What changed in this filing

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Item 2. Management’s Discussion and Analysis

2021-02-09 compared with 2020-11-09 · 378 added, 408 removed, 435 unchanged (64% of the section changed)

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Part 2 - Results of Operations.

This section provides an analysis of our results of operations for the second quarter of fiscal 2021 in comparison to the second quarter of fiscal 2020, and for the six months ended September 30, 2020 in comparison to the six months ended September 30, 2019.

This section provides an analysis of our results of operations for the third quarter of fiscal 2021 in comparison to the third quarter of fiscal 2020, and for the nine months ended December 31, 2020 in comparison to the nine months ended December 31, 2019.

Part 3 - Financial Liquidity and Capital Resources.

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hemp industry by the USDA;

expectations regarding the potential success of, and the costs and benefits associated with, our acquisitions, joint ventures, strategic alliances and equity investments;

expectations regarding the potential success of, and the costs and benefits associated with, our acquisitions, joint ventures, strategic alliances, equity investments and dispositions;

the amended plan of arrangement with Acreage Holdings, Inc.

(“Acreage”), including the satisfaction or waiver of the conditions to closing of such acquisition;

the plan of arrangement with Canopy Rivers Inc.

(“Canopy Rivers”), including the satisfaction or waiver of the conditions to closing of such transaction;

the grant, renewal and impact of any license or supplemental license to conduct activities with cannabis or any amendments thereof;

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(viii) government regulation of our activities and products including but not limited to the areas of taxation and environmental protection;

(ix) the timely receipt of any required regulatory authorizations, approvals, consents,

permits and/or licenses;

(ix) the timely receipt of any required regulatory authorizations, approvals, consents, permits and/or licenses;

(x) our ability to obtain qualified staff, equipment and services in a timely and cost-efficient manner;

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On October 17, 2018, the Cannabis Act came into effect in Canada, regulating both the medical and recreational cannabis markets in Canada and providing provincial, territorial and municipal governments the authority to prescribe regulations regarding the distribution and sale of recreational cannabis.

On October 17, 2019, the second phase of recreational cannabis products, specifically, ingestible cannabis, cannabis extracts and cannabis topical products (referred to as “Cannabis 2.0”), were legalized pursuant to certain amendments to the regulations under the Cannabis Act .

We began selling our cannabis-infused chocolates, cannabis-infused beverage offerings, vape pen power sources and pod-based vape devices across Canada in the fourth quarter of fiscal 2020, with these products

complementing our existing flower, oil and softgel products.

amendments to the regulations under the Cannabis Act .

We began selling our cannabis-infused chocolates , cannabis-infused beverage offerings , vape pen power sources and pod-based vape devices across Canada in the fourth quarter of fiscal 2020, with these products complementing our existing flower, oil and softgel products.

Our 510-threaded vape cartridges began shipping into the market in April 2020, with product availability varying based on provincial and territorial regulations.

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Our Spectrum Therapeutics medical division is a global leader in medical cannabis.

Spectrum Therapeutics produces and distributes a diverse portfolio of medical cannabis products to healthcare practitioners and medical customers in Canada, and in several other countries where it is federally permissible to do so, and Spectrum Therapeutics also offers education, resource and support programs.

In April 2019, we acquired C 3 Cannabinoid Compound Company (“C 3 ”), Europe’s largest cannabinoid-based pharmaceuticals company and a leading manufacturer of dronabinol, a registered active pharmaceutical ingredient in Germany and certain other European countries.

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Agricultural Improvement Act of 2018 in December 2018, we began building our hemp supply chain in the United States through our investment in hemp growing capability and in processing, extraction and finished goods manufacturing facilities.

We sell a line of hemp-derived CBD isolate products under the First & Free brand, including oils, softgels and topical creams, and in September 2020, we launched Martha Stewart CBD, a new line of premium quality, hemp-derived wellness gummies, oils and softgels.

In June 2019, we implemented a plan of arrangement (the “Prior Arrangement”) pursuant to an arrangement agreement (the “Arrangement Agreement”) with Acreage, a U.S.

In September 2020, our Martha Stewart CBD line of premium quality, hemp-derived wellness gummies, oils and softgels was launched in the United States.

In June 2019, we implemented a plan of arrangement pursuant to an arrangement agreement with Acreage, a U.S.

multi-state cannabis operator.

Pursuant to the Prior Arrangement, following the occurrence or waiver (at our discretion) of changes in U.S.

federal law to permit the general cultivation, distribution, and possession of marijuana or to remove the regulation of such activities from the federal laws of the United States (the “Triggering Event”) and subject to the satisfaction or waiver of the conditions set out in the Arrangement Agreement, we agreed to acquire all of the issued and outstanding shares of Acreage.

In June 2020, we entered into the Proposal Agreement (as defined below) with Acreage to amend the terms of the Prior Arrangement.

In September 2020, following receipt of all required approvals, we entered into a second amendment to the Arrangement Agreement with Acreage and implemented an amended and restated plan of arrangement (the “Amended Arrangement”);

refer to “Recent Developments” below for further information.

In September 2020, following receipt of all required approvals, we entered into a second amendment to the arrangement agreement with Acreage and implemented an amended and restated plan of arrangement (the “Acreage Arrangement”).

Pursuant to the Acreage Arrangement, following the occurrence or waiver (at our discretion) of changes in U.S.

federal law to permit the general cultivation, distribution, and possession of marijuana or to remove the regulation of such activities from the federal laws of the United States (the “Triggering Event”) and subject to the satisfaction or waiver of the conditions set out in the arrangement agreement with Acreage, we (i) agreed to acquire approximately 70% of the issued and outstanding shares of Acreage, and (ii) obtained the right to acquire the other approximately 30% of the issued and outstanding shares of Acreage.

The acquisition of Acreage, if completed, will provide a pathway into cannabis markets in the United States;

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These infrastructure investments allow us to supply the recreational and medical markets with a complimentary balance of flower products and extracted cannabinoid input for our oil, CBD and Cannabis 2.0 products.

Additionally, we have built a hemp supply chain in the United States, and we hold the necessary licenses to cultivate and produce cannabis in Denmark, allowing us to supply the domestic European market.

Additionally, we have built a hemp supply chain in the United States and hold the necessary licenses to cultivate and produce cannabis in Denmark.

We operate in two reportable segments:

Cannabis, Hemp and Other Consumer Products, which encompasses the production, distribution and sale of a diverse range of cannabis, hemp-based, and other consumer products in Canada and internationally pursuant to applicable international and domestic legislation, regulations and permits;

Canopy Rivers Inc.

Canopy Rivers, a publicly-traded company in Canada, through which we provide growth capital and strategic support in the global cannabis sector, where federally lawful.

Canopy Rivers did not generate net revenue in the three and six months ended September 30, 2020.

Canopy Rivers did not generate net revenue in the three and nine months ended December 31, 2020.

Refer to “Recent Developments” below for a description of the plan of arrangement with Canopy Rivers.

Update on the COVID-19 Pandemic

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Given the uncertainties associated with the COVID-19 pandemic, including those related to the use of our products by consumers, disruptions to the global and local economies due to related stay-at-home orders, quarantine policies and restrictions on travel, trade and business operations and a reduction in discretionary consumer spending, we are unable to estimate the impact of the COVID-19 pandemic on our business, financial condition, results of operations, and/or cash flows.

The uncertain nature of the impacts of the COVID-19 pandemic may continue to affect our results of operations for the balance of fiscal 2021.

We believe we have sufficient liquidity available from cash and cash equivalents and short-term investments on hand of $673.3 million and $1.0 billion, respectively, at September 30, 2020, and from available capacity under our revolving debt facility to enable us to meet our working capital and other operating requirements, fund growth initiatives and capital expenditures, settle our liabilities, and repay scheduled principal and interest payments on debt.

The uncertain nature of the impacts of the COVID-19 pandemic may continue to affect our results of operations for the balance of fiscal 2021 and into the beginning of fiscal 2022.

We believe we have sufficient liquidity available from cash and cash equivalents and short-term investments on hand of $825.0 million and $768.6 million, respectively, at December 31, 2020, and from available capacity under our revolving debt facility to enable us to meet our working capital and other operating requirements, fund growth initiatives and capital expenditures, settle our liabilities, and repay scheduled principal and interest payments on debt.

Refer to “Part 3 – Financial Liquidity and Capital Resources” for further information.

Recent Developments

Amendments to Acreage Arrangement

On June 24, 2020, we entered into a proposal agreement (the “Proposal Agreement”) with Acreage to amend the terms of the Prior Arrangement made pursuant to the Arrangement Agreement between us and Acreage dated April 18, 2019, as amended on May 15, 2019.

Pursuant to the terms of the Prior Arrangement, shareholders of Acreage and holders of certain securities convertible into Existing SVS (as defined below) as of June 26, 2019, received an immediate aggregate total payment of US$300.0 million ($395.2 million) in exchange for granting Canopy Growth both the right and the obligation (the “Acreage financial instrument”) to acquire all of the issued and outstanding shares of Acreage following the occurrence or waiver of the Triggering Event and subject to the satisfaction or waiver of the conditions set out in the Arrangement Agreement.

In September 2020, Acreage obtained the requisite approvals of the shareholders of Acreage and the Supreme Court of British Columbia and on September 23, 2020, Canopy Growth and Acreage entered into a second amendment to the Arrangement Agreement and implemented the Amended Arrangement.

The Amended Arrangement provides for, among other things, the following:

A capital reorganization of Acreage (the “Capital Reorganization”), pursuant to which Acreage amended its Notice of Articles and Articles to, among other things, create the Fixed Shares (as defined below), the Floating Shares (as defined below) and the Fixed Multiple Shares (as defined below) and remove the existing Acreage subordinated voting shares (the “Existing SVS”), the existing Acreage proportionate voting shares (the “Existing PVS”) and the existing Acreage multiple voting shares (the “Existing MVS”).

Pursuant to the Capital Reorganization (i) each outstanding Existing SVS was exchanged for 0.7 of a Fixed Share and 0.3 of a Floating Share;

(ii) each outstanding Existing PVS was exchanged for 28 Fixed Shares and 12 Floating Shares;

and (iii) each outstanding Existing MVS was exchanged for 0.7 of a Fixed Multiple Share and 0.3 of a Floating Share;

The new Class E subordinated voting shares (the “Fixed Shares”) have the same attributes as the Existing SVS and are listed on the Canadian Securities Exchange (the “CSE”) under the ticker symbol ACRG.A.U.

Following the occurrence or waiver (at the discretion of Canopy Growth) of the Triggering Event and subject to the satisfaction or waiver of the conditions set out in the Arrangement Agreement (as modified in connection with the Amended Arrangement), Canopy Growth will acquire all of the issued and outstanding Fixed Shares based on an amended exchange ratio equal to 0.3048 of a common share to be received for each Fixed Share held (reduced from 0.5818 per Existing SVS pursuant to the Prior Arrangement).

The foregoing exchange ratio for the Fixed Shares is subject to adjustment in accordance with the Amended Arrangement if, among other things, Acreage issues greater than the permitted number of Fixed Shares;

The new Class D subordinated voting shares (the “Floating Shares”) are listed on the CSE under the ticker symbol ACRG.B.U.

Upon the occurrence or waiver (at the discretion of Canopy Growth) of the Triggering Event, Canopy Growth will have the right exercisable for a period of 30 days, to acquire all of the issued and outstanding Floating Shares for cash or common shares

or a combination thereof, in Canopy Growth’s sole discretion at a price equal to the 30-day volume weighted average trading price of the Floating Shares on the CSE, subject to a minimum call price of US$6.41 per Floating Share .

The foregoing exchange ratio for the Floating Shares is subject to adjustment in accordance with the Amended Arrangement if Acreage issues greater than the permitted number of Floating Shares.

The acquisition of the Floating Shares, if acquired, will take place concurrently with the closing of the acquisition of the Fixed Shares;

The new Class F multiple voting shares (the “Fixed Multiple Shares”) have the same attributes as the Existing MVS, provided that each Fixed Multiple Share entitles the holder thereof to 4,300 votes per share at shareholder meetings of Acreage.

Immediately prior to the acquisition of the Fixed Shares, each issued and outstanding Fixed Multiple Share will automatically be exchanged for one Fixed Share and thereafter be acquired by Canopy Growth upon the same terms and conditions as the acquisition of the Fixed Shares;

If the occurrence or waiver of the Triggering Event does not occur within 10 years from the date the Amended Arrangement was implemented (being September 23, 2020), Canopy Growth’s rights to acquire both the Fixed Shares and the Floating Shares will terminate;

Upon implementation of the Amended Arrangement, Canopy Growth made a cash payment to the shareholders of Acreage and holders of certain securities convertible into Existing SVS in the aggregate amount of US$37.5 million ($49.8 million);

Acreage is only permitted to issue an aggregate of up to 32,700,000 Fixed Shares and Floating Shares.

In connection with the implementation of the Amended Arrangement, we advanced US$50.0 million ($67.0 million) to Universal Hemp, LLC, a wholly-owned subsidiary of Acreage (“Acreage Hempco”) pursuant to the terms of a secured debenture (“debenture”).

In accordance with the terms of the debenture, the funds cannot be used, directly or indirectly, in connection with or for any cannabis or cannabis-related operations in the United States, unless and until such operations comply with all applicable laws of the United States.

The debenture bears interest at a rate of 6.1% per annum, matures 10 years from the implementation of the Amended Arrangement or such earlier date in accordance with the terms of the debenture, and all interest payments made pursuant to the debenture are payable in cash by Acreage Hempco.

The debenture is not convertible and is not guaranteed by Acreage.

An additional US$50.0 million may be advanced pursuant to the debenture subject to the satisfaction of certain conditions by Acreage Hempco.

Restructuring Actions and Sale of British Columbia Production Facilities

In December 2020, as the partial outcome of an ongoing end-to-end strategic review of our operations, we announced a series of Canadian operational changes designed to streamline our operations and further improve our gross margins.

We have ceased operations at our sites in St.

John’s, Newfoundland and Labrador;

Fredericton, New Brunswick;

Edmonton, Alberta;

Bowmanville, Ontario;

as well as our outdoor cannabis grow operations in Saskatchewan.

As a result of these restructuring actions, we eliminated approximately 220 full-time positions.

Additionally, we (i) completed the sale of our production facilities in Aldergrove and Delta, British Columbia in December 2020 and January 2021, respectively, for combined proceeds of $40.7 million;

and (ii) completed our strategy shift in Latin America that we commenced in the fourth quarter of fiscal 2020.

As a result of the restructuring actions described above and adjustments to the net book value of our production facilities in British Columbia in order to reflect their selling prices, we recorded pre-tax charges totaling $400.4 million in the third quarter of fiscal 2021 in asset impairment and restructuring costs, and recorded a write-down of inventory in the amount of $15.6 million in cost of goods sold.

These charges are detailed below under “Part 2 – Results of Operations”.

Canopy Rivers Arrangement Agreement

In December 2020, we entered into an arrangement agreement (the “Canopy Rivers Arrangement Agreement”) with our wholly-owned subsidiary The Tweed Tree Lot Inc.

(“Tweed NB”), Canopy Rivers and its wholly-owned subsidiary Canopy Rivers Corporation (“CRC”), pursuant to which we will acquire certain assets from CRC, as set out below, in exchange for cash, common shares in the capital of Canopy Growth and the surrender of all shares in the capital of Canopy Rivers held by us by way of a plan of arrangement under the Business Corporations Act (Ontario) (the “Arrangement”).

Pursuant to the Arrangement, we will increase our conditional ownership interest in TerrAscend Corp.

(“TerrAscend”) through the acquisition of (i) 19,445,285 exchangeable shares in the capital of TerrAscend;

(ii) 2,225,714 common share purchase warrants in the capital of TerrAscend with an exercise price of $5.95 per share;

(iii) 333,723 common share purchase warrants in the capital of TerrAscend with an exercise price of $6.49 per share;

and (iv) a $13.2 million loan receivable owing by TerrAscend Canada Inc.

