Canopy Growth Corp 10-Q

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations. Introduction 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: • Part 1 - Business Overview. This section provides a general description of our business, which we believe is important in understanding the results of our operations, financial condition, and potential future trends. • Part 2 - Results of Operations. 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. This section provides an analysis of our cash flows and outstanding debt and commitments. Included in this analysis is a discussion of the amount of financial capacity available to fund our ongoing operations and future commitments. We prepare and report our Interim Financial Statements in accordance with U.S. GAAP. Our Interim Financial Statements, and the financial information contained herein, are reported in thousands of Canadian dollars, except share and per share amounts or as otherwise stated. We have determined that the Canadian dollar is the most relevant and appropriate reporting currency as, despite continuing shifts in the relative size of our operations across multiple geographies, the majority of our operations are conducted in Canadian dollars and our financial results are prepared and reviewed internally by management in Canadian dollars. Special Note Regarding Forward-Looking Statements This Quarterly Report contains “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933, as amended (the “Securities Act”), and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”) and other applicable securities laws, which involve certain known and unknown risks and uncertainties. Forward-looking statements predict or describe our future operations, business plans, business and investment strategies and the performance of our investments. These forward-looking statements are generally identified by their use of such terms and phrases as “intend,” “goal,” “strategy,” “estimate,” “expect,” “project,” “projections,” “forecasts,” “plans,” “seeks,” “anticipates,” “potential,” “proposed,” “will,” “should,” “could,” “would,” “may,” “likely,” “designed to,” “foreseeable future,” “believe,” “scheduled” and other similar expressions. Our actual results or outcomes may differ materially from those anticipated. You are cautioned not to place undue reliance on these forward-looking statements, which speak only as of the date the statement was made. Forward-looking statements include, but are not limited to, statements with respect to: • the uncertainties associated with the COVID-19 pandemic, including our ability, and the ability of our suppliers and distributors, to effectively manage the restrictions, limitations and health issues presented by the COVID-19 pandemic, the ability to continue our production, distribution and sale of our products and the demand for and 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; • laws and regulations and any amendments thereto applicable to our business and the impact thereof, including uncertainty regarding the application of U.S. state and federal law to U.S. hemp (including CBD) products and the scope of any regulations by the U.S. Food and Drug Administration (the “FDA”), the U.S. Drug Enforcement Administration (the “DEA”), the U.S. Federal Trade Commission (the “FTC”), the U.S. Patent and Trademark Office (the “USPTO”), the U.S. Department of Agriculture (the “USDA”) and any state equivalent regulatory agencies over U.S. hemp (including CBD) products; • expectations regarding the laws and regulations and any amendments thereto relating to the U.S. hemp industry in the U.S., including the promulgation of regulations for the U.S. hemp industry by the USDA and relevant state regulatory authorities; • expectations regarding the potential success of, and the costs and benefits associated with, our acquisitions, joint ventures, strategic alliances, equity investments and dispositions; • 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); 29 • 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; • our international activities and joint venture interests, including required regulatory approvals and licensing, anticipated costs and timing, and expected impact; • our ability to successfully create and launch brands and further create, launch and scale cannabis-based products and U.S. hemp-derived consumer products in jurisdictions where such products are legal and that we currently operate in; • the benefits, viability, safety, efficacy, dosing and social acceptance of cannabis, including CBD and other cannabinoids; • the anticipated benefits and impact of the investments in us (the “CBI Group Investments”) from Constellation Brands, Inc. (“CBI”) and its affiliates (together, the “CBI Group”); • the potential exercise of the warrants held by the CBI Group, pre-emptive rights and/or top-up rights held by the CBI Group, including proceeds to us that may result therefrom or the potential conversion of the convertible senior notes (the “Notes”) issued by Canopy Growth and held by the CBI Group; • expectations regarding the use of proceeds of equity financings, including the proceeds from CBI; • the legalization of the use of cannabis for medical or recreational in jurisdictions outside of Canada, the related timing and impact thereof and our intentions to participate in such markets, if and when such use is legalized; • our ability to execute on our strategy and the anticipated benefits of such strategy; • the ongoing impact of the legalization of additional cannabis product