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Item 2. Management’s Discussion and Analysis

2022-02-09 compared with 2021-11-08 · 380 added, 336 removed, 513 unchanged (58% of the section changed)

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Part 2 - Results of Operations.

This section provides an analysis of our results of operations for the second quarter of fiscal 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.

This section provides an analysis of our results of operations for the third quarter of fiscal 2022 in comparison to the third quarter of fiscal 2021, and for the nine months ended December 31, 2021 in comparison to the nine months ended December 31, 2020.

Part 3 - Financial Liquidity and Capital Resources.

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our ability to execute on our strategy and the anticipated benefits of such strategy;

expectations of the amount or frequency of impairment losses, including as a result of the write-down of intangible assets, including goodwill;

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;

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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.

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.

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:

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

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

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

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

Part 1 - Business Overview

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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.

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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 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 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.

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however, we and Acreage will continue to operate as independent companies until the acquisition of Acreage is completed.

Additionally, on October 14, 2021, we entered into definitive agreements (the “Wana Agreements”) with Mountain High Products, LLC, Wana Wellness, LLC and The Cima Group, LLC (collectively, “Wana” and each, a “Wana Entity”) 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.

Refer to “Recent Developments” below for further information regarding the plan to acquire Wana.

Our other product offerings, which are sold by our subsidiaries in jurisdictions where it is permissible to do so, include (i) Storz & Bickel vaporizers;

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

We also refer throughout this MD&A to

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

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

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

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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.

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 third 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.

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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.

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

We believe we have sufficient liquidity available from cash and cash equivalents and short-term investments on hand of $615.1 million and $807.9 million, respectively, at December 31, 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

Divestiture of C 3 Cannabinoid Compound Company

On December 15, 2021, we entered into an agreement to divest all of our interest in C 3 Cannabinoid Compound Company GmbH (“C 3 ”) to a European pharmaceutical company headquartered in Germany.

C 3 develops and manufactures cannabinoid-based pharmaceutical products for distribution in Germany and certain other European countries.

The divestiture was completed on January 31, 2022, pursuant to which we received a cash payment of $128.3 million (€88.7 million), inclusive of cash, working capital and debt adjustments.

We will also be entitled to an earnout payment of up to €42.6 million, subject to the achievement of certain milestones by C 3 .

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.

On October 14, 2021, we and Wana entered into 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.

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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.

As consideration for entering into the Wana Agreements, we made an upfront cash payment (the “Upfront Payment”) in the aggregate of $368.1 million (US$297.5 million).

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

As additional consideration for the right to acquire Wana, we expect to make additional deferred payments (the “Deferred Payments”) in respect of Wana 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.

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

Refer to Note 9 of the Interim Financial Statements for further information regarding the plan to acquire Wana.

Part 2 - Results of Operations

Discussion of Second Quarter of Fiscal 2022 Results of Operations

Three months ended September 30,

Discussion of Third Quarter of Fiscal 2022 Results of Operations

Three months ended December 31,

(in thousands of Canadian dollars, except share amounts and

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Basic and diluted loss per share 1

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

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

1 For the three months ended December 31, 2021, the weighted average number of outstanding common shares, basic and diluted, totaled 393,818,282.

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

We report net revenue in two segments:

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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:

The following tables present segmented net revenue, by channel and by form, for the three months ended December 31, 2021 and 2020:

Revenue by Channel

Three months ended September 30,

Three months ended December 31,

(in thousands of Canadian dollars)

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Other consumer products revenue

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).

1 Reflects excise taxes of $12,754 and other revenue adjustments, representing our determination of returns and pricing adjustments, of $1,000 for the three months ended December 31, 2021 (three months ended December 31, 2020 - excise taxes of $15,977 and other revenue adjustments of $3,750).

2 Reflects excise taxes of $1,298 for the three months ended December 31, 2021 (three months ended December 31, 2020 - $1,402).

Revenue by Form

Three months ended September 30,

Three months ended December 31,

(in thousands of Canadian dollars)

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1 Excludes the impact of other revenue adjustments.

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

The year-over-year decrease is attributable to:

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

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

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

Net revenue was $141.0 million in the third quarter of fiscal 2022, as compared to $152.5 million in the third quarter of fiscal 2021.

The year-over-year decrease is attributable to a decrease of 20% in our global cannabis segment, which was primarily due to declines across our organic Canadian recreational and medical businesses, and C 3 .

The declines in this segment were partially offset by (i) net revenue attributable to the acquisitions, in the first quarter of fiscal 2022, of Supreme Cannabis and Ace Valley;

and (ii) an increase of 19% in our other consumer products segment, which was primarily due to growth in our BioSteel business.

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.

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.

Net revenue from our global cannabis segment was $83.0 million in the third quarter of fiscal 2022, as compared to $103.8 million in the third quarter of fiscal 2021.

Canadian recreational cannabis net revenue was $47.8 million in the third quarter of fiscal 2022, as compared to $63.4 million in the third quarter of fiscal 2021.

Net revenue from the business-to-business channel was $33.3 million in the third quarter of fiscal 2022, as compared to $43.1 million in the third quarter of fiscal 2021.

In the third quarter of fiscal 2022, we continued to be 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 resulting from increased competition, both in the value-priced and mainstream dried flower categories of the Canadian recreational market.

These factors were partially offset by net revenue from the acquisitions of Ace Valley and Supreme Cannabis in the first quarter of fiscal 2022 which, together, contributed net revenue of $10.4 million in the third quarter of fiscal 2022.

Revenue from the business-to-consumer channel was $14.5 million in the third quarter of fiscal 2022, as compared to $20.2 million in the third quarter of fiscal 2021.

The year-over-year decrease is primarily attributable to the continuing 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 $12.9 million in the third quarter of fiscal 2022, a year-over-year decrease of $1.0 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 continued to be impacted in the third 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 network across Canada, customers are now offered greater availability and convenience in shopping for cannabis products.

International and other cannabis revenue was $22.3 million in the third quarter of fiscal 2022, as compared to $26.5 million in the third quarter of fiscal 2021.

