6-K

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 6-K

REPORT OF FOREIGN PRIVATE ISSUER

PURSUANT TO RULE 13a-16 OR 15d-16

UNDER THE SECURITIES EXCHANGE ACT OF 1934

For the month of December, 2019

Commission File Number: 001-38781

HEXO Corp.

(Translation of registrant’s name into English)

3000 Solandt Road

Ottawa, Ontario, Canada K2K 2X2

(Address of principal executive office)

Indicate by check mark whether the registrant files or will file annual reports under cover of Form 20-F or Form 40-F.

Form 20-F  ☐    Form 40-F  ☒

Indicate by check mark if the registrant is submitting the Form 6-K in paper as permitted by Regulation S-T Rule 101(b)(1):  ☐

Indicate by check mark if the registrant is submitting the Form 6-K in paper as permitted by Regulation S-T Rule 101(b)(7):  ☐

EXPLANATORY NOTE

Exhibits 99.1 and 99.2 included with this Report on Form 6-K are hereby incorporated by reference into the Registration Statement on Form F-10 of HEXO Corp. (File No. 333-228924).

Exhibit	Description
99.1	Condensed interim consolidated financial statements for the three months ended October 31, 2019 and 2018
99.2	Management’s Discussion and Analysis for the three month period ended October 31, 2019
99.3	Form 52-109F2 — Certification of Interim Filings - CEO
99.4	Form 52-109F2 — Certification of Interim Filings - CFO

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

	HEXO Corp.
Date: December 16, 2019	/s/ Sébastien St-Louis
	President and Chief Executive Officer

EX-99.1

Exhibit 99.1

Notice to Reader

(Unaudited, expressed in CAD $000’s)

As described in Note 32, the Company identified an error related to the deferred tax liability as at July 31, 2019 which has not been corrected in the condensed interim consolidated financial statements as at October 31, 2019 and July 31, 2019. The Company is in the process of restating and reissuing the consolidated annual financial statements for the year ended July 31, 2019 and will also restate and reissue these condensed interim consolidated statements for the period ending October 31, 2019, correcting this error.

The deferred tax liability is overstated as at October 31, 2019 and July 31, 2019, as it was not offset by a deferred tax asset relating to a tax loss generated in one subsidiary against a deferred tax liability generated by a separate subsidiary. Due to the two tax positions existing in two separate entities, the Company’s original position was that they could not be offset or reduce one another. The applicable subsidiaries were consolidated on August 1, 2019. The correction of this error will result in a reduction of the deferred tax liability and deficit, by $ $14,373, as at October 31, 2019 and July 31, 2019. Additionally, net loss for the year ended July 31, 2019 was overstated by $14,373.

To the Audit Committee of HEXO Corp.

In accordance with our engagement letter dated November 19, 2019 we have performed an interim review of the condensed interim consolidated statement of financial position of HEXO Corp. as at October 31, 2019, the condensed interim consolidated statements of loss and comprehensive loss for the three-month period ended October 31, 2019, and the condensed interim consolidated statements of changes in shareholders’ equity and cash flows for the three-month period then ended, and notes to the condensed interim consolidated financial statements. These financial statements are the responsibility of HEXO Corp’s management.

We performed our interim review in accordance with Canadian generally accepted standards for a review of interim financial statements by an entity’s auditor.

An interim review is substantially less in scope than an audit, the objective of which is the expression of an opinion regarding the financial statements. Accordingly, we do not express such an opinion. An interim review does not provide assurance that we would become aware of any or all significant matters that might be identified in an audit.

HEXO Corp. has a deferred tax liability of $14,373,000 and $20,396,000 as reported in the condensed interim consolidated statement of financial position as at October 31, 2019 and in the statement of financial position as at July 31, 2019 respectively. Such deferred tax liability has not been reduced by the income tax recovery related to a deferred tax asset of $14,373,000 each, as at October 31, 2019 and July 31, 2019. Accordingly, the deferred tax liability and deficit would have been reduced by $14,373,000 each, as at October 31, 2019 and July 31, 2019 respectively, and net loss for the year ended July 31, 2019 would have been reduced by $14,373,000.

