What changed in this filing

/stocks — the workspaceLOADING

Item 2. Management’s Discussion and Analysis

2021-11-08 compared with 2021-08-06 · 487 added, 199 removed, 362 unchanged (65% of the section changed)

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

This Management’s Discussion and Analysis (“MD&A”) should be read together with other information, including our unaudited condensed interim consolidated financial statements and the related notes to those statements included in Part I, Item 1 of this Quarterly Report (the “Interim Financial Statements”), our consolidated financial statements appearing in our Annual Report on Form 10-K for the year ended March 31, 2021 (as amended, the “Annual Report”) and Part I, Item 1A, Risk Factors, of the Annual Report.

This Management’s Discussion and Analysis (“MD&A”) should be read together with other information, including our unaudited condensed interim consolidated financial statements and the related notes to those statements included in Part I, Item 1 of this Quarterly Report (the “Interim Financial Statements”), our consolidated financial statements appearing in our Annual Report on Form 10-K for the year ended March 31, 2021 (the “Annual Report”) and Part I, Item 1A, Risk Factors, of the Annual Report.

This MD&A provides additional information on our business, recent developments, financial condition, cash flows and results of operations, and is organized as follows:

2 unchanged sentences

Part 2 - Results of Operations.

This section provides an analysis of our results of operations for the first quarter of fiscal 2022 in comparison to the first quarter of fiscal 2021.

This section provides an analysis of our results of operations for the second quarter of fiscal 2022 in comparison to the second quarter of fiscal 2021, and for the six months ended September 30, 2021 in comparison to the six months ended September 30, 2020.

Part 3 - Financial Liquidity and Capital Resources.

26 unchanged sentences

the Acreage Amended Arrangement (as defined below), including the occurrence or waiver (at our discretion) of the Triggering Event (as defined below) and the satisfaction or waiver of the conditions to closing the acquisition of Acreage (as defined below);

the Wana Agreements (as defined below), including the occurrence of waiver (at our discretion) of the Triggering Event;

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

91 unchanged sentences

We undertake no obligation to update or revise any forward-looking statements, whether as a result of new information, estimates or opinions, future events or results or otherwise or to explain any material difference between subsequent actual events and such forward-looking statements, except as required by law.

The forward-looking statements contained in this Quarterly Report and other reports we file with, or furnish to, the SEC and other regulatory agencies and made by our directors, officers, other employees and other persons authorized to speak on our behalf are expressly qualified in their entirety by these cautionary statements.

The forward-looking statements contained in this Quarterly Report and other reports we file with, or furnish to, the SEC and other regulatory

agencies and made by our directors, officers, other employees and other persons authorized to speak on our behalf are expressly qualified in their entirety by these cautionary statements.

Part 1 - Business Overview

6 unchanged sentences

We also operate a network of Tweed and Tokyo Smoke retail stores across Canada, where permissible, to promote brand awareness and drive consumer demand under a “business-to-consumer” model.

In the first quarter of fiscal 2022, we completed the acquisitions of (i) Supreme Cannabis Company, Inc.

(“Supreme Cannabis”), a producer of recreational, wholesale and medical cannabis products with a diversified portfolio of distinct cannabis products and brands, and (ii) AV Cannabis Inc.

(“Ace Valley”), an Ontario-based cannabis brand focused on premium, ready-to-enjoy products including vapes, pre-roll joints and gummies.

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

6 unchanged sentences

In the fourth quarter of fiscal 2021, we expanded our product offering to include CBD products for pets under the Martha Stewart CBD for Pet line and SurityPro, and a line of premium, ready-to-drink CBD-infused sparkling waters under the Quatreau brand.

In the second quarter of fiscal 2022, we introduced whisl, a CBD vape that was made available to customers in the United States on ShopCanopy.com in mid-September 2021, and through an exclusive nationwide retail partnership in the United States with Circle K beginning on October 1, 2021.

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

11 unchanged sentences

THC is the primary psychoactive or intoxicating cannabinoid found in cannabis.

We also refer throughout this MD&A to “hemp”, which is a term used to classify varieties of the cannabis sativa plant that contain CBD and 0.3% or less THC content (by dry weight).

We also refer throughout this MD&A to

“hemp”, which is a term used to classify varieties of the cannabis sativa plant that contain CBD and 0.3% or less THC content (by dry weight).

Conversely, references to the term “marijuana” refers to varieties of the cannabis sativa plant with more than 0.3% THC content and moderate levels of CBD.

4 unchanged sentences

and confectionary manufacturing.

These capabilities allow us to supply the recreational and medical

markets with a complimentary balance of flower products and extracted cannabinoid input for our oil, CBD , ingestible cannabis, cannabis extracts and cannabis topical products.

These capabilities allow us to supply the recreational and medical markets with a complimentary balance of flower products and extracted cannabinoid input for our oil, CBD, ingestible cannabis, cannabis extracts and cannabis topical products.

Additionally, we have built a hemp supply chain in the United States.

10 unchanged sentences

In addition, since our non-production workforce continues to effectively work remotely using various technology tools, we are able to maintain our full operations and internal controls over financial reporting and disclosures.

The COVID-19 pandemic, including government measures to limit the spread of COVID-19, did not have a material adverse impact on our results of operations in the first quarter of fiscal 2022.

The COVID-19 pandemic, including government measures to limit the spread of COVID-19, did not have a material adverse impact on our results of operations in the second quarter of fiscal 2022.

However, given the uncertainties associated with the COVID-19 pandemic, including those related to the distribution and acceptance of the vaccines and their effectiveness with respect to new variants of the virus, 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 future 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 affect our results of operations into the second quarter of fiscal 2022.

We believe we have sufficient liquidity available from cash and cash equivalents and short-term investments on hand of $559.8 million and $1.5 billion, respectively, at June 30, 2021, 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 for at least the next twelve months.

Recently in the United States, there have been a number of supply chain challenges, such as container ships facing delays due to congestion in ports, impacting many industries, including the industries in which we operate.

Although we have not yet seen a significant impact, we continue to monitor our supply chain closely.

The uncertain nature of the impacts of the COVID-19 pandemic may affect our results of operations into the third quarter of fiscal 2022.

We believe we have sufficient liquidity available from cash and cash equivalents and short-term investments on hand of $807.6 million and $1.2 billion, respectively, at September 30, 2021, 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 for at least the next twelve months.

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

Recent Developments

Acquisition of Supreme Cannabis

On June 22, 2021, we and Supreme Cannabis Company, Inc.

(“Supreme Cannabis”) completed an arrangement (the “Supreme Arrangement”) pursuant to which we acquired 100% of the issued and outstanding common shares of Supreme Cannabis (the “Supreme Shares”).

Supreme Cannabis is a producer of recreational, wholesale and medical cannabis products, with a diversified portfolio of distinct cannabis companies, products and brands.

Pursuant to the Supreme Arrangement, we issued 9,013,400 common shares with a fair value on closing of $260.7 million and made a cash payment of $0.1 million to former Supreme Cannabis shareholders in consideration for their Supreme Shares.

Acquisition of Ace Valley

On April 1, 2021, we entered into a share purchase agreement (the “AV Share Purchase Agreement”) with Tweed Inc., AV Cannabis Inc.

(“Ace Valley”), and the shareholders of Ace Valley (the “AV Vendors”) pursuant to which we indirectly acquired 100% of the issued and outstanding shares of Ace Valley for cash consideration of $51.6 million.

Ace Valley is an Ontario-based cannabis brand with a focus on premium, ready-to-enjoy products including vapes, pre-roll joints and gummies.

Pursuant to the terms of the AV Share Purchase Agreement, we may be required to make certain earn-out payments to the AV Vendors, which may result in an additional cash payment or the issuance of common shares, subject to the fulfillment of certain conditions by April 1, 2023.

Refer to Note 26 of our Interim Financial Statements for information regarding the fair value of the consideration given and the provisional fair values assigned to the assets acquired and liabilities assumed for the acquisitions of Supreme Cannabis and Ace Valley.

Plan to Acquire Wana

On October 14, 2021, we and Mountain High Products, LLC, Wana Wellness, LLC and The Cima Group, LLC (collectively, “Wana” and each, a “Wana Entity”) announced that we have entered into definitive agreements (the “Wana Agreements”) providing us with the right, upon the occurrence or waiver (at our discretion) of the Triggering Event, to acquire 100% of the outstanding membership interests of Wana.

Wana manufactures and sells gummies in the U.S.

state of Colorado and licenses its intellectual property to partners, who manufacture, distribute, and sell Wana-branded gummies across the United States, including in California, Arizona, Illinois, Michigan and Florida.

This gives Wana a total footprint of 12 U.S.

states currently, and across Canada.

Wana expects to have license agreements in place in more than 20 U.S.

states, including in future adult-use markets in New York and New Jersey, prior to the end of calendar 2022.

The Wana Agreements are structured as three separate option agreements whereby we have a call option to acquire 100% of the membership interests in each Wana Entity.

As consideration for entering into the Wana Agreements, we made an upfront cash payment (the “Upfront Payment”) in the aggregate of US$297.5 million.

Upon exercise of the right to acquire each Wana Entity, we will make a payment equal to 15% of the fair market value of such Wana Entity at the time the option is exercised (the “Call Option Payments”).

As additional consideration for the right to acquire each Wana Entity, we may make additional deferred payments (the “Deferred Payments”) in respect of each Wana Entity as of the 2.5 and 5-year anniversary of the Upfront Payment, less certain deductions.

At our option, the Call Option Payments and the Deferred Payments may be satisfied in cash, common shares or a combination thereof at our sole discretion.

Until such time as we exercise our right to acquire each Wana Entity, we will have no economic or voting interest in Wana, we will not control Wana, and we and Wana will continue to operate independently.

Part 2 - Results of Operations

Discussion of First Quarter of Fiscal 2022 Results of Operations

Three months ended June 30,

Discussion of Second Quarter of Fiscal 2022 Results of Operations

Three months ended September 30,

(in thousands of Canadian dollars, except share amounts and

2 unchanged sentences

Gross margin percentage

Net income (loss)

Net income (loss) attributable to Canopy Growth

Basic earnings (loss) per share 1

Diluted earnings (loss) per share 1

1 For the three months ended June 30, 2021, the weighted average number of outstanding common shares, basic and diluted, totaled 384,055,133 and 404,546,243, respectively.

For the three months ended June 30, 2020, the weighted average number of outstanding common shares, basic and diluted, totaled 363,763,347.

Net loss attributable to Canopy Growth

Basic and diluted loss per share 1

1 For the three months ended September 30, 2021, the weighted average number of outstanding common shares, basic and diluted, totaled 393,274,758.