C 3 contributed revenue of $9.7 million in the third quarter of fiscal 2022, a year-over-year decrease of $8.0 million driven primarily by (i) increased competition in the synthetic cannabinoid market in Germany, and price compression for C 3 ’s products;

and (ii) a limitation on sales activities associated with COVID-19 restrictions in Germany.

Other cannabis revenue was $12.6 million in the third quarter of fiscal 2022, a year-over-year increase of $3.7 million primarily attributable to (i) opportunistic international bulk cannabis sales from Supreme Cannabis in the amount of $4.2 million;

and (ii) the growth in our U.S.

CBD business, which was driven by the introduction of whisl CBD vapes.

Partially offsetting these increases was a year-over-year decrease associated with our German medical cannabis business, primarily related to increased competition and price compression.

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;

Revenue from our other consumer products segment was $58.0 million in the third quarter of fiscal 2022, as compared to $48.7 million in the third quarter of fiscal 2021.

Revenue from Storz & Bickel was $25.2 million in the third quarter of fiscal 2022, a year-over-year increase of $1.1 million due primarily to sales of new vaporizers launched late in the second quarter of fiscal 2022.

However, the impact of continuing global supply chain shortages and delays creating challenges in obtaining certain parts for our vaporizers partially offset the benefit to revenue of the new product launches.

Revenue from This Works was $10.7 million in the third quarter of fiscal 2022, relatively consistent with revenue generated in the third quarter of fiscal 2021 of $10.9 million.

Revenue from BioSteel was $17.0 million in the third quarter of fiscal 2022, a year-over-year increase of $9.6 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 second quarter of fiscal 2021 related to COVID-19 related restrictions on retailers.

and (iii) higher international sales of ready-to-drink products and beverage mixes.

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,

The following table presents cost of goods sold, gross margin and gross margin percentage on a consolidated basis for the three months ended December 31, 2021 and 2020:

Three months ended December 31,

(in thousands of Canadian dollars except where indicated)

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Gross margin percentage

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

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

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

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

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

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

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

CBD businesses, BioSteel , and Storz & Bickel.

Cost of goods sold was $130.9 million in the third quarter of fiscal 2022, as compared to $127.9 million in the third quarter of fiscal 2021.

Our gross margin was $10.1 million in the third quarter of fiscal 2022, or 7% of net revenue, as compared to a gross margin of $24.6 million and gross margin percentage of 16% of net revenue in the third quarter of fiscal 2021.

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

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 third quarter of fiscal 2022;

The impact of the under-absorption of costs for our U.S.

CBD business and for BioSteel;

A shift in the business mix resulting from a decrease in the proportionate revenue contribution from C 3 relative to the third quarter of fiscal 2021;

A year-over-year decline in C 3 ’s gross margins due primarily to (i) the decrease in revenue, and the associated impact on C 3 ’s cost leverage;

and (ii) price compression for synthetic cannabinoid products resulting from increased competition.

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

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.

Restructuring charges totaling $4.6 million relating to inventory write-downs resulting from strategic changes to our business, including the closure of our facility in Langley, British Columbia.

Our gross margin in the third quarter of fiscal 2022 benefited from payroll subsidies in the amount of $6.6 million received from the Canadian government, pursuant to a COVID-19 relief program.

Comparatively, our gross margin in the third quarter of fiscal 2021 was impacted by restructuring charges totaling $15.6 million relating primarily to inventory write-downs associated with the closure of several of our production facilities in Canada in December 2020.

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

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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,

The following table presents segmented gross margin and gross margin percentage for the three months ended December 31, 2021 and 2020:

Three months ended December 31,

(in thousands of Canadian dollars except where indicated)

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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.

Gross margin for our global cannabis segment was $(11.2) million in the third quarter of fiscal 2022, or (14%) of net revenue, as compared to $7.4 million in the third quarter of fiscal 2021, or 7% of net revenue.

The year-over-year decease in the gross margin percentage was primarily due to (i) a shift in the business mix resulting from a decrease in the proportionate revenue contribution from the relatively-higher margin C 3 business as compared to the third quarter of fiscal 2021;

and (ii) the factors impacting the gross margins for C 3 and our Canadian recreational cannabis business, our U.S.

CBD business, and BioSteel, as described in our analysis of cost of goods sold and gross margin on a consolidated basis above.

Additionally, we recorded:

Charges totaling $3.1 million related to the flow-through of inventory step-up associated with the acquisition of Supreme Cannabis;

Restructuring charges totaling $4.6 million relating to inventory write-downs resulting from strategic changes to our business.

Finally, our gross margin in the third quarter of fiscal 2022 benefited from payroll subsidies in the amount of $6.6 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.

Gross margin for our other consumer products segment was $21.3 million in the third quarter of fiscal 2022, or 37% of net revenue, relatively consistent with our gross margin and gross margin percentage of $17.2 million and 35% of net revenue, respectively, in the third quarter of fiscal 2021.

Operating Expenses

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

Three months ended September 30,

The following table presents operating expenses for the three months ended December 31, 2021 and 2020:

Three months ended December 31,

(in thousands of Canadian dollars)

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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.

Selling, general and administrative expenses were $116.8 million in the third quarter of fiscal 2022, as compared to $144.1 million in the third quarter of fiscal 2021.

General and administrative expense was $27.4 million in the third quarter of fiscal 2022, as compared to $52.1 million in the third 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.

(ii) professional consulting fees;

and (iii) facilities costs.

Additionally, we received payroll subsidies in the amount of $10.6 million from the Canadian government in the third 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.

Sales and marketing expense was $64.4 million in the third quarter of fiscal 2022, as compared to $53.7 million in the third quarter of fiscal 2021.

The year-over-year increase is primarily due to (i) higher sponsorship fees associated with BioSteel’s partnership deals;

and (ii) increased digital advertising and trade activity expenses associated with BioSteel’s new product launches across 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.

These increases in sales and marketing expense were partially offset by cost reductions attributable to the restructuring actions initiated in the fourth quarter of fiscal 2020 and continuing through fiscal 2021, resulting in lower compensation costs as compared to the third quarter of fiscal 2021.