Based on our interim review, except for the matter described in the preceding paragraph, we are not aware of any material modification that needs to be made for these condensed interim consolidated financial statements to be in accordance with International Financial Reporting Standards as issued by the International Accounting Standards Board.

This report is solely for the use of the Audit Committee of HEXO Corp. to assist it in discharging its regulatory obligation to review these financial statements, and should not be used for any other purpose.

Ottawa, Ontario
December 15, 2019
	Chartered Professional Accountants
	Licensed Public Accountants

Table of Contents

Condensed Interim Consolidated Statements of Financial Position	1
Condensed Interim Consolidated Statements of Loss and Comprehensive Loss	2
Condensed Interim Consolidated Statements of Changes in Shareholders’ Equity	3
Condensed Interim Consolidated Statements of Cash Flows	4
Notes to the Consolidated Financial Statements	5–30

Condensed Interim Consolidated Statements of Financial Position

(Unaudited, expressed in CAD $000’s)

As at	Note		October 31, 2019			July 31, 2019
Assets
Current assets
Cash and cash equivalents		4	$	41,277		$	113,568
Restricted cash		5		18,776			22,350
Short-term investments		4		13,402			25,937
Trade receivables		17		8,015			19,693
Commodity taxes recoverable and other receivables		6		15,553			15,247
Convertible debentures receivable		15		10,727			13,354
Prepaid expenses				12,806			10,762
Inventory		7		84,908			86,271
Biological assets		8		6,609			7,371
			$	212,073		$	314,553
Property, plant and equipment		9	$	329,856		$	258,793
Intangible assets		10		126,912			127,282
Investment in associate and joint ventures		19		58,817			52,849
License and prepaid royalty – HIP		26		1,284			1,409
Long term investments		20		12,528			14,277
Goodwill		11		111,877			111,877
			$	853,347		$	881,040
Liabilities
Current liabilities
Accounts payable and accrued liabilities			$	51,350		$	45,581
Excise taxes payable				6,947			3,494
Warrant liability		12, 13		196			493
Lease liability – current		28		304			—
Term loan – current		16		3,032			3,117
			$	61,829		$	52,685
Term loan		16		29,519			30,257
Deferred rent liability				—			946
Deferred tax liability		32		14,373			20,396
Lease liability		28		22,373			—
			$	128,094		$	104,284
Shareholders’ equity
Share capital		13	$	799,880		$	799,706
Share-based payment reserve		13		51,071			40,315
Warrants		13		60,433			60,433
Deficit				(187,131	)		(124,698	)
Non-controlling interest		27		1,000			1,000
			$	725,253		$	776,756
			$	853,347		$	881,040

Commitments and contingencies (Note 23)

Subsequent events (Note 33)

Approved by the Board /s/ Jason Ewart, Director /s/ Michael Munzar, Director

The accompanying notes are an integral part of these consolidated financial statements.

1

Condensed Interim Consolidated Statements of Loss and Comprehensive Loss

(Unaudited, expressed in CAD $000’s except share amounts)

For the three months ended	Note	October 31, 2019			October 31, 2018
Gross revenue from sale of goods	29	$	19,297		$	6,630
Excise taxes			(4,839	)		(1,014	)
Net revenue from sale of goods			14,458			5,616
Ancillary revenue	25		41			47
Net revenue			14,499			5,663
Cost of goods sold	7, 18		9,947			2,831
Gross margin before fair value adjustments			4,552			2,832
Realized fair value amounts on inventory sold	7		6,663			717
Unrealized gain on changes in fair value of biological assets	8		(7,051	)		(5,123	)
Write off of biological assets and destruction costs	7,8		663			—
Write off of inventory	7		2,175			—
Impairment loss on inventory	7		25,458			—
Gross (loss)/margin		$	(23,356	)	$	7,238
Operating Expenses
General and administrative			15,973			4,912
Marketing and promotion			6,220			11,711
Share-based compensation	13, 18		8,164			4,689
Research and development			1,744			—
Amortization of intangible assets	10		1,666			150
Depreciation of property, plant and equipment	9		1,333			573
	18	$	35,100		$	22,035
Loss from operations			(58,456	)		(14,737	)
Restructuring costs	31		(3,722	)		—
Revaluation of financial instruments loss	12		297			(2,337	)
Share of loss from investment in associate and joint ventures	19		(1,682	)		(161	)
Unrealized (loss)/gain on convertible debenture receivable	15		(2,627	)		3,434
Unrealized loss on investments	20		(1,671	)		—
Realized gain on investments	20		17			—
Foreign exchange loss			(46	)		—
Interest and financing expenses			(435	)		(8	)
Interest income	4		571			1,066
Impairment loss on right-of-use asset	28		(702	)		—
Net loss and comprehensive loss attributable to shareholders before tax		$	(68,456	)	$	(12,803	)
Income tax	32		6,023			—
Total net loss		$	(62,433	)	$	(12,803	)
Net loss per share, basic and diluted		$	(0.24	)	$	(0.07	)
Weighted average number of outstanding shares
Basic and diluted	13		256,996,663			194,033,380