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

We report net revenue in two segments:

1 unchanged sentence

and (ii) other consumer products.

The following tables present segmented net revenue, by channel and by form, for the three months ended June 30, 2021 and 2020:

The following tables present segmented net revenue, by channel and by form, for the three months ended September 30, 2021 and 2020:

Revenue by Channel

Three months ended June 30,

Three months ended September 30,

(in thousands of Canadian dollars)

8 unchanged sentences

Other consumer products revenue

1 Reflects excise taxes of $17,834 and other revenue adjustments, representing our determination of returns and pricing adjustments, of $3,000 for the three months ended June 30, 2021 (three months ended June 30, 2020 - excise taxes of $7,246 and other revenue adjustments of $3,400).

2 Reflects excise taxes of $1,380 for the three months ended June 30, 2021 (three months ended June 30, 2020 - $1,426).

1 Reflects excise taxes of $12,913 and other revenue adjustments, representing our determination of returns and pricing adjustments, of $nil for the three months ended September 30, 2021 (three months ended September 30, 2020 - excise taxes of $14,200 and other revenue adjustments of $3,750).

2 Reflects excise taxes of $1,361 for the three months ended September 30, 2021 (three months ended September 30, 2020 - $1,362).

Revenue by Form

Three months ended June 30,

Three months ended September 30,

(in thousands of Canadian dollars)

11 unchanged sentences

1 Excludes the impact of other revenue adjustments.

Net revenue was $136.2 million in the first quarter of fiscal 2022, as compared to $110.4 million in the first quarter of fiscal 2021.

The year-over-year increase is attributable to:

Growth in our global cannabis segment, which was primarily due to the performance of our Canadian recreational business-to-business and business-to-consumer channels;

Growth in our other consumer products segment, which was primarily due to the continued strong performance by Storz & Bickel and growth in our BioSteel business.

These increases were both due primarily to the expansion of our U.S.

distribution networks during fiscal 2021.

Net revenue was $131.4 million in the second quarter of fiscal 2022, as compared to $135.3 million in the second quarter of fiscal 2021.

The year-over-year decrease is attributable to:

A 12% decrease in revenue from our other consumer products segment, as a decline at our Storz & Bickel business was only partially offset by growth in our BioSteel and This Works businesses;

Growth of 1% in our global cannabis segment, which was primarily due to growth in our U.S.

CBD business, largely offset by declines across our Canadian recreational and medical businesses, and C 3 .

Global cannabis

Net revenue from our global cannabis segment was $92.9 million in the first quarter of fiscal 2022, as compared to $79.3 million in the first quarter of fiscal 2021.

Canadian recreational cannabis net revenue was $60.0 million in the first quarter of fiscal 2022, as compared to $44.3 million in the first quarter of fiscal 2021.

Net revenue from the business-to-business channel was $42.7 million in the first quarter of fiscal 2022, as compared to $34.9 million in the first quarter of fiscal 2021.

The year-over-year increase is primarily attributable to (i) the overall increase in demand resulting from the opening of 1,117 new retail stores across Canada since June 30, 2020, of which 413 opened in the first quarter of fiscal 2022;

(ii) the growth in our business from the acquisitions of Ace Valley on April 1, 2021, and Supreme Cannabis on June 22, 2021;

and (iii) the removal of COVID-19 related restrictions on businesses and reopening of cannabis retail stores across Canada since the first quarter of fiscal 2021;

these closures and restrictions had negatively impacted net revenue from our business-to-business channel in the first quarter of fiscal 2021.

However, we were impacted in the first quarter of fiscal 2022 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, and continued price compression resulting from increased competition in the value-priced dried flower category of the recreational market.

Revenue from the business-to-consumer channel was $17.3 million in the first quarter of fiscal 2022, as compared to $9.3 million in the first quarter of fiscal 2021.

The year-over-year increase is primarily attributable to (i) the build-out of our retail store platform across Canada to 34 corporate-owned Tweed and Tokyo Smoke retail stores, an increase from 22 stores at June 30, 2020;

and (ii) in the first quarter of fiscal 2021, revenue from our business-to-consumer channel was impacted by the

temporary closures of our retail stores and other operating restrictions implemented in response to the COVID-19 pandemic;

upon their re-opening, beginning in mid-April 2020, our retail stores largely operated with reduced hours and under a “click-and-collect” model with curbside pickup or delivery.

Canadian medical cannabis net revenue was $13.5 million in the first quarter of fiscal 2022, a slight decrease of 3% as compared to the first quarter of fiscal 2021.

International and other cannabis revenue was $19.4 million in the first quarter of fiscal 2022, as compared to $21.1 million in the first quarter of fiscal 2021.

C 3 contributed revenue of $11.4 million in the first quarter of fiscal 2022, a year-over-year decrease of $3.9 million driven primarily by a limitation on sales activities associated with COVID-19 restrictions, and increased competition in the synthetic cannabinoid market in Germany relative to the prior year.

Other cannabis revenue was $8.0 million in the first quarter of fiscal 2022, a year-over-year increase of $2.2 million primarily attributable to the growth in our U.S.

CBD business, which was driven by the introduction of the Martha Stewart CBD line of products and Quatreau CBD beverages in the second and fourth quarters of fiscal 2021, respectively.

Partially offsetting this was a year-over-year decrease associated with our German medical cannabis business, primarily related to increased competition and the stockpiling of cannabis products by German pharmacies in the first quarter of fiscal 2021 in response to COVID-19 related restrictions on trade and business operations.

Net revenue from our global cannabis segment was $95.3 million in the second quarter of fiscal 2022, as compared to $94.3 million in the second quarter of fiscal 2021.

Canadian recreational cannabis net revenue was $58.6 million in the second quarter of fiscal 2022, as compared to $60.9 million in the second quarter of fiscal 2021.

Net revenue from the business-to-business channel was $41.9 million in the second quarter of fiscal 2022, as compared to $42.2 million in the second quarter of fiscal 2021.

In the second quarter of fiscal 2022, we were impacted primarily by (i) insufficient supply of in-demand dried flower products, driven by shifting consumer preferences for certain single strain and higher-potency dried flower products and smaller format pre-rolls;

and (ii) continued price compression, particularly in the value-priced dried flower category of the recreational market.

These factors were largely offset by the growth in our business from the acquisitions of Ace Valley and Supreme Cannabis in the first quarter of fiscal 2022 which, together, contributed revenue of $14.2 million in the second quarter of fiscal 2022.

Revenue from the business-to-consumer channel was $16.7 million in the second quarter of fiscal 2022, as compared to $18.7 million in the second quarter of fiscal 2021.

The year-over-year decrease is primarily attributable to the rapid increase in the number of third-party owned retail stores across Canada, resulting in increased competition in the provinces in which we operate corporate-owned stores.

Canadian medical cannabis net revenue was $13.1 million in the second quarter of fiscal 2022, a year-over-year decrease of $0.8 million.

While the broadening of our brand and medical cannabis product offerings to include pre-rolled joints, vapes, and premium dried flower products has benefited the average size of orders placed through our medical channel, we were impacted in the second

quarter of fiscal 2022 by a year-over-year decrease in the total number of medical orders , which was primarily related to the increasing number of recreational cannabis retail stores across Canada.

With the build-out of the retail store netw ork across Canada, customers are now offered greater availability and convenience in shopping for cannabis products.

International and other cannabis revenue was $23.7 million in the second quarter of fiscal 2022, as compared to $19.5 million in the second quarter of fiscal 2021.

C 3 contributed revenue of $11.9 million in the second quarter of fiscal 2022, a year-over-year decrease of $1.7 million driven primarily by increased competition in the synthetic cannabinoid market in Germany, and the impact of the stronger Canadian dollar relative to the prior year.

Other cannabis revenue was $11.8 million in the second quarter of fiscal 2022, a year-over-year increase of $5.8 million primarily attributable to the growth in our U.S.

CBD business, which was driven by the introduction of the Martha Stewart CBD line of products, Quatreau CBD beverages, and whisl CBD vapes over the last twelve months.

Partially offsetting this increase was a year-over-year decrease associated with our German medical cannabis business, primarily related to increased competition and the impact of the stronger Canadian dollar relative to the prior year.

Other consumer products

Revenue from our other consumer products segment was $43.3 million in the first quarter of fiscal 2022, as compared to $31.1 million in the first quarter of fiscal 2021.

Revenue from Storz & Bickel was $24.1 million in the first quarter of fiscal 2022, a year-over-year increase of $7.0 million due primarily to the continuing strong performance in the United States which was largely attributable to the expansion of our distribution network over the last year.

Revenue from This Works was $6.6 million in the first quarter of fiscal 2022, a year-over-year increase of $0.5 million driven primarily by (i) the expansion of third-party e-commerce channels over the last year;

and (ii) the adverse impact on revenue in the first quarter of fiscal 2021 due to the temporary closure of brick-and-mortar retail stores in the United Kingdom associated with the COVID-19 pandemic, which This Works was able to partially mitigate through the sale of hand sanitizer products.

Revenue from BioSteel was $6.7 million in the first quarter of fiscal 2022, a year-over-year increase of $4.2 million due primarily to (i) the expansion of our United States distribution network beginning in the fourth quarter of fiscal 2021;

Revenue from our other consumer products segment was $36.0 million in the second quarter of fiscal 2022, as compared to $41.0 million in the second quarter of fiscal 2021.

Revenue from Storz & Bickel was $14.5 million in the second quarter of fiscal 2022, a year-over-year decrease of $7.3 million due primarily to (i) shipping restrictions and constraints impacting the delivery of our products;

(ii) challenges in obtaining certain parts for our vaporizers due to global supply chain shortages and delays;

(iii) the comparable period had benefited from consumers purchasing household items, such as vaporizers, due to closures and restrictions associated with the COVID-19 pandemic;

and (iv) the impact of the stronger Canadian dollar relative to the prior year.

Revenue from This Works was $9.0 million in the second quarter of fiscal 2022, a year-over-year increase of $1.2 million driven primarily by (i) the expansion of third-party e-commerce channels over the last year;

and (ii) the adverse impact on revenue in the second quarter of fiscal 2021 due to the temporary closure of brick-and-mortar retail stores in the United Kingdom associated with the COVID-19 pandemic.

Revenue from BioSteel was $7.5 million in the second quarter of fiscal 2022, a year-over-year increase of $2.4 million due primarily to (i) the expansion of our United States distribution network beginning in the fourth quarter of fiscal 2021;

(ii) new “ready-to-drink” product launches during the last year;

and (iii) the adverse impact on revenue in the first quarter of fiscal 2021 related to COVID-19 related restrictions on retailers.

and (iii) the adverse impact on revenue in the second quarter of fiscal 2021 related to COVID-19 related restrictions on retailers.