Research and development expense was $6.5 million in the third quarter of fiscal 2022, as compared to $14.0 million in the third 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.

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.

We also realized a reduction in research and development costs associated with the closure of certain of our sites in Canada in the third quarter of fiscal 2021.

Acquisition-related costs were $1.6 million in the third quarter of fiscal 2022, as compared to $3.1 million in the third quarter of fiscal 2021.

In the third quarter of fiscal 2022, costs were incurred primarily in relation to the plan to acquire Wana and the divestiture of C 3 , both of which are described in the “Recent Developments” section above, and evaluating other potential acquisition opportunities.

Comparatively, in the third quarter of fiscal 2021, costs were incurred primarily in relation to the plan of arrangement (the “RIV Arrangement”) with RIV Capital Inc.

(“RIV Capital”), which was completed on February 23, 2021.

We also incurred costs evaluating other potential acquisition opportunities.

Depreciation and amortization expense was $16.9 million in the third quarter of fiscal 2022, as compared to $21.2 million in the third 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.

Share-based compensation expense was $5.8 million in the third quarter of fiscal 2022, as compared to $18.3 million in the third 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;

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.

The completion of vesting, prior to the third 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 2.2 million forfeitures in the first nine months of fiscal 2022.

Further impacting share-based compensation expense was the forfeiture of 0.9 million stock options in the third quarter of fiscal 2022.

Share-based compensation expense related to acquisition milestones was $1.0 million in the third quarter of fiscal 2022, as compared to $1.6 million in the third quarter of fiscal 2021.

The year-over-year decrease is primarily related to the completion of vesting, during the third quarter of fiscal 2022, of the share-based compensation associated with the acquisition of our clinic partners in fiscal 2017.

This resulted in comparatively less share-based compensation expense recognized with respect to this acquisition in the third 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.

In the third quarter of fiscal 2021, we recorded expected credit losses on financial assets and related charges in the amount of $13.7 million, in relation to PharmHouse Inc.

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

$7.5 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 “PharmHouse Financial Guarantee”).

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).

$6.2 million related to expected credit losses associated with a debtor-in-possession credit facility advanced by RIV Capital to PharmHouse (the “DIP Financing”), and which we determined may not be recoverable.

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.

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

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

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

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

Three months ended September 30,

Asset impairment and restructuring costs recorded in operating expenses were $36.4 million in the third quarter of fiscal 2022, as compared to $400.4 million in the third quarter of fiscal 2021.

Asset impairment and restructuring costs recorded in the third quarter of fiscal 2022 were primarily associated with adjustments related to changes in the estimated fair value of certain of our Canadian sites that were closed in December 2020 as part of a strategic review of our operations.

The charges recorded in the third quarter of fiscal 2022 primarily represent the difference between the net book value of the associated long-lived assets and their estimated fair value.

Comparatively, in the third quarter of fiscal 2021, we recognized asset impairment and restructuring costs in relation to:

The restructuring actions commenced in the third quarter of fiscal 2021 resulting in the closure of certain of our sites in Canada.

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

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

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

of-use assets.

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

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

Additionally, we recognized costs totaling $4.4 million related to contractual and other settlement obligations, employee-related costs, and other restructuring costs associated with the remediation of damages caused by the fire at the Delta facility in November 2020, the closure of the facilities in British Columbia, and their sale.

The following table presents loss from equity method investments, other income (expense), net, and income tax recovery for the three months ended December 31, 2021 and 2020:

Three months ended December 31,

(in thousands of Canadian dollars)

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Other income (expense), net

Income tax recovery (expense)

Income tax recovery

Loss from equity method investments

The loss from equity method investments 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.

The loss from equity method investments was $nil in the third quarter of fiscal 2022, as compared to $0.7 million in the third quarter of fiscal 2021.

The year-over-year decrease in the loss is primarily attributable to the impairment of our remaining investment in Agripharm Corp.

(“Agripharm”) in the first quarter of fiscal 2022.

As a result of this impairment, there were no remaining equity method investment balances at December 31, 2021.

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.

Other income (expense), net was an income amount of $34.3 million in the third quarter of fiscal 2022, as compared to an expense amount of $290.6 million in the third quarter of fiscal 2021.

The year-over-year change of $324.8 million, from an expense amount to an income amount, is primarily attributable to:

Increase in non-cash income of $362.0 million related to the non-cash fair value changes on the liability arising from the Acreage Arrangement, from an expense amount of $303.0 million in the third quarter of fiscal 2021 to an income amount of $59.0 million in the third 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);

The income amount recognized in the third quarter of fiscal 2022, associated with a decrease in the liability arising from the Acreage Arrangement, is primarily attributable to a decrease of approximately 37% in our share price during the third quarter of fiscal 2022, relative to a decrease of approximately 40% in Acreage’s share price during that same period.

As a result, the model at December 31, 2021 reflects a lower estimated value of the Canopy Growth shares expected to be issued at the exchange ratio of 0.3048 upon a Triggering Event, relative to the estimated value of the Acreage shares expected to be acquired at that time (changes in our share price have a more significant impact on the model relative to changes in Acreage’s share price);

this resulted in a reduction of the liability amount.

Comparatively, the income amount recognized in the second quarter of fiscal 2021 was primarily attributable to the implementation of the Acreage Amended Arrangement in September 2020 which resulted in (i) an incremental payment to Acreage shareholders of US$37.5 million ($49.8 million);

(ii) the loan advance of US$50.0 million ($67.0 million) to Universal Hemp, LLC, a wholly-owned subsidiary

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

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

Comparatively, the expense amount recognized in the third quarter of fiscal 2021 was primarily attributable to an increase of approximately 64% in our share price in the third quarter of fiscal 2021, relative to an increase of approximately 2% in Acreage’s share price during that same period.

Increase in non-cash income of $261.3 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.

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.

The decrease of $67.3 million in the fair value of the warrant derivative liability (resulting in non-cash income) in the third quarter of fiscal 2022 is primarily attributable to a decrease of approximately 37% in our share price during the third quarter of fiscal 2022, further impacted by a shorter expected time to maturity of the warrants.