types and forms for recreational use in Canada, including federal, provincial, territorial and municipal regulations pertaining thereto, the related timing and impact thereof and our intentions to participate in such markets; • the ongoing impact of developing provincial, territorial and municipal regulations pertaining to the sale and distribution of cannabis, the related timing and impact thereof, as well as the restrictions on federally regulated cannabis producers participating in certain retail markets and our intentions to participate in such markets to the extent permissible; • the timing and nature of legislative changes in the U.S. regarding the regulation of cannabis including tetrahydrocannabinol (“THC”); • the future performance of our business and operations; • our competitive advantages and business strategies; • the competitive conditions of the industry; • the expected growth in the number of customers using our products; • our ability or plans to identify, develop, commercialize or expand our technology and research and development initiatives in cannabinoids, or the success thereof; • expectations regarding revenues, expenses and anticipated cash needs; • expectations regarding cash flow, liquidity and sources of funding; • expectations regarding capital expenditures; • our ability to refinance debt as and when required on terms favorable to us and comply with covenants contained in our debt facilities and debt instruments; • the expansion of our production and manufacturing, the costs and timing associated therewith and the receipt of applicable production and sale licenses; • the expected growth in our growing, production and supply chain capacities; • expectations regarding the resolution of litigation and other legal and regulatory proceedings, reviews and investigations; • expectations with respect to future production costs; • expectations with respect to future sales and distribution channels and networks; • the expected methods to be used to distribute and sell our products; • our future product offerings; • the anticipated future gross margins of our operations; • accounting standards and estimates; • expectations regarding our distribution network; • expectations regarding the costs and benefits associated with our contracts and agreements with third parties, including under our third-party supply and manufacturing agreements; and • expectations on price changes in cannabis markets. Certain of the forward-looking statements contained herein concerning the industries in which we conduct our business are based on estimates prepared by us using data from publicly available governmental sources, market research, industry analysis and on assumptions based on data and knowledge of these industries, which we believe to be reasonable. However, although generally indicative of relative market positions, market shares and performance characteristics, such data is inherently imprecise. The industries in which we conduct our business involve risks and uncertainties that are subject to change based on various factors, which are described further below. 30 The forward-looking statements contained herein are based upon certain material assumptions that were applied in drawing a conclusion or making a forecast or projection, including: (i) management’s perceptions of historical trends, current conditions and expected future developments; (ii) our ability to generate cash flow from operations; (iii) general economic, financial market, regulatory and political conditions in which we operate; (iv) the production and manufacturing capabilities and output from our facilities and our joint ventures, strategic alliances and equity investments; (v) consumer interest in our products; (vi) competition; (vii) anticipated and unanticipated costs; (viii) government regulation of our activities and products including but not limited to the areas of taxation and environmental protection; (ix) the timely receipt of any required regulatory authorizations, approvals, consents, permits and/or licenses; (x) our ability to obtain qualified staff, equipment and services in a timely and cost-efficient manner; (xi) our ability to conduct operations in a safe, efficient and effective manner; (xii) our ability to realize anticipated benefits, synergies or generate revenue, profits or value from our recent acquisitions into our existing operations; (xiii) our ability to continue to operate in light of the COVID-19 pandemic and the impact of the pandemic on demand for, and sales of, our products and our distribution channels; and (xiv) other considerations that management believes to be appropriate in the circumstances. While our management considers these assumptions to be reasonable based on information currently available to management, there is no assurance that such expectations will prove to be correct. By their nature, forward-looking statements are subject to inherent risks and uncertainties that may be general or specific and which give rise to the possibility that expectations, forecasts, predictions, projections or conclusions will not prove to be accurate, that assumptions may not be correct and that objectives, strategic goals and priorities will not be achieved. A variety of factors, including known and unknown risks, many of which are beyond our control, could cause actual results to differ materially from the forward-looking statements in this Quarterly Report and other reports we file with, or furnish to, the Securities and Exchange Commission (the “SEC”) and