Cost of Goods Sold and Gross Margin

The following table presents cost of goods sold, gross margin and gross margin percentage on a consolidated basis for the three months ended June 30, 2021 and 2020:

Three months ended June 30,

The following table presents cost of goods sold, gross margin and gross margin percentage on a consolidated basis for the three months ended September 30, 2021 and 2020:

Three months ended September 30,

(in thousands of Canadian dollars except where indicated)

1 unchanged sentence

Gross margin percentage

Cost of goods sold was $109.0 million in the first quarter of fiscal 2022, as compared to $103.9 million in the first quarter of fiscal 2021.

Our gross margin was $27.2 million in the first quarter of fiscal 2022, or 20% of net revenue, as compared to a gross margin of $6.5 million and gross margin percentage of 6% of net revenue in the first quarter of fiscal 2021.

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

Improved leverage of our fixed and variable costs relative to the first quarter of fiscal 2021, particularly as it relates to Canada.

In the first quarter of fiscal 2021, we lowered our production output to align with the expected market demand at that time.

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 first quarter of fiscal 2021, resulted in an adverse impact on our gross margin in the first quarter of fiscal 2021.

Additionally, in connection with the change to our

production strategy we had also adjusted our cannabis production profile to focus on higher-potency strains, resulting in additional inventory charges in the first quarter of fiscal 2021.

Payroll subsidies in the amount of $7.3 million received from the Canadian government in the first quarter of fiscal 2022, pursuant to a COVID-19 relief program.

Our gross margin in the first quarter of fiscal 2022 was impacted by the following items:

Cost of goods sold was $202.5 million in the second quarter of fiscal 2022, as compared to $109.2 million in the second quarter of fiscal 2021.

Our gross margin was $(71.1) million in the second quarter of fiscal 2022, or (54%) of net revenue, as compared to a gross margin of $26.1 million and gross margin percentage of 19% of net revenue in the second quarter of fiscal 2021.

The year-over-year decrease in the gross margin percentage was primarily attributable to inventory write-downs recorded in the second quarter of fiscal 2022.

These write-downs were primarily related to excess Canadian cannabis inventory, resulting from underperformance relative to forecast as well as declines in expected near-term demand.

Our gross margin in the second quarter of fiscal 2022 was also impacted by the following items:

A year-over-year decrease in net revenue and continued price compression in our Canadian recreational cannabis channel, as described above in our analysis of revenue for the second quarter of fiscal 2022.

Higher third-party shipping, distribution and warehousing costs across North America resulting primarily from increased rates, which impacted our Canadian cannabis and U.S.

1 unchanged sentence

Charges totaling $3.1 million related to the flow-through of inventory step-up associated with the acquisition of Supreme Cannabis in the first quarter of fiscal 2022.

This compares to charges of $1.2 million in the first quarter of fiscal 2021, which were associated with fiscal 2020 business combinations.

This compares to charges of $0.3 million in the second quarter of fiscal 2021, which were associated with fiscal 2020 business combinations.

Our gross margin in the second quarter of fiscal 2022 benefited from payroll subsidies in the amount of $6.9 million received from the Canadian government, pursuant to a COVID-19 relief program.

We report gross margin and gross margin percentage in two segments:

1 unchanged sentence

and (ii) other consumer products.

The following table presents segmented gross margin and gross margin percentage for the three months ended June 30, 2021 and 2020:

Three months ended June 30,

The following table presents segmented gross margin and gross margin percentage for the three months ended September 30, 2021 and 2020:

Three months ended September 30,

(in thousands of Canadian dollars except where indicated)

6 unchanged sentences

Global cannabis

Gross margin for our global cannabis segment was $13.4 million in the first quarter of fiscal 2022, or 14% of net revenue, as compared to $(6.9) million in the first quarter of fiscal 2021, or (9%) of net revenue.

The year-over-year increase in the gross margin percentage was primarily due to (i) the improvement in our Canadian cannabis business, as described above in our analysis of gross margin on a consolidated basis;

and (ii) payroll subsidies in the amount of $7.3 million received from the Canadian government in the first quarter of fiscal 2022, pursuant to a COVID-19 relief program.

Partially offsetting these factors was (i) a shift in the business mix in the first quarter of fiscal 2022, as the revenue contribution to the global cannabis segment from our higher-margin C 3 business decreased relative to the first quarter of fiscal 2021, as explained above in our analysis of segmented revenue;

and (ii) charges totaling $1.4 million related to the flow-through of inventory step-up associated with the acquisition of Supreme Cannabis in the first quarter of fiscal 2022.

Gross margin for our global cannabis segment was $(82.6) million in the second quarter of fiscal 2022, or (87%) of net revenue, as compared to $12.1 million in the second quarter of fiscal 2021, or 13% of net revenue.

The year-over-year decease in the gross margin percentage was primarily due to the inventory write-downs recorded in the second quarter of fiscal 2022 in relation to excess Canadian cannabis inventory, as described above in our analysis of gross margin on a consolidated basis.

Additionally, we recorded charges totaling $3.1 million related to the flow-through of inventory step-up associated with the acquisition of Supreme Cannabis.

Our gross margin in the second quarter of fiscal 2022 benefited from payroll subsidies in the amount of $6.9 million received from the Canadian government, pursuant to a COVID-19 relief program.

Other consumer products

Gross margin for our other consumer products segment was $13.9 million in the first quarter of fiscal 2022, or 32% of net revenue, as compared to $13.4 million in the first quarter of fiscal 2021, or 43% of net revenue.

The year-over-year decrease in the gross margin percentage was primarily attributable to increased third-party shipping, distribution and warehousing costs across North America, which primarily impacted Storz & Bickel and BioSteel.

The effect of this was compounded by a shift in the business mix towards an increased revenue contribution from the lower-margin BioSteel business.

Gross margin for our other consumer products segment was $11.5 million in the second quarter of fiscal 2022, or 32% of net revenue, as compared to $14.0 million in the second quarter of fiscal 2021, or 34% of net revenue.

The gross margin was also impacted by the year-over-year reduction in revenue for our Storz & Bickel business, as discussed above in our analysis of net revenue for the second quarter of fiscal 2022, and the resulting shift in the business mix towards an increased revenue contribution from the lower-margin BioSteel business.

Operating Expenses

The following table presents operating expenses for the three months ended June 30, 2021 and 2020:

Three months ended June 30,

The following table presents operating expenses for the three months ended September 30, 2021 and 2020:

Three months ended September 30,

(in thousands of Canadian dollars)

10 unchanged sentences

Share-based compensation expense

Expected credit losses on financial assets

and related charges

Asset impairment and restructuring costs

1 unchanged sentence

Selling, general and administrative expenses

Selling, general and administrative expenses were $112.6 million in the first quarter of fiscal 2022, as compared to $135.4 million in the first quarter of fiscal 2021.

General and administrative expense was $33.7 million in the first quarter of fiscal 2022, as compared to $64.8 million in the first quarter of fiscal 2021.

Selling, general and administrative expenses were $125.8 million in the second quarter of fiscal 2022, as compared to $147.3 million in the second quarter of fiscal 2021.

General and administrative expense was $35.5 million in the second quarter of fiscal 2022, as compared to $69.6 million in the second quarter of fiscal 2021.

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 and continuing through fiscal 2021, resulting from an organizational and strategic review of our business.

As a result of these restructuring actions, we realized reductions primarily related to (i) compensation costs for finance, information technology, legal and other administrative functions;

and (ii) professional consulting fees.

Additionally, we received payroll subsidies in the amount of $12.7 million from the Canadian government in the first quarter of fiscal 2022, pursuant to a COVID-19 relief program.

Sales and marketing expense was $50.5 million in the first quarter of fiscal 2022, as compared to $37.8 million in the first quarter of fiscal 2021.

The year-over-year increase is primarily due to a return to more normal advertising and promotional spending in the first quarter of fiscal 2022;

in the first quarter of fiscal 2021, we delayed or cancelled various product and brand marketing initiatives across our business due to the measures established to contain the spread of COVID-19.

Research and development expense was $8.3 million in the first quarter of fiscal 2022, as compared to $13.7 million in the first quarter of fiscal 2021.

As a result of these initiatives, we continued to realize reductions relative to the prior year primarily in relation to (i) compensation and third-party costs for finance, information technology, legal and other administrative functions;

and (ii) professional consulting fees associated with the business review described above.

Additionally, we received payroll subsidies in the amount of $10.6 million from the Canadian government in the second quarter of fiscal 2022, pursuant to a COVID-19 relief program.

These cost reductions were partially offset by an increase in general and administrative expenses associated with the growth in our business, particularly in relation to our acquisition of Supreme Cannabis in the first quarter of fiscal 2022.

Sales and marketing expense was $64.5 million in the second quarter of fiscal 2022, as compared to $43.4 million in the second quarter of fiscal 2021.

The year-over-year increase is primarily due to a return to more normal advertising and promotional spending in the second quarter of fiscal 2022, as in the first half of fiscal 2021 we delayed or cancelled various product and brand marketing initiatives across our business due to the measures established to contain the spread of COVID-19.

Additionally, we incurred higher sponsorship fees associated with BioSteel’s partnership deals, and increased advertising and promotion expenses associated with new product launches, most notably the launch of BioSteel’s ready-to-drink beverages across the United States, and the introduction of our whisl, a CBD vape in the United States.

We also incurred professional consulting fees associated with our selling, advertising and marketing strategies, and our costs increased as a result of the acquisitions of Supreme Cannabis and Ace Valley in the first quarter of fiscal 2022.

Research and development expense was $8.8 million in the second quarter of fiscal 2022, as compared to $14.2 million in the second quarter of fiscal 2021.

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 to focus on opportunities outside of pharmaceutical drug development, we realized reductions in compensation costs and concluded or curtailed certain research and development projects for which we had incurred costs in fiscal 2020 and in the first quarter of fiscal 2021.

Further, projects planned for fiscal 2022 have been slow to launch.

Additionally, we realized a reduction in research and development costs associated with the closure of certain of our sites in Canada in the fourth quarter of fiscal 2021.

Acquisition-related costs were $5.8 million in the first quarter of fiscal 2022, as compared to $1.4 million in the first quarter of fiscal 2021.

In the first quarter of fiscal 2022, costs were incurred in relation to the acquisitions of Ace Valley and Supreme Cannabis, as described in “Recent Developments” above, and evaluating other potential acquisition opportunities.

Comparatively, in the first quarter of fiscal 2021, costs were primarily incurred in relation to the Acreage Amended Arrangement.

Depreciation and amortization expense was $14.2 million in the first quarter of fiscal 2022, as compared to $17.7 million in the first quarter of fiscal 2021.