Comparatively, the increase of $194.0 million in the fair value of the warrant derivative liability in the third quarter of fiscal 2021 was primarily attributable to an increase of approximately 64% in our share price during the third quarter of fiscal 2021, partially offset by changes during the quarter in certain other assumptions used to value the liability, including the risk-free rate.

Increase in non-cash income of $76.1 million related to the non-cash fair value changes on the Notes, from an expense amount of $75.5 million in the third quarter of fiscal 2021 to an income amount of $0.6 million in the third quarter of fiscal 2022.

The year-over-year change is primarily due to the decrease of approximately 37% in our share price in the third quarter of fiscal

2022, as compared to an increase of approximately 64% during the third quarter of fiscal 2021, along with year-over-year changes in credit spreads.

Change of $350.0 million related to non-cash fair value changes on our other financial assets, from an income amount of $281.4 million in the third quarter of fiscal 2021 to an expense amount of $68.7 million in the third 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”) ($53.0 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 $13.0 million), driven largely by (i) a decrease of approximately 12% in TerrAscend’s share price in the third quarter of fiscal 2022;

Comparatively, in the third quarter of fiscal 2021 the income amount was primarily attributable to fair value increases relating to our investments in the TerrAscend exchangeable shares ($210.0 million), and the TerrAscend Canada secured debentures and TerrAscend Warrants (totaling $87.1 million), driven largely by an increase of approximately 120% in TerrAscend’s share price in the third quarter of fiscal 2021 and a re-assessment of the probability and timing of changes in federal laws in the United States regarding the permissibility of the cultivation, distribution or possession of marijuana.

Partially offsetting these fair value increases in the third quarter of fiscal 2021 was a fair value decrease of $15.0 million representing the difference between the US$50 million loan advanced to a wholly-owned subsidiary of Acreage (“Acreage Hempco”) pursuant to a debenture and the debenture’s estimated fair value measured using a discounted cash flow model.

Increase in interest expense of $25.4 million, from $1.0 million in the third quarter of fiscal 2021 to $26.4 million in the third 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.

Income tax recovery

Income tax recovery in the third quarter of fiscal 2022 was $0.2 million, compared to an income tax recovery of $15.6 million in the third quarter of fiscal 2021.

In the third quarter of fiscal 2022, income tax recovery consisted of a deferred income tax expense of $2.4 million (compared to a recovery of $16.6 million in the third quarter of fiscal 2021) and current income tax recovery of $2.6 million (compared to an expense of $1.0 million in the third quarter of fiscal 2021).

The change of $19.0 million from a deferred income tax recovery to an expense is primarily a result of changes in the third quarter of fiscal 2022 being less than changes in the third quarter of fiscal 2021 in respect 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 with 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 $3.5 million from current income tax expense to a recovery arose primarily in connection with legal entities that generated income for tax purposes that could not be reduced by the group’s tax attributes, net of prior years’ return to provision tax recovery.

The net loss in the third quarter of fiscal 2022 was $115.5 million, as compared to a net loss of $829.3 million in the third quarter of fiscal 2021.

The year-over-year decrease in the net loss is primarily attributable to the year-over-year decreases in (i) asset impairment and restructuring costs;

(ii) selling, general and administrative expenses;

(iii) expected credit losses on financial assets and related charges;

and (iv) share-based compensation expense, and the year-over-year increase in other income (expense), net.

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

These variances are described above.

11 unchanged sentences

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.

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

Three months ended September 30,

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

The following table presents Adjusted EBITDA for the three months ended December 31, 2021 and 2020:

Three months ended December 31,

(in thousands of Canadian dollars)

Income tax (recovery) expense

Income tax recovery

Other (income) expense, net

6 unchanged sentences

and related charges

Restructuring costs recorded in cost of goods sold

Charges related to the flow-through of inventory

2 unchanged sentences

1 From Statements of Cash Flows.

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

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

These variances are described above.

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

Six months ended September 30,

The Adjusted EBITDA loss in the third quarter of fiscal 2022 was $67.4 million, relatively consistent with the Adjusted EBITDA loss of $68.4 million in the third quarter of fiscal 2021.

Discussion of Results of Operations for the Nine Months Ended December 31, 2021

Nine months ended December 31,

(in thousands of Canadian dollars, except share amounts and

6 unchanged sentences

Diluted earnings (loss) per share 1

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

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

1 For the nine months ended December 31, 2021, the weighted average number of outstanding common shares, basic and diluted, totaled 390,423,083 and 410,986,802, respectively.

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

We report net revenue in two segments:

1 unchanged sentence

and (ii) other consumer products.

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

The following tables present segmented net revenue, by channel and by form, for the nine months ended December 31, 2021 and 2020:

Revenue by Channel

Six months ended September 30,

Nine months ended December 31,

(in thousands of Canadian dollars)

8 unchanged sentences

Other consumer products revenue

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

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

1 Reflects excise taxes of $43,501 and other revenue adjustments, representing our determination of returns and pricing adjustments, of $4,000 for the nine months ended December, 2021 (nine months ended December 31, 2020 - excise taxes of $37,423 and other revenue adjustments of $10,900).

2 Reflects excise taxes of $4,039 for the nine months ended December 31, 2021 (nine months ended December 31, 2020 - $4,190).

Revenue by Form

Six months ended September 30,

Nine months ended December 31,

(in thousands of Canadian dollars)

11 unchanged sentences

1 Excludes the impact of other revenue adjustments.

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

The year-over-year increase is attributable to:

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

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

CBD business.

Net revenue was $408.6 million in the nine months ended December 31, 2021, as compared to $398.2 million in the nine months ended December 31, 2020.

The year-over-year increase is attributable to growth of 14% in our other consumer products segment, which was primarily due to the growth in our BioSteel business.

The growth in this segment was partially offset by a decrease of 2% in our global cannabis segment, as declines across our organic Canadian recreational and medical cannabis businesses were only partially offset by net revenue attributable to the acquisitions, in the first quarter of fiscal 2022, of Supreme Cannabis and Ace Valley.