(“TerrAscend Canada”) to CRC.

The securities in the capital of TerrAscend are not currently convertible or exercisable, and will not be convertible or exercisable until federal laws in the United States with respect to marijuana are amended.

Subject to certain rights of first refusal, pursuant to the Arrangement, we will also acquire all of the common shares and Class A preferred shares in the capital of

Les Serres Vert Cannabis Inc.

(“ Vert Mirabel ”) held by CRC.

In addition, all of the obligations of Tweed NB owing to CRC pursuant to a royalty agreement between the parties will be terminated.

We currently own 36,468,318 Class B multiple voting shares and 15,223,938 Class A subordinate voting shares in the capital of Canopy Rivers.

Pursuant to the Arrangement, all of the shares held by us will be repurchased by Canopy Rivers for cancellation on a cashless basis.

We will not have any equity, debt or other interest in Canopy Rivers following completion of the Arrangement.

As additional consideration for the assets being transferred and the termination of the royalty agreement, we will make a cash payment to CRC of $115.0 million and issue an aggregate of up to 3,750,000 common shares.

The Arrangement remains subject to approval by the shareholders of Canopy Rivers at a special shareholder meeting expected to be held on February 16, 2021.

The Arrangement does not require the approval of our shareholders.

In addition to Canopy Rivers shareholder approval, the Arrangement is subject to applicable approvals by the Ontario Superior Court of Justice and certain other closing conditions.

PharmHouse Inc.

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CCAA Proceedings

During the three months ended September 30, 2020, it was determined that the previously anticipated timeline for PharmHouse to generate cash flows from its offtake agreements with Canopy Growth and TerrAscend Canada Inc.

would not be met, and the ultimate timing and receipt of cash inflows pursuant to these agreements became uncertain.

During the nine months ended December 31, 2020, PharmHouse determined that the previously anticipated timeline to generate cash flows from its offtake agreements with Canopy Growth and TerrAscend Canada would not be met, and the ultimate timing and receipt of cash inflows pursuant to these agreements became uncertain.

As a result of this, as well as broader sector-wide challenges impacting the Canadian cannabis industry, PharmHouse did not have sufficient liquidity and capital resources to meet its business objectives and became unable to meet its financial obligations as they became due.

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The Court appointed an independent professional services firm to act as the Monitor of PharmHouse in the CCAA Proceedings while PharmHouse explores a restructuring of its business and operations (the “Restructuring”).

On October 29, 2020, PharmHouse received approval from the Court to commence its Sale and Investor Solicitation Process (“SISP”).

The SISP is intended to solicit interest in, and opportunities for, a sale of, or investment in, all or part of PharmHouse’s assets or business.

This may include a restructuring, recapitalization, or other form of reorganization of PharmHouse’s business and affairs.

Phase one of the SISP concluded on November 30, 2020, and a number of non-binding offers were received.

PharmHouse, with the assistance of the Monitor and the SISP advisor, selected a number of parties to bring forward to the next phase of the SISP, and binding offers for phase two of the SISP are due on or about February 16, 2021.

PharmHouse Recoverability Assessment

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Significant unobservable inputs used to determine the fair value of PharmHouse’s assets include the selling price per square foot for PharmHouse’s greenhouse facility;

the recoverability percentage on the liquidation of

PharmHouse’s property, plant and equipment;

the recoverability percentage on the liquidation of PharmHouse’s property, plant and equipment;

the selling price per gram of PharmHouse’s existing cannabis inventory;

and adjustments for the risk of fair value changes and liquidity.

Based on the foregoing, we estimated the recoverable value of PharmHouse’s assets in an orderly liquidation scenario to be approximatel y $ 65.0 million .

The impact of the PharmHouse Recoverability Assessment on Canopy Growth’s various PharmHouse-related financial instru ments is described below.

Based on the foregoing, we estimated the recoverable value of PharmHouse’s assets in an orderly liquidation scenario to be approximately $57.5 million.

The impact of the PharmHouse Recoverability Assessment on Canopy Growth’s various PharmHouse-related financial instruments is described below.

PharmHouse Financial Guarantee

As at September 30, 2020, PharmHouse had entered a syndicated credit agreement with amended terms (the “PharmHouse Credit Agreement”) with a number of Canadian banks to provide PharmHouse with a committed, non-revolving credit facility (the “PharmHouse Credit Facility”) with a maximum principal amount of $90.0 million, which was fully drawn.

The obligations of PharmHouse under the PharmHouse Credit Facility are secured by guarantees of Canopy Rivers and Canopy Rivers Corporation (“CRC”, a wholly-owned subsidiary of Canopy Rivers), and a pledge by CRC of all of the shares of PharmHouse held by it (the “PharmHouse Financial Guarantee”).

Accordingly, if PharmHouse is not able to generate sufficient cash flows to service its obligations pursuant to the PharmHouse Credit Facility, we may be required to recognize a financial liability relating to all or a portion of the PharmHouse Financial Guarantee.

The PharmHouse Credit Agreement also contains certain representations and warranties and affirmative covenants applicable to Canopy Growth.

Prior to December 31, 2020, PharmHouse had entered into a syndicated credit agreement (as amended, the “PharmHouse Credit Agreement”) with a number of Canadian banks (the “Lenders”) to provide PharmHouse with a committed, non-revolving credit facility (the “PharmHouse Credit Facility”) with a maximum principal amount of $90.0 million, which was fully drawn.

The obligations of PharmHouse under the PharmHouse Credit Facility are secured by guarantees of Canopy Rivers and CRC, and a pledge by CRC of all of the shares of PharmHouse held by it (the “PharmHouse Financial Guarantee”).

Accordingly, if PharmHouse is not able to generate sufficient cash flows to service its obligations pursuant to the PharmHouse Credit Facility, we may be required to compensate the Lenders for their loss incurred on the PharmHouse Credit Facility.

The PharmHouse Credit Agreement also contains other covenants applicable to Canopy Rivers and CRC.

Based on the PharmHouse Recoverability Assessment described above, we determined that the fair value of PharmHouse’s assets under an orderly liquidation scenario where the facility is not used for cannabis operations may be less than the principal amount owed by PharmHouse pursuant to the PharmHouse Credit Facility.

Accordingly, we estimated that we have a financial liability related to the PharmHouse Financial Guarantee, reflecting the estimated shortfall between the recoverable amount of PharmHouse en bloc and our exposure to the PharmHouse Credit Facility.

As at September 30, 2020, we estimated the current expected credit loss related to its contingent obligation under the PharmHouse Financial Guarantee to be $25.0 million, and recognized a financial liability for this amount in the consolidated balance sheet (March 31, 2020 – $nil) and the associated current expected credit loss in net income (loss) for the three and six months ended September 30, 2020 (three and six months ended September 30, 2019 – $nil).

As at December 31, 2020, we estimated the current expected credit loss related to its contingent obligation under the PharmHouse Financial Guarantee to be $32.5 million, and recognized a financial liability for this amount in the consolidated balance sheet (March 31, 2020 – $nil).

During the three and nine months ended December 31, 2020, we recognized associated current expected credit losses of $7.5 million and $32.5 million, in net income (loss) for the three and nine months ended December 31, 2020, respectively (three and nine months ended December 31, 2019 – $nil).

Other financial assets, including loans receivable

As at September 30, 2020, we had advanced $40.0 million of secured debt financing pursuant to a shareholder loan agreement with PharmHouse (March 31, 2020 – $40.0 million).

As at December 31, 2020, CRC had advanced $40.0 million of secured debt financing pursuant to a shareholder loan agreement with PharmHouse (March 31, 2020 – $40.0 million).

The shareholder loan has a three-year term and an annual interest rate of 12%, with interest calculated monthly (effective as at the date principal is advanced) and payable quarterly upon the achievement of certain sales-related milestones.

As at September 30, 2020, we had advanced $2.5 million to PharmHouse pursuant to a secured demand promissory note (March 31, 2020 – $2.5 million).

As at December 31, 2020, CRC had advanced $2.5 million to PharmHouse pursuant to a secured demand promissory note (March 31, 2020 – $2.5 million).

The secured demand promissory note is non-interest bearing both before and after demand or default.

Based on the terms of the secured demand promissory note, we had recognized the secured demand promissory note as a financial asset initially recorded at fair value and subsequently measured at amortized cost.

On August 4, 2020, we entered into an unsecured demand promissory note agreement with PharmHouse, pursuant to which it made total advances of $1.2 million between August 4, 2020, and September 8, 2020.

On August 4, 2020, CRC entered into an unsecured demand promissory note agreement with PharmHouse, pursuant to which it made total advances of $1.2 million between August 4, 2020, and September 8, 2020.

The unsecured promissory note bears interest at a rate of 12% per annum, calculated and compounded monthly, and is payable on the demand date.

Based on the terms of the unsecured demand promissory note, we recognized the instrument as a financial asset initially recorded at fair value and subsequently measured at amortized cost.

Pursuant to the Initial Order, we entered into an agreement to provide a super-priority, debtor-in-possession (“DIP”) interim, non-revolving credit facility up to a maximum principal amount of $7.2 million (the “DIP Financing”) to enable PharmHouse to continue its day-to-day operations throughout the anticipated Restructuring.

The DIP Financing bears interest at a rate of 8% per annum, calculated and compounded monthly and payable on the maturity date, which is the earlier of December 29, 2020, and the date the CCAA Proceedings are terminated.

As at September 30, 2020, we had advanced $2.1 million pursuant to the DIP Financing.

As a result of the PharmHouse Recoverability Assessment described above, we recognized current expected credit losses of $25.0 million related to its contingent obligation under the PharmHouse Financial Guarantee and concluded that the following amounts may not be recoverable:

(i) $2.1 million advanced pursuant to DIP Financing;

Pursuant to the Initial Order, CRC entered into an agreement to provide a super-priority, debtor-in-possession (“DIP”) interim, non-revolving credit facility up to a maximum principal amount of $7.2 million (the “DIP Financing”) to enable PharmHouse to continue its day-to-day operations throughout the anticipated Restructuring.

The DIP Financing, which is subordinate to PharmHouse’s obligations to the Lenders under the PharmHouse Credit Facility, bears interest at a rate of 8% per annum, calculated and compounded monthly and payable on the maturity date, which is the earlier of December 29, 2020, and the date the CCAA Proceedings are terminated.

On December 15, 2020, the DIP Financing agreement entered into between CRC and PharmHouse was amended.

As a result of this amendment, the maximum principal amount available to be drawn by PharmHouse pursuant to the DIP Financing increased from $7.2 million to $9.7 million, and the maturity date was extended from December 29, 2020 to February 28, 2021.

On December 18, 2020, the Court approved the DIP Financing amendment and extended the stay of proceedings in respect of PharmHouse until February 28, 2021, inclusively.

As at December 31, 2020, CRC had advanced $8.3 million pursuant to the DIP Financing.

As a result of the PharmHouse Recoverability Assessment described above, we recognized current expected credit losses of $7.5 million and $32.5 million for the three and nine months ended December 31, 2020, respectively, related to the contingent obligation under the PharmHouse Financial Guarantee.

We also concluded that the following amounts may not be recoverable:

(i) $8.3 million advanced pursuant to DIP Financing, of which $6.2 million was advanced in the three months ended December 31, 2020;

(ii) $40.0 million advanced under the shareholder loan agreement;

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(iv) $1.2 million advanced under the unsecured demand promissory note;

and (v) $9.0 million in interest receivable in relation to the aforementioned financial instruments.

Additionally, it was determined that certain advances in the amount of $15.0 million provided to PharmHouse by Canopy

Growth may not be recoverable.

A ccordingly, we recorded expected credit losses on financial assets and related charges of $94.7 million for the three and six months ended September 30, 2020 .

and (v) $9.0 million in interest receivable in relation to the

aforementioned financial instruments.

Additionally, it was determined that certain advances in the amount of $15.0 million provided to PharmHouse by Canopy Growth may not be recoverable .

A ccordingly, we recorded expected credit losses on financial assets and related charges of $ 1 3.7 million and $ 10 8.5 million for the three and nine months ended December 31 , 2020 , respectively (three and nine months ended December 31 , 2019 – $nil).

PharmHouse equity method investment

As at September 30, 2020, we owned 10,998,660 common shares of PharmHouse (March 31, 2020 – 10,998,660 common shares), representing a 49% equity interest on a non-diluted basis.

We have not yet received any distributions on account of its common share investment in PharmHouse.

As a result of the PharmHouse Recoverability Assessment described above, we determined that there was an other-than-temporary-impairment and recognized an impairment charge for the full amount of its equity method investment of $32.4 million or the three and six months ended September 30, 2020 (three and six months ended September 30, 2019 – $nil).

British Columbia Production Facility

On November 1, 2020, a production facility owned by the Company in Delta, British Columbia was damaged by a fire.

The facility has been non-operational since March 2020.

We are in the process of assessing the impact of the fire, including the extent of damages and potential insurance recoveries.

As a result, an estimate of the financial effect on our consolidated financial statements is uncertain at this time.

As at December 31, 2020, CRC owned 10,998,660 common shares of PharmHouse (March 31, 2020 – 10,998,660 common shares), representing a 49% equity interest on a non-diluted basis.

CRC has not yet received any distributions on account of its common share investment in PharmHouse.

Refer to “Canopy Rivers Arrangement Agreement” above for a description of the plan of arrangement with Canopy Rivers.

TerrAscend Option Agreement

On January 13, 2021, we entered into an option agreement to acquire 1,072,450 common shares of TerrAscend for US$10.5 million, conditional upon the occurrence or waiver of amendments to federal laws of the United States to permit the general cultivation, distribution and possession of marijuana or to remove the regulation of such activities from the federal laws of the United States.

Part 2 - Results of Operations

Discussion of Second Quarter of Fiscal 2021 Results of Operations

Three months ended September 30,

(in thousands of Canadian dollars, except share amounts and where otherwise indicated)

Discussion of Third Quarter of Fiscal 2021 Results of Operations

Three months ended December 31,

(in thousands of Canadian dollars, except share amounts and

where otherwise indicated)

Selected financial information:

Gross margin percentage

Net (loss) income

Net (loss) income attributable to Canopy Growth

(Loss) earnings per share - basic

(Loss) earnings per share - diluted 1

1 For the three months ended September 30, 2020, the weighted average number of outstanding common shares, basic and diluted, totaled 371,520,534.

For the three months ended September 30, 2019, the weighted average number of outstanding common shares, basic and diluted, totaled 347,226,921 and 380,323,118, respectively.

Net loss attributable to Canopy Growth

Loss per share - basic and diluted 1

1 For the three months ended December 31, 2020, the weighted average number of outstanding common shares, basic and diluted, totaled 372,908,767.

For the three months ended December 31, 2019, the weighted average number of outstanding common shares, basic and diluted, totaled 348,530,622.

Revenue by Channel

Three months ended September 30,

Three months ended December 31,

(in thousands of Canadian dollars)

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Other revenue

1 Reflects excise taxes of $14,200 and other revenue adjustments, representing our determination of returns and pricing adjustments, of $3,750 for the three months ended September 30, 2020 (three months ended September 30, 2019 - excise taxes of $7,823 and other revenue adjustments of $32,727).

2 Reflects excise taxes of $1,362 for the three months ended September 30, 2020 (three months ended September 30, 2019 - $1,185).

1 Reflects excise taxes of $15,977 and other revenue adjustments, representing our determination of returns and pricing adjustments, of $3,750 for the three months ended December 31, 2020 (three months ended December 31, 2019 - excise taxes of $10,457 and other revenue adjustments of $5,343).

2 Reflects excise taxes of $1,402 for the three months ended December 31, 2020 (three months ended December 31, 2019 - $1,325).