Acquisition-related costs were $2.4 million in the second quarter of fiscal 2022, as compared to $3.5 million in the second quarter of fiscal 2021.

In the second quarter of fiscal 2022, costs were incurred primarily in relation to the plan to acquire Wana, as described in “Recent Developments” above, the completion of the acquisition of Supreme Cannabis, and evaluating other potential acquisition opportunities.

Comparatively, in the second quarter of fiscal 2021, costs were primarily incurred in relation to the Acreage Amended Arrangement.

Depreciation and amortization expense was $14.5 million in the second quarter of fiscal 2022, as compared to $16.7 million in the second quarter of fiscal 2021.

The year-over-year decrease is primarily associated with operational changes announced in December 2020, which resulted in the abandonment or impairment of certain of our Canadian production facilities and intangible assets, and the termination of a licensing agreement with a third party in the fourth quarter of fiscal 2021.

Share-based compensation expense

Share-based compensation expense was $11.4 million in the first quarter of fiscal 2022, as compared to $28.6 million in the first quarter of fiscal 2021.

Share-based compensation expense was $14.2 million in the second quarter of fiscal 2022, as compared to $19.9 million in the second quarter of fiscal 2021.

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

The completion of vesting, prior to the first quarter of fiscal 2022, of a significant number of stock options that were granted in previous fiscal years;

The impact of our restructuring actions that commenced in the fourth quarter of fiscal 2020 and continued in fiscal 2021, which resulted in 8.2 million forfeitures in fiscal 2021 and 809,960 forfeitures and cancellations in the first quarter of fiscal 2022;

An overall decrease in the number of outstanding stock options resulting from the implementation of a new “Total Rewards Program” for our employees in the first half of fiscal 2020 and associated modification of our share-based compensation program, which reduced the number of stock option awards granted in the first quarter of fiscal 2022.

The completion of vesting, prior to the second quarter of fiscal 2022, of a significant number of stock options that were granted in previous fiscal years;

The impact of our restructuring actions that commenced in the fourth quarter of fiscal 2020 and continued in fiscal 2021, which resulted in 8.2 million forfeitures in fiscal 2021 and 1.3 million forfeitures and cancellations in the first six months of fiscal 2022;

On a go-forward basis, we have determined to fix the regular timing of our annual long-term incentive grants to occur in June of each year, beginning in fiscal 2022.

As such, no long-term incentive awards were granted in the first quarter of fiscal 2021, with the prior long-term incentive grants having been made in the fourth quarter of fiscal 2020.

Share-based compensation expense related to acquisition milestones was $1.7 million in the first quarter of fiscal 2022, as compared to $2.1 million in the first quarter of fiscal 2021.

Accordingly, there were no stock option grants in the second quarter of fiscal 2022.

Share-based compensation expense related to acquisition milestones was $1.7 million in the second quarter of fiscal 2022, as compared to $2.1 million in the second quarter of fiscal 2021.

The year-over-year decrease is primarily related to the completion of vesting, in prior quarters, of the share-based compensation associated with the acquisitions of ebbu Inc.

(“ebbu”) and Spectrum Cannabis Denmark Aps.

Therefore, there was no share-based compensation expense recognized with respect to these acquisitions in the first quarter of fiscal 2022.

(“ebbu”) and Spectrum Cannabis Denmark Aps (“Spectrum Denmark”).

Therefore, there was no share-based compensation expense recognized with respect to these acquisitions in the second quarter of fiscal 2022.

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, in relation to PharmHouse Inc.

(“PharmHouse”), a joint venture formed between RIV Capital Inc.

(“RIV Capital”) and its joint venture partner in May 2018.

These expected credit losses and related charges were recognized through February 23, 2021, the date on which a plan of arrangement (the “RIV Arrangement”) was completed pursuant to which we surrendered all shares in the capital of RIV Capital held by us, and derecognized RIV Capital’s consolidated assets and liabilities from our consolidated financial statements.

These expected credit losses and related charges included:

$54.7 million related to expected credit losses associated with financing provided by RIV Capital to PharmHouse, and which we determined may not be recoverable.

The amounts included (i) $40.0 million of secured debt financing advanced pursuant to a shareholder loan;

(ii) $2.1 million advanced under a debtor-in-possession, non-revolving credit facility;

(iii) a total of $3.7 million advanced under secured and unsecured promissory notes;

and (iv) associated interest receivable totaling $8.9 million;

$25.0 million related to expected credit losses recognized for RIV Capital’s contingent obligation to perform on the financial guarantee they provided with respect to PharmHouse’s $90.0 million credit agreement.

The expected credit losses reflected the shortfall between the estimated recoverable amount of PharmHouse and RIV Capital’s exposure under their financial guarantee of PharmHouse’s credit agreement;

$15.0 million related to certain advances provided by RIV Capital to PharmHouse that were determined to be unrecoverable.

Additionally, we determined that there was an other-than-temporary impairment on our equity investment in PharmHouse, and recognized an impairment charge for the full amount of the investment of $32.4 million (see “Loss from equity method investments” below).

Asset impairment and restructuring costs

Asset impairment and restructuring costs recorded in operating expenses were $89.2 million in the first quarter of fiscal 2022, as compared to $12.8 million in the first quarter of fiscal 2021.

In the first quarter of fiscal 2022, we recorded charges related to operational changes resulting from the continuing strategic review of our business as a result of recent acquisition activities, and the partial outcome of certain integration initiatives.

Additionally, we recognized incremental costs associated with the closure of certain of our Canadian production facilities in December 2020.

Charges totaling $89.2 million were recognized in the first quarter of fiscal 2022, primarily representing the difference between the net book value of the associated long-lived assets and their estimated fair value.

Comparatively, in the first quarter of fiscal 2021 we recognized asset impairment and restructuring costs of $12.8 million in relation to (i) final adjustments related to changes in certain estimates recorded at March 31, 2020, associated with the closure of certain of our Canadian production facilities;

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

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

The following table presents loss from equity method investments, other income (expense), net, and income tax (expense) recovery for the three months ended June 30, 2021 and 2020:

Three months ended June 30,

Asset impairment and restructuring costs recorded in operating expenses were $2.5 million in the second quarter of fiscal 2022, as compared to $46.4 million in the second quarter of fiscal 2021.

In the second quarter of fiscal 2022, we recorded charges of $2.5 million primarily related to incremental costs associated with the closure of previously-identified Canadian production facilities in December 2020.

Comparatively, in the second quarter of fiscal 2021, we recognized asset impairment and restructuring costs of $46.4 million in relation to (i) adjustments related to changes in the estimated fair value of certain Canadian production facilities from March 31, 2020;

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

The following table presents loss from equity method investments, other income (expense), net, and income tax (expense) recovery for the three months ended September 30, 2021 and 2020:

Three months ended September 30,

(in thousands of Canadian dollars)

1 unchanged sentence

Other income (expense), net

Income tax (expense) recovery

Income tax recovery (expense)

Loss from equity method investments

The loss from equity method investments was $0.1 million in the first quarter of fiscal 2022, as compared to $7.2 million in the first quarter of fiscal 2021.

The year-over-year decrease in the loss is primarily attributable to the losses associated with our equity investments in PharmHouse Inc.

and Agripharm Corp.

(“Agripharm”) in the first quarter of fiscal 2021 (both of which were impaired in fiscal 2021, and no further equity method losses were recognized in respect of these investments in the first quarter of fiscal 2022), whereas in the first quarter of fiscal 2022 we recognized a nominal impairment of our investment in Agripharm.

The loss from equity method investments was $nil in the second quarter of fiscal 2022, as compared to $33.0 million in the second quarter of fiscal 2021.

The year-over-year decrease 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 investment in PharmHouse, as discussed above under “Expected credit losses on financial assets and related charges”.

Additionally, as our remaining investment in Agripharm Corp.

(“Agripharm”) was impaired in the first quarter of fiscal 2022, no equity method losses were recognized in the second quarter of fiscal 2022.

Other income (expense), net

Other income (expense), net was an income amount of $580.7 million in the first quarter of fiscal 2022, as compared to an income amount of $48.2 million in the first quarter of fiscal 2021.

The year-over-year increase in income of $532.5 million is primarily attributable to:

Increase in non-cash income of $280.9 million related to fair value changes on the warrant derivative liability associated with the Tranche B Warrants held by CBI (as defined in Note 27 of the Interim Financial Statements).

The decrease of $316.3 million in the fair value of the warrant derivative liability (resulting in non-cash income) in the first quarter of fiscal 2022 is primarily attributable to a decrease of approximately 26% in our share price from April 1, 2021 to June 30, 2021, further impacted by a shorter expected time to maturity of the warrants.

Comparatively, the decrease of $35.4 million in the fair value of the warrant derivative liability in the first quarter of fiscal 2021 was primarily attributable to changes during the quarter in certain assumptions used to value the liability, including the risk-free rate, partially offset by a slight increase in the price of our common shares.

Change of $185.0 million related to the non-cash fair value changes on the liability arising from the Acreage Arrangement, from an expense amount of $35.0 million in the first quarter of fiscal 2021 to an income amount of $150.0 million in the first quarter of fiscal 2022.

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 Amended Arrangement.

The income amount recognized in the first quarter of fiscal 2022, associated with a decrease in the liability arising from the Acreage Arrangement, is primarily attributable to a decrease of approximately 26% in our share price from April 1, 2021 to June 30, 2021, relative to a decrease of approximately 27% in Acreage’s share price during that same period.

As a result, the model at June 30, 2021 reflects a lower 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 (changes in our share price have a more significant impact on the model relative to changes in Acreage’s share price).

Comparatively, the expense amount recognized in the first quarter of fiscal 2021 was primarily attributable to the amendments proposed in that quarter to the previous arrangement with Acreage, relating to the revised exchange ratio and the expected incremental shareholder payment of US$37.5 million.

Change of $71.0 million related to the non-cash fair value changes on the Notes, from an expense amount of $20.3 million in the first quarter of fiscal 2021 to an income amount of $50.7 million in the first quarter of fiscal 2022.

The year-over-year change is primarily due to the decrease of approximately 26% in our share price in the first quarter of fiscal 2022, as compared to an increase of approximately 7% in our share price in the first quarter of fiscal 2021.

Change of $62.3 million related to non-cash fair value changes on our other financial assets, from an income amount of $21.8 million in the first quarter of fiscal 2021 to an income amount of $84.2 million in the first quarter of fiscal 2022.

The current quarter income amount is primarily attributable to fair value increases relating to our investments in the exchangeable shares in the capital of TerrAscend Corp.

Other income (expense), net was an income amount of $195.8 million in the second quarter of fiscal 2022, as compared to an income amount of $221.3 million in the second quarter of fiscal 2021.