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;

Net revenue from our global cannabis segment was $271.2 million in the nine months ended December 31, 2021, as compared to $277.4 million in the nine months ended December 31, 2020.

Canadian recreational cannabis net revenue was $166.4 million in the nine months ended December 31, 2021, as compared to $168.5 million in the nine months ended December 31, 2020.

Net revenue from the business-to-business channel was $117.9 million in the nine months ended December 31, 2021, as compared to $120.3 million in the nine months ended December 31, 2020.

The year-over-year decrease is primarily attributable to the impacts, in the nine months ended December 31, 2021, of (i) an insufficient supply of in-demand dried flower products, as described above in our analysis of revenue for the third 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

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

These factors were partially offset by net revenue from the acquisitions of Supreme Cannabis and Ace Valley in the first quarter of fiscal 2022, which, together, contributed revenue of $29.6 million in the nine months ended December 31, 2021.

Revenue from the business-to-consumer channel was $48.5 million in the nine months ended December 31, 2021, relatively consistent with revenue generated of $48.3 million in the nine months ended December 31, 2020.

Canadian medical cannabis net revenue was $39.5 million in the nine months ended December 31, 2021, a decrease of 5% as compared to the nine months ended December 31, 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 $65.4 million in the nine months ended December 31, 2021, as compared to $67.1 million in the nine months ended December 31, 2020.

C 3 contributed revenue of $33.0 million in the nine months ended December 31, 2021, a year-over-year decrease of $13.6 million driven primarily by (i) increased competition in the synthetic cannabinoid market in Germany, and price compression for C 3 ’s products;

(ii) a limitation on sales activities associated with COVID-19 restrictions, particularly in the first and third quarters of fiscal 2022;

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

Other cannabis revenue was $32.4 million in the nine months ended December 31, 2021, a year-over-year increase of $11.8 million primarily attributable to (i) the growth in our U.S.

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

and (ii) opportunistic international bulk cannabis sales from Supreme Cannabis in the third quarter of fiscal 2022, in the amount of $4.2 million.

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

and (ii) 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 our other consumer products segment was $137.3 million in the nine months ended December 31, 2021, as compared to $120.8 million in the nine months ended December 31, 2020.

Revenue from Storz & Bickel was $63.8 million in the nine months ended December 31, 2021, relatively consistent with revenue generated in the nine months ended December 31, 2020 of $63.1 million.

Revenue from This Works was $26.3 million in the nine months ended December 31, 2021, a year-over-year increase of $1.5 million driven primarily by the expansion of third-party e-commerce channels over the last year.

Revenue from BioSteel was $31.1 million, a year-over-year increase of $16.2 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.

(iii) higher international sales of ready-to-drink products and beverages mixes;

and (iv) the adverse impact on revenue in the nine months ended December 31, 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,

The following table presents cost of goods sold, gross margin and gross margin percentage on a consolidated basis for the nine months ended December 31, 2021 and 2020:

Nine months ended December 31,

(in thousands of Canadian dollars except where indicated)

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Gross margin percentage

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

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

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

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

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

CBD businesses, BioSteel, and Storz & Bickel.

Cost of goods sold was $442.4 million in the nine months ended December 31, 2021, as compared to $341.1 million in the nine months ended December 31, 2020.

Our gross margin was $(33.8) million in the nine months ended December 31, 2021, or (8%) of net revenue, as compared to a gross margin of $57.2 million and gross margin percentage of 14% of net revenue in the nine months ended December 31, 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.

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 nine months ended December 31, 2021 was also impacted by the items described above in our analysis of “Cost of Goods Sold and Gross Margin” for the third quarter of fiscal 2022 relating to (i) the shift in the business mix relative to the nine months ended December 31, 2020, and (ii) the factors impacting the gross margins for our Canadian recreational cannabis business, C 3 , our U.S.

CBD business, and BioSteel in the nine months ended December 31, 2021.

We were also impacted by:

Charges totaling $7.7 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.

This compares to charges of $1.5 million in the nine months ended December 31, 2020, which were associated with fiscal 2020 business combinations;

Restructuring charges totaling $4.6 million relating to inventory write-downs resulting from strategic changes to our business, including the closure of our facility in Langley, British Columbia.

Comparatively, our gross margin in the third quarter of fiscal 2021 was impacted by restructuring charges totaling $15.6 million relating primarily to the closure of several of our production facilities in Canada in December 2020.

Our gross margin in the nine months ended December 31, 2021 benefited from payroll subsidies in the amount of $20.8 million received from the Canadian government, pursuant to a COVID-19 relief program.

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

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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,

The following table presents segmented gross margin and gross margin percentage for the nine months ended December 31, 2021 and 2020:

Nine months ended December 31,

(in thousands of Canadian dollars except where indicated)

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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.

Gross margin for our global cannabis segment was $(80.4) million in the nine months ended December 31, 2021, or (30%) of net revenue, as compared to $12.6 million in the nine months ended December 31, 2020, or 5% of net revenue.

Additionally, we recorded:

Charges totaling $7.7 million in the nine months ended December 31, 2021 related to the flow-through of inventory step-up associated with the acquisition of Supreme Cannabis;

Restructuring charges totaling $4.6 million relating to inventory write-downs resulting from strategic changes to our business.

Comparatively, our gross margin in the nine months ended December 31, 2020 was impacted by restructuring charges totaling $15.6 million relating primarily to inventory write-downs associated with the closure of several of our production facilities in Canada in December 2020.

Our gross margin in the nine months ended December 31, 2021 benefited from payroll subsidies in the amount of $20.8 million received from the Canadian government pursuant to a COVID-19 relief program.

Other consumer products

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

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

Gross margin for our other consumer products segment was $46.6 million in the nine months ended December 31, 2021, or 34% of net revenue, as compared to $44.6 million in the nine months ended December 31, 2020, or 37% of net revenue.