Revenue by Form

Three months ended September 30,

Three months ended December 31,

(in thousands of Canadian dollars)

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1 Excludes the impact of other revenue adjustments.

Net revenue in the second quarter of fiscal 2021 was $135.3 million, as compared to $76.6 million in the second quarter of fiscal 2020.

The year-over-year increase is primarily attributable to (i) the year-over-year increase in Canadian recreational net revenue;

and (ii) the year-over-year increase in other revenue primarily resulting from continued strong performance by Storz & Bickel and the acquisition of BioSteel in October 2019.

Canadian recreational net revenue in the second quarter of fiscal 2021 was $60.9 million, as compared to $22.0 million in the second quarter of fiscal 2020.

Net revenue from the business-to-business channel in the second quarter of fiscal 2021 was $42.2 million, as compared to $8.9 million in the second quarter of fiscal 2020.

Net revenue in the second quarter of fiscal 2020 was impacted by other revenue adjustments in the amount of $32.7 million related to our determination, at that time, of returns and pricing adjustments associated primarily with the risk of over-supply of certain oil and softgel products.

We also benefited in the second quarter of fiscal 2021 from (i) an overall increase in demand resulting from the opening of 185 new retail stores across Canada in the second quarter of fiscal 2021, 46 of which were in Ontario;

(ii) an increase in sales of our dry bud product, largely resulting from a competitive repositioning of our product offerings in the value-priced dried flower category that was implemented in the first quarter of fiscal 2021;

and (iii) the introduction of our Cannabis 2.0 products, which represented approximately 8% of gross revenue from the business-to-business channel in the second quarter of fiscal 2021.

Our cannabis-infused beverage products represented approximately 72% of our Cannabis 2.0 sales in the second quarter of fiscal 2021.

These variances resulting in year-over-year net revenue growth were partially offset by an increase in excise taxes of $6.4 million, due primarily to an increase in the volume of value-priced dried flower product sold compared to the prior year.

Revenue from the business-to-consumer channel in the second quarter of fiscal 2021 was $18.7 million, as compared to $13.1 million in the second quarter of fiscal 2020.

The year-over-year increase is primarily attributable to (i) year-over-year same-store sales growth of 44%.

We benefitted in the second quarter of fiscal 2021 from increased traffic and ticket size at our retail stores as we broadened our brand and product offerings at our retail locations, including the introduction of new value-priced dried flower products, vapes, and cannabis-infused beverages.

Additionally, we saw an increase in foot traffic as the Canadian provinces relaxed COVID-19 measures, our communities re-opened, and our stores returned to normal operations;

Net revenue in the third quarter of fiscal 2021 was $152.5 million, as compared to $123.8 million in the third quarter of fiscal 2020.

The year-over-year increase is primarily attributable to growth in other revenue, the Canadian recreational business-to-consumer channel, and revenue from C 3 .

Canadian recreational net revenue in the third quarter of fiscal 2021 was $63.4 million, as compared to $58.2 million in the third quarter of fiscal 2020.

Net revenue from the business-to-business channel in the third quarter of fiscal 2021 was $43.1 million, consistent with the $43.0 million generated in the third quarter of fiscal 2020.

Our business-to-business gross revenue improved year-over-year due primarily to (i) the overall increase in demand resulting from the opening of 305 new retail stores across Canada in the third quarter of fiscal 2021 (nearly 170 of which were in Ontario);

and (ii) the introduction of our Cannabis 2.0 products.

However, these improvements were partially offset by an unfavorable product mix due primarily to an increase in the volume of value-priced dried flower product sold compared to the prior year.

Revenue from the business-to-consumer channel in the third quarter of fiscal 2021 was $20.2 million, as compared to $15.2 million in the third quarter of fiscal 2020.

The year-over-year increase is primarily attributable to (i) the benefit of holiday promotional campaigns held in the third quarter of fiscal 2021, and the continuing broadening of our brand and product offerings at our retail locations, including the introduction of new value-priced dried flower products, vapes, and cannabis-infused beverages;

and (ii) the build-out of our retail store platform across Canada.

At September 30, 2020, we operated 32 corporate-owned Tweed and Tokyo Smoke retail stores, an increase of 11 stores from September 30, 2019.

Medical cannabis net revenue in the second quarter of fiscal 2021 was $31.4 million, as compared to $31.1 million in the second quarter of fiscal 2020.

Canadian medical net revenue in the second quarter of fiscal 2021 was $13.9 million, as compared to $13.0 million in the second quarter of fiscal 2020.

The year-over-year increase is due primarily to an increase in the average order size by our medical customers, resulting largely from (i) the continued broadening of our brand and medical cannabis product offerings available on the Spectrum Therapeutics online store;

and (ii) the convenience of our trusted e-commerce channel, which benefited from the slower-than-expected opening of recreational retail stores in Ontario in recent months due largely to the COVID-19 pandemic.

International medical revenue in the second quarter of fiscal 2021 was $17.5 million, a 3% decrease from $18.1 million in the second quarter of fiscal 2020.

Our international medical revenue in the second quarter of fiscal 2021 was comprised of revenue from C 3 and our German medical business of $13.6 million and $3.9 million, respectively, compared to $14.0 million and $4.1 million, respectively, in the second quarter of fiscal 2020.

At December 31, 2020, we operated 33 corporate-owned Tweed and Tokyo Smoke retail stores, an increase from 22 stores at December 31, 2019.

Medical cannabis net revenue in the third quarter of fiscal 2021 was $35.5 million, as compared to $32.1 million in the third quarter of fiscal 2020.

Canadian medical net revenue in the third quarter of fiscal 2021 was $13.9 million, as compared to $13.4 million in the third quarter of fiscal 2020.

The year-over-year increase is due primarily to the continued broadening of our brand and medical cannabis product offerings available on the Spectrum Therapeutics online store in response to customer demand, including the introduction of pre-rolled joints, vapes and cannabis-infused chocolates, and holiday promotions.

International medical revenue in the third quarter of fiscal 2021 was $21.5 million, as compared to $18.7 million in the third quarter of fiscal 2020.

C 3 contributed revenue of $17.6 million in the third quarter of fiscal 2021, a year-over-year increase of $2.9 million due primarily to growth in our customer base relative to the prior year.

Our German medical business contributed revenue of $3.9 million in the third quarter of fiscal 2021, consistent with the comparative period.

Other revenue is comprised of revenue related to (i) vaporizers sold by Storz & Bickel;

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(iii) sports nutrition beverages, mixes, protein, gum and mints, some of which have been infused with hemp-derived CBD isolate, sold by BioSteel;

and (iv) other strategic revenue sources such as our clinic partners.

Other revenue in the second quarter of fiscal 2021 was $43.0 million, as compared to $23.6 million in the second quarter of fiscal 2020.

The year-over-year increase of $19.4 million is primarily due to increases in revenue from both Storz & Bickel and This Works, and the acquisition of BioSteel in October 2019.

Revenue from Storz & Bickel was $21.8 million in the second quarter of fiscal 2021, a year-over-year increase of $10.9 million due primarily to the expansion of our distribution network in the United States.

Additionally, This Works contributed revenue totaling $7.8 million in the second quarter of fiscal 2021, a year-over-year increase of $2.0 million due primarily to the expansion of distribution to both direct-to-consumer and third-party e-commerce channels and new product launches.

These factors were partially offset by the impact of lower traffic at brick-and-mortar retail stores in the United Kingdom related to the COVID-19 pandemic.

(iv) our United States CBD business;

and (v) other strategic revenue sources such as our clinic partners.

Other revenue in the third quarter of fiscal 2021 was $53.7 million, as compared to $33.4 million in the third quarter of fiscal 2020.

The year-over-year increase of $20.3 million is primarily due to the continued strong performance by Storz & Bickel, revenue improvement at BioSteel, growth in our United States CBD business, and revenue growth at This Works.

Revenue from Storz & Bickel was $24.1 million in the third quarter of fiscal 2021, a year-over-year increase of $8.3 million due primarily to the expansion of our distribution network in the United States.

Additionally, This Works contributed revenue totaling $10.9 million in the third quarter of fiscal 2021, a year-over-year increase of $2.6 million due primarily to the expansion of distribution to both direct-to-consumer and third-party e-commerce channels, and new product launches.

Cost of Goods Sold and Gross Margin

Three months ended September 30,

Three months ended December 31,

(in thousands of Canadian dollars except where indicated)

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Gross margin percentage

Cost of goods sold in the second quarter of fiscal 2021 was $109.2 million, as compared to $73.0 million in the second quarter of fiscal 2020.

Our gross margin in the second quarter of fiscal 2021 was $26.1 million, or 19% of net revenue, as compared to a gross margin of $3.6 million and gross margin percentage of 5% of net revenue in the second quarter of fiscal 2020.

In the second quarter of fiscal 2021, our gross margin percentage was primarily impacted by operating costs relating to facilities not yet cultivating or producing cannabis, not yet producing cannabis-related products or having under-utilized capacity.

In the second quarter of fiscal 2021, these costs amounted to $28.2 million and primarily related to (i) start-up costs associated with our indoor cultivation facility in Newfoundland and our gummy production facility in Smiths Falls;

and (ii) under-utilized capacity associated with our chocolate factory and vape production facilities in Smiths Falls.

Comparatively, our gross margin percentage in the second quarter of fiscal 2020 was impacted by (i) charges of $17.0 million for excess finished recreational cannabis inventory recorded primarily in connection with our evaluation of the estimated on-hand provincial and territorial inventory levels at that time;

(ii) the impact on gross margin of $9.2 million reflecting the returns and pricing adjustments relating primarily to the over-supply of certain oil and softgel products;

and (iii) other adjustments related to the net realizable value of inventory.

Further, we incurred operating costs of $10.5 million relating to facilities not yet cultivating or processing cannabis, not yet producing cannabis-related products or having under-utilized capacity, primarily related to start-up costs associated with our advanced manufacturing and beverage facilities in Smiths Falls and our greenhouse in Denmark.

Cost of goods sold in the third quarter of fiscal 2021 was $127.9 million, as compared to $85.6 million in the third quarter of fiscal 2020.

Our gross margin in the third quarter of fiscal 2021 was $24.6 million, or 16% of net revenue, as compared to a gross margin of $38.2 million and gross margin percentage of 31% of net revenue in the third quarter of fiscal 2020.

The year-over-year decrease in the gross margin percentage was primarily attributable to:

Restructuring charges totaling $15.6 million recorded in the third quarter of fiscal 2021, relating primarily to the closure of several of our production facilities in Canada as described above in “Recent Developments”.

Operating costs relating to facilities not yet cultivating or producing cannabis, not yet producing cannabis-related products or having under-utilized capacity.

In the third quarter of fiscal 2021, these costs amounted to $13.9 million and primarily related to start-up costs associated with our gummy production facility in Smiths Falls and our facilities in the United States, and under-utilized capacity associated with our indoor facility in Newfoundland prior to its closure in early December, as discussed in “Recent Developments” above.

Comparatively, our gross margin percentage in the third quarter of fiscal 2020 was impacted by operating costs of $8.1 million relating to facilities not yet cultivating or processing cannabis, not yet producing cannabis-related products or having under-utilized capacity, primarily related to start-up costs associated with our advanced manufacturing and beverage facilities in Smiths Falls, our greenhouse in Denmark, and under-utilized capacity associated with our KeyLeaf extraction facility in Saskatchewan.

Operating Expenses

Three months ended September 30,

Three months ended December 31,

(in thousands of Canadian dollars)

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Selling, general and administrative expenses

Selling, general and administrative expenses in the second quarter of fiscal 2021 were $147.3 million, as compared to $181.6 million in the second quarter of fiscal 2020.

General and administrative expense in the second quarter of fiscal 2021 was $69.6 million, as compared to $94.2 million in the second quarter of fiscal 2020.

The year-over-year decrease is due primarily to:

Losses recorded in the second quarter of fiscal 2020 of $10.8 million related to legal disputes with a third-party supplier, and $8.8 million associated with additional reserves on onerous lease obligations.

These losses did not recur in the second quarter of fiscal 2021.

A reduction in costs attributable to the restructuring actions initiated in the fourth quarter of fiscal 2020, resulting from an organizational and strategic review of our business.

Accordingly, as we exited non-strategic geographies, rationalized our production capability and infrastructure footprint, and began streamlining our operations, we realized reductions related to (i) compensation costs for finance, information technology, legal and other administrative functions;

Selling, general and administrative expenses in the third quarter of fiscal 2021 were $144.1 million, as compared to $168.9 million in the third quarter of fiscal 2020.

General and administrative expense in the third quarter of fiscal 2021 was $52.1 million, as compared to $67.8 million in the third quarter of fiscal 2020.

The year-over-year decrease is due primarily to a reduction in costs attributable to the restructuring actions initiated in the fourth quarter of fiscal 2020, resulting from an organizational and strategic review of our business.

Accordingly, as we exited non-strategic geographies and began streamlining our operations, we realized reductions related to (i) compensation costs for finance, information technology, legal and other administrative functions;

(ii) facilities and insurance costs;

and (iii) scaling-back on our expansion and business development initiatives.

Partially offsetting these cost reductions was a year-over-year increase in third-party professional fees associated with the organizational and strategic review of our business, and third-party information technology costs to support our business.

Sales and marketing expense in the second quarter of fiscal 2021 was $43.4 million, as compared to $62.1 million in the second quarter of fiscal 2020.

In the comparative prior period we incurred (i) costs attributable to product marketing and brand awareness advertising and media campaigns in support of the launch of our Cannabis 2.0 portfolio of products and the launch of our First & Free line of CBD products in the United States, and (ii) staffing costs associated with servicing our Canadian and United States markets in the areas of creative design and advertising, brand insights and launch support, and brand management.

These costs did not recur to the same extent in the second quarter of fiscal 2021, as we rationalized our Canadian marketing organization in April 2020, delayed or cancelled various planned product and brand marketing initiatives across our business due to measures established to contain the spread of the COVID-19 pandemic, and incurred significantly reduced travel costs due to travel restrictions.

The above factors that resulted in a year-over-year decrease in sales and marketing expense were partially offset by (i) higher advertising and promotion expenses associated with new market awareness campaigns in support of price changes and new product launches for our Canadian recreational cannabis business, and in support of the Martha Stewart line of CBD products in the United States;

and (ii) the growth in our business as compared to the second quarter of fiscal 2020 resulting primarily from the acquisitions of C 3 in April 2019, This Works in May 2019 and BioSteel in October 2019.

Research and development expense in the second quarter of fiscal 2021 was $14.2 million, as compared to $11.9 million in the second quarter of fiscal 2020.

The year-over-year increase is primarily attributable to (i) higher third-party professional fees,

particularly associated with conducting research and testing for dronabinol-based health products and therapies.

Specifically, costs increased year-over-year due to the acquisition of C 3 in April 2019;

and (ii) costs related to research and develop ment of patent-protected technology, most notably in relation to product innovation, plant science and extraction technology.

The above factors that result ed in a year-over-year increase in research and development expense were partially offset by lower third-party professional fees associated with a refocusing of Spectrum Therapeutics’ research objectives.

Acquisition-related costs in the second quarter of fiscal 2021 were $3.5 million, as compared to $2.6 million in the second quarter of fiscal 2020.

In the second quarter of fiscal 2021, costs were incurred in relation to implementing the Amended Arrangement with Acreage, as described in “Recent Developments” above.

Comparatively, in the second quarter of fiscal 2020, costs were incurred primarily in relation to the acquisition of BioSteel, which closed in October 2019, and evaluating other potential acquisition opportunities.

Depreciation and amortization expense in the second quarter of fiscal 2021 was $16.7 million, as compared to $10.8 million in the second quarter of fiscal 2020.

The year-over-year increase is primarily attributable to the growth in our business over the past year with the acquisitions of C 3 , BioSteel and This Works, and our investment in the build-out of our infrastructure across Canada over the past year.