The year-over-year decrease in income of $25.4 million is primarily attributable to:

Change of $361.5 million related to non-cash fair value changes on our other financial assets, from an income amount of $82.1 million in the second quarter of fiscal 2021 to an expense amount of $279.4 million in the second quarter of fiscal 2022.

The current quarter expense amount is primarily attributable to fair value decreases relating to our investments in the exchangeable shares in the capital of TerrAscend Corp.

(“TerrAscend”) ($166.0 million), and the secured debentures issued by TerrAscend Canada Inc.

(“TerrAscend Canada”) and Arise Bioscience and associated warrants issued by TerrAscend (the “TerrAscend Warrants”) (totaling $32.7 million), driven largely by (i) an increase of approximately 11% in TerrAscend’s share price in the first quarter of fiscal 2022;

and (ii) re-assessments 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 in the third and fourth quarters of fiscal 2021.

Comparatively, in the first quarter of fiscal 2021 the income amount was primarily attributable to fair value increases in the secured debenture issued by TerrAscend Canada and the associated TerrAscend Warrants, driven largely by an increase in TerrAscend’s share price of approximately 17% from April 1, 2020 to June 30, 2020.

Although the percentage increase in TerrAscend’s share price was more significant in fiscal 2021, we increased our investment in TerrAscend in the second half of fiscal 2021.

Decrease in interest income of $6.3 million, from $9.0 million in the first quarter of fiscal 2021 to $2.6 million in the first quarter of fiscal 2022.

The year-over-year decrease is primarily attributable to the decrease in interest rates and the divestiture of our interest in RIV Capital Inc.

in the fourth quarter of fiscal 2021.

Increase in interest expense of $23.4 million, primarily attributable to the US$750M debt financing that occurred in the fourth quarter of fiscal 2021.

Decrease of $40.2 million in non-cash income related to fair value changes on acquisition related contingent consideration.

In the first quarter of fiscal 2021, we recognized income attributable to changes in our assessment of the probability and timing of ebbu achieving certain scientific milestones associated with its acquisition in fiscal 2019.

The acquisition related contingent consideration associated with ebbu was settled by the end of fiscal 2021.

Income tax (expense) recovery

Income tax expense in the first quarter of fiscal 2022 was $2.9 million, compared to income tax recovery of $3.0 million in the first quarter of fiscal 2021.

In the first quarter of fiscal 2022, income tax expense consisted of a deferred income tax recovery of $0.6 million (compared to a recovery of $2.1 million in the first quarter of fiscal 2021) and current income tax expense of $3.5 million (compared to a recovery of $0.9 million in the first quarter of fiscal 2021).

The decrease of $1.5 million in the deferred income tax recovery is primarily a result of current quarter changes being less than prior year in respect of 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.

(“TerrAscend Canada”) and Arise Bioscience and associated warrants issued by TerrAscend (the “TerrAscend Warrants”) (totaling $109.0 million), driven largely by (i) a decrease of approximately 38% in TerrAscend’s share price in the second quarter of fiscal 2022;

Comparatively, in the second quarter of fiscal 2021 the income amount was primarily attributable to fair value increases relating to our investments in the TerrAscend exchangeable shares ($61.0 million), and the TerrAscend Canada secured debentures and TerrAscend Warrants (totaling $55.9 million), driven largely by an increase of approximately 101% in TerrAscend’s share price from July 1, 2020 to September 30, 2020.

Increase in interest expense of $25.1 million, from $1.5 million in the second quarter of fiscal 2021 to $26.6 million in the second quarter of fiscal 2022.

The year-over-year increase is primarily attributable to the US$750 million debt financing that occurred in the fourth quarter of fiscal 2021.

Increase in non-cash income of $199.8 million related to the non-cash fair value changes on the liability arising from the Acreage Arrangement, from $88.2 million in the second quarter of fiscal 2021 to $288.0 million in the second quarter of fiscal 2022.

The income amount recognized in the first quarter of fiscal 2022, associated with a decrease in the liability arising from the Acreage Arrangement, is primarily attributable to a decrease of approximately 41% in our share price from July 1, 2021 to September 30, 2021, relative to a decrease of approximately 9% in Acreage’s share price during that same period.

As a result, the model at September 30, 2021 reflects a lower 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 (changes in our share price have a more significant impact on the model relative to changes in Acreage’s share price);

this resulted in a reduction of the liability amount.

Comparatively, the income amount recognized in the second quarter of fiscal 2021 was primarily attributable to the implementation of the Acreage Amended Arrangement in September 2020 which 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 Universal Hemp, LLC, a wholly-owned subsidiary

of Acreage ( “Acreage Hempco ”) pursuant to the debenture;

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

Increase in non-cash income of $129.4 million related to fair value changes on the warrant derivative liability associated with the Tranche B Warrants held by CBI (as defined in Note 27 of the Interim Financial Statements).

The decrease of $194.5 million in the fair value of the warrant derivative liability (resulting in non-cash income) in the second quarter of fiscal 2022 is primarily attributable to a decrease of approximately 41% in our share price from July 1, 2021 to September 30, 2021, further impacted by a shorter expected time to maturity of the warrants.

Comparatively, the decrease of $65.2 million in the fair value of the warrant derivative liability in the second quarter of fiscal 2021 was 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 rate.

Change of $42.0 million related to the non-cash fair value changes on the Notes, from an expense amount of $11.9 million in the second quarter of fiscal 2021 to an income amount of $30.0 million in the second quarter of fiscal 2022.

The year-over-year change is primarily due to the decrease of approximately 41% in our share price in the second quarter of fiscal 2022, as compared to a decline of approximately 15% in our share price in the second quarter of fiscal 2021, along with year-over-year changes in credit spreads.

Income tax recovery (expense)

Income tax recovery in the second quarter of fiscal 2022 was $3.2 million, compared to income tax expense of $0.6 million in the second quarter of fiscal 2021.

In the second quarter of fiscal 2022, income tax recovery consisted of a deferred income tax recovery of $1.4 million (compared to a recovery of $1.1 million in the second quarter of fiscal 2021) and current income tax recovery of $1.8 million (compared to an expense of $1.6 million in the second quarter of fiscal 2021).

The increase of $0.3 million in the deferred income tax recovery is primarily a result of 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.

In connection with certain deferred tax assets, mainly in respect to losses for tax purposes, where the accounting criteria for recognition of an asset has yet to be satisfied and it is not probable that they will be used, the deferred tax asset has not been recognized.

The increase of $4.4 million in the current income tax expense arose primarily in connection with legal entities that generated income for tax purposes that could not be reduced by the group’s tax attributes.

Net Income (Loss)

Net income in the first quarter of fiscal 2022 was $390.0 million, as compared to a net loss of $128.3 million in the first quarter of fiscal 2021.

The year-over-year change from a net loss to net income is primarily attributable to the year-over-year increase in other income (expense), net, as described above.

The change of $3.4 million from current income tax expense to recovery arose primarily in connection with legal entities that generated income for tax purposes that could not be reduced by the group’s tax attributes, net of prior years’ return to provision tax recovery.

The net loss in the second quarter of fiscal 2022 was $16.3 million, as compared to a net loss of $96.6 million in the second quarter of fiscal 2021.

The year-over-year decrease in the net loss is primarily attributable to the year-over-year decreases in (i) expected credit losses on financial assets and related charges;

(ii) asset impairment and restructuring costs;

and (iii) the loss from equity method investments.

These changes, contributing to a decrease in the net loss, were partially offset by the year-over-year decrease in our gross margin.

These variances are described above.

Adjusted EBITDA (Non-GAAP Measure)

11 unchanged sentences

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 June 30, 2021 and 2020:

Three months ended June 30,

The following table presents Adjusted EBITDA for the three months ended September 30, 2021 and 2020:

Three months ended September 30,

(in thousands of Canadian dollars)

Income tax (recovery) expense

Other (income) expense, net

Loss on equity method investments

Share-based compensation 1

Acquisition-related costs

Depreciation and amortization 1

Asset impairment and restructuring costs

Expected credit losses on financial assets

and related charges

Charges related to the flow-through of inventory

step-up on business combinations

Adjusted EBITDA

1 From Statements of Cash Flows.

The Adjusted EBITDA loss in the second quarter of fiscal 2022 was $162.6 million, as compared to an Adjusted EBITDA loss of $85.7 million in the second quarter of fiscal 2021.

The year-over-year increase in the Adjusted EBITDA loss is primarily attributable to the year-over-year decrease in our gross margin, partially offset by the reduction in our total selling, general and administrative expense.

These variances are described above.

Discussion of Results of Operations for the Six Months Ended September 30, 2021

Six months ended September 30,

(in thousands of Canadian dollars, except share amounts and

where otherwise indicated)

Selected consolidated financial information:

Gross margin percentage

Net income (loss)

Income tax expense (recovery)

Net income (loss) attributable to Canopy Growth

Basic earnings (loss) per share 1

Diluted earnings (loss) per share 1

1 For the six months ended September 30, 2021, the weighted average number of outstanding common shares, basic and diluted, totaled 388,696,975 and 409,158,915, respectively.

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

We report net revenue in two segments:

(i) global cannabis;

and (ii) other consumer products.

The following tables present segmented net revenue, by channel and by form, for the six months ended September 30, 2021 and 2020:

Revenue by Channel

Six months ended September 30,

(in thousands of Canadian dollars)

Canadian recreational cannabis net revenue

Business-to-business 1

Business-to-consumer

Canadian medical cannabis net revenue 2

International and other revenue

Global cannabis net revenue

Other consumer products

Storz & Bickel

Other consumer products revenue

1 Reflects excise taxes of $30,747 and other revenue adjustments, representing our determination of returns and pricing adjustments, of $3,000 for the six months ended September 30, 2021 (six months ended September 30, 2020 - excise taxes of $21,446 and other revenue adjustments of $7,150).

2 Reflects excise taxes of $2,741 for the six months ended September 30, 2021 (six months ended September 30, 2020 - $2,788).

Revenue by Form

Six months ended September 30,

(in thousands of Canadian dollars)

Canadian recreational cannabis

Oils and softgels 1

Beverages, edibles, topicals and vapes 1

Other revenue adjustments

Medical cannabis and other

Oils and softgels

Beverages, edibles, topicals and vapes

Global cannabis net revenue

Other consumer products

Storz & Bickel

Other consumer products revenue

1 Excludes the impact of other revenue adjustments.

Net revenue was $267.6 million in the six months ended September 30, 2021, as compared to $245.7 million in the six months ended September 30, 2020.

