granted under Privateer
Holdings’ equity-based compensation plan (the “Original
Plan”) and the new 2018 Equity Incentive Plan (the “New
Plan”) and the fair value of the Convertible Senior Notes due
2023 (“Convertible Notes”) and equity component.
Foreign currency These financial statements are presented in the
United States dollar (“USD”), which is the
Company’s reporting currency. Functional currencies for the
entities in these financial statements are their respective local
currencies, including the Canadian dollar (“CAD”),
Australian dollar, Chilean Peso and the Euro. The assets and liabilities of each entity are
translated to USD at the exchange rate in effect as at
December 31, 2018 and 2017. Certain transactions affecting the
stockholders’ equity (deficit) are translated at historical
foreign exchange rates. The statements of net loss and
comprehensive loss and statements of cash flows are translated to
USD applying the average foreign exchange rate in effect during the
reporting period. The resulting translation adjustments are
included in other comprehensive loss.
Monetary assets and liabilities denominated in
foreign currencies are translated to the functional currency by
applying the foreign exchange rate in effect at the balance sheet
date. Revenues and expenses are translated using the average
foreign exchange rate for the reporting period. Realized and
unrealized foreign currency differences are recognized in the
statement of net loss and comprehensive loss.
Net loss per share Basic net loss per share is computed by dividing
reported net loss by the weighted average number of common shares
outstanding for the reported period. Diluted net loss per share
reflects the potential dilution that could occur if securities or
other contracts to issue common stock were exercised or converted
into common stock of the Company during reported periods. Diluted
net loss per share is computed by dividing net loss by the sum of
the weighted average number of common shares and the number of
dilutive potential common share equivalents outstanding during the
period. Potential dilutive common share equivalents consist of the
incremental common shares issuable upon the exercise of vested
share options and the incremental shares issuable upon conversion
of the Convertible Notes. Potential dilutive common share
equivalents consist of stock options, restricted stock units
(“RSUs”) and restricted stock awards. In computing diluted earnings per share, common
share equivalents are not considered in periods in which a net loss
is reported, as the inclusion of the common share equivalents would
be anti-dilutive. As of December 31, 2018, there were
7,902,263 common share equivalents with potential dilutive impact.
Since the Company is in a net loss for all periods presented in
these financial statements, there is no difference between the
Company’s basic and diluted net loss per share for the
periods presented. There were no common share equivalents that
would have a dilutive impact in 2016 and 2017.
Cash and cash equivalents Cash and cash equivalents are comprised of cash and
highly liquid investments that are readily convertible into known
amounts of cash with original maturities of three months or
less. Cash and cash equivalents include amounts held
primarily in U.S. dollar, Canadian dollar, Euro, Australian dollar,
Chilean peso, corporate bonds, commercial paper, treasury bills and
money market funds.
Investments Investments consist of treasury bills and equity
securities. Equity securities generally consist of securities
that represent ownership interests in an enterprise for which do
not have significant influence or a controlling interest. The
Company’s investments are classified as available-for-sale
Available-for-sale Securities classified as available-for-sale available-for-sale, held-to-maturity Net realized gains and losses on investments are
determined in accordance with the specific identification
method.
Cost method investments Equity securities for which the fair value is not
readily determinable are carried at cost. Distributions from
the equity security are recognized as income dividend when
received. An impairment charge is recorded if the carrying
amount of the investment exceeds its fair value and determined to
be other-than-temporary.
Fair value measurements The carrying value of the Company’s accounts
receivable, other receivables, accounts payable, accrued expenses
and other current liabilities approximate their fair value due to
their short-term nature. Investments classified as
available-for-sale Fair value is the price that would be received to
sell an asset or paid to transfer a liability in an orderly
transaction between market participants at the measurement date. In
estimating the fair value of an asset or a liability, the Company
takes into account the characteristics of the asset or liability if
market participants would take those characteristics into account
when pricing the asset or liability at the measurement date.