(iii) scaling-back on our expansion and business development initiatives;

and (iv) other professional consulting fees.

Sales and marketing expense in the third quarter of fiscal 2021 was $53.7 million, as compared to $63.4 million in the third quarter of fiscal 2020.

In the comparative prior period we incurred costs attributable to product marketing and brand awareness advertising and media campaigns largely in support of the launch and penetration of our Cannabis 2.0 portfolio of products in Canada.

These costs did not recur to the same extent in the third quarter of fiscal 2021.

This decrease was partially offset by (i) an increase in sponsorship fees relating to BioSteel’s partnerships deals with the Toronto Raptors and Dallas Mavericks, and promotional and sales and marketing staff compensation costs supporting BioSteel’s launch of ready-to-drink beverages across the United States through their distribution network;

and (ii) increased brand and advertisement agency spending in support of our United States CBD business.

Research and development expense in the third quarter of fiscal 2021 was $14.0 million, as compared to $20.8 million in the third quarter of fiscal 2020.

The year-over-year decrease is primarily attributable to a reduction in costs due to the restructuring actions initiated in the fourth quarter of fiscal 2020 and continuing throughout fiscal 2021.

As we rationalized our research and development activities, we realized reductions in compensation costs and curtailed certain research and development projects for which we had incurred costs in the third quarter of fiscal 2020.

Acquisition-related costs in the third quarter of fiscal 2021 were $3.1 million, relatively consistent with $3.3 million in the third quarter of fiscal 2020.

In the third quarter of fiscal 2021, costs were incurred in relation to the Canopy Rivers Arrangement Agreement, as described in “Recent Developments” above, and evaluating other potential acquisition opportunities.

Comparatively, in the third quarter of fiscal 2020, we completed the acquisitions of BioSteel and the unowned interest in Beckley Canopy Therapeutics (“BCT”), and the transaction to launch More Life Growth Company (“More Life”).

Depreciation and amortization expense in the third quarter of fiscal 2021 was $21.2 million, as compared to $13.7 million in the third quarter of fiscal 2020.

The year-over-year increase is primarily attributable to the growth in our network of corporate-owned

Tweed and Tokyo Smoke retail stores, the implementation of information technology software projects, and the growth in our business through acquisitions .

Share-based compensation expense

Share-based compensation expense in the second quarter of fiscal 2021 was $19.9 million, as compared to $83.8 million in the second quarter of fiscal 2020.

Share-based compensation expense in the third quarter of fiscal 2021 was $18.3 million, as compared to $56.8 million in the third quarter of fiscal 2020.

The year-over-year decrease is primarily attributable to:

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The decrease in the number of stock option grants from fiscal 2019 to fiscal 2020 was due to the modification of our share-based compensation program in fiscal 2020;

only 295,451 options were granted in the six months ended September 30, 2020, as compared to 5.3 million in the comparative period;

The forfeiture or cancellation of 5.9 million stock options in fiscal 2020 and another 5.5 million stock options in the six months ended September 30, 2020 resulting primarily from restructuring actions commenced in the fourth quarter of fiscal 2020.

only 433,199 options were granted in the nine months ended December 31, 2020, as compared to 8.3 million in the comparative period;

The forfeiture or cancellation of 5.9 million stock options in fiscal 2020 and the forfeiture of another 7.3 million stock options in the nine months ended December 31, 2020 resulting primarily from restructuring actions commenced in the fourth quarter of fiscal 2020.

These forfeitures and cancellations also contributed to a year-over-year reduction in share-based compensation expense.

As a result of the changes described above to our share-based compensation program leading to a reduction in the number of stock option grants, and the forfeiture or cancellation of stock options in recent quarters, 25.9 million stock options were outstanding at September 30, 2020, as compared to 32.9 million at September 30, 2019.

Share-based compensation expense related to acquisition milestones in the second quarter of fiscal 2021 was $2.1 million, as compared to $9.1 million in the second quarter of fiscal 2020.

As a result of the changes described above to our share-based compensation program leading to a reduction in the number of stock option grants, stock option exercises and the forfeiture of stock options in recent quarters, 22.5 million stock options were outstanding at December 31, 2020, as compared to 33.6 million at December 31, 2019.

Share-based compensation expense related to acquisition milestones in the third quarter of fiscal 2021 was $1.6 million, as compared to $4.9 million in the third quarter of fiscal 2020.

The year-over-year decrease is primarily related to the restructuring of our operations in Colombia in the fourth quarter of fiscal 2020, which resulted in the acceleration of share-based compensation expense related to the unvested milestones associated with the acquisitions of Spectrum Colombia S.A.S.

(“Spectrum Colombia”) and Canindica Capital Ltd.

(“Canindica”) (as a result, there is no remaining share-based compensation expense to be recognized in association with these acquisitions);

and (ii) the achievement, in earlier quarters, of major milestones associated with the acquisitions of Spectrum Colombia, Canindica, and Spectrum Cannabis Denmark Aps (“Spectrum Denmark”), which had resulted in the recognition of share-based compensation expense at that time.

(“Canindica”).

As a result, there is no remaining share-based compensation expense to be recognized in association with the Spectrum Colombia acquisition, and only a minimal amount of remaining share-based compensation expense to be recognized in association with the Canindica acquisition.

Expected credit losses on financial assets and related charges

In the second quarter of fiscal 2021, we recorded expected credit losses on financial assets and related charges in the amount of $94.7 million, as discussed in “Recent Developments” above.

In the third quarter of fiscal 2021, we recorded expected credit losses on financial assets and related charges in the amount of $13.7 million, in relation to our equity investment in PharmHouse, as discussed in “Recent Developments” above.

Asset impairment and restructuring costs

Asset impairment and restructuring costs recorded in operating expenses in the second quarter of fiscal 2021 were $46.4 million.

We recorded (i) adjustments related to changes in the estimated fair value of certain of our Canadian production facilities from March 31, 2020;

and (ii) charges related to rationalizing certain research and development activities.

Three months ended September 30,

Asset impairment and restructuring costs recorded in operating expenses in the third quarter of fiscal 2021 were $400.4 million.

Due to the restructuring actions resulting in the closure of certain of our sites in Canada in the third quarter of fiscal 2021 as described in “Recent Developments” above, we abandoned or impaired certain of our production facilities and intangible assets.

A loss totaling $352.6 million was recognized in the third quarter of fiscal 2021 representing the difference between the net book value of the long-lived assets and their estimated salvage value or fair value.

Of this loss, $298.2 million related to property, plant and equipment and $54.4 million related to facility licenses and other intangible assets.

The losses related to property, plant and equipment were primarily attributable to buildings and greenhouses, production and warehouse equipment, and right-of-use assets.

Additionally, we recognized contractual and other settlement obligations of $13.1 million and employee-related and other restructuring costs of $1.9 million.

Additionally, as a result of the sale of our production facilities in Aldergrove and Delta, British Columbia in December 2020 and January 2021, respectively, and the completion of our strategy shift in Latin America that we commenced in the fourth quarter of fiscal 2020, we recognized a loss totaling $28.4 million in the third quarter of fiscal 2021 representing the difference between the net book value of the long-lived assets and their selling prices.

Additionally, we recognized costs totaling $4.4 million related to contractual and other settlement obligations, employee-related costs, and other restructuring costs associated with the remediation of damages caused by the fire at the Delta facility in November, the closure of the facilities in British Columbia, and their sale.

Three months ended December 31,

(in thousands of Canadian dollars)

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Other income (expense), net

Income tax (expense) recovery

Income tax recovery

Loss from equity method investments

The loss from equity method investments in the second quarter of fiscal 2021 was $33.0 million, as compared to $2.2 million in the second quarter of fiscal 2020.

The year-over-year increase in the loss is primarily attributable to impairment charges of $32.4 million recognized in the second quarter of fiscal 2021 relating to our equity method investment in PharmHouse, as discussed in “Recent Developments” above.

The loss from equity method investments in the third quarter of fiscal 2021 was $0.7 million, as compared to $2.7 million in the third quarter of fiscal 2020.

The year-over-year decrease in the loss is primarily attributable to (i) the impairment of our equity investment in PharmHouse in the second quarter of fiscal 2021, as no further equity method losses were recognized in respect of this equity investment in the third quarter of fiscal 2021;

and (ii) improved performance by CanapaR prior to its sale by Canopy Rivers in late December 2020.

Other income (expense), net

Other income (expense), net in the second quarter of fiscal 2021 was $221.3 million, as compared to $509.9 million in the second quarter of fiscal 2020.

The year-over-year decrease of $288.6 million is primarily attributable to:

A decrease in non-cash income of $576.7 million related to fair value changes on the warrant derivative liability associated with the Tranche B Warrants held by CBI.

The decrease of $65.2 million in the fair value of the warrant derivative liability (resulting in non-cash income) in the second quarter of fiscal 2021 is primarily attributable to a decline of approximately 15% in our share price from July 1, 2020 to September 30, 2020 and changes during the quarter in certain other assumptions used to value the liability, including the risk-free interest rate.

Comparatively, the decrease of $641.9 million in the fair value of the warrant derivative liability in the second quarter of fiscal 2020 was attributable to a decline of approximately 42% in our share price from July 1, 2019 to September 30, 2019.

Change of $176.3 million, from an income amount of $164.4 million in the second quarter of fiscal 2020 to an expense amount of $11.9 million in the second quarter of fiscal 2021, related to the non-cash fair value changes on our senior convertible notes.

The year-over-year change is primarily due to the larger decline in our share price in the second quarter of fiscal 2020 (approximately 42%) relative to the decline in the second quarter of fiscal 2021 (15%), along with year-over-year changes in credit spreads.

A decrease in interest income of $13.7 million, primarily attributable to the year-over-year decrease in our cash and cash equivalents and short-term investments balances and lower interest rates relative to the prior year.

Change of $323.3 million related to the fair value changes on the liability arising from the Acreage Arrangement, from an expense amount of $235.2 million in the second quarter of fiscal 2020 to an income amount of $88.2 million in the second quarter of fiscal 2021.

The current quarter income amount, associated with a decrease in the liability arising from the Acreage Arrangement, is primarily attributable to the implementation of the Amended Arrangement with Acreage in September 2020, as described above in “Recent Developments”.

On a quarterly basis, we determine the fair value of the Acreage financial instrument using a probability-weighted expected return model, incorporating several potential scenarios and outcomes associated with our arrangement with Acreage.

The implementation of the Amended Arrangement in September 2020 resulted in (i) an incremental payment to Acreage shareholders of US$37.5 million ($49.8 million);

(ii) the loan advance of US$50.0 million ($67.0 million) to Acreage Hempco pursuant to the debenture and the removal of the estimated discount on the loan, now captured through the loan’s recognition at fair value at September 30, 2020;

and (iii) the removal of the uncertainties related to the approval and implementation of the terms of the Amended Arrangement, including the reset of the exchange ratio, that existed at June 30, 2020 and had impacted our model and resulted in a higher liability amount at that time.

Comparatively, the expense amount of $235.2 million in the second quarter of fiscal 2020 was primarily attributable to overall declines in both Canopy Growth’s and Acreage’s share prices, as well as share prices across multi-state cannabis operators in the United States.

Change of $151.8 million related to non-cash fair value changes on our other financial assets, from an expense amount of $69.7 million in the second quarter of fiscal 2020 to an income amount of $82.1 million in the second quarter of fiscal 2021.

The current quarter changes are primarily attributable to fair value increases relating to our investments in the TerrAscend exchangeable shares ($61.0 million), and the TerrAscend Canada secured debenture and TerrAscend warrants (totaling $55.9 million), driven largely by an increase of approximately 101% in TerrAscend’s share price from July 1 to September 30, 2020.

Comparatively, in the second quarter of fiscal 2020 the expense amount was primarily driven by decreases of $40.0 million and $25.0 million in the fair value of our exchangeable shares in TerrAscend and warrants in the capital of SLANG Worldwide Inc., respectively, which were in-line with declines in share prices across multi-state cannabis operators in the United States.

Partially offsetting these year-over-year fair value increases was a fair value decrease of $23.3 million representing the difference between the loan advanced to Acreage Hempco, and the debenture’s estimated fair value using a discounted cash

The discount resulted from our assessment of the market interest rate currently available on comparable issuances of debt relative to the debenture’s stated interest rate of 6.1% per annum.

Income tax (expense) recovery

Income tax expense in the second quarter of fiscal 2021 was $0.6 million, compared to income tax recovery of $5.8 million in the second quarter of fiscal 2020.

In the second quarter of fiscal 2021, the income tax expense consisted of a deferred income tax recovery of $1.1 million (compared to a recovery of $11.9 million in the second quarter of fiscal 2020) and current income tax expense of $1.6 million (compared to an expense of $6.1 million in the second quarter of fiscal 2020).

Other income (expense), net in the third quarter of fiscal 2021 was an expense amount of $290.6 million, as compared to an income amount of $58.0 million in the third quarter of fiscal 2020.

The year-over-year change of $348.5 million from an income amount to an expense amount is primarily attributable to:

Change of $276.5 million related to fair value changes on the warrant derivative liability associated with the Tranche B Warrants held by CBI, from an income amount of $82.5 million in the third quarter of fiscal 2020 to an expense amount of $194.0 million in the third quarter of fiscal 2021.

The increase of $194.0 million in the fair value of the warrant derivative liability (resulting in non-cash expense) in the third quarter of fiscal 2021 is primarily attributable to an increase of approximately 64% in our share price from October 1, 2020 to December 31, 2020, partially offset by changes during the quarter in certain other assumptions used to value the liability, including the risk-free interest rate.

Comparatively, the decrease of $82.5 million in the fair value of the warrant derivative liability in the third quarter of fiscal 2020 was attributable to a decline of approximately 5% in our share price from October 1, 2019 to December 31, 2019.

Increase in non-cash expense of $273.0 million related to the fair value changes on the liability arising from the Acreage Arrangement, from $30.0 million in the third quarter of fiscal 2020 to $303.0 million in the third quarter of fiscal 2021.

On a quarterly basis, we determine the fair value of the liability arising from the Acreage Arrangement using a probability-weighted expected return model, incorporating several potential scenarios and outcomes associated with the Acreage Arrangement.

The current quarter expense amount, associated with an increase in the liability arising from the Acreage Arrangement, is primarily attributable to an increase of approximately 64% in our share price from October 1, 2020 to December 31, 2020, relative to an increase of approximately 2% in Acreage’s share price during that same period.

As a result, the model in the third quarter of fiscal 2021 reflects a higher estimated value of the Canopy Growth shares expected to be issued at the exchange ratio of 0.3048 upon a Triggering Event, relative to the estimated value of the Acreage shares expected to be acquired at that time.

Comparatively, the expense amount of $30.0 million in the third quarter of fiscal 2020 was primarily attributable to overall declines, in that quarter, in both Canopy Growth’s and Acreage’s share prices.

Change of $82.2 million related to the non-cash fair value changes on our senior convertible notes, from an income amount of $6.7 million in the third quarter of fiscal 2020 to an expense amount of $75.5 million in the third quarter of fiscal 2021.

The year-over-year change is primarily due to the increase of approximately 64% in our share price from October 1, 2020 to December 31, 2020, as compared to a decline of approximately 5% in our share price in the third quarter of fiscal 2020.

In the third quarter of fiscal 2020, we recognized gains of $61.8 million in relation to (i) our acquisition of the unowned interest in BCT, which increased our total ownership to 100% of BCT’s issued and outstanding shares ($39.5 million);

and (ii) our disposal of a previously-consolidated subsidiary in conjunction with the transaction completed to launch More Life ($22.3 million).

No such transactions resulting in gains occurred in the third quarter of fiscal 2021.

Change of $358.7 million related to non-cash fair value changes on our other financial assets, from an expense amount of $77.3 million in the third quarter of fiscal 2020 to an income amount of $281.4 million in the third quarter of fiscal 2021.