The year-over-year increase is attributable to:

Growth in our other consumer products segment, which was primarily due to the growth in our BioSteel and This Works businesses;

Growth in our global cannabis segment, which was primarily due to the performance of our Canadian recreational business-to-business and business-to-consumer channels and our U.S.

CBD business.

Global cannabis

Net revenue from our global cannabis segment was $188.3 million in the six months ended September 30, 2021, as compared to $173.6 million in the six months ended September 30, 2020.

Canadian recreational cannabis net revenue was $118.6 million in the six months ended September 30, 2021, as compared to $105.2 million in the six months ended September 30, 2020.

Net revenue from the business-to-business channel was $84.6 million in the six months ended September 30, 2021, as compared to $77.2 million in the six months ended September 30, 2020.

The year-over-year increase is primarily attributable to (i) the overall increase in demand resulting from the opening of 1,226 new retail stores across Canada since September 30, 2020, of which 643 opened in the six months ended September 30, 2021;

and (ii) the growth in our business from the acquisitions of Ace Valley on April 1, 2021, and Supreme Cannabis on June 22, 2021.

Together, these acquisitions contributed revenue of $19.1 million in the six months ended September 30, 2021.

Partially offsetting these factors were the impacts, in the six months ended September 30, 2021 of (i) an insufficient supply of in-demand dried flower products, as described above in our analysis of revenue for the second quarter of fiscal 2022;

(ii) an unfavorable product mix, due primarily to an increase in the volume of value-priced dried flower product sold compared to the prior year;

(iii) continued price compression resulting from increased competition in the value-priced dried flower category of the recreational market.

Revenue from the business-to-consumer channel was $34.0 million in the six months ended September 30, 2021, as compared to $28.0 million in the six months ended September 30, 2020.

and (ii) in the six months ended September 30, 2020, revenue from our business-to-consumer channel was impacted by the temporary closures of our retail stores and other operating restrictions implemented in

response to the COVID-19 pandemic;

upon their re-opening, beginning in mid-April 2020, our retail stores largely operated with reduced hours and under a “click-and-collect” model with curbside pickup or delivery .

These factors were partially offset by the rapid build-out of third-party owned retail stores across Canada, resulting in increased competition in the provinces in which we operate corporate-owned stores.

Canadian medical cannabis net revenue was $26.6 million in the six months ended September 30, 2021, a decrease of 4% as compared to the six months ended September 30, 2020 due primarily to a year-over-year decrease in the total number of medical orders associated with the increase in the number of recreational cannabis retail stores across Canada, partially offset by an increase in the average order size.

International and other cannabis revenue was $43.1 million in the six months ended September 30, 2021, as compared to $40.6 million in the six months ended September 30, 2020.

C 3 contributed revenue of $23.3 million in the six months ended September 30, 2021, a year-over-year decrease of $5.6 million driven primarily by (i) a limitation on sales activities associated with COVID-19 restrictions, particularly in the first quarter of fiscal 2022;

(ii) increased competition in the synthetic cannabinoid market in Germany;

and (iii) the impact of the stronger Canadian dollar relative to the prior year.

Other cannabis revenue was $19.7 million in the six months ended September 30, 2021, a year-over-year increase of $8.1 million primarily attributable to the growth in our U.S.

CBD business, which was driven by the introduction of the Martha Stewart CBD line of products, Quatreau CBD beverages, and whisl CBD vapes over the last twelve months.

Partially offsetting this was a year-over-year decrease associated with our German medical cannabis business, primarily related to (i) increased competition;

(ii) the stockpiling of cannabis products by German pharmacies in the six months ended September 30, 2020 in response to COVID-19 related restrictions on trade and business operations;

and (iii) the impact of the stronger Canadian dollar relative to the prior year.

Other consumer products

Revenue from our other consumer products segment was $79.3 million in the six months ended September 30, 2021, as compared to $72.1 million in the six months ended September 30, 2020.

Revenue from Storz & Bickel was $38.6 million in the six months ended September 30, 2021, a slight decrease of 1% as compared to the six months ended September 30, 2020.

Revenue from This Works was $15.6 million in the six months ended September 30, 2021, a year-over-year increase of $1.7 million driven primarily by (i) the expansion of third-party e-commerce channels over the last year;

and (ii) the adverse impact on revenue in six months ended September 30, 2020 resulting from the temporary closure of brick-and-mortar retail stores in the United Kingdom associated with the COVID-19 pandemic.

Revenue from BioSteel was $14.2 million, a year-over-year increase of $6.6 million due primarily to (i) the expansion of our United States distribution network beginning in the fourth quarter of fiscal 2021;

(ii) new “ready-to-drink” product launches during the last year;

and (iii) the adverse impact on revenue in the six months ended September 30, 2020 related to COVID-19 related restrictions on retailers.

Cost of Goods Sold and Gross Margin

The following table presents cost of goods sold, gross margin and gross margin percentage on a consolidated basis for the six months ended September 30, 2021 and 2020:

Six months ended September 30,

(in thousands of Canadian dollars except where indicated)

Cost of goods sold

Gross margin percentage

Cost of goods sold was $311.5 million in the six months ended September 30, 2021, as compared to $213.1 million in the six months ended September 30, 2020.

Our gross margin was $(43.9) million in the six months ended September 30, 2021, or (16%) of net revenue, as compared to a gross margin of $32.6 million and gross margin percentage of 13% of net revenue in the six months ended September 30, 2020.

analysis of “Cost of Goods Sold and Gross Margin” within our discussion of our results of operations for the second quarter of fiscal 2022.

Our gross margin in the six months ended September 30, 2021 was also impacted by the following items:

Higher third-party shipping, distribution and warehousing costs across North America resulting primarily from increased rates, which impacted our Canadian cannabis and U.S.

CBD businesses, BioSteel, and Storz & Bickel.

Charges totaling $4.5 million related to the flow-through of inventory step-up associated with the acquisition of Supreme Cannabis in the first quarter of fiscal 2022.

This compares to charges of $1.5 million in the six months ended September 30, 2020, which were associated with fiscal 2020 business combinations.

Our gross margin in the six months ended September 30, 2021 benefited from payroll subsidies in the amount of $14.2 million received from the Canadian government, pursuant to a COVID-19 relief program.

We report gross margin and gross margin percentage in two segments:

(i) global cannabis;

and (ii) other consumer products.

The following table presents segmented gross margin and gross margin percentage for the six months ended September 30, 2021 and 2020:

Six months ended September 30,

(in thousands of Canadian dollars except where indicated)

Global cannabis segment

Cost of goods sold

Gross margin percentage

Other consumer products segment

Cost of goods sold

Gross margin percentage

Global cannabis

Gross margin for our global cannabis segment was $(69.2) million in the six months ended September 30, 2021, or (37%) of net revenue, as compared to $5.2 million in the six months ended September 30, 2020, or 3% of net revenue.

The year-over-year decrease in the gross margin percentage was primarily attributable to the inventory write-downs recorded in the second quarter of fiscal 2022 in relation to excess Canadian cannabis inventory, as described above in our analysis of “Cost of Goods Sold and Gross Margin” within our discussion of our results of operations for the second quarter of fiscal 2022.

Additionally, we recorded charges totaling $4.5 million in the six months ended September 30, 2021 related to the flow-through of inventory step-up associated with the acquisition of Supreme Cannabis.

Our gross margin in the six months ended September 30, 2021 benefited from payroll subsidies in the amount of $14.2 million received from the Canadian government pursuant to a COVID-19 relief program.

Other consumer products

Gross margin for our other consumer products segment was $25.3 million in the six months ended September 30, 2021, or 32% of net revenue, as compared to $27.4 million in the six months ended September 30, 2020, or 38% of net revenue.

The effect of this was compounded by a shift in the business mix towards an increased revenue contribution from the lower-margin BioSteel business.

Operating Expenses

The following table presents operating expenses for the six months ended September 30, 2021 and 2020:

Six months ended September 30,

(in thousands of Canadian dollars)

Operating expenses

General and administrative

Sales and marketing

Research and development

Acquisition-related costs

Depreciation and amortization

Selling, general and administrative expenses

Share-based compensation

Share-based compensation related to

acquisition milestones

Share-based compensation expense

Expected credit losses on financial assets

and related charges

Asset impairment and restructuring costs

Total operating expenses

Selling, general and administrative expenses

Selling, general and administrative expenses were $238.3 million in the six months ended September 30, 2021, as compared to $282.6 million in the six months ended September 30, 2020.

General and administrative expense was $69.2 million in the six months ended September 30, 2021, as compared to $134.4 million in the six months ended September 30, 2020.

As a result of these restructuring actions, we continued to realize reductions relative to the prior year primarily related to (i) compensation and third-party costs for finance, information technology, legal and other administrative functions;

and (ii) professional consulting fees associated with the business review described above.

Additionally, we received payroll subsidies in the amount of $23.3 million from the Canadian government in the six months ended September 30, 2021, pursuant to a COVID-19 relief program.

Sales and marketing expense was $115.1 million in the six months ended September 30, 2021, as compared to $81.1 million in the six months ended September 30, 2020.

The year-over-year increase is primarily due to a return to more normal advertising and promotional spending in the six months ended September 30, 2021.

In the first half of fiscal 2021, we delayed or cancelled various product and brand marketing initiatives across our business due to the measures established to contain the spread of COVID-19.

Additionally, relative to the six months ended September 30, 2021, we incurred (i) higher sponsorship fees associated with BioSteel’s partnership deals;

(ii) increased advertising and promotion expenses associated with new product launches for BioSteel and our U.S.

CBD business;

(iii) professional consulting fees associated with our selling, advertising and marketing strategies;

and (iv) increased sales and marketing costs associated with our acquisition of Supreme Cannabis and Ace Valley in the first quarter of fiscal 2022.

Research and development expense was $17.1 million in the six months ended September 30, 2021, as compared to $27.8 million in the six months ended September 30, 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.

We realized reductions in compensation costs and concluded or curtailed certain research and development projects as we rationalized our initiatives to focus on opportunities outside of pharmaceutical drug development.

Further, projects planned for fiscal 2022 have been slow to launch, and we realized a reduction in research and development costs associated with the closure of certain of our sites in Canada in the fourth quarter of fiscal 2021.

Acquisition-related costs were $8.2 million in the six months ended September 30, 2021, as compared to $4.9 million in the six months ended September 30, 2020.

In the six months ended September 30, 2021, costs were incurred in relation to the acquisitions of Supreme Cannabis and Ace Valley, the plan to acquire Wana, as described in “Recent Developments” above, and evaluating other potential acquisition opportunities.

Comparatively, in the six months ended September 30, 2020, costs were primarily incurred in relation to entering into, and implementing, the Acreage Amended Arrangement.