other regulatory agencies and made by our directors, officers, other employees and other persons authorized to speak on our behalf. Such factors include, without limitation, changes in laws, regulations and guidelines and our compliance with such laws, regulations and guidelines; the risk that the COVID-19 pandemic may disrupt our operations and those of our suppliers and distribution channels and negatively impact the demand for and use of our products; consumer demand for cannabis and U.S. hemp products; our limited operating history; the risks and uncertainty regarding future product development; our reliance on licenses issued by and contractual arrangements with various federal, state and provincial governmental authorities; the risk that cost savings and any other synergies from the CBI Group Investments may not be fully realized or may take longer to realize than expected; risks associated with jointly owned investments; risks relating to our current and future operations in emerging markets; future levels of revenues and the impact of increasing levels of competition; risks related to the protection and enforcement of our intellectual property rights; our ability to manage disruptions in credit markets or changes to our credit ratings; future levels of capital, environmental or maintenance expenditures, general and administrative and other expenses; the success or timing of completion of ongoing or anticipated capital or maintenance projects; risks related to the integration of acquired businesses; the timing and manner of the legalization of cannabis in the United States; business strategies, growth opportunities and expected investment; the adequacy of our capital resources and liquidity, including but not limited to, availability of sufficient cash flow to execute our business plan (either within the expected timeframe or at all); counterparty risks and liquidity risks that may impact our ability to obtain loans and other credit facilities on favorable terms; the potential effects of judicial, regulatory or other proceedings, or threatened litigation or proceedings, on our business, financial condition, results of operations and cash flows; risks related to stock exchange restrictions; risks associated with divestment and restructuring; volatility in and/or degradation of general economic, market, industry or business conditions; our exposure to risks related to an agricultural business, including wholesale price volatility and variable product quality; third-party transportation risks; compliance with applicable environmental, economic, health and safety, energy and other policies and regulations and in particular health concerns with respect to vaping and the use of cannabis and U.S. hemp products in vaping devices; the anticipated effects of actions of third parties such as competitors, activist investors or federal, state, provincial, territorial or local regulatory authorities, self-regulatory organizations, plaintiffs in litigation or persons threatening litigation; changes in regulatory requirements in relation to our business and products; and the factors discussed under the heading “Risk Factors” in the Annual Report. Readers are cautioned to consider these and other factors, uncertainties and potential events carefully and not to put undue reliance on forward-looking statements. Forward-looking statements are provided for the purposes of assisting the reader in understanding our financial performance, financial position and cash flows as of and for periods ended on certain dates and to present information about management’s current expectations and plans relating to the future, and the reader is cautioned that the forward-looking statements may not be appropriate for any other purpose. While we believe that the assumptions and expectations reflected in the forward-looking statements are reasonable based on information currently available to management, there is no assurance that such assumptions and expectations will prove to have been correct. Forward-looking statements are made as of the date they are made and are based on the beliefs, estimates, expectations and opinions of management on that date. 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 31 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 We are a world-leading diversified cannabis and cannabinoid-based consumer products company with operations in countries across the world. We produce, distribute and sell a diverse range of cannabis and hemp-based products and other consumer products for both recreational and medical purposes under a portfolio of distinct brands in Canada pursuant to the Cannabis Act , and globally pursuant to applicable international and Canadian legislation, regulations and permits. On October 17, 2018, the Cannabis Act came into effect in Canada, regulating both the medical and recreational cannabis markets in Canada and providing provincial, territorial and municipal governments the authority to prescribe regulations regarding the distribution and sale of recreational cannabis. On October 17, 2019, the second phase of recreational cannabis products was legalized pursuant to certain amendments to the regulations under the Cannabis Act . We currently offer product varieties in dried flower, oil, softgels, vape pen power sources, pod-based vape devices, vape cartridges, cannabis-infused beverages and cannabis-infused edibles, with product availability varying based on provincial and territorial regulations. Our recreational cannabis products are predominantly sold to provincial and territorial agencies under a “business-to-business” wholesale model, with those provincial and territorial agencies then being responsible for the distribution of our products to brick-and-mortar stores and for online retail sales. 