The current quarter income amount is primarily attributable to fair value increases relating to our investments in the TerrAscend exchangeable shares ($210.0 million), and the TerrAscend Canada secured debenture and TerrAscend warrants (totaling $86.4 million), driven largely by an increase of approximately 120% in TerrAscend’s share price from October 1 to December 31, 2020 and a re-assessment of the probability and timing of changes in federal laws in the United States regarding the permissibility of the cultivation, distribution or possession of marijuana.

Partially offsetting these year-over-year fair value increases was a fair value decrease of $15.0 million representing the difference between the loan advanced to a wholly-owned subsidiary of Acreage (“Acreage Hempco”) and the debenture’s estimated fair value measured using a discounted cash flow model.

Comparatively, in the third quarter of fiscal 2020 the expense amount was primarily driven by a decrease of $42.0

million i n the fair value of our exchangeable shares in TerrAscend , primarily attributable to a decline in TerrAscend’s share price during the quarter, and fair value decreases for several of our other investments which were in-line with the broader decline in the Canadian cannabis market at that time .

Income tax recovery

Income tax recovery in the third quarter of fiscal 2021 was $15.6 million, compared to income tax recovery of $27.4 million in the third quarter of fiscal 2020.

In the third quarter of fiscal 2021, the income tax recovery consisted of a deferred income tax recovery of $16.6 million (compared to a recovery of $33.9 million in the third quarter of fiscal 2020) and current income tax expense of $1.0 million (compared to an expense of $6.5 million in the third quarter of fiscal 2020).

The decrease of $17.3 million in the deferred income tax recovery is primarily a result of (i) recording a reduction in deferred tax liabilities that arose in connection with the required revaluation of the accounting carrying value, but not the tax basis, of property, plant and equipment, intangible assets, and other financial assets;

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The decrease of $5.5 million in the current income tax expense arose primarily in connection with acquired legal entities that generated income for tax purposes during prior periods that could not be reduced by the group’s tax attributes but whose current period income will now be reduced by the group’s tax attributes.

Net (Loss) Income

Net loss in the second quarter of fiscal 2021 was $96.6 million, as compared to net income of $242.7 million in the second quarter of fiscal 2020.

The year-over-year change from net income to net loss is primarily attributable to the year-over-year decrease in other income (expense), net, and the other variances described above.

The net loss in the third quarter of fiscal 2021 was $829.3 million, as compared to a net loss of $109.6 million in the third quarter of fiscal 2020.

The year-over-year increase in the net loss is primarily attributable to the year-over-year change in other income (expense), net, the asset impairment and restructuring costs recognized in the third quarter of fiscal 2021, and the other variances described above.

Segmented Analysis

In the second quarters of fiscal 2021 and fiscal 2020, all of our revenue was earned by the Cannabis, Hemp and Other Consumer Products segment.

Canopy Rivers contributed a net loss of $91.8 million in the second quarter of fiscal 2021, of which $24.7 million was attributable to Canopy Growth.

In the second quarter of fiscal 2020, Canopy Rivers contributed a net loss of $2.7 million, of which $0.7 million was attributable to Canopy Growth.

The increase in the net loss reflects the impairment losses and expected credit losses related to the PharmHouse equity method investment and associated financial assets, as described under “Recent Developments” above.

In the third quarters of fiscal 2021 and fiscal 2020, all of our revenue was earned by the Cannabis, Hemp and Other Consumer Products segment.

Canopy Rivers contributed net income of $101.7 million in the third quarter of fiscal 2021, of which $27.5 million was attributable to Canopy Growth.

In the third quarter of fiscal 2020, Canopy Rivers contributed a net loss of $5.1 million, of which $1.4 million was attributable to Canopy Growth.

The change from a net loss to net income is primarily attributable to fair value increases relating to Canopy Rivers’ investments in the TerrAscend exchangeable shares, for the reasons noted above.

Refer to “Recent Developments” above for a description of the Canopy Rivers Arrangement Agreement.

Adjusted EBITDA (Non-GAAP Measure)

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GAAP and may not be comparable to similar measures presented by other companies.

Management calculates Adjusted EBITDA as the reported net (loss) income, adjusted to exclude income tax recovery (expense);

Management calculates Adjusted EBITDA as the reported net loss, adjusted to exclude income tax recovery (expense);

other income (expense), net;

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expected credit losses on financial assets and related charges;

restructuring costs recorded in cost of goods sold;

and charges related to the flow-through of inventory step-up on business combinations, and further adjusted to remove acquisition-related costs.

Accordingly, management believes that Adjusted EBITDA provides meaningful and useful financial information as this measure demonstrates the operating performance of businesses.

The following table presents Adjusted EBITDA for the three months ended September 30 , 2020 and 2019:

Three months ended September 30,

The following table presents Adjusted EBITDA for the three months ended December 31, 2020 and 2019:

Three months ended December 31,

(in thousands of Canadian dollars)

Net (loss) income

Income tax expense (recovery)

Income tax recovery

Other (income) expense, net

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and related charges

Charges related to the flow-through of inventory

step-up on business combinations

Restructuring costs recorded in cost of goods sold

Adjusted EBITDA 2

1 From Condensed Interim Consolidated Statements of Cash Flows.

2 Adjusted EBITDA is a non-GAAP measure and is calculated as the reported net (loss) income, adjusted to exclude income tax (expense) recovery;

2 Adjusted EBITDA is a non-GAAP measure and is calculated as the reported net loss, adjusted to exclude income tax (expense) recovery;

other income (expense), net;

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expected credit losses on financial assets and related charges;

restructuring costs recorded in cost of goods sold;

and charges related to the flow-through of inventory step-up on business combinations, and further adjusted to remove acquisition-related costs.

The Adjusted EBITDA loss in the second quarter of fiscal 2021 was $85.7 million, as compared to the Adjusted EBITDA loss of $150.4 million in the second quarter of fiscal 2020.

The year-over-year decrease in the Adjusted EBITDA loss is primarily attributable to the improvement in our gross margin percentage, and a year-over-year reduction in our selling, general and administrative expense.

Discussion of Results of Operations for the Six Months Ended September 30, 2020

Six months ended September 30,

(in thousands of Canadian dollars, except share amounts and where otherwise indicated)

The Adjusted EBITDA loss in the third quarter of fiscal 2021 was $68.4 million, as compared to the Adjusted EBITDA loss of $97.0 million in the third quarter of fiscal 2020.

The year-over-year decrease in the Adjusted EBITDA loss is primarily attributable to the year-over-year reduction in our selling, general and administrative expense, as discussed above.

Discussion of Results of Operations for the Nine Months Ended December 31, 2020

Nine months ended December 31,

(in thousands of Canadian dollars, except share amounts and

where otherwise indicated)

Selected financial information:

Gross margin percentage

Net (loss) income

Net (loss) income attributable to Canopy Growth

(Loss) earnings per share - basic

(Loss) earnings per share - diluted 1

1 For the six months ended September 30, 2020, the weighted average number of outstanding common shares, basic and diluted, totaled 367,663,135.

For the six months ended September 30, 2019, the weighted average number of outstanding common shares, basic and diluted, totaled 346,028,903 and 382,765,533, respectively.

Net loss attributable to Canopy Growth

Loss per share - basic and diluted 1

1 For the nine months ended December 31, 2020, the weighted average number of outstanding common shares, basic and diluted, totaled 369,418,037.

For the nine months ended December 31, 2019, the weighted average number of outstanding common shares, basic and diluted, totaled 346,877,660.

Revenue by Channel

Six months ended September 30,

Nine months ended December 31,

(in thousands of Canadian dollars)

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Other revenue

1 Reflects excise taxes of $21,446 and other revenue adjustments, representing our determination of returns and pricing adjustments, of $7,150 for the six months ended September 30, 2020 (six months ended September 30, 2019 - excise taxes of $19,367 and other revenue adjustments of $40,727).

2 Reflects excise taxes of $2,788 for the six months ended September 30, 2020 (six months ended September 30, 2019 - $2,550).

1 Reflects excise taxes of $37,423 and other revenue adjustments, representing our determination of returns and pricing adjustments, of $10,900 for the nine months ended December 31, 2020 (nine months ended December 31, 2019 - excise taxes of $29,824 and other revenue adjustments of $46,070).

2 Reflects excise taxes of $4,190 for the nine months ended December 31, 2020 (nine months ended December 31, 2019 - $3,875).

Revenue by Form

Six months ended September 30,

Nine months ended December 31,

(in thousands of Canadian dollars)

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1 Excludes the impact of other revenue adjustments.

Net revenue in the six months ended September 30, 2020 was $245.7 million, as compared to $167.1 million in the six months ended September 30, 2019.

The year-over-year increase is primarily attributable to (i) the increase in Canadian recreational net revenue;

(ii) the increase in other revenue resulting from strong performance by Storz & Bickel, a full six months of revenue contribution from This Works (acquired in May 2019), and the acquisition of BioSteel in October 2019;

and (iii) the increase in medical net revenue, which was primarily due to a full six months of revenue contribution from C 3 (acquired in April 2019), and year-over-year growth in our German and Canadian medical businesses.

Canadian recreational net revenue in the six months ended September 30, 2020 was $105.2 million, as compared to $71.5 million in the six months ended September 30, 2019.

Net revenue from the business-to-business channel in the six months ended September 30, 2020 was $77.2 million, as compared to $47.7 million in the six months ended September 30, 2019.

Net revenue in the six months ended September 30, 2019 was impacted by other revenue adjustments in the amount of $40.7 million related to our determination, at that time, of returns and pricing adjustments associated primarily to the risk of over-supply of certain oil and softgel products.

We also benefited in the current period from (i) an overall increase in demand resulting from the opening of over 315 new retail stores across Canada in the six months ended September 30, 2020;

and (ii) the introduction of our portfolio of Cannabis 2.0 product offerings, which represented approximately 10% of gross revenue from the business-to-business channel.

Net revenue in the nine months ended December 31, 2020 was $398.2 million, as compared to $290.9 million in the nine months ended December 31, 2019.

The year-over-year increase is primarily attributable to growth in other revenue, growth across both the Canadian recreational business-to-business and business-to-consumer channels, and growth in C 3 revenue due both to strong performance and a full nine months of revenue contribution.

Canadian recreational net revenue in the nine months ended December 31, 2020 was $168.5 million, as compared to $129.7 million in the nine months ended December 31, 2019.

Net revenue from the business-to-business channel in the nine months ended December 31, 2020 was $120.3 million, as compared to $90.7 million in the nine months ended December 31, 2019.

Net revenue in the nine months ended December 31, 2019 was impacted by other revenue adjustments in the amount of $46.7 million related to our determination, primarily in the first two quarters of fiscal 2020, of returns and pricing adjustments associated primarily to the risk of over-supply of certain oil and softgel products.

We also benefited in the current period from (i) an overall increase in demand resulting from the opening of over 620 new retail stores across Canada in the nine months ended December 31, 2020;

and (ii) the introduction of our portfolio of Cannabis 2.0 product offerings.

These favorable year-over-year variances were partially offset by lower sales of our dry bud products.

We took steps to reposition our product offerings in the value-priced dried flower category in the first quarter of fiscal 2021, the effect of which contributed to a year-over-year improvement in our sales in this category in the second quarter of fiscal 2021.

However, increased competition in that particular category of the recreational market – in the form of the number of competitive offerings, particularly those with higher THC potency, and aggressive pricing strategies adopted by some market participants – impacted sales of our dry bud products in the first quarter of fiscal 2021 and resulted in a decline in our dry bud sales during the six months ended September 30, 2020 as compared to the prior year.

Revenue from the business-to-consumer channel in the six months ended September 30, 2020 was $28.0 million, as compared to $23.7 million in the six months ended September 30, 2019.

We took steps to reposition our product offerings in the value-priced dried flower category in the first quarter of fiscal 2021, the effect of which began contributing to year-over-year improvement in our sales in this category in the second quarter of fiscal 2021.

Additionally, we were impacted by an unfavorable product mix due primarily to an increase in the volume of value-priced dried flower product sold compared to the prior year.

Revenue from the business-to-consumer channel in the nine months ended December 31, 2020 was $48.3 million, as compared to $39.0 million in the nine months ended December 31, 2019.

The year-over-year increase is primarily attributable to (i) increased traffic and ticket size at our retail stores, due largely to the broadening of our brand and product offerings at our retail locations, including the introduction of new value-priced dried flower products, vapes, and cannabis-infused beverages;

and (ii) the build-out of our retail store platform across Canada to 32 corporate-owned Tweed and Tokyo Smoke retail stores at September 30, 2020, a year-over-year increase of 11 stores.

and (ii) the build-out of our retail store platform across Canada to 33 corporate-owned Tweed and Tokyo Smoke retail stores at December 31, 2020, an increase from 22 stores at December 31, 2019.

Partially offsetting this increase was the adverse impact, predominantly in the first quarter of fiscal 2021, of the temporary closure of our retail stores in response to the COVID-19 pandemic and their re-opening, beginning in mid-April, with reduced hours and under a “click-and-collect” model with curbside pickup or delivery.

Medical cannabis net revenue in the six months ended September 30, 2020 was $65.5 million, as compared to $53.2 million in the six months ended September 30, 2019.

Canadian medical net revenue in the six months ended September 30, 2020 was $27.8 million, as compared to $24.7 million in the six months ended September 30, 2019.

The year-over-year increase is due primarily to (i) the prior year period being impacted by the transition of our medical customers to the Spectrum Therapeutics online store and its more medical-focused range of cannabis products prior to the opening of the Canadian recreational market in October 2018 (since that transition, we have broadened our brand and medical cannabis product offerings available on the Spectrum Therapeutics online store in response to medical customer demand);

and (ii) the convenience of our trusted e-commerce channel, which has been benefitting from the slower-than-expected opening of recreational retail stores in Ontario in fiscal 2021 due largely to the COVID-19 pandemic.

International medical revenue in the six months ended September 30, 2020 was $37.7 million, as compared to $28.6 million in the six months ended September 30, 2019.

C 3 (acquired in April 2019) contributed a full six months of revenue totaling $28.9 million in the current period, a year-over-year increase of $6.1 million.

Additionally, the year-over-year growth in our German medical business of $3.0 million is primarily attributable to the resolution of supply constraints we had experienced early in the prior fiscal year, and which were largely associated with the opening of the recreational cannabis market in Canada.

Other revenue in the six months ended September 30, 2020 was $75.0 million, as compared to $42.4 million in the six months ended September 30, 2019.

The year-over-year increase of $32.6 million is primarily due to an increase in revenue from Storz & Bickel, a full six months of revenue contribution from both This Works (acquired in May 2019), and the acquisition of BioSteel in October 2019.

Revenue from Storz & Bickel was $39.0 million in the six months ended September 30, 2020, a year-over-year increase of $18.4 million due primarily to strong sales performance and an expansion of our distribution network in the United States.

Additionally, This Works contributed a full period of revenue totaling $13.9 million in the six months ended September 30, 2020, a year-over-year increase of $5.7 million due primarily to one incremental month of contribution in the six months ended September 30, 2020, the expansion of distribution to both direct-to-consumer and third-party e-commerce channels, and new product launches.

These factors were only partially offset by the impact of the closure of brick-and-mortar retail stores and measures in relation to the COVID-19 pandemic.

Medical cannabis net revenue in the nine months ended December 31, 2020 was $100.9 million, as compared to $85.4 million in the nine months ended December 31, 2019.

Canadian medical net revenue in the nine months ended December 31, 2020 was $41.7 million, as compared to $38.1 million in the nine months ended December 31, 2019.

The year-over-year increase is due primarily to (i) the continued broadening of our brand and medical cannabis product offerings available on the Spectrum Therapeutics online store in response to medical customer demand, including the introduction pre-rolled joints, vapes and cannabis-infused chocolates;

and (ii) the convenience of our trusted medical cannabis e-commerce channel, which has been benefitting from the slower-than-expected opening of recreational retail stores in Ontario in fiscal 2021.