Inventory Inventory is comprised of raw materials, finished
goods and work-in-progress pre-harvested by-products Inventory is stated at the lower of cost or net
realizable value, determined using weighted average cost. Cost
includes expenditures directly related to manufacturing and
distribution of the products. Primary costs include raw materials,
packaging, direct labor, overhead, shipping and the depreciation of
manufacturing equipment and production facilities determined at
normal capacity. Manufacturing overhead and related expenses
include salaries, wages, employee benefits, utilities, maintenance
and property taxes. Net realizable value is defined as the estimated
selling price in the ordinary course of business, less reasonably
predictable costs of completion, disposal and transportation. At
the end of each reporting period, the Company performs an
assessment of inventory obsolescence to measure inventory at the
lower of cost or net realizable value. Factors considered in the
determination of obsolescence include slow-moving or non-marketable
Property and equipment Property and equipment are recorded at cost net of
accumulated depreciation. Assets held under capital leases are
capitalized at the commencement of the lease at the lower of the
present value of minimum lease payments at the inception of the
lease or fair value. Depreciation is computed using the
straight-line method over the estimated useful lives of the assets.
The estimated useful life of buildings is 20 years and the
estimated useful life of property and equipment, other than
buildings, ranges from three to seven years. Land is not
depreciated. Leasehold improvements are amortized over the lesser
of the asset’s estimated useful life or the remaining lease
term. When assets are retired or disposed of, the cost
and accumulated depreciation are removed from the respective
accounts and any related gain or loss is recognized. Maintenance
and repairs are charged to expense as incurred. Significant
expenditures, which extend the useful lives of assets or increase
productivity, are capitalized. When significant parts of an item of
property and equipment have different useful lives, they are
accounted for as separate items or components of property and
equipment.
Construction in progress includes construction
progress payments, deposits, engineering costs, interest expense
for debt financing on long-term construction projects and other
costs directly related to the construction of the facilities.
Expenditures are capitalized during the construction period and
construction in progress is transferred to the relevant class of
property and equipment when the assets are available for use, at
which point the depreciation of the asset commences.
Intangible assets The Company capitalizes certain internal-use The estimated useful lives are reviewed at the end
of each reporting period, with the effect of any changes in
estimate being accounted for on a prospective basis. Intangible assets also include the license acquired
as part of the acquisition of Alef Biotechnology SpA
(“Alef”). The acquisition of Alef was accounted
for as an asset acquisition as it did not meet the definition of a
business.
Impairment of long-lived assets The Company reviews long-lived assets for
impairment whenever events or changes in circumstances indicate
that the carrying value of an asset may not be recoverable. In
order to determine if assets have been impaired, assets are grouped
and tested at the lowest level for which identifiable independent
cash flows are available (“asset group”). An impairment
loss is recognized when the sum of projected undiscounted cash
flows is less than the carrying value of the asset group. The
measurement of the impairment loss to be recognized is based on the
difference between the fair value and the carrying value of the
asset group. Fair value can be determined using a market approach,
income approach or cost approach. The reversal of impairment losses
is prohibited.
Capitalization of interest Interest incurred relating to the construction or
expansion of facilities is capitalized to the construction in
progress. The Company ceases the capitalization of interest when
construction activities are substantially completed and the
facility is available for commercial use.
Leases The Company enters into various leases in
conducting its business. At the inception of each lease, the
Company evaluates the lease agreement to determine whether the
lease is an operating or capital lease. A capital lease is a lease
in which 1) ownership of the property transfers to the lessee
by the end of the lease term; 2) the lease contains a bargain
purchase option; 3) the lease term is equal to 75% or more of
the economic life of the leased property; or 4) the present value
of the minimum lease payment at the inception of the lease term
equals or exceeds 90% of the fair value of the leased property. An asset and a corresponding liability are
established at inception for capital leases. The capital lease
assets are included in property, plant and equipment and the
capital lease obligations are included in accrued obligations under
capital lease. Operating lease payments are recognized as an
expense on a straight-line basis over the lease term.