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. Spectrum Therapeutics produces and distributes a diverse portfolio of medical cannabis products to healthcare practitioners and medical customers in Canada, and in several other countries where it is federally permissible to do so. In April 2019, we acquired C 3 Cannabinoid Compound Company (“C 3 ”), Europe’s largest cannabinoid-based pharmaceuticals company and a leading manufacturer of dronabinol, a registered active pharmaceutical ingredient in Germany and certain other European countries. The addition of dronabinol has allowed us to expand our portfolio of medical cannabis offerings for our customers in Germany. Subsequent to the passage, in December 2018, of the U.S. Agricultural Improvement Act of 2018, we began building our hemp supply chain in the United States through our investment in processing, extraction and finished goods manufacturing facilities. In September 2020, our Martha Stewart CBD line of premium quality, hemp-derived wellness gummies, oils and softgels was launched in the United States. In 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. (“Acreage”), a U.S. multi-state cannabis operator. In September 2020, we entered into a second amendment to the Acreage Arrangement Agreement (the “Acreage Amending Agreement”) and implemented an amended and restated plan of arrangement (the “Acreage Amended Arrangement”). Pursuant to the Acreage Amended Arrangement, following the occurrence or waiver (at our discretion) of changes in U.S. federal law to permit the general cultivation, distribution, and possession of marijuana or to remove the regulation of such activities from the federal laws of the United States (the “Triggering Event”) and subject to the satisfaction or waiver of the conditions set out in the Acreage Arrangement Agreement (as modified by the Acreage Amending Agreement), we (i) agreed to acquire approximately 70% of the issued and outstanding shares of Acreage, and (ii) obtained the right to acquire the other approximately 30% of the issued and outstanding shares of Acreage. The acquisition of Acreage, if completed, will provide a pathway into cannabis markets in the United States; however, we and Acreage will continue to operate as independent companies until the acquisition of Acreage is completed. Our other product offerings, which are sold by our subsidiaries in jurisdictions where it is permissible to do so, include (i) Storz & Bickel vaporizers; (ii) This Works beauty, skincare, wellness and sleep products, some of which have been blended with hemp-derived CBD isolate; and (iii) BioSteel sports nutrition beverages, mixes, protein, gum and mints, some of which have been infused with hemp-derived CBD isolate. Our products contain THC, CBD, or a combination of these two cannabinoids which are found in the cannabis sativa plant species. THC is the primary psychoactive or intoxicating cannabinoid found in cannabis. We also refer throughout this MD&A to 32 “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. Our licensed operational capacity in Canada includes indoor and greenhouse cultivation space; post-harvest processing and cannabinoid extraction capability; advanced manufacturing capability for vape products, softgel encapsulation and pre-rolled joints; a beverage production facility; 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. Additionally, we have built a hemp supply chain in the United States. We operate in two reportable segments: • Global cannabis, which encompasses the production, distribution and sale of a diverse range of cannabis and cannabinoid-based consumer products in Canada and internationally pursuant to applicable international and domestic legislation, regulations and permits; and • Other consumer products, which is comprised of the production, distribution and sale of consumer products by Storz & Bickel, This Works, and BioSteel, and other revenue sources. Update on the COVID-19 Pandemic Management has continued to closely monitor the impact of the COVID-19 global pandemic, with a focus on the health and safety of our employees, business continuity and supporting its communities. We established a COVID-19 Management Committee shortly after the declaration of COVID-19 as a global pandemic and implemented various measures to reduce the spread of the virus. We have continued to operate under preventative measures and have experienced minimal disruption to our production and supply chain. As of the date of this Quarterly Report, all 34 of our corporate-owned retail stores are open and offering click-and-collect and/or in-store shopping. Our Canadian medical business, which operates as an e-commerce channel, has continued largely unchanged. Our international medical business operates primarily as a pharmacy model, with pharmacies being deemed essential businesses in Germany and other European countries in which we conduct business. 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 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. 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 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. 33 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. 