The accompanying notes are an integral part of these consolidated financial statements.

2

Condensed Interim Consolidated Statements of Changes in Shareholders’ Equity

(Unaudited, expressed in CAD $000’s except share amounts)

For the three months ended	Note		Number common shares		Share capital		Share-based payment reserve			Warrants			Non- controlling Interest		Deficit			Shareholders’ equity
Balance at July 31, 2019				256,981,753	$	799,706	$	40,315		$	60,433		$	1,000	$	(124,698	)	$	776,756
Exercise of stock options		13		80,030		174		(69	)		—			—		—			105
Stock-based compensation		13,18		—		—		10,825			—			—		—			10,825
Total net loss				—		—		—			—			—		(62,433	)		(62,433	)
Balance at October 31, 2019				257,061,783	$	799,880	$	51,071		$	60,433		$	1,000	$	(187,131	)	$	725,253
Balance at July 31, 2018				193,629,116	$	347,233	$	6,139		$	12,635		$	—	$	(43,134	)	$	322,873
Issuance of warrants		19		—		—		—			42,386			—		—			42,386
Exercise of stock options		13		621,729		626		(264	)		—			—		—			362
Exercise of warrants		12,13		1,937,885		4,807		—			(991	)		—		—			3,815
Exercise of Broker/Finder warrants		13		1,199,861		4,736		—			(302	)		—		—			4,434
Stock-based compensation		13		—		—		4,800			—			—		—			4,800
Net loss				—		—		—			—			—		(12,803	)		(12,803	)
Balance at October 31, 2018				197,388,591	$	357,402	$	10,675		$	53,728		$	—	$	(55,938	)	$	365,867

The accompanying notes are an integral part of these consolidated financial statements.

3

Condensed Interim Consolidated Statements of Cash Flows

(Unaudited, expressed in CAD $000’s)

For the three months ended	Note		October 31, 2019			October 31, 2018
Operating activities
Total net loss			$	(62,433	)	$	(12,803	)
Items not affecting cash
Income tax recovery		32		(6,023	)		—
Depreciation of property, plant and equipment		9		1,333			573
Amortization of intangible assets		10		1,666			150
Unrealized revaluation loss/(gain) on convertible debenture		15		2,627			(3,434	)
Unrealized gain on changes in fair value of biological assets		8		(7,051	)		(5,123	)
Unrealized fair value adjustment on investments		20		1,671			—
Gain on investment				(17	)		—
Amortization of deferred financing costs		16		49			—
Accrued interest income				—			(215	)
License depreciation and prepaid royalty expenses – HIP		26		125			—
Write off of inventory, biological assets and destruction costs				2,838			—
Impairment loss on inventory		7		25,458			—
Share of loss from investment in associate and joint ventures		19		1,682			161
Realized fair value amounts on inventory sold		7		6,663			717
Share-based compensation		13,18		8,164			4,800
Revaluation of financial instruments (gain)/loss		12		(297	)		2,337
Impairment loss on right-of-use assets		28		702			—
Changes in non-cash operating working capital items
Trade receivables				11,678			(6,332	)
Commodity taxes recoverable and other receivables				(211	)		(150	)
Prepaid expenses				(2,044	)		965
Inventory		7		(32,823	)		(1,729	)
Biological assets		8		7,150			—
Accounts payable and accrued liabilities				1,421			(681	)
Excise taxes payable				3,453			—
Cash and cash equivalents used in operating activities				(34,219	)		(20,764	)
Financing activities
Exercise of stock options		13		105			362
Exercise of warrants		13		—			5,589
Payments on term loans				(872	)		—
Leasing interest expense		28		(369	)		—
Cash used in financing activities				(1,136	)		5,951
Investing activities
Disposal of short-term investments		4		12,535			56,838
Issuance of promissory note receivable				—			(20,334	)
Restricted cash		5		3,574			(5,000	)
Acquisition of property, plant and equipment				(45,248	)		(25,341	)
Purchase of intangible assets				(147	)		(379	)
Investment in associate and joint ventures		19		(7,650	)		(7,035	)
Cash used in investing activities				(36,936	)		(1,251	)
Decrease in cash and cash equivalents				(72,291	)		(16,064	)
Cash and cash equivalents, beginning of period				113,568			39,342
Cash and cash equivalents, end of period			$	41,277		$	23,278