Convertible Senior Notes due 2023 The Company accounts for its Convertible Notes with
a cash conversion feature in accordance with ASC 470-20 non-cash Upon repurchase of convertible debt instruments,
ASC 470-20 paid-in
Revenue recognition The Company recognizes revenue as earned when the
following four criteria have been met: (i) when persuasive
evidence of an arrangement exists, (ii) the product has been
delivered to a customer, (iii) the sales price is fixed or
determinable, and (iv) collection is reasonably assured.
Revenue is recognized net of sales incentives and returns, after
discounts for the assurance program, veterans coverage program and
compassionate programs. Direct-to-patient adult-use Customer loyalty awards are accounted for as a
separate component of the sales transaction in which they are
granted. A portion of the consideration received in a transaction
that includes the issuance of an award is deferred until the awards
are ultimately redeemed. The allocation of the consideration to the
award is based on an evaluation of the award’s estimated fair
value at the date of the transaction. The customer loyalty program
was discontinued in September 2017 and all customer loyalty awards
expired as at December 31, 2017.
Cost of sales Cost of sales represents costs directly related to
manufacturing and distribution of the Company’s products.
Primary costs include raw materials, packaging, direct labor,
overhead, shipping and handling and the depreciation of
manufacturing equipment and production facilities. Manufacturing
overhead and related expenses include salaries, wages, employee
benefits, utilities, maintenance and property taxes. The Company
recognizes the cost of sales as the associated revenues are
recognized. Stock-based compensation The Company measures and recognizes compensation
expense for stock options and RSUs on a straight-line basis over
the vesting period based on their grant date fair values. The
Company estimates the fair value of stock options on the date of
grant using the Black-Scholes option pricing model. The fair
value of RSUs is based on the share price as at date of grant. For
stock options and RSUs granted in May and June 2018, prior to the
Company’s IPO, the fair value of common stock at the date of
grant was determined by the Board of Directors with assistance from
third-party valuation specialists. The Company estimates
forfeitures at the time of grant and revises these estimates in
subsequent periods if actual forfeitures differ from those
estimates. The critical assumptions and estimates used in
determining the fair value of stock-based compensation on the grant
date are: fair value of common shares on the grant date, risk-free
interest rate, share price volatility of comparable companies, and
the expected term. For performance-based stock options and RSUs, the
Company records compensation expense over the estimated service
period once the achievement of the performance-based milestone is
considered probable. At each reporting date, the Company assesses
whether achievement of a milestone is considered probable, and if
so, records compensation expense based on the portion of the
service period elapsed to date with respect to that milestone, with
a cumulative catch-up,
Income taxes The Company uses the asset and liability method of
accounting for income taxes. Under this method, deferred tax assets
and liabilities are determined based on the differences between the
financial reporting and the tax bases of assets and liabilities and
are measured using the enacted tax rates and laws that will be in
effect when the differences are expected to reverse. Management
makes an assessment of the likelihood that the resulting deferred
tax assets will be realized. A valuation allowance is provided when
it is more likely than not that some portion or all of a deferred
tax asset will not be realized. The Company recognizes uncertain income tax
positions at the largest amount that is more likely than not to be
sustained upon audit by the relevant taxing authority. An uncertain
income tax position will not be recognized if it has less than a
50% likelihood of being sustained. Changes in recognition or
measurement are reflected in the period in which judgment
occurs.
New accounting pronouncements not yet adopted In May 2014, the Financial Accounting Standards
Board (“FASB”) issued Accounting Standard Update
(“ASU”) 2014-09, ASU 2015-14, ASU 2014-09 ASU 2014-09 In January 2016, the FASB issued ASU 2016-01, 825-10) 2016-01 2016-01 ASU 2016-01
In February 2016, the FASB issued ASU 2016-02, 2016-02 In March 2016, the FASB issued ASU 2016-09, 2016-09 2016-09 2016-09 In June 2016, the FASB issued ASU 2016-13, 2016-13 2016-13 2016-13 In August 2018, the FASB issued ASU 2018-13, 2018-13 2018-13 |