International medical revenue in the nine months ended December 31, 2020 was $59.2 million, as compared to $47.3 million in the nine months ended December 31, 2019.

C 3 (acquired in April 2019) contributed revenue totaling $46.6 million in the current period, a year-over-year increase of $9.0 million.

In addition to the full nine months of revenue contribution in the current period, revenue growth was driven by an expansion of C 3 ’s customer base relative to the prior year.

Our German medical business contributed revenue of $12.6 million, resulting in year-over-year growth of $2.9 million primarily attributable to the resolution of supply constraints we had experienced early in the prior fiscal year, and which were largely associated with the opening of the recreational cannabis market in Canada.

Other revenue in the nine months ended December 31, 2020 was $128.7 million, as compared to $75.8 million in the nine months ended December 31, 2019.

The year-over-year increase of $53.0 million is primarily due to an increase in revenue from Storz & Bickel, a full nine months of revenue contribution from both This Works (acquired in May 2019) and BioSteel (acquired in October 2019), and the growth in our United States CBD business.

Revenue from Storz & Bickel was $63.1 million in the nine months ended December 31, 2020, a year-over-year increase of $26.6 million due primarily to an expansion of our distribution network in the United States.

Additionally, This Works contributed a full period of revenue totaling $24.8 million in the nine months ended December 31, 2020, a year-over-year increase of $8.4 million due primarily to one incremental month of contribution in the nine months ended December 31, 2020, the expansion of distribution to both direct-to-consumer and third-party e-commerce channels, and new product launches.

These factors were only partially offset by the impact of the temporary closure of brick-and-mortar retail stores and measures in relation to the COVID-19 pandemic, largely in the first quarter and late in the third quarter of fiscal 2021.

Cost of Goods Sold and Gross Margin

Six months ended September 30,

Nine months ended December 31,

(in thousands of Canadian dollars except where indicated)

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Gross margin percentage

Cost of goods sold in the six months ended September 30, 2020 was $213.1 million, as compared to $145.2 million in the six months ended September 30, 2019.

Our gross margin in the six months ended September 30, 2020 was $32.6 million, or 13% of net revenue, as compared to a gross margin of $21.9 million and gross margin percentage of 13% of net revenue in the six months ended September 30, 2019.

In the six months ended September 30, 2020, our gross margin percentage was adversely impacted by the following:

Cost of goods sold in the nine months ended December 31, 2020 was $341.1 million, as compared to $230.7 million in the nine months ended December 31, 2019.

Our gross margin in the nine months ended December 31, 2020 was $57.2 million, or 14% of net revenue, as compared to a gross margin of $60.1 million and gross margin percentage of 21% of net revenue in the nine months ended December 31, 2019.

The year-over-year decrease in the gross margin percentage was primarily attributable to:

The impact of operating costs relating to facilities not yet cultivating or producing cannabis, not yet producing cannabis-related products or having under-utilized capacity.

In the six months ended September 30, 2020, these costs amounted to $36.9 million and primarily related to (i) start-up costs associated with our indoor cultivation facility in Newfoundland, our gummy production facility in Smiths Falls, and our greenhouse in Denmark, and (ii) under-utilized capacity associated with our chocolate, beverage and vape production facilities in Smiths Falls;

Lower production output in the six months ended September 30, 2020, particularly in Canada, to align with current and expected market demand.

In the nine months ended December 31, 2020, these costs amounted to $50.8 million and primarily related to (i) start-up costs associated with our gummy production facility in Smiths Falls, our facilities in the United States, and our greenhouse in Denmark;

and (ii) under-utilized capacity associated with our chocolate, beverage and vape production facilities in Smiths Falls, and our indoor facility in Newfoundland prior to its closure in early December, as discussed in “Recent Developments” above;

Lower production output, particularly in the first quarter of fiscal 2021 in Canada, to align with market demand at that time and expected market demand.

Lower production output, coupled with (i) our fixed costs representing a high proportion of our overall cultivation and manufacturing cost structure;

and (ii) the gradual reduction of our variable costs late in the current period, resulted in the under-absorption of these fixed and variable costs and an adverse impact on gross margin in the current period.

In connection with these changes to our production strategy we also adjusted our cannabis production profile to focus on higher-potency strains which are more in-demand in the current market, resulting in additional inventory charges in the six months ended September 30, 2020.

Comparatively, our gross margin percentage in the six months ended September 30, 2019 was impacted by (i) charges of $17.0 million for excess finished recreational cannabis inventory recorded primarily in connection with our evaluation of the estimated on-hand provincial and territorial inventory levels at that time;

and (ii) the gradual reduction of our variable costs late in the first quarter

of fiscal 2021, resulted in the under-absorption of these fixed and variable costs and an adverse impact on gross margin in the current period.

In connection with these changes to our production strategy we also adjusted our cannabis production profile to focus on higher-potency strains which are more in-demand, resulting in additional inventory charges in the first quarter of fiscal 2021 .

Comparatively, our gross margin percentage in the nine months ended December 31, 2019 was impacted by (i) charges of $19.8 million for excess finished recreational cannabis inventory recorded primarily in connection with our evaluation of the estimated on-hand provincial and territorial inventory levels at that time;

(ii) the impact on gross margin of $9.2 million reflecting the returns and pricing adjustments relating primarily to the over-supply of certain oil and softgel products;

and (iii) other adjustments related to the net realizable value of inventory.

Additionally, we incurred operating costs of $26.8 million relating to facilities not yet cultivating or processing cannabis, not yet producing cannabis-related products or having under-utilized capacity, primarily related to start-up costs associated with our advanced manufacturing and beverage facilities in Smiths Falls, and our greenhouse in Denmark.

Additionally, we incurred operating costs of $34.9 million relating to facilities not yet cultivating or processing cannabis, not yet producing cannabis-related products or having under-utilized capacity, primarily related to start-up costs associated with our advanced manufacturing and beverage facilities in Smiths Falls, our greenhouse in Denmark, and under-utilized capacity associated with our KeyLeaf extraction facility.

Operating Expenses

Six months ended September 30,

Nine months ended December 31,

(in thousands of Canadian dollars)

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Selling, general and administrative expenses

Selling, general and administrative expenses in the six months ended September 30, 2020 were $282.6 million, as compared to $327.2 million in the six months ended September 30, 2019.

General and administrative expense in the six months ended September 30, 2020 was $134.4 million, as compared to $157.5 million in the six months ended September 30, 2019.

Selling, general and administrative expenses in the nine months ended December 31, 2020 were $426.7 million, as compared to $496.2 million in the nine months ended December 31, 2019.

General and administrative expense in the nine months ended December 31, 2020 was $186.5 million, as compared to $225.3 million in the nine months ended December 31, 2019.

The year-over-year decrease is primarily attributable to:

A reduction in costs attributable to the restructuring actions initiated in the fourth quarter of fiscal 2020, as described above in our analysis of our results of operations for the third quarter of fiscal 2021.

Partially offsetting these cost reductions were a year-over-year increase in third-party professional fees associated with the organizational and strategic review of our business, and the growth in our business through the acquisitions of C 3 , This Works and BioSteel in fiscal 2020 that contributed a full nine months to our operating results in fiscal 2021.

Losses recorded in the second quarter of fiscal 2020 of $10.8 million related to a legal dispute with a third-party supplier, and $8.8 million associated with additional reserves on onerous lease obligations.

These losses did not recur in the current period.

Partially offsetting these cost reductions were a year-over-year increase in third-party professional fees associated with the organizational and strategic review of our business.

Sales and marketing expense in the six months ended September 30, 2020 was $81.1 million, as compared to $112.6 million in the six months ended September 30, 2019.

In the comparative period we incurred costs attributable to (i) creative design, brand insights and product marketing campaigns in preparation for the launch of our Cannabis 2.0 portfolio of products and the launch of our First & Free line of CBD products in the United States;

Sales and marketing expense in the nine months ended December 31, 2020 was $134.8 million, as compared to $176.0 million in the nine months ended December 31, 2019.

(ii) staffing costs associated with servicing our Canadian and United States markets in the areas of creative design and advertising, brand insights and launch support, and brand management;

and (iii) media and advertisement placement campaigns to drive brand awareness and educate consumers in support of our Tweed, Tokyo Smoke and other recreational brands at the onset of the opening of the Canadian recreational market in October 2018.

These costs did not recur to the same extent in the six months ended September 30, 2020, as we rationalized our Canadian marketing organization in April 2020, delayed or cancelled various product and brand marketing initiatives across our business due to measures established to contain the spread of COVID-19, and incurred significantly reduced travel costs due to travel restrictions.

The above factors resulting in a year-over-year decrease in sales and marketing expense were partially offset by higher compensation costs related to our marketing and sales capabilities servicing (i) the United States market, where initiatives continue to

commercialize and drive brand and product awareness for our Martha Stewart line of CBD products;

and (ii) the growth in our business as compared to the prior period resulting from the acquisitions of C 3 in April 2019, This Work s in May 2019 and BioSteel in October 2019.

Research and development expense in the six months ended September 30, 2020 was $27.8 million, as compared to $20.4 million in the six months ended September 30, 2019.

The year-over-year increase is primarily attributable to (i) higher compensation costs associated with an increase in the number of employees conducting research and developing patent-protected technology, most notably in relation to our Cannabis 2.0 products and other product innovation initiatives, plant science and extraction technology;

and (ii) a year-over-year increase in costs associated with conducting external laboratory research, testing and clinical trials for CBD, dronabinol, and other cannabinoid-based human and animal health products and therapies.

The above factors resulting in a year-over-year increase in research and development expense were partially offset by lower travel costs resulting from travel restrictions due to the COVID-19 pandemic, and lower third-party professional fees associated with a refocusing of Spectrum Therapeutics’ research objectives.

Acquisition-related costs in the six months ended September 30, 2020 were $4.9 million, as compared to $15.7 million in the six months ended September 30, 2019.

The year-over-year decrease is primarily attributable to more mergers and acquisitions activity in the six months ended September 30, 2019, which included entering into and implementing the Arrangement Agreement with Acreage, closing the acquisitions of C 3 and This Works.

Additionally, costs were incurred in relation to the acquisition of BioSteel, which closed in October 2019, and evaluating other potential acquisition opportunities.

Comparatively, in the six months ended September 30, 2020, our primary mergers and acquisitions activity related to entering into the Proposal Agreement and Amended Arrangement with Acreage in the first quarter of fiscal 2021, and implementing the Amended Arrangement in the second quarter of fiscal 2021, as described in “Recent Developments” above.

Depreciation and amortization expense in the six months ended September 30, 2020 was $34.4 million, as compared to $20.9 million in the six months ended September 30, 2019.

and (iii) media and advertisement placement campaigns to drive brand awareness and educate

consumers in support of our recreational brands at the onset of the opening of the Canadian recreational market in October 2018.

These costs did not recur to the same extent in the nine months ended December 31 , 2020 , as we rationalized our Canadian marketing organization in April 2020, delayed or cancelled various product and brand marketing initiatives across our business due to measures established to contain the spread of COVID-19, and incurred significantly reduced travel costs due to travel restrictions.

T he above factors were partially offset by higher compensation costs related to our marketing and sales capabilities servicing (i) the United States market, where initiatives continue to commercialize and drive brand and product awareness for our United States C BD business ;

and (ii) the growth in our business as compared to the prior period resulting in a full nine months of contributions to our operating results from the acquisitions of C 3 in April 2019, This Works in May 2019 and BioSteel in October 2019.

Research and development expense in the nine months ended December 31, 2020 was $41.8 million, consistent with $41.2 million in the nine months ended December 31, 2019.

Acquisition-related costs in the nine months ended December 31, 2020 were $8.0 million, as compared to $19.0 million in the nine months ended December 31, 2019.

The year-over-year decrease is primarily attributable to more mergers and acquisitions activity in the nine months ended December 31, 2019, which included entering into and implementing the arrangement agreement with Acreage, closing the acquisitions of C 3 , This Works, BioSteel and the unowned interest in BCT, and the transaction to launch More Life.

Additionally, costs were incurred in relation to evaluating other potential acquisition opportunities.

Comparatively, in the nine months ended December 31, 2020, our primary mergers and acquisitions activity related to (i) entering into, and implementing the Acreage Arrangement, and (ii) entering into the Canopy Rivers Arrangement Agreement.

Depreciation and amortization expense in the nine months ended December 31, 2020 was $55.6 million, as compared to $34.6 million in the nine months ended December 31, 2019.

The year-over-year increase is primarily attributable to substantial completion of the build-out of our infrastructure across Canada over the past year, the growth in our business over the past year with the acquisitions of C 3 , BioSteel and This Works, the growth in our network of corporate-owned Tweed and Tokyo Smoke retail stores, the implementation of information technology software projects, and our investment in our infrastructure in Europe and the United States.

Share-based compensation expense

Share-based compensation expense in the six months ended September 30, 2020 was $48.5 million, as compared to $160.8 million in the six months ended September 30, 2019.

Share-based compensation expense in the nine months ended December 31, 2020 was $66.8 million, as compared to $217.6 million in the nine months ended December 31, 2019.

The year-over-year decrease is primarily attributable to:

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We granted 22.1 million stock options in fiscal 2019 at a weighted average price of $51.49 per option, as compared to 9.5 million options in fiscal 2020 at a weighted average price of $33.87.

The year-over-year decrease in the number of stock option grants was due to the modification of our share-based compensation program in the first half of fiscal 2020, and only 295,451 options were granted in the first quarter of fiscal 2021;

The year-over-year decrease in the number of stock option grants was due to the modification of our share-based compensation program in the first half of fiscal 2020, and only 433,199 options were granted in the nine months ended December 31, 2020;

These forfeitures and cancellations also resulted in a year-over-year reduction in share-based compensation expense.

Share-based compensation expense related to acquisition milestones in the six months ended September 30, 2020 was $4.2 million, as compared to $19.4 million in the six months ended September 30, 2019.

Share-based compensation expense related to acquisition milestones in the nine months ended December 31, 2020 was $5.9 million, as compared to $24.3 million in the nine months ended December 31, 2019.

The year-over-year decrease is primarily related to (i) the restructuring of our operations in Colombia in the fourth quarter of fiscal 2020, which resulted in the acceleration of share-based compensation expense related to the unvested milestones associated with the acquisitions of Spectrum Colombia and Canindica (as a result, there is no remaining share-based compensation expense to be recognized in association with the Spectrum Colombia acquisition and only a minimal amount was recognized in connection with the Canindica acquisition in the current period);

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Expected credit losses on financial assets and related charges

In the six months ended September 30, 2020, we recorded expected credit losses on financial assets and related charges in the amount of $94.7 million, as discussed in “Recent Developments” above.

In the nine months ended December 31, 2020, we recorded expected credit losses on financial assets and related charges in the amount of $108.5 million, in relation to our equity investment in PharmHouse, as discussed in “Recent Developments” above.

Asset impairment and restructuring costs

Asset impairment and restructuring costs recorded in operating expenses in the six months ended September 30, 2020 were $59.2 million.

In the first quarter of fiscal 2021, we completed certain of the restructuring actions that had commenced in the previous fiscal year, and recorded final adjustments related to changes in certain estimates recorded at March 31, 2020.

Asset impairment and restructuring costs recorded in operating expenses in the nine months ended December 31, 2020 were $459.6 million.

In the first quarter of fiscal 2021, we completed certain of the restructuring actions that had commenced in the fourth quarter of fiscal 2020, including completing the exit of our operations in South Africa and Lesotho, and recorded final adjustments related to changes in certain estimates recorded at March 31, 2020.

In addition, we incurred additional costs in the first quarter of fiscal 2021 related primarily to the rationalization of our marketing organization in April 2020.