The year-over-year decrease in the gross margin percentage was primarily attributable to the year-over-year increase in revenue for our BioSteel business, as discussed above in our analysis of “Net Revenue” for the nine months ended December 31, 2021, and the resulting shift in the business mix towards an increased revenue contribution from the lower-margin BioSteel business.

Operating Expenses

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

Six months ended September 30,

The following table presents operating expenses for the nine months ended December 31, 2021 and 2020:

Nine months ended December 31,

(in thousands of Canadian dollars)

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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.

Selling, general and administrative expenses were $355.2 million in the nine months ended December 31, 2021, as compared to $426.7 million in the nine months ended December 31, 2020.

General and administrative expense was $96.6 million in the nine months ended December 31 2021, as compared to $186.5 million in the nine months ended December 31, 2020.

The year-over-year decrease is due primarily to a reduction in costs attributable to the previously-noted restructuring actions, 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.

(ii) professional consulting fees;

and (iii) facilities costs.

Additionally, we received payroll subsidies in the amount of $33.9 million from the Canadian government in the nine months ended December 31, 2021, pursuant to a COVID-19 relief program.

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

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

Sales and marketing expense was $179.5 million in the nine months ended December 31, 2021, as compared to $134.8 million in the nine months ended December 31, 2020.

The year-over-year increase is primarily due to a return to more normal advertising and promotional spending in the nine months ended December 31, 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;

Additionally, relative to the nine months ended December 31, 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.

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(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.

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

These increases in sales marketing expense were partially offset by cost reductions attributable to the previously-noted restructuring actions, resulting in lower compensation costs as compared to the nine months ended December 31, 2020.

Research and development expense was $23.6 million in the nine months ended December 31, 2021, as compared to $41.8 million in the nine months ended December 31, 2020.

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

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

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

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

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

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

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

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

Acquisition-related costs were $9.8 million in the nine months ended December 31, 2021, as compared to $8.0 million in the nine months ended December 31, 2020.

In the nine months ended December 31, 2021, costs were incurred primarily in relation to the plan to acquire Wana and the divestiture of C 3 , both of which are described in the “Recent Developments” section above, the acquisitions of Supreme Cannabis and Ace Valley, and evaluating other potential acquisition opportunities.

Comparatively, in the nine months ended December 31, 2020, costs were primarily incurred in relation to entering into, and implementing, the Acreage Amended Arrangement, and the RIV Arrangement.

Depreciation and amortization expense was $45.7 million in the nine months ended December 31, 2021, as compared to $55.6 million in the nine months ended December 31, 2020.

The year-over-year decrease is primarily due to (i) operational changes announced in December 2020, which resulted in the abandonment or impairment of certain of our Canadian production facilities and intangible assets;

(ii) the impairment of certain intangible assets associated with the rationalization of our research and development activities;

and (iii) the termination of a licensing agreement with a third party in the fourth quarter of fiscal 2021.

These decreases were partially offset by an increase in depreciation expense associated with the build-out of our production infrastructure in the United States.

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.

Share-based compensation expense was $31.5 million in the nine months ended December 31, 2021, as compared to $66.8 million in the nine months ended December 31, 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;

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.

The completion of vesting, prior to the nine months ended December 31, 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 2.2 million forfeitures in the nine months ended December 31, 2021.

Share-based compensation expense related to acquisition milestones was $4.4 million in the nine months ended December 31, 2021, as compared to $5.9 million in the nine months ended December 31, 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 acquisition of Spectrum Cannabis Denmark Aps, and the completion of vesting, during the third quarter of fiscal 2022, of the share-based compensation associated with the acquisitions of our clinic partners in fiscal 2017.

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.

In the nine months ended December 31, 2021, we recorded expected credit losses on financial assets and related charges in the amount of $108.5 million, in relation to PharmHouse.

These expected credit losses were recognized through February 23, 2021, the date on which the RIV Arrangement was completed, and included:

$61.0 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) $8.3 million advanced pursuant to the DIP Financing;

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

and (iv) associated interest receivable totaling $9.0 million;

$32.5 million related to expected credit losses recognized for RIV Capital’s contingent obligation to perform on the PharmHouse Financial Guarantee.

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

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.

Asset impairment and restructuring costs recorded in operating expenses were $128.2 million in the nine months ended December 31, 2021, as compared to $459.6 million in the nine months ended December 31, 2020.

In the nine months ended December 31, 2021, we recorded charges related primarily to:

Operational changes resulting from the continuing strategic review of our business as a result of recent acquisition activities, which resulted in the closure of our Niagara-on-the-Lake, Ontario and Langley, British Columbia facilities in November 2021;

Adjustments related to changes in the estimated fair value of certain of our Canadian sites that were closed in December 2020, and the Canadian facilities that were closed in November 2021.

Adjustments for certain of these facilities were made to reflect either their final or estimated selling prices;

Incremental costs associated with the closure of these facilities.

The charges recognized in the nine months ended December 31, 2021, primarily representing the difference between the net book value of the associated long-lived assets and their estimated fair value.

Comparatively, in the nine months ended December 31, 2020, we recorded charges related to:

Completing certain of the restructuring actions that had commenced in the previous fiscal year, and final adjustments related to changes in certain estimates recorded at March 31, 2020.

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

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

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

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

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

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

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

contractual and other settlement obligations;

and employee-related and other restructuring costs;

(ii) adjustments to the net book value of our production facilities in Aldergrove and Delta, British Columbia in order to reflect their selling prices, and other costs associated with the remediation of damages caused by the fire at the Delta facility in November 2020, the closure of the facilities in British Columbia, and their sale;

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

The following table presents loss from equity method investments, other income (expense), net, and income tax recovery for the nine months ended December 31, 2021 and 2020:

Nine months ended December 31,

(in thousands of Canadian dollars)

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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.

The loss from equity method investments was $0.1 million in the nine months ended December 31, 2021, as compared to $40.9 million in the nine months ended December 31, 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 nine months ended December 31, 2021.