34 Part 2 - Results of Operations Discussion of Second Quarter of Fiscal 2022 Results of Operations Three months ended September 30, (in thousands of Canadian dollars, except share amounts and where otherwise indicated) 2021 2020 $ Change % Change Selected consolidated financial information: Net revenue $ 131,374 $ 135,266 $ (3,892 ) (3 %) Gross margin percentage (54 %) 19 % - (7,300) bps Net loss $ (16,331 ) $ (96,552 ) $ 80,221 83 % Net loss attributable to Canopy Growth Corporation $ (11,058 ) $ (32,061 ) $ 21,003 66 % Basic and diluted loss per share 1 $ (0.03 ) $ (0.09 ) $ 0.06 67 % 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. Revenue 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 three months ended September 30, 2021 and 2020: Revenue by Channel Three months ended September 30, (in thousands of Canadian dollars) 2021 2020 $ Change % Change Canadian recreational cannabis net revenue Business-to-business 1 $ 41,927 $ 42,223 $ (296 ) (1 %) Business-to-consumer 16,652 18,709 (2,057 ) (11 %) 58,579 60,932 (2,353 ) (4 %) Canadian medical cannabis net revenue 2 13,093 13,888 (795 ) (6 %) 71,672 74,820 (3,148 ) (4 %) International and other revenue C 3 11,887 13,556 (1,669 ) (12 %) Other 11,766 5,918 5,848 99 % 23,653 19,474 4,179 21 % Global cannabis net revenue 95,325 94,294 1,031 1 % Other consumer products Storz & Bickel 14,511 21,836 (7,325 ) (34 %) This Works 9,027 7,833 1,194 15 % BioSteel 7,512 5,122 2,390 47 % Other 4,999 6,181 (1,182 ) (19 %) Other consumer products revenue 36,049 40,972 (4,923 ) (12 %) Net revenue $ 131,374 $ 135,266 $ (3,892 ) (3 %) 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). 35 Revenue by Form Three months ended September 30, (in thousands of Canadian dollars) 2021 2020 $ Change % Change Canadian recreational cannabis Dry bud 1 $ 56,845 $ 63,895 $ (7,050 ) (11 %) Oils and softgels 1 5,472 7,021 (1,549 ) (22 %) Beverages, edibles, topicals and vapes 1 9,175 7,966 1,209 15 % Other revenue adjustments - (3,750 ) 3,750 100 % Excise taxes (12,913 ) (14,200 ) 1,287 9 % 58,579 60,932 (2,353 ) (4 %) Medical cannabis and other Dry bud 9,115 9,836 (721 ) (7 %) Oils and softgels 20,797 23,458 (2,661 ) (11 %) Beverages, edibles, topicals and vapes 8,195 1,430 6,765 473 % Excise taxes (1,361 ) (1,362 ) 1 - 36,746 33,362 3,384 10 % Global cannabis net revenue 95,325 94,294 1,031 1 % Other consumer products Storz & Bickel 14,511 21,836 (7,325 ) (34 %) This Works 9,027 7,833 1,194 15 % BioSteel 7,512 5,122 2,390 47 % Other 4,999 6,181 (1,182 ) (19 %) Other consumer products revenue 36,049 40,972 (4,923 ) (12 %) Net revenue $ 131,374 $ 135,266 $ (3,892 ) (3 %) 1 Excludes the impact of other revenue adjustments. 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; and • 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 $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 36 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 $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 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 September 30, 2021 and 2020: Three months ended September 30, (in thousands of Canadian dollars except where indicated) 2021 2020 $ Change % Change Net revenue $ 131,374 $ 135,266 $ (3,892 ) (3 %) Cost of goods sold $ 202,514 $ 109,186 $ 93,328 85 % Gross margin (71,140 ) 26,080 (97,220 ) (373 %) Gross margin percentage (54 %) 19 % - (7,300) bps 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. 37 • 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 $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 $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: (i) global cannabis; and (ii) other consumer products. 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) 2021 2020 $ Change % Change Global cannabis segment Cost of goods sold $ 177,917 $ 82,232 $ 95,685 116 % Gross margin (82,592 ) 12,062 (94,654 ) 785 % Gross margin percentage (87 %) 13 % (10,000) bps Other consumer products segment Cost of goods sold $ 24,597 $ 26,954 $ (2,357 ) (9 %) Gross margin 11,452 14,018 (2,566 ) (18 %) Gross margin percentage 32 % 34 % (200) bps Global cannabis 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 $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 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 our Storz & Bickel and BioSteel businesses. 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. 38 Operating Expenses 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) 2021 2020 $ Change % Change Operating expenses General and administrative $ 35,545 $ 69,555 $ (34,010 ) (49 %) Sales and marketing 64,534 43,373 21,161 49 % Research and development 8,764 14,166 (5,402 ) (38 %) Acquisition-related costs 2,391 3,472 (1,081 ) (31 %) Depreciation and amortization 14,522 16,687 (2,165 ) (13 %) Selling, general and administrative expenses 125,756 147,253 (21,497 ) (15 %) Share-based compensation 14,247 19,901 (5,654 ) (28 %) Share-based compensation related to acquisition milestones 1,706 2,083 (377 ) (18 %) Share-based compensation expense 15,953 21,984 (6,031 ) (27 %) Expected credit losses on financial assets and related charges - 94,745 (94,745 ) (100 %) Asset impairment and restructuring costs 2,510 46,363 (43,853 ) (95 %) Total operating expenses $ 144,219 $ 310,345 $ (166,126 ) (54 %) Selling, general and administrative expenses 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 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 second quarter of fiscal 2021. 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. 