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and (ii) charges related to rationalizing certain research and development activities.

As a result, in the six months ended September 30, 2020, we recognized asset impairment and restructuring costs of $59.2 million in relation to (i) changes in the estimated fair value of certain of our Canadian production facilities, and costs associated with their closure;

(ii) completing the exit of our operations in South Africa and Lesotho;

(iii) employee-related costs associated with rationalizing certain marketing activities;

and (iv) charges related to rationalizing certain research and development activities.

Six months ended September 30,

In the third quarter of fiscal 2021, we recorded charges related primarily to (i) the restructuring actions resulting in the closure of certain of our sites in Canada, with losses recognized for the difference between the net book value of the associated property, plant and equipment and intangible assets and their estimated salvage value or fair value, contractual and other settlement obligations;

and employee-related and other restructuring costs;

(ii) adjustments to the net book value of our production facilities in Aldergrove and Delta, British Columbia in order to reflect their selling prices, and other costs associated with the remediation of damages caused by the fire at the Delta facility in November, the closure of the facilities in British Columbia, and their sale;

and (iii) the completion of our strategy shift in Latin America that we commenced in the fourth quarter of fiscal 2020.

The restructuring actions in the third quarter of fiscal 2021 and the sale of our production facilities in British Columbia are described above under “Recent Developments”.

Nine months ended December 31,

(in thousands of Canadian dollars)

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Other income (expense), net

Income tax recovery (expense)

Income tax recovery

Loss from equity method investments

The loss from equity method investments in the six months ended September 30, 2020 was $40.2 million, as compared to $4.0 million in the six months ended September 30, 2019.

The loss from equity method investments in the nine months ended December 31, 2020 was $40.9 million, as compared to $6.7 million in the nine months ended December 31, 2019.

The year-over-year increase in the loss is primarily attributable to (i) impairment charges of $32.4 million recognized in the second quarter of fiscal 2021 relating to our equity method investment in PharmHouse, as discussed in “Recent Developments” above;

and (ii) the larger net losses recognized by our investees PharmHouse (prior to its impairment) and Agripharm in the nine months ended December 31, 2020, relative to the comparative period.

Other income (expense), net

Other income (expense), net in the six months ended September 30, 2020 was $269.5 million, as compared to $542.7 million in the six months ended September 30, 2019.

The year-over-year decrease of $273.2 million is primarily attributable to:

A decrease in in non-cash income of $566.2 million related to fair value changes on the warrant derivative liability associated with the Tranche B Warrants held by CBI.

The decrease of $100.5 million in the fair value of the warrant derivative liability (resulting in non-cash income) in the six months ended September 30, 2020 is primarily attributable to changes during the period in certain of the assumptions used to value the liability, most notably the decrease in the risk-free interest rate and a slight decrease in the price of our common shares, and the shorter time to maturity of the warrants.

Comparatively, the decrease of $666.7 million in the fair value of the warrant derivative liability during the six months ended September 30, 2019 was primarily attributable to a decline of approximately 43% in our share price from the time the terms of the Tranche B Warrants were amended in late June 2019 to September 30, 2019.

Change of $228.1 million, from an income amount of $195.8 million in the six months ended September 30, 2019 to an expense amount of $32.3 million in the six months ended September 30, 2020, related to the non-cash fair value changes on our senior convertible notes.

The year-over-year change is primarily due to the larger decline in our share price in the six months ended September 30, 2019 (47%) relative to the decline in the six months ended September 30, 2020 (1%).

A decrease in interest income of $27.4 million, primarily attributable to the year-over-year decrease in our cash and cash equivalents and short-term investments balances and lower interest rates relative to the prior year.

Changes of $288.3 million related the fair value changes on the liability arising from the Acreage Arrangement, from an expense amount of $235.2 million in the six months ended September 30, 2019 to an income amount of $53.2 million in the six months ended September 30, 2020.

The current period income amount, associated with a decrease in the liability arising from the Acreage Arrangement, is primarily attributable to the implementation of the Amended Arrangement with Acreage, as described above in “Recent Developments”.

Specifically, the Amended Arrangement included a reset of the exchange ratio and resulted in other changes to potential scenarios and outcomes associated with our arrangement with Acreage that had been considered in prior valuation models, and had resulted in higher liability balances at those times.

Comparatively, the expense amount of $235.2 million in the six months ended September 30, 2019 was primarily attributable to overall declines in both Canopy Growth’s and Acreage’s share prices, as well as share prices across multi-state cannabis operators in the United States.

Change of $214.7 million related to non-cash fair value changes on our other financial assets, from an expense amount of $110.8 million in the six months ended September 30, 2019 to an income amount of $103.9 million in the six months ended September 30, 2020.

The current period changes are primarily attributable to fair value increases relating to our investments in

the TerrAscend exchangeable shares ($ 67.0 million), and the TerrAscend Canada secured debenture and the TerrAscend warrants ($ 77.2 million), driven largely by a n increase of approximately 136 % in TerrAscend’s share price from April 1, 2020 to September 30, 2020.

Comparatively, in the six months ended September 30, 2019 , the expense amount was primarily driven by decreases of $ 60.0 million and $ 33.0 million in the fair value of our exchangeable shares in TerrAscend and warrants in the capital of SLANG Worldwide Inc., respectively.

Partially offsetting these year-over-year fair value increases was a fair value decrease of $ 23.3 milli o n re presenting the difference between the loan advanced to Acreage Hempco and the debenture’s estimated fair value measured using a discounted cash flow model.

Change of $44.5 million related to non-cash fair value changes on acquisition related contingent consideration, from an expense amount in the six months ended September 30, 2019 to an income amount in the six months ended September 30, 2020.

Other income (expense), net in the nine months ended December 31, 2020 was an expense amount of $21.1 million, as compared to an income amount of $600.6 million in the nine months ended December 31, 2019.

The year-over-year change of $621.7 million from an income amount to an expense amount is primarily attributable to:

Change of $842.7 million related to fair value changes on the warrant derivative liability associated with the Tranche B Warrants held by CBI, from an income amount of $749.3 million in the nine months ended December 31, 2019 to an expense amount of $93.5 million in the nine months ended December 31, 2020.

The increase of $93.5 million in the fair value of the warrant derivative liability (resulting in non-cash expense) in the nine months ended December 31, 2020 is primarily attributable to an increase of approximately 53% in our share price from April 1, 2020 to December 31, 2020, partially offset by a decrease in the risk-free rate and a shorter expected time to maturity of the warrants.

Comparatively, the decrease of $749.3 million in the fair value of the warrant derivative liability during the nine months ended December 31, 2019 was primarily attributable to a decline of approximately 49% in our share price from the time the terms of the Tranche B Warrants were amended in late June 2019 to December 31, 2019.

Change of $310.3 million related to the non-cash fair value changes on our senior convertible notes, from an income amount of $202.6 million in the nine months ended December 31, 2019 to an expense amount of $107.8 million in the nine months ended December 31, 2020.

The year-over-year change is primarily due to the increase of approximately 53% in our share price from April 1, 2020 to December 31, 2020, as compared to a decline in our share price of approximately 57% in the nine months ended December 31, 2019.

In the nine months ended December 31, 2019, we recognized gains of $61.8 million in relation to (i) our acquisition of the unowned interest in BCT, which increased our total ownership to 100% of BCT’s issued and outstanding shares ($39.5 million);

and (ii) our disposal of a previously-consolidated subsidiary in conjunction with the transaction completed to launch More Life ($22.3 million).

No such transactions resulting in gains occurred in the nine months ended December 31, 2020.

A decrease in interest income of $32.5 million, primarily attributable t o the year-over-year decrease in our cash and cash equivalents and short-term investments balances and lower interest rates relative to the prior year.

Change of $573.3 million related to non-cash fair value changes on our other financial assets, from an expense amount of $188.1 million in the nine months ended December 31, 2019 to an income amount of $385.2 million in the nine months ended December 31, 2020.

The income amount recognized in the nine months ended December 31, 2020 is primarily attributable to fair value increases relating to our investments in the TerrAscend exchangeable shares ($277.0 million), and the TerrAscend Canada secured debenture and the TerrAscend warrants (totaling $163.5 million), driven largely by an increase of approximately 410% in TerrAscend’s share price from April 1, 2020 to December 31, 2020.

Comparatively, in the nine months ended December 31, 2019, the expense amount was primarily driven by decreases of $102.0 million and $35.0 million in the fair value of our exchangeable shares in TerrAscend and warrants in the capital of SLANG Worldwide Inc., respectively, which were attributable primarily to declines in share prices for these two companies during the period.

Additionally, the fair values of several of our other investments decreased during the period in-line with the broader decline in the Canadian cannabis market.

Partially offsetting these year-over-year fair value increases was a fair value decrease of $38.3 million representing the difference between the loan advanced to Acreage Hempco and the debenture’s estimated fair value measured using a discounted cash flow model.

An increase of $36.7 million in non-cash income related to fair value changes on acquisition related contingent consideration.

In fiscal 2019 we acquired ebbu Inc.

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The year-over-year change in the fair value of the acquisition related contingent consideration is primarily attributable to changes in our assessment of the probability and timing of ebbu achieving certain of these milestones.

Income tax recovery (expense)

Income tax recovery in the six months ended September 30, 2020 was $2.5 million, compared to income tax expense of $4.5 million in the six months ended September 30, 2019.

In the six months ended September 30, 2020, the income tax recovery consisted of a deferred income tax recovery of $3.2 million (compared to a recovery of $3.6 million in the six months ended September 30, 2019) and current income tax expense of $0.7 million (compared to an expense of $8.1 million in the six months ended September 30, 2019).

A decrease in non-cash expense of $15.3 million related the fair value changes on the liability arising from the Acreage Arrangement, from $265.2 million in the nine months ended December 31, 2019 to $249.8 million in the nine months ended December 31, 2020.

The current period expense amount, associated with an increase the liability arising from the Acreage Arrangement, is primarily attributable to (i) an increase of approximately 53% in our share price from April 1, 2020 to December 31, 2020, resulting in the estimated value of the Canopy Growth shares expected to be issued upon a Triggering Event to be higher relative to the estimated value of the Acreage shares expected to be acquired at that same time, partially offset by (ii) the implementation of the amended arrangement with Acreage in September 2020, which included a reset of the exchange ratio and resulted in other changes to potential scenarios and outcomes associated with the Acreage Arrangement that had been considered in prior valuation models, and had resulted in higher liability balances at those times.

Comparatively, the expense amount of $265.2 million in the nine months ended December 31, 2019 was primarily attributable to overall declines in both Canopy Growth’s and Acreage’s share prices in the period.

Income tax recovery

Income tax recovery in the nine months ended December 31, 2020 was $18.1 million, compared to income tax recovery of $22.9 million in the nine months ended December 31, 2019.

In the nine months ended December 31, 2020, the income tax recovery consisted of a deferred income tax recovery of $19.8 million (compared to a recovery of $37.5 million in the nine months ended December 31, 2019) and current income tax expense of $1.7 million (compared to an expense of $14.6 million in the nine months ended December 31, 2019).

The decrease of $17.7 million in the deferred income tax recovery is primarily a result of (i) recording a reduction in deferred tax liabilities that arose in connection with the required revaluation of the accounting carrying value, but not the tax basis, of property, plant and equipment, intangible assets, and other financial assets;

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The decrease of $12.9 million in the current income tax expense arose primarily in connection with acquired legal entities that generated income for tax purposes during prior periods that could not be reduced by the group’s tax attributes but whose current period income will now be reduced by the group’s tax attributes.

Net (Loss) Income

Net loss in the six months ended September 30, 2020 was $224.9 million, as compared to net income of $48.6 million in the six months ended September 30, 2019.

The change from net income to net loss is primarily attributable to the year-over-year decrease in other income (expense), net, and the other variances described above.

The net loss in the nine months ended December 31, 2020 was $1.1 billion, as compared to a net loss of $61.0 million in the nine months ended December 31, 2019.

The increase in the net loss is primarily attributable to the year-over-year change in other income (expense), net;

asset impairment and restructuring costs;

expected credit losses on financial assets and related charges, and partially offset by year-over-year reductions in our selling, general and administrative expenses and share-based compensation expense.

Segmented Analysis

In the six months ended September 30, 2020 and 2019, all of our revenue was earned by the Cannabis, Hemp and Other Consumer Products segment.

Canopy Rivers contributed a net loss of $97.1 million in the six months ended September 30, 2020, of which $26.1 million was attributable to Canopy Growth.

In the six months ended September 30, 2019, Canopy Rivers contributed a net loss of $6.0 million, of which $1.6 million was attributable to Canopy Growth.

In the nine months ended December 31, 2020 and 2019, all of our revenue was earned by the Cannabis, Hemp and Other Consumer Products segment.

Canopy Rivers contributed net income of $4.6 million in the nine months ended December 31, 2020, of which $1.4 million was attributable to Canopy Growth.

In the nine months ended December 31, 2019, Canopy Rivers contributed a net loss of $11.1 million, of which $3.0 million was attributable to Canopy Growth.

The decrease in the net loss reflects the fair value increases relating to Canopy Rivers’ investments in the TerrAscend exchangeable shares, partially offset by the impairment losses and expected credit losses related to the PharmHouse equity method investment and associated financial assets, as described under “Recent Developments” above.

Additionally, refer to “Recent Developments” above for a description of the Canopy Rivers Arrangement Agreement.

Adjusted EBITDA (Non-GAAP Measure)

The following table presents Adjusted EBITDA for the six months ended September 30, 2020 and 2019:

Six months ended September 30,

The following table presents Adjusted EBITDA for the nine months ended December 31, 2020 and 2019:

Nine months ended December 31,

(in thousands of Canadian dollars)

Net (loss) income

Income tax (recovery) expense

Income tax recovery

Other (income) expense, net

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and related charges

Restructuring costs recorded in cost of goods sold

Charges related to the flow-through of inventory

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1 From Condensed Interim Consolidated Statements of Cash Flows.

2 Adjusted EBITDA is a non-GAAP measure and is calculated as the reported net (loss) income, adjusted to exclude income tax (expense) recovery;

2 Adjusted EBITDA is a non-GAAP measure and is calculated as the reported net loss, adjusted to exclude income tax (expense) recovery;

other income (expense), net;

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expected credit losses on financial assets and related charges;

restructuring costs recorded in cost of goods sold;

and charges related to the flow-through of inventory step-up on business combinations, and further adjusted to remove acquisition-related costs.

The Adjusted EBITDA loss in the six months ended September 30, 2020 was $177.9 million, as compared to the Adjusted EBITDA loss of $243.8 million in the six months ended September 30, 2019.

The year-over-year decrease in the Adjusted EBITDA loss is primarily attributable to the improvement in our gross margin, and a year-over-year reduction in our selling, general and administrative expenses.

The Adjusted EBITDA loss in the nine months ended December 31, 2020 was $246.3 million, as compared to the Adjusted EBITDA loss of $340.8 million in the nine months ended December 31, 2019.

The year-over-year decrease in the Adjusted EBITDA loss is primarily attributable to the year-over-year reduction in our selling, general and administrative expense, as discussed above.

Part 3 – Financial Liquidity and Capital Resources

We manage liquidity risk by reviewing, on an ongoing basis, our sources of liquidity and capital requirements.

As of September 30, 2020, we had cash and cash equivalents of $673.3 million and short-term investments of $1.0 billion, which are predominantly invested in liquid securities issued by the United States and Canadian governments.

Additionally, we have capacity of $34.7 million under our $40.0 million revolving debt facility with Farm Credit Canada (“FCC”).

As of December 31, 2020, we had cash and cash equivalents of $825.0 million and short-term investments of $768.6 million, which are predominantly invested in liquid securities issued by the United States and Canadian governments.

Additionally, we have capacity of $40.0 million under our revolving debt facility with Farm Credit Canada (“FCC”).