Additionally, in the nine months ended December 31, 2020, we recognized losses associated with our equity investments in both PharmHouse and Agripharm;

as these investments were substantially impaired in fiscal 2021, we recognized only a nominal impairment of our remaining investment in Agripharm in the nine months ended December 31, 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;

Other income (expense), net was an income amount of $810.8 million in the nine months ended December 31, 2021, as compared to an expense amount of $21.1 million in the nine months ended December 31, 2020.

The year-over-year change of $831.9 million, from an expense amount to an income amount, is primarily attributable to:

Increase in non-cash income of $746.8 million related to the non-cash fair value changes on the liability arising from the Acreage Arrangement, from an expense amount of $249.8 million in the nine months ended December 31, 2020 to an income amount of $497.0 million in the nine months ended December 31, 2021.

The income amount recognized in the nine months ended December 31, 2021, associated with a decrease in the liability arising from the Acreage Arrangement, is primarily attributable to a decrease of approximately 73% in our share price from April 1, 2021 to December 31, 2021, relative to a decrease of approximately 59% in Acreage’s share price during that same period.

As a result, the model at December 31, 2021 reflects a lower estimated value of the Canopy Growth shares expected to be issued upon a Triggering Event, relative to the estimated value of the Acreage shares expected to be acquired at that time;

this resulted in a reduction of the liability amount.

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

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

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

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

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

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

and (ii) re-assessments of the probability and timing of changes in federal laws in the United States regarding the permissibility of the

cultivation, distribution or possession of marijuana in the second quarter of fiscal 2022 .

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

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

Comparatively, the expense amount recognized in the nine months ended December 31, 2020 was primarily attributable to (i) an increase of approximately 53% in our share price from April 1, 2020 to December 31, 2020, resulting in the estimated value of the Canopy Growth shares expected to be issued upon a Triggering Event to be higher relative to the estimated value of the

Acreage shares to be acquired at that same time, partially offset by (ii) the implementation of the Acreage Amended Arrangement in September 2020, which included a reset of the exchange ratio and resulted in other changes to potential scenarios and outcomes associated with the Acreage Arrangement that had been considered in prior valuation models, and had resulted in higher liability balances at those times.

Increase in non-cash income of $671.5 million related to fair value changes on the warrant derivative liability associated with the Tranche B Warrants held by CBI.

The decrease of $578.1 million in the fair value of the warrant derivative liability (resulting in non-cash income) in the nine months ended December 31, 2021 is primarily attributable to a decrease of approximately 73% in our share price from April 1, 2021 to December 31, 2021, further impacted by a shorter expected time to maturity of the warrants.

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

Increase in non-cash income of $189.1 million related to the non-cash fair value changes on the Notes, from an expense amount of $107.8 million in the nine months ended December 31, 2020 to an income amount of $81.3 million in the nine months ended December 31, 2021.

The year-over-year change is primarily due to the decline in our share price from April 1, 2020 to December 31, 2021 (73%) relative to the increase in our share price of approximately 53% from April 1, 2020 to December 31, 2020, and year-over-year changes in credit spreads.

Change of $649.2 million related to non-cash fair value changes on our other financial assets, from an income amount of $385.2 million in the nine months ended December 31, 2020 to an expense amount of $263.9 million in the nine months ended December 31, 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 ($166.0 million), and the secured debentures issued by TerrAscend Canada and Arise Bioscience and the TerrAscend Warrants (totaling $89.3 million), driven largely by (i) a decrease of approximately 39% in TerrAscend’s share price from April 1, 2021 to December 31, 2021;

Comparatively, in the nine months ended December 31, 2020 the income amount was primarily attributable to fair value increases relating to our investments in the TerrAscend exchangeable shares ($277.0 million), and the TerrAscend Canada secured debentures and TerrAscend Warrants (totaling $164.3 million), driven largely by an increase of approximately 410% in TerrAscend’s share price from April 1, 2020 to December 31, 2020.

Increase in interest expense of $73.9 million, from $3.7 million in the nine months ended December 31, 2020 to $77.6 million in the nine months ended December 31, 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 $39.3 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.

In the nine months ended December 31, 2020, we recognized income attributable to changes in our assessment of the probability and timing of ebbu Inc.

(“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.

Decrease in interest income of $12.1 million, from $19.1 million in the nine months ended December 31, 2020 to $7.0 million in the nine months ended December 31, 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.

Income tax recovery in the nine months ended December 31, 2021 was $0.5 million, compared to an income tax recovery of $18.1 million in the nine months ended December 31, 2020.

In the nine months ended December 31, 2021, the income tax recovery consisted of a deferred income tax expense of $0.4 million (compared to a recovery of $19.8 million in the nine months ended December 31, 2020) and current income tax recovery of $0.9 million (compared to an expense of $1.7 million in the nine months ended December 31, 2020).

The change of $20.2 million from a deferred income tax recovery to an expense is primarily a result of current year changes being less than prior year in respect of deferred tax liabilities that arose in connection with the required revaluation of the accounting carrying value, but not the tax basis, of property, plant and equipment, intangible assets, and other financial assets.

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

The change of $2.6 million from current income tax expense to a 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 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.

Net income in the nine months ended December 31, 2021 was $258.1 million, as compared to a net loss of $1.1 billion in the nine months ended December 31, 2020.

(ii) expected credit losses on financial assets and related charges;

and (iii) selling, general and administrative expenses.

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

These variances are described above.

Adjusted EBITDA (Non-GAAP Measure)

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

Six months ended September 30,

The following table presents Adjusted EBITDA for the nine months ended December 31, 2021 and 2020:

Nine months ended December 31,

(in thousands of Canadian dollars)

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and related charges

Restructuring costs recorded in cost of goods sold

Charges related to the flow-through of inventory

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1 From 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 Adjusted EBITDA loss in the nine months ended December 31, 2021 was $293.7 million, as compared to the Adjusted EBITDA loss of $246.3 million in the nine months ended December 31, 2020.

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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.

As of December 31, 2021, we had cash and cash equivalents of $615.1 million and short-term investments of $807.9 million, which are predominantly invested in liquid securities issued by the United States and Canadian governments.