39 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 $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 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; and • 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 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. 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 (“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 $2.5 million in the second quarter of fiscal 2022, as compared to $46.4 million in the second quarter of fiscal 2021. 40 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. Other 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) 2021 2020 $ Change % Change Loss from equity method investments $ - $ (32,991 ) $ 32,991 100 % Other income (expense), net 195,821 221,256 (25,435 ) (11 %) Income tax recovery (expense) 3,207 (552 ) 3,759 681 % Loss from equity method investments 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 $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 $109.0 million), driven largely by (i) a decrease of approximately 38% in TerrAscend’s share price in the second 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 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. 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 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 41 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 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. Net Loss 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) Our “Adjusted EBITDA” is a non-GAAP measure used by management that is not defined by U.S. GAAP and may not be comparable to similar measures presented by other companies. Management calculates Adjusted EBITDA as the reported net income (loss), adjusted to exclude income tax recovery (expense); other income (expense), net; loss on equity method investments; share-based compensation expense; depreciation and amortization expense; asset impairments and restructuring costs; restructuring costs recorded in cost of goods sold; and charges related to the flow-through of inventory step-up on business combinations, and further adjusted to remove acquisition-related costs. Asset impairments related to periodic changes to our supply chain processes are not excluded from Adjusted EBITDA given their occurrence through the normal course of core operational activities. Accordingly, management believes that Adjusted EBITDA provides meaningful and useful financial information as this measure demonstrates the operating performance of businesses. 42 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) 2021 2020 $ Change % Change Net loss $ (16,331 ) $ (96,552 ) $ 80,221 83 % Income tax (recovery) expense (3,207 ) 552 (3,759 ) (681 %) Other (income) expense, net (195,821 ) (221,256 ) 25,435 11 % Loss on equity method investments - 32,991 (32,991 ) (100 %) Share-based compensation 1 15,953 21,984 (6,031 ) (27 %) Acquisition-related costs 2,391 3,472 (1,081 ) (31 %) Depreciation and amortization 1 28,780 31,758 (2,978 ) (9 %) Asset impairment and restructuring costs 2,510 46,363 (43,853 ) (95 %) Expected credit losses on financial assets and related charges - 94,745 (94,745 ) (100 %) Charges related to the flow-through of inventory step-up on business combinations 3,123 281 2,842 1011 % Adjusted EBITDA $ (162,602 ) $ (85,662 ) $ (76,940 ) (90 %) 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. 43 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) 2021 2020 $ Change % Change Selected consolidated financial information: Net revenue $ 267,583 $ 245,682 $ 21,901 9 % Gross margin percentage (16 %) 13 % - (2,900) bps Net income (loss) $ 373,624 $ (224,874 ) $ 598,498 266 % Net income (loss) attributable to Canopy Growth Corporation $ 381,360 $ (140,562 ) $ 521,922 371 % Basic earnings (loss) per share 1 $ 0.98 $ (0.38 ) $ 1.36 358 % Diluted earnings (loss) per share 1 $ 0.72 $ (0.38 ) $ 1.10 289 % 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. Revenue 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) 2021 2020 $ Change % Change Canadian recreational cannabis net revenue Business-to-business 1 $ 84,620 $ 77,157 $ 7,463 10 % Business-to-consumer 33,996 28,039 5,957 21 % 118,616 105,196 13,420 13 % Canadian medical cannabis net revenue 2 26,585 27,798 (1,213 ) (4 %) 145,201 132,994 12,207 9 % International and other revenue C 3 23,330 28,925 (5,595 ) (19 %) Other 19,733 11,657 8,076 69 % 43,063 40,582 2,481 6 % Global cannabis net revenue 188,264 173,576 14,688 8 % Other consumer products Storz & Bickel 38,581 38,956 (375 ) (1 %) This Works 15,578 13,882 1,696 12 % BioSteel 14,173 7,570 6,603 87 % Other 10,987 11,698 (711 ) (6 %) Other consumer products revenue 79,319 72,106 7,213 10 % Net revenue $ 267,583 $ 245,682 $ 21,901 9 % 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). 44 Revenue by Form Six months ended September 30, (in thousands of Canadian dollars) 2021 2020 $ Change % Change Canadian recreational cannabis Dry bud 1 $ 122,815 $ 104,024 $ 18,791 18 % Oils and softgels 1 11,213 14,742 (3,529 ) (24 %) Beverages, edibles, topicals and vapes 1 18,335 15,026 3,309 22 % Other revenue adjustments (3,000 ) (7,150 ) 4,150 58 % Excise taxes (30,747 ) (21,446 ) (9,301 ) (43 %) 118,616 105,196 13,420 13 % Medical cannabis and other Dry bud 18,726 20,668 (1,942 ) (9 %) Oils and softgels 41,313 48,673 (7,360 ) (15 %) Beverages, edibles, topicals and vapes 12,350 1,827 10,523 576 % Excise taxes (2,741 ) (2,788 ) 47 2 % 69,648 68,380 1,268 2 % Global cannabis net revenue 188,264 173,576 14,688 8 % Other consumer products Storz & Bickel 38,581 38,956 (375 ) (1 %) This Works 15,578 13,882 1,696 12 % BioSteel 14,173 7,570 6,603 87 % Other 10,987 11,698 (711 ) (6 %) Other consumer products revenue 79,319 72,106 7,213 10 % Net revenue $ 267,583 $ 245,682 $ 21,901 9 % 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; and • 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. 