In evaluating our capital requirements, including the impact, if any, on our business from the COVID-19 pandemic, and our ability to fund the execution of our strategy, we believe we have adequate available liquidity to enable us to meet our working capital and other operating requirements, fund growth initiatives and capital expenditures, settle our liabilities, and repay scheduled principal and interest payments on debt for at least the next twelve months.

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We have also ensured that we have access to public capital markets through our U.S.

and Canadian public stock exchange listings.

However, there can be no assurance that we will gain adequate market acceptance for our products or be able to generate sufficient positive cash flow to achieve our business plans.

In the six months ended September 30, 2020, our purchases of and deposits on property, plant and equipment totaled $90.2 million, which were funded out of available cash, cash equivalents and short-term investments.

and Canadian public stock exchange listings, and continue to review and pursue selected external financing sources to ensure adequate financial resources.

These potential sources include, but are not limited to (i) obtaining financing from traditional or non-traditional investment capital organizations;

(ii) obtaining funding from the sale of our common shares or other equity or debt instruments;

and (iii) obtaining debt financing with lending terms that more closely match our business model and capital needs.

There can be no assurance that we will gain adequate market acceptance for our products or be able to generate sufficient positive cash flow to achieve our business plans.

In the nine months ended December 31, 2020, our purchases of and deposits on property, plant and equipment totaled $138.0 million, which were funded out of available cash, cash equivalents and short-term investments.

Included in our purchase obligations for fiscal 2021, as reflected under the heading “Contractual Obligations and Commitments” in the MD&A section of our Annual Report, are commitments for the purchase of property, plant and equipment totaling $73.2 million in fiscal 2021.

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Therefore, we are subject to risks including, but not limited to, our inability to raise additional funds through debt and/or equity financing to support our continued development, including capital expenditure requirements, operating requirements and to meet our liabilities and commitments as they come due.

Six months ended September 30,

Nine months ended December 31,

(in thousands of Canadian dollars)

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Operating activities

Cash used in operating activities in the six months ended September 30, 2020 totaled $280.3 million, as compared to cash used of $372.1 million in the six months ended September 30, 2019.

The year-over-year decrease in the cash used in operating activities was primarily due to the year-over-year reduction in our working capital spending on inventory primarily attributable to the lower production output in the six months ended September 30, 2020, as described in the “Cost of Goods Sold and Gross Margin” section above.

This factor was partially offset by the change from net income in the second quarter of fiscal 2020 to a net loss in the second quarter of fiscal 2021 and an overall decrease in the non-cash income and expense items impacting net (loss) income.

Cash used in operating activities in the nine months ended December 31, 2020 totaled $367.9 million, as compared to cash used of $562.0 million in the nine months ended December 31, 2019.

The year-over-year decrease in the cash used in operating activities was primarily due to the year-over-year reduction in our working capital spending on inventory, primarily attributable to the lower production output in the nine months ended December 31, 2020, as described in the “Cost of Goods Sold and Gross Margin” section above, and a year-over-year reduction in our selling, general and administrative expenses as discussed above.

Investing activities

The cash used in investing activities totaled $568.1 million in the six months ended September 30, 2020, as compared to cash used of $935.5 million in the six months ended September 30, 2019.

In the six months ended September 30, 2020, we invested $90.2 million, primarily in our production infrastructure in the United States, an expansion of our Storz & Bickel facilities, and our indoor facility in Newfoundland.

Comparatively, in the six months ended September 30, 2019, we invested $440.2 million in expanding our growing capacity, and the construction of advanced manufacturing capability and a bottling plant at our Smiths Falls location.

The year-over-year decrease in our purchases of property, plant and equipment reflects the substantial completion of our cultivation and

Cannabis 2.0 infrastructure build-out, and the shift in strategy to an asset-light model in certain markets and sustaining and process improvement investments.

In the six months ended September 30, 2020, we did not complete any acquisitions, whereas in the six months ended September 30, 2019, cash outflows related to acquisitions totaled $416.0, with the most notable outflows relating to our acquisitions of C 3 and This Works.

We completed strategic investments totaling $124.4 million in the six months ended September 30, 2020, including the payment of $49.8 million to Acreage shareholders upon implementation of the Amended Arrangement, and the loan advance of $67.0 million to Acreage Hempco.

This compares to strategic investments totaling $431.6 million in the six months ended September 30, 2019, which most notably included the $395.2 million investment in the Acreage financial instrument.

Finally, in the six months ended September 30, 2020, we made payments totaling $6.4 million for acquisition-related liabilities, as compared to $21.4 million in the six months ended September 30, 2019 as we continue to draw-down on the amounts owing in relation to acquisitions completed in prior years.

Additional cash inflows during the six months ended September 30, 2020 related to proceeds of $18.3 million from the sale of a portfolio of patents in Germany, and $10.0 million related to a recovery of amounts related to construction financing.

Partially offsetting these decreases in cash outflows was the net purchase of short-term investments in the six months ended September 30, 2020 in the amount of $367.8 million, as compared to the net redemption of short-term investments of $388.0 million in the six months ended September 30, 2019.

The cash used in investing activities totaled $328.9 million in the nine months ended December 31, 2020, as compared to cash used of $281.4 million in the nine months ended December 31, 2019.

In the nine months ended December 31, 2020, we invested $138.0 million, primarily in our production infrastructure in the United States and an expansion of our Storz & Bickel facilities.

Comparatively, in the nine months ended December 31, 2019, we invested $610.9 million in expanding our growing capacity, and the construction of advanced manufacturing capability and a bottling plant at our Smiths Falls location.

The year-over-year decrease in

our purchases of property, plant and equipment reflects the substantial completion of our cultivation and Cannabis 2.0 infrastructure build-out, and the shift in strategy to an asset-light model in certain markets and sustaining and process improvement investments.

In the nine months ended December 31, 2020, we did not complete any acquisitions, whereas in the nine months ended December 31, 2019, cash outflows related to acquisitions totaled $505.2 million, with the most notable outflows relating to our acquisitions of C 3 and This Works.

We completed strategic investments totaling $34.2 million in the nine months ended December 31, 2020, made payments of $49.8 million to Acreage shareholders upon implementation of the amended arrangement with Acreage in September 2020, and advanced the loan of $67.0 million to Acreage Hempco.

This compares to strategic investments totaling $446.2 million in the nine months ended December 31, 2019, which most notably included the initial $395.2 million investment related to Acreage.

Finally, in the nine months ended December 31, 2020, we made payments totaling $15.1 million for acquisition-related liabilities, as compared to $29.8 million in the nine months ended December 31, 2019 as we continue to draw-down on the amounts owing in relation to acquisitions completed in prior years.

Additional cash inflows during the nine months ended December 31, 2020 related to proceeds of $30.9 million from the sale of property, plant and equipment, proceeds of $7.0 million from the sale of equity method investments, proceeds of $18.3 million from the sale of a portfolio of patents in Germany, and $10.0 million related to a recovery of amounts related to construction financing.

Partially offsetting these decreases in cash outflows was the net purchase of short-term investments in the nine months ended December 31, 2020 in the amount of $83.6 million, as compared to the net redemption of short-term investments of $1.3 billion in the nine months ended December 31, 2019.

The year-over-year change reflects our investment of the proceeds from CBI exercising their warrants during the quarter (see below) in relatively safe, liquid investments.

Comparatively, in the first quarter of fiscal 2020 we redeemed short-term investments for use for the purposes described above.

Comparatively, in the nine months ended December 31, 2020, we redeemed short-term investments primarily for use for the purposes described above.

Financing activities

The cash provided by financing activities totaled $250.8 million in the six months ended September 30, 2020, as compared to cash used of $62.5 million in the six months ended September 30, 2019.

In the six months ended September 30, 2020, we received proceeds of $245.0 million in relation to CBI exercising 18.9 million warrants to purchase our common shares.

Comparatively, in the six months ended September 30, 2019, we repaid the Alberta Treasury Board financing in the amount of $95.2 million and made other scheduled debt repayments.

The cash provided by financing activities totaled $269.1 million in the nine months ended December 31, 2020, as compared to cash used of $71.4 million in the nine months ended December 31, 2019.

In the nine months ended December 31, 2020, we received proceeds of $245.0 million in relation to CBI exercising 18.9 million warrants to purchase our common shares.

Comparatively, in the nine months ended December 31, 2019, we repaid the Alberta Treasury Board financing in the amount of $95.2 million and made other scheduled debt repayments.

Free Cash Flow (Non-GAAP Measure)

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Management believes that free cash flow presents meaningful information regarding the amount of cash flow required to maintain and organically expand our business, and that the free cash flow measure provides meaningful information regarding our liquidity requirements.

Three months ended September 30,

Six months ended September 30,

Three months ended December 31,

Nine months ended December 31,

(in thousands of Canadian dollars)

Net cash used in operating activities

Purchases of and deposits on property, plant and equipment

Purchases of and deposits on property,

plant and equipment

Free cash flow 1

1 Free cash flow is a non-GAAP measure, and is calculated as net cash provided by (used in) operating activities, less purchases of and deposits on property, plant and equipment.

Free cash flow in the second quarter of fiscal 2021 was an outflow of $190.4 million, as compared to an outflow of $442.1 million in the second quarter of fiscal 2020.

Free cash flow in the third quarter of fiscal 2021 was an outflow of $135.4 million, as compared to an outflow of $360.6 million in the third quarter of fiscal 2020.

The year-over-year decrease in the outflow reflects the decrease in the cash used for operating activities, as described above, and the substantial completion of our cultivation and Cannabis 2.0 infrastructure build-out over the past year and the shift in strategy to an asset-light model in certain markets.

Free cash flow in the six months ended September 30, 2020 was an outflow of $370.5 million, as compared to an outflow of $812.2 million in the six months ended September 30, 2019.

Free cash flow in the nine months ended December 31, 2020 was an outflow of $505.9 million, as compared to an outflow of $1.2 billion in the nine months ended December 31, 2019.

The year-over-year decrease in the outflow reflects the decrease in the cash used for operating activities, as described above, and the substantial completion of our infrastructure build-out and shift to a sustaining and process improvement investment strategy.

Since our formation, we have financed our cash requirements primarily through the issuance of capital stock, including the $5.1 billion investment by CBI in the third quarter of fiscal 2019, and debt.

Total debt outstanding as of September 30, 2020 was $533.7 million, as compared to $465.4 million as of March 31, 2020.

The total principal amount owing, which excludes fair value adjustments related to our convertible senior notes, was $611.5 million at September 30, 2020, relatively consistent with the principal amount owing of $615.2 million at March 31, 2020.

Total debt outstanding as of December 31, 2020 was $632.2 million, as compared to $465.4 million as of March 31, 2020.

The total principal amount owing, which excludes fair value adjustments related to our convertible senior notes, was $604.4 million at December 31, 2020, a decrease from the principal amount owing of $615.2 million at March 31, 2020 due primarily to the repayment of the outstanding balance on the revolving debt facility with FCC.

Convertible senior notes

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This facility replaced all previous loans with FCC and is secured by our property on Niagara-on-the-Lake, Ontario.

The outstanding balance at September 30, 2020 is $5.3 million, and the facility bears interest of 3.45%, or the FCC prime rate plus 1.0%, and matures on September 3, 2024.

The outstanding balance at December 31, 2020 is $nil million, and the facility bears interest of 3.45%, or the FCC prime rate plus 1.0%, and matures on September 3, 2024.

The outstanding balance plus accrued interest was repaid in October 2020.

The revolving debt facility agreement with FCC includes affirmative, negative and financial covenants.

As of September 30, 2020, we are in compliance with all covenants in the revolving debt facility agreement.

As of December 31, 2020, we were in compliance with all covenants in the revolving debt facility agreement.

Further information regarding our debt issuances, including the conversion rights of the senior convertible notes, is included in Note 16 of the Interim Financial Statements.

5 unchanged sentences

There have been no material changes to our critical accounting policies and estimates from the information provided in the MD&A section in our Annual Report.

Quantitative and Qualitativ e Disclosures About Market Risk.

Market risk is the potential economic loss arising from adverse changes in market factors.

As a result of our global operating, acquisition and financing activities, we are exposed to market risk associated with changes in foreign currency exchange rates, interest rates and equity prices.

To manage the volatility relating to these risks, we may periodically purchase derivative instruments including foreign currency forwards.

We do not enter into derivative instruments for trading or speculative purposes.

Foreign currency risk

Our Interim Financial Statements are presented in Canadian dollars.

We are exposed to foreign currency exchange rate risk as the functional currencies of certain subsidiaries, including those in the United States and Europe, are not in Canadian dollars.

The translation of foreign currencies to Canadian dollars is performed for balance sheet accounts using exchange rates in effect at the balance sheet date, and for revenues and expense using an average exchange rate for the period.

Therefore, fluctuations in the value of the Canadian dollar affect the reported amounts of net revenue, expenses, assets and liabilities.

The resulting translation adjustments are reported as a component of accumulated other comprehensive income or loss on the consolidated balance sheet.

A hypothetical 10% change in the U.S.

dollar against the Canadian dollar compared to the exchange rate at September 30, 2020, would affect the carrying value of net assets by approximately $102.5 million, with a corresponding impact to the foreign currency translation account within accumulated other comprehensive income (loss).

A hypothetical 10% change in the euro against the Canadian dollar compared to the exchange rate at September 30, 2020, would affect the carrying value of net assets by approximately $18.0 million, with a corresponding impact to the foreign currency translation account within accumulated other comprehensive income (loss).

We also have exposure to changes in foreign exchange rates associated with transactions which are undertaken by our subsidiaries in currencies other than their functional currency.

As a result, we have been impacted by changes in exchange rates and may be impacted for the foreseeable future.

Foreign currency derivative instruments may be used to hedge existing foreign currency denominated assets and liabilities, forecasted foreign currency denominated sales/purchases to/from third parties as well as intercompany sales/purchases, intercompany principal and interest payments, and in connection with acquisitions, divestitures or investments outside of Canada.

Historically, while we have purchased derivative instruments to mitigate the foreign exchange risks associated with certain transactions, the impact of these hedging transactions on our financial statements has been immaterial.

Interest rate risk

Our cash equivalents and short-term investments are held in both fixed-rate and adjustable-rate securities.

Investments in fixed-rate instruments carry a degree of interest rate risk.

The fair value of fixed-rate securities may be adversely impacted due to a rise in interest rates.

Additionally, a falling-rate environment creates reinvestment risk because as securities mature, the proceeds are reinvested at a lower rate, generating less interest income.

As at September 30, 2020, our cash and cash equivalents, and short-term investments, consisted of $1.3 billion, consistent with $1.3 billion at March 31, 2020, in interest rate sensitive instruments.

Our financial liabilities consist of long-term fixed rate debt and floating-rate debt.

Fluctuations in interest rates could impact our cash flows, primarily with respect to the interest payable on floating-rate debt.

Aggregate Notional Value

Decrease in Fair Value - Hypothetical 1% Rate Increase

September 30, 2020

March 31, 2020

September 30, 2020

March 31, 2020

September 30, 2020

March 31, 2020

Convertible senior note

Fixed interest rate debt

Variable interest rate debt

Equity price risk

We hold other financial assets and liabilities in the form of investments in shares, warrants, options, put liabilities, and convertible debentures that are measured at fair value and recorded through either net income (loss) or other comprehensive income (loss).

We are exposed to price risk on these financial assets, which is the risk of variability in fair value due to movements in equity or market prices.

For our convertible senior notes, a primary driver of its fair value is our share price.

An increase in our share price typically results in a fair value increase of the liability.

Information regarding the fair value of financial instrument assets and liabilities that are measured at fair value on a recurring basis, and the relationship between the unobservable inputs used in the valuation of these financial assets and their fair value is presented in Note 23 of the Interim Financial Statements.

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What changed 10-Q

Item 2. Management’s Discussion and Analysis