Additionally, we have capacity of $40.0 million under our revolving debt facility with Farm Credit Canada (“FCC”), as well as up to an additional US$500.0 million available under the Credit Facility (as defined below).

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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.

In the nine months ended December 31, 2021, our purchases of and deposits on property, plant and equipment totaled $36.6 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.

Six months ended September 30,

Nine months ended December 31,

(in thousands of Canadian dollars)

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Operating activities

Cash used in operating activities 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.

Cash used in operating activities totaled $419.1 million in the nine months ended December 31, 2021, as compared to cash used of $367.9 million in the nine months ended December 31, 2020.

The increase in the cash used in operating activities is primarily due to (i) the year-over-year decrease in our gross margin;

and (ii) an increase in interest paid, associated with the US$750M debt financing that occurred in the fourth quarter of fiscal 2021.

These factors were partially offset by the year-over-year reductions in our total selling, general and administrative expenses, and an improvement in our working capital spending.

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.

The cash used in investing activities totaled $71.1 million in the nine months ended December 31, 2021, as compared to cash used of $328.9 million in the nine months ended December 31, 2020.

In the nine months ended December 31, 2021, purchases of property, plant and equipment were $36.6 million, as compared to $138.0 million in the nine months ended December 31, 2020.

Our investments in both nine-month periods related to our production infrastructure in the United States and an expansion of our Storz & Bickel facilities, with the year-over-year decrease reflecting the substantial completion of our infrastructure build-out.

In the nine months ended December 31, 2021, the net cash outflow relating to acquisitions totaled $14.9 million.

In the nine months ended December 31, 2020, we did not complete any acquisitions.

Our strategic investments in other financial assets in the nine months ended December 31, 2021 were $374.4 million, and related primarily to the upfront payment made as consideration for entering into the Wana Agreements.

Comparatively, in the nine months ended December 31, 2020, we completed strategic investments totaling $151.1 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 nine months ended December 31, 2021 related to proceeds of $10.3 million from the sale of certain wholly-owned subsidiaries, and proceeds of $25.7 million from the sale of property, plant and equipment.

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

Net redemptions of short-term investments in the nine months ended December 31, 2021 were $340.2 million, as compared to net purchases of short-term investments of $83.6 million in the nine months ended December 31, 2020.

The year-over-year change reflects the redemption of our short-term investments for the investing activities described above.

Finally, in the nine months ended December 31, 2021, other investing activities resulted in a cash outflow of $16.8 million, primarily related to the payment of acquisition-related liabilities.

In the nine months ended December 31, 2021, other investing activities resulted in a cash inflow of $5.3 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

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.

The cash used in financing activities totaled $46.3 million in the nine months ended December 31, 2021, as compared to cash provided of $269.1 million in the nine months ended December 31, 2020.

In the nine months ended December 31, 2021, we made repayments of long-term debt in the amount of $50.2 million, primarily related to the term loan assumed upon the completion of the acquisition of Supreme Cannabis on June 22, 2021.

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

Free Cash Flow (Non-GAAP Measure)

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

Three months ended September 30,

Six months ended September 30,

Three months ended December 31,

Nine months ended December 31,

(in thousands of Canadian dollars)

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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.

Free cash flow in the third quarter of fiscal 2022 was an outflow of $168.3 million, as compared to an outflow of $135.4 million in the third quarter of fiscal 2021.

The year-over-year increase in the outflow reflects the increase in the cash used for operating activities, as described above, partially offset by the lower purchases of property, plant and equipment associated with the substantial completion of our infrastructure build-out.

Free cash flow in the nine months ended December 31, 2021 was an outflow of $455.7 million, as compared to an outflow of $505.9 million in the nine months ended December 31, 2020.

The year-over-year decrease in the outflow reflects 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, partially offset by the increase in the cash used for operating activities, as described above.

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.

Total debt outstanding as of December 31, 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 $1.6 billion at December 31, 2021, as compared to $1.5 billion at March 31, 2021.

The increase, from March 31, 2021 to December 31, 2021, is primarily due to the assumption of the Supreme Debentures and the Accretion Debentures as a result of the Supreme Arrangement (all terms as defined below).

Credit Facility

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

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

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

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

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

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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.

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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.

The outstanding balance at December 31, 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.

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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.

Impairment of goodwill

Goodwill needs to be tested for impairment annually at the measurement date of March 31, or sooner, if events or circumstances indicate that the carrying value of goodwill may not be recoverable.

An entity may first perform a qualitative assessment of impairment, and a quantitative analysis is only required if the qualitative assessment is inconclusive.

As a result of the continued decline in the price of our common shares in the third quarter of fiscal 2022, we performed a quantitative interim goodwill impairment assessment for the cannabis operations reporting unit in the global cannabis segment as of December 31, 2021.

The estimated fair value of the cannabis operations reporting unit was determined using the market valuation method, which is consistent with the methodology used for our annual impairment test conducted at March 31, 2021.

The most significant assumption used in applying the market valuation methodology was the price of our common shares during the third quarter of fiscal 2022.

We concluded that the estimated fair value of the cannabis operations reporting unit exceeded its carrying value at December 31, 2021 and, as a result, goodwill is not impaired.

However, the fair value of the goodwill associated with our cannabis operations reporting unit only exceeded its carrying value by approximately 15% to 20%.

Accordingly, our cannabis operations goodwill is at risk for impairment in future periods.

The carrying value of goodwill associated with our cannabis operations reporting unit was $1.8 billion at December 31, 2021.

To the extent we continue to experience declines in the price of our common shares, we may be required to perform a quantitative goodwill impairment assessment in future periods.

For the remaining reporting units, we do not believe that an event occurred or circumstances changed during the third quarter of fiscal 2022 that would, more likely than not, reduce the fair value of these reporting units below their carrying value.

Therefore, we concluded that the quantitative goodwill impairment assessment was not required.

The carrying value of goodwill associated with all other reporting units was $212.3 million at December 31, 2021.

We are required to perform the next annual goodwill impairment analysis on March 31, 2022.

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

What changed 10-Q

Item 2. Management’s Discussion and Analysis