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 32 stores at 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 45 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) 2021 2020 $ Change % Change Net revenue $ 267,583 $ 245,682 $ 21,901 9 % Cost of goods sold $ 311,485 $ 213,107 $ 98,378 46 % Gross margin (43,902 ) 32,575 (76,477 ) (235 %) Gross margin percentage (16 %) 13 % - (2,900) bps 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. 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 46 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) 2021 2020 $ Change % Change Global cannabis segment Cost of goods sold $ 257,487 $ 168,372 $ 89,115 53 % Gross margin (69,223 ) 5,204 (74,427 ) (1430 %) Gross margin percentage (37 %) 3 % (4,000) bps Other consumer products segment Cost of goods sold $ 53,998 $ 44,735 $ 9,263 21 % Gross margin 25,321 27,371 (2,050 ) (7 %) Gross margin percentage 32 % 38 % (600) bps 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 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. 47 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) 2021 2020 $ Change % Change Operating expenses General and administrative $ 69,222 $ 134,382 $ (65,160 ) (48 %) Sales and marketing 115,066 81,142 33,924 42 % Research and development 17,106 27,825 (10,719 ) (39 %) Acquisition-related costs 8,171 4,866 3,305 68 % Depreciation and amortization 28,765 34,430 (5,665 ) (16 %) Selling, general and administrative expenses 238,330 282,645 (44,315 ) (16 %) Share-based compensation 25,674 48,460 (22,786 ) (47 %) Share-based compensation related to acquisition milestones 3,405 4,209 (804 ) (19 %) Share-based compensation expense 29,079 52,669 (23,590 ) (45 %) Expected credit losses on financial assets and related charges - 94,745 (94,745 ) (100 %) Asset impairment and restructuring costs 91,759 59,157 32,602 55 % Total operating expenses $ 359,168 $ 489,216 $ (130,048 ) (27 %) 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. 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 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. 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 $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. 48 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. 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 $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; and • 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 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. 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. 49 Other 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) 2021 2020 $ Change % Change Loss from equity method investments $ (100 ) $ (40,180 ) $ 40,080 100 % Other income (expense), net 776,487 269,461 507,026 188 % Income tax recovery 307 2,486 (2,179 ) (88 %) 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 50 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. 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 $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. 51 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) 2021 2020 $ Change % Change Net income (loss) $ 373,624 $ (224,874 ) $ 598,498 266 % Income tax recovery (307 ) (2,486 ) 2,179 88 % Other (income) expense, net (776,487 ) (269,461 ) (507,026 ) (188 %) Loss on equity method investments 100 40,180 (40,080 ) (100 %) Share-based compensation 1 29,079 52,669 (23,590 ) (45 %) Acquisition-related costs 8,171 4,866 3,305 68 % Depreciation and amortization 1 53,912 65,805 (11,893 ) (18 %) Asset impairment and restructuring costs 81,128 59,157 21,971 37 % Expected credit losses on financial assets and related charges - 94,745 (94,745 ) (100 %) Charges related to the flow-through of inventory step-up on business combinations 4,537 1,494 3,043 204 % Adjusted EBITDA $ (226,243 ) $ (177,905 ) $ (48,338 ) (27 %) 1 From Statements of Cash Flows. 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. 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. Part 3 – Financial Liquidity and Capital Resources We manage liquidity risk by reviewing, on an ongoing basis, our sources of liquidity and capital requirements. As of September 30, 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). In evaluating our capital requirements, including the impact, if any, on our business from the COVID-19 pandemic, and our ability to fund the execution of our strategy, we believe we have adequate available liquidity to enable us to meet our working capital and other operating requirements, fund growth initiatives and capital expenditures, settle our liabilities, and repay scheduled principal and interest payments on debt for at least the next twelve months. Our objective is to generate sufficient cash to fund our operating requirements and expansion plans. While we have incurred net losses on a U.S. GAAP basis and Adjusted EBITDA losses to date, and our cash and cash equivalents have decreased $347.0 million from March 31, 2021 (and, together with short-term investments, decreased $341.3 million from March 31, 2021), as discussed in the “Cash Flows” section below, management anticipates the success and eventual profitability of the business. We have also ensured that we have access to public capital markets through our U.S. 