Depreciation and amortization expense was $28.8 million in the six months ended September 30, 2021, as compared to $34.4 million in the six months ended September 30, 2020.

Share-based compensation expense

Share-based compensation expense was $25.7 million in the six months ended September 30, 2021, as compared to $48.5 million in the six months ended September 30, 2020.

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

The completion of vesting, prior to the six months ended September 30, 2021, of a significant number of stock options that were granted in previous fiscal years;

The impact of our restructuring actions that commenced in the fourth quarter of fiscal 2020 and continued in fiscal 2021, which resulted in 8.2 million forfeitures in fiscal 2021 and 1.3 million forfeitures in the six months ended September 30, 2021;

On a go-forward basis, we have determined to fix the regular timing of our annual long-term incentive grants to occur in June of each year, beginning in fiscal 2022.

Share-based compensation expense related to acquisition milestones was $3.4 million in the six months ended September 30, 2021, as compared to $4.2 million in the six months ended September 30, 2020.

The year-over-year decrease is primarily related to the completion of vesting, in prior quarters, of the share-based compensation associated with the acquisitions of ebbu and Spectrum Denmark.

Therefore, there was no share-based compensation expense recognized with respect to these acquisitions in the six months ended September 30, 2021.

Expected credit losses on financial assets and related charges

In the six months ended September 30, 2021, we recorded expected credit losses on financial assets and related charges in the amount of $94.7 million, as described above in “Expected credit losses on financial assets and related charges”, within our discussion of our results of operations for the second quarter of fiscal 2022.

Asset impairment and restructuring costs

Asset impairment and restructuring costs recorded in operating expenses were $91.8 million in the six months ended September 30, 2021, as compared to $59.2 million in the six months ended September 30, 2020.

In the six months ended September 30, 2021, we recorded charges related to operational changes resulting from the continuing strategic review of our business as a result of recent acquisition activities, which will result in the closure of our Niagara-on-the-Lake, Ontario and Langley, British Columbia facilities.

Additionally, we recognized incremental costs associated with the closure of previously-identified Canadian production facilities in December 2020.

Charges totaling $91.8 million were recognized in the six months ended September 30, 2021, primarily representing the difference between the net book value of the associated long-lived assets and their estimated fair value.

Comparatively, 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.

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.

In the second quarter of fiscal 2021, 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.

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.

The following table presents loss from equity method investments, other income (expense), net, and income tax (expense) recovery for the six months ended September 30, 2021 and 2020:

Six months ended September 30,

(in thousands of Canadian dollars)

Loss from equity method investments

Other income (expense), net

Income tax recovery

Loss from equity method investments

The loss from equity method investments was $0.1 million in the six months ended September 30, 2021, as compared to $40.2 million in the six months ended September 30, 2020.

The year-over-year decrease 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 investment in PharmHouse, as described above in “Expected credit losses on financial assets and related charges”, within our discussion of our results of operations for the second quarter of fiscal 2022.

Additionally, in the six months ended September 30, 2020, we recognized losses associated with our equity investments in both PharmHouse and Agripharm;

as these investments were impaired in fiscal 2021, we recognized only a nominal impairment of our remaining investment in Agripharm in the six months ended September 30, 2021.

Other income (expense), net

Other income (expense), net was an income amount of $776.5 million in the six months ended September 30, 2021, as compared to an income amount of $269.5 million in the six months ended September 30, 2020.

The year-over-year increase in income of $507.0 million is primarily attributable to:

Increase in non-cash income of $410.3 million related to fair value changes on the warrant derivative liability associated with the Tranche B Warrants held by CBI.

The decrease of $510.8 million in the fair value of the warrant derivative liability (resulting in non-cash income) in the six months ended September 30, 2021 is primarily attributable to a decrease of approximately 57% in our share price from April 1, 2021 to September 30, 2021, further impacted by a shorter expected time to maturity of the warrants.

Comparatively, the decrease of $100.5 million in the fair value of the warrant derivative liability in the six months ended September 30, 2020 was 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.

Increase in non-cash income of $384.8 million related to the non-cash fair value changes on the liability arising from the Acreage Arrangement, from $53.2 million in the six months ended September 30, 2020 to $438.0 million in the six months ended September 30, 2021.

The income amount recognized in the six months ended September 30, 2021, associated with a decrease in the liability arising from the Acreage Arrangement, is primarily attributable to a decrease of approximately 57% in our share price from April 1, 2021 to September 30, 2021, relative to a decrease of approximately 32% in Acreage’s share price during that same period.

As a result, the model at September 30, 2021 reflects a lower estimated value of the Canopy Growth shares expected to be issued upon a Triggering Event, relative to the estimated value of the Acreage shares expected to be acquired at that time;

this resulted in a reduction of the liability amount.

Comparatively, the income amount recognized in the six months ended September 30, 2020 was primarily attributable to the implementation of the Acreage Amended Arrangement in September 2020, as described above in “Other income (expense), net” within our discussion of our results of operations for the second quarter of fiscal 2022.

Specifically, the Acreage 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.

Change of $113.0 million related to the non-cash fair value changes on the Notes, from an expense amount of $32.3 million in the six months ended September 30, 2020 to an income amount of $80.7 million in the six months ended September 30, 2021.

The year-over-year change is primarily due to the decline in our share price in the six months ended September 30, 2021 (57%) relative to the decline in the six months ended September 30, 2020 (1%), and year-over-year changes in credit spreads.

Change of $299.1 million related to non-cash fair value changes on our other financial assets, from an income amount of $103.9 million in the six months ended September 30, 2020 to an expense amount of $195.3 million in the six months ended September 30, 2021.

The current quarter expense amount is primarily attributable to fair value decreases relating to our investments in the exchangeable shares in the capital of TerrAscend ($113.0 million), and the secured debentures issued by TerrAscend Canada and Arise Bioscience and the TerrAscend Warrants (totaling $76.3 million), driven largely by (i) a decrease of approximately 31% in TerrAscend’s share price in the six months ended September 30, 2021;

and (ii) re-assessments 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 in the second quarter of fiscal 2022 .

Comparatively, in the six months ended September 30, 2020 the income amount was primarily attributab le to fair value increases relating to our investments in the TerrAscend exchangeable shares ($67.0 million), and the TerrAscend Canada secured debentures and TerrAscend Warrants (totaling $77.2 million), driven largely by an increase of approximately 136% in TerrAscend’s share price from April 1, 2020 to September 30, 2020.

Increase in interest expense of $48.5 million, from $2.7 million in the six months ended September 30, 2020 to $51.2 million in the six months ended September 30, 2021.

The year-over-year increase is primarily attributable to the US$750M debt financing that occurred in the fourth quarter of fiscal 2021.

Decrease of $43.0 million in non-cash income related to fair value changes on acquisition related contingent consideration.

In the six months ended September 30, 2020, we recognized income attributable to changes in our assessment of the probability and timing of ebbu achieving certain scientific milestones associated with its acquisition in fiscal 2019.

The acquisition related contingent consideration associated with ebbu was settled by the end of fiscal 2021.

Decrease in interest income of $6.4 million, from $11.8 million in the six months ended September 30, 2020 to $5.4 million in the six months ended September 30, 2021.

The year-over-year decrease is primarily attributable to the decrease in interest rates and the divestiture of our interest in RIV Capital in the fourth quarter of fiscal 2021.

Income tax recovery

Income tax recovery in the six months ended September 30, 2021 was $0.3 million, compared to an income tax recovery of $2.5 million in the six months ended September 30, 2020.

In the six months ended September 30, 2021, the income tax recovery consisted of a deferred income tax recovery of $2.0 million (compared to a recovery of $3.2 million in the six months ended September 30, 2021) and current income tax expense of $1.7 million (compared to an expense of $0.7 million in the six months ended September 30, 2021).

The decrease of $1.2 million in the deferred income tax recovery is primarily a result of current year changes being less than prior year in respect of 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.

The increase of $1.0 million in the current income tax expense arose primarily in connection with legal entities that generated income for tax purposes that could not be reduced by the group’s tax attributes.

Net Income (Loss)

Net income in the six months ended September 30, 2021 was $373.6 million, as compared to a net loss of $224.9 million in the six months ended September 30, 2020.

The year-over-year change from a net loss to net income is primarily attributable to the year-over-year increase in other income (expense), net, and the year-over-year decreases in operating expense and the loss from equity method investments.

These changes were partially offset by the year-over-year decrease in our gross margin.

These variances are described above.

Adjusted EBITDA (Non-GAAP Measure)

The following table presents Adjusted EBITDA for the six months ended September 30, 2021 and 2020:

Six months ended September 30,

(in thousands of Canadian dollars)

Net income (loss)

Income tax recovery

Other (income) expense, net

Loss on equity method investments

3 unchanged sentences

Asset impairment and restructuring costs

Expected credit losses on financial assets

and related charges

Charges related to the flow-through of inventory

2 unchanged sentences

1 From Statements of Cash Flows.

The Adjusted EBITDA loss in the first quarter of fiscal 2022 was $63.6 million, as compared to the Adjusted EBITDA loss of $92.2 million in the first quarter of fiscal 2021.

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

The Adjusted EBITDA loss in the six months ended September 30, 2021 was $226.2 million, as compared to the Adjusted EBITDA loss of $177.9 million in the six months ended September 30, 2020.

These variances are described 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 June 30, 2021, we had cash and cash equivalents of $559.8 million and short-term investments of $1.5 billion, which are predominantly invested in liquid securities issued by the United States and Canadian governments.

As of September 30, 2021, we had cash and cash equivalents of $807.6 million and short-term investments of $1.2 billion, 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”), as well as up to an additional US$500.0 million available under the Credit Facility (as defined below).

5 unchanged sentences

and Canadian public stock exchange listings, and in March 2021, we entered into a credit agreement (the “Credit Agreement”) with the lenders and Wilmington Trust, National Association, as administrative agent and collateral agent for the lenders.

The Credit Agreement provided for a credit facility (the “Credit Facility”) in the initial aggregate principal amount of US$750.0 million.

The Credit Agreement provides for a credit facility (the “Credit Facility”) in the initial aggregate principal amount of US$750.0 million.

We continue to review and pursue selected external financing sources to ensure adequate financial resources.

3 unchanged sentences

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 first quarter of fiscal 2022, our purchases of and deposits on property, plant and equipment totaled $20.3 million, which were funded out of available cash, cash equivalents and short-term investments.

In the six months ended September 30, 2021, our purchases of and deposits on property, plant and equipment totaled $35.7 million, which were funded out of available cash, cash equivalents and short-term investments.

We expect to continue funding these purchases with our available cash, cash equivalents and short-term investments.

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.