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 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. These potential sources include, but are not limited to (i) obtaining financing from traditional or non-traditional investment capital organizations; (ii) obtaining funding from the sale of our common shares or other equity or debt instruments; and (iii) obtaining debt financing with lending terms that more closely match our business model and capital needs. There can be no assurance that we will gain adequate market acceptance for our products or be able to generate sufficient positive cash flow to achieve our business plans. In the 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. 52 Cash Flows Six months ended September 30, (in thousands of Canadian dollars) 2021 2020 Net cash (used in) provided by: Operating activities $ (251,745 ) $ (280,295 ) Investing activities (46,297 ) (568,130 ) Financing activities (46,681 ) 250,805 Effect of exchange rate changes on cash and cash equivalents (2,309 ) (32,269 ) Net decrease in cash and cash equivalents (347,032 ) (629,889 ) Cash and cash equivalents, beginning of period 1,154,653 1,303,176 Cash and cash equivalents, end of period $ 807,621 $ 673,287 Operating activities 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 $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 $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 53 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) Free cash flow is a non-GAAP measure used by management that is not defined by U.S. GAAP and may not be comparable to similar measures presented by other companies. Management believes that free cash flow presents meaningful information regarding the amount of cash flow required to maintain and organically expand our business, and that the free cash flow measure provides meaningful information regarding our liquidity requirements. Three months ended September 30, Six months ended September 30, (in thousands of Canadian dollars) 2021 2020 2021 2020 Net cash used in operating activities $ (85,965 ) $ (161,749 ) $ (251,745 ) $ (280,295 ) Purchases of and deposits on property, plant and equipment (15,379 ) (28,648 ) (35,658 ) (90,195 ) Free cash flow 1 $ (101,344 ) $ (190,397 ) $ (287,403 ) $ (370,490 ) 1 Free cash flow is a non-GAAP measure, and is calculated as net cash provided by (used in) operating activities, less purchases of and deposits on property, plant and equipment. Free cash flow in the second quarter of fiscal 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. Debt 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 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 The Credit Agreement provides for the Credit Facility in the aggregate principal amount of US$750.0 million. We also have the ability to obtain up to an additional US$500.0 million of incremental senior secured debt pursuant to the Credit Agreement. The Credit Facility has no amortization payments, matures on March 18, 2026, has a coupon of LIBOR plus 8.50% and is subject to a LIBOR floor of 1.00%. Our obligations under the Credit Facility are guaranteed by material Canadian and U.S. 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. Convertible Notes In June 2018, we issued the Notes with an aggregate principal amount of $600.0 million. The Notes bear interest at a rate of 4.25% per annum, payable semi-annually on January 15th and July 15th of each year commencing January 15, 2019. The Notes mature on July 15, 2023. Holders of the Notes may convert the Notes at their option at any time from January 15, 2023 to the maturity date. CBI holds $200.0 million of these Notes. Convertible Debentures and Accretion Debentures On October 19, 2018, Supreme Cannabis issued 6.0% senior unsecured convertible debentures (the “Supreme Debentures”) for gross proceeds of $100.0 million. On September 9, 2020, the Supreme Debentures were amended to effect, among other things: (i) the cancellation of $63.5 million of principal amount of the Supreme Debentures; (ii) an increase in the interest rate to 8% per annum; (iii) the extension of the maturity date to September 10, 2025; 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 (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 54 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 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. Beginning on and after September 9, 2023, Supreme Cannabis may from time to time, upon providing 60 days prior written notice to the Trustee, redeem the Convertible Debentures outstanding, provided that the Accretion Debentures have already been redeemed in full. Other On August 13, 2019, we entered into a $40.0 million revolving debt facility with FCC. This facility replaced all previous loans with FCC and is secured by our property on Niagara-on-the-Lake, Ontario. 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 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. Contractual Obligations and Commitments There have been no material changes to our contractual obligations and commitments from the information provided in the MD&A section in our Annual Report. Off-Balance Sheet Arrangements We have no off-balance sheet arrangements that have, or are reasonably likely to have, a material current or future effect on our financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources that are material to investors. Critical Accounting Policies and Estimates There have been no material changes to our critical accounting policies and estimates from the information provided in the MD&A section in our Annual Report. 55