Three months ended June 30,

Six months ended September 30,

(in thousands of Canadian dollars)

9 unchanged sentences

Operating activities

Cash used in operating activities totaled $165.8 million in the first quarter of fiscal 2022, as compared to cash used of $118.5 million in the first quarter of fiscal 2021.

The increase in the cash used in operating activities is primarily due to the year-over-year increase in interest paid, associated with the US$750M debt financing that occurred in the fourth quarter of fiscal 2021.

Cash used in operating activities totaled $251.7 million in the six months ended September 30, 2021, as compared to cash used of $280.3 million in the six months ended September 30, 2020.

The decrease in the cash used in operating activities is primarily due to the year-over-year reduction in our working capital spending, particularly related to inventory, and a decrease in our total selling, general and administrative expense.

These factors were partially offset by the year-over-year decrease in our gross margin.

These variances are described above.

Investing activities

The cash used in investing activities totaled $374.6 million in the first quarter of fiscal 2022, as compared to cash used of $426.0 million in the first quarter of fiscal 2021.

In the first quarter of fiscal 2022, purchases of property, plant and equipment were $20.3 million, primarily in our production infrastructure in the United States and an expansion of our Storz & Bickel facilities.

Comparatively, in the first quarter of fiscal 2021, we invested $61.5 million in our production infrastructure in Canada and the United

States and our gummie factory in Smiths Falls.

The year-over-year decrease in our purchases of property, plant and equipment reflects the substantial completion of our infrastructure build-out, and the shift in strategy to an asset-light model in certain markets.

In the first quarter of fiscal 2022, we completed the acquisitions of Ace Valley and Supreme Cannabis, with the net cash outflow totaling $8.9 million.

In the first quarter of fiscal 2021, we did not complete any acquisitions.

Our strategic investments in the first quarter of fiscal 2021 were $2.6 million.

Finally, in the first quarter of fiscal 2022 we made payments totaling $8.4 million for acquisition-related liabilities, as compared to $4.5 million in the first quarter of fiscal 2021 as we continue to draw-down on the amounts owing in relation to acquisitions completed in prior years.

Additional cash inflows during the first quarter of fiscal 2022 related to proceeds of $10.3 million from the sale of certain wholly-owned subsidiaries.

Additional cash inflows during the first quarter of fiscal 2021 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 first quarter of fiscal 2022 in the amount of $346.6 million, as compared to $382.5 million in the first quarter of fiscal 2021.

The cash used in investing activities totaled $46.3 million in the six months ended September 30, 2021, as compared to cash used of $568.1 million in the six months ended September 30, 2020.

In the six months ended September 30, 2021, purchases of property, plant and equipment were $35.7 million, primarily related to our production infrastructure in the United States and an expansion of our Storz & Bickel facilities.

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

The year-over-year decrease in our purchases of property, plant and equipment reflects the substantial completion of our infrastructure build-out.

In the six months ended September 30, 2021, we completed the acquisitions of Ace Valley and Supreme Cannabis, with the net cash outflow totaling $9.1 million.

In the six months ended September 30, 2020, we did not complete any acquisitions.

We did not complete any strategic investments in other financial assets in the six months ended September 30, 2021, while in the six months ended September 30, 2020, we completed strategic investments totaling $124.4 million, including the payment of $49.8 million to Acreage shareholders upon implementation of the Acreage Amended Arrangement, and the loan advance of $67.0 million to Acreage Hempco.

Additional cash inflows during the six months ended September 30, 2021 related to proceeds of $10.3 million from the sale of certain wholly-owned subsidiaries.

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.

Net purchases of short-term investments in the six months ended September 30, 2021 were minimal, in the amount of $0.7 million, as compared to net purchases of short-term investments of $367.8 million in the six months ended September 30, 2020.

The year-over-year change reflects our investment of the proceeds from CBI exercising their warrants during the six months ended September 30, 2020 (see below) in relatively safe, liquid investments.

Finally, in the six months ended September 30, 2021, other investing activities resulted in a cash outflow of $10.9 million, primarily related to the payment of acquisition-related liabilities.

In the six months ended September 30, 2021, other investing activities resulted in a cash inflow of $3.5 million, primarily related to a recovery of amounts related to construction financing partially offset by payments of acquisition-related liabilities.

Financing activities

The cash used in financing activities totaled $45.0 million in the first quarter of fiscal 2022, as compared to cash provided of $247.3 million in the first quarter of fiscal 2021.

In the first quarter of fiscal 2022, we made repayments of long-term debt in the amount of $48.1 million, primarily related to the term loan assumed upon the completion of the acquisition of Supreme Cannabis on June 22, 2021.

Comparatively, in the first quarter of fiscal 2021, we received proceeds of $245.0 million in relation to CBI exercising 18.9 million warrants to purchase our common shares.

The cash used in financing activities totaled $46.7 million in the six months ended September 30, 2021, as compared to cash provided of $250.8 million in the six months ended September 30, 2020.

In the six months ended September 30, 2021, we made repayments of long-term debt in the amount of $50.0 million, primarily related to the term loan assumed upon the completion of the

acquisition of Supreme Cannabis on June 22, 2021.

Comparatively, 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.

Free Cash Flow (Non-GAAP Measure)

2 unchanged sentences

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 June 30,

Three months ended September 30,

Six months ended September 30,

(in thousands of Canadian dollars)

4 unchanged sentences

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 first quarter of fiscal 2022 was an outflow of $186.1 million, as compared to an outflow of $180.1 million in the first quarter of fiscal 2021.

The year-over-year increase in the outflow reflects the increase in the cash used for operating activities, as described above, and the lower purchase of property, plant and equipment associated with the substantial completion of our 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 second quarter of fiscal 2022 was an outflow of $101.3 million, as compared to an outflow of $190.4 million in the second quarter of fiscal 2021.

Free cash flow in the six months ended September 30, 2021 was an outflow of $287.4 million, as compared to an outflow of $370.5 million in the six months ended September 30, 2020.

The year-over-year decreases in the outflow reflects the decrease in the cash used for operating activities, as described above, and the lower purchases of property, plant and equipment associated with the substantial completion of our infrastructure build-out, with our ongoing investments primarily being made in the United States and in the expansion of our Storz & Bickel facilities.

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

Total debt outstanding as of June 30, 2021 was $1.5 billion, as compared to $1.6 billion as of March 31, 2021.

The total principal amount owing, which excludes fair value adjustments related to the Notes, was $1.5 billion at June 30, 2021, consistent with March 31, 2021.

Total debt outstanding as of September 30, 2021 was $1.5 billion, as compared to $1.6 billion as of March 31, 2021.

The total principal amount owing, which excludes fair value adjustments related to the Notes, was $1.5 billion at September 30, 2021, consistent with March 31, 2021.

Credit Facility

3 unchanged sentences

Our obligations under the Credit Facility are guaranteed by material Canadian and U.S.

subsidiaries of Canopy

The Credit Facility is secured by substantially all of the assets, including material real property, of the b orrowers and each of the guarantors thereunder .

subsidiaries of Canopy Growth.

The Credit Facility is secured by substantially all of the assets, including material real property, of the borrowers and each of the guarantors thereunder.

The Credit Agreement contains representations and warranties, and affirmative and negative covenants, including a financial covenant requiring minimum liquidity of US$200.0 million at the end of each fiscal quarter.

12 unchanged sentences

and (iv) a reduction in the conversion price to $0.285.

In addition, on September 9, 2020 Supreme Cannabis issued new senior unsecured non-convertible debentures (“Accretion Debentures”).

The principal amount began at $nil and accretes at a rate of 11.06% per annum based on the remaining principal amount of the Supreme Debentures of $36.5 million to a maximum of $13.5 million, compounding on a semi-annual basis commencing on September 9, 2020, and ending on September 9, 2023.

In addition, on September 9, 2020 Supreme Cannabis issued new senior unsecured non-convertible debentures (the “Accretion Debentures”).

The principal amount began at $nil and accretes at a rate of 11.06% per annum based on the remaining principal amount

of the Supreme Debentures of $36.5 million to a maximum of $13.5 million, compounding on a semi-annual basis commencing on September 9, 2020, and ending on September 9, 2023.

The Accretion Debentures are payable in cash, but do not bear cash interest and are not convertible into Supreme Shares.

The principal amount of the Accretion Debentures will amortize, or be paid, at 1.0% per month over the 24 months prior to maturity.

As a result of the Supreme Arrangement, the Supreme Debentures remain outstanding as securities of Supreme Cannabis, which, upon conversion will entitle the holder thereof to receive, in lieu of the number of Supreme Shares to which such holder was theretofore entitled, the consideration payable under the Supreme Arrangement that such holder would have been entitled to be issued and receive if, immediately prior to the effective time of the Supreme Arrangement, such holder had been the registered holder of the number of Supreme Shares to which such holder was theretofore entitled.

In connection with the Supreme Arrangement, we, Supreme Cannabis and Computershare Trust Company of Canada entered into a supplemental indenture whereby we agreed to issue common shares upon conversion of any Supreme Debenture.

As a result of the arrangement (the “Supreme Arrangement”) we completed with Supreme Cannabis on June 22, 2021 pursuant to which we acquired 100% of the issued and outstanding common shares of Supreme Cannabis (the “Supreme Shares”), the Supreme Debentures remain outstanding as securities of Supreme Cannabis, which, upon conversion will entitle the holder thereof to receive, in lieu of the number of Supreme Shares to which such holder was theretofore entitled, the consideration payable under the Supreme Arrangement that such holder would have been entitled to be issued and receive if, immediately prior to the effective time of the Supreme Arrangement, such holder had been the registered holder of the number of Supreme Shares to which such holder was theretofore entitled.

In connection with the Supreme Arrangement, we, Supreme Cannabis and Computershare Trust Company of Canada (the “Trustee”) entered into a supplemental indenture whereby we agreed to issue common shares upon conversion of any Supreme Debenture.

In addition, we may force conversion of the Supreme Debentures outstanding with 30 days’ notice if the daily volume weighted average trading price of our common shares is greater than $38.59 for any 10 consecutive trading days.

We, Supreme Cannabis and the Trustee entered into a further supplemental indenture whereby we agreed to guarantee the obligations of Supreme Cannabis pursuant to the Supreme Debentures and Accretion Debentures.

Prior to September 9, 2023, the Supreme Debentures are not redeemable.

3 unchanged sentences

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 June 30, 2021 is $nil.

As of June 30, 2021, we were in compliance with all covenants in the revolving debt facility agreement.

The outstanding balance at September 30, 2021 is $nil.

Further information regarding our debt issuances, including the conversion rights of the Notes, is included in Note 14 of the Interim Financial Statements.

6 unchanged sentences

Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-Q

Item 2. Management’s Discussion and Analysis