The accompanying notes are an integral part of these consolidated financial statements.

4

Notes to the Condensed Interim Consolidated Financial Statements

For the three months ended October 31, 2019 and 2018

(Unaudited, expressed in CAD and in $000’s except share amounts or where otherwise stated)

1. Description of Business

HEXO Corp. (the “Company”), is a publicly traded corporation, incorporated in Ontario. HEXO is a producer of cannabis and its sites are licensed by Health Canada for production and sale. Its head office is located at 240-490 Boulevard Saint-Joseph, Gatineau, Quebec, Canada. The Company’s common shares are listed on the Toronto Stock Exchange (“TSX”) and the New York Stock Exchange (“NYSE”), both under the trading symbol “HEXO”.

2. Basis of Presentation

Statement of Compliance

These condensed interim consolidated financial statements (“consolidated financial statements”) have been prepared in compliance with International Accounting Standard 34, Interim Financial Reporting (“IAS 34”). These consolidated financial statements should be read in conjunction with the annual consolidated financial statements of the Company for the fiscal year ended July 31, 2019, and have been prepared using consistent accounting policies as described in the annual consolidated financial statements for the year ended July 31, 2019 except for the adoption of the new lease standard as disclosed in Note 3.

These consolidated financial statements were approved and authorized for issue by the Board of Directors on December 15, 2019.

Basis of Measurement and Consolidation

The consolidated financial statements have been prepared on an historical cost basis except for short term investments, biological assets, convertible debentures receivable, long term investments, and the warrant liability, which are measured at fair value on a recurring basis and include the accounts of the Company and entities controlled by the Company and its subsidiaries.

Historical cost is the fair value of the consideration given in exchange for goods and services based upon the fair value at the time of the transaction of the consideration provided.

Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date, regardless of whether that price is directly observable or estimated using another valuation technique. In estimating the fair value of an asset or a liability, the Company takes into account the characteristics of the asset or liability if market participants would take those characteristics into account when pricing the asset or liability at the measurement date. Fair value for measurement and/or disclosure purposes in these consolidated financial statements is determined on such a basis, except for share-based payment transactions that are within the scope of IFRS 2, Share-based payment and measurements that have some similarities to fair value but are not fair value, such as net realizable value in IAS 2, Inventories.

In addition, for financial reporting purposes, fair value measurements are categorized into Level 1, 2 or 3 based on the degree to which the inputs to the fair value measurements are observable and the significance of the inputs to the fair value measurement in its entirety, which are described as follows:

Level 1 - inputs are quoted prices (unadjusted) in active markets for identical assets or liabilities that the entity can access at the measurement date;

Level 2 - inputs are inputs other than quoted prices included within Level 1, that are observable for the asset or liability, either directly or indirectly; and

Level 3 - inputs are unobservable inputs for the asset or liability.

(a) INVESTMENT IN ASSOCIATES AND JOINT VENTURES

When determining the appropriate basis of accounting for the Company’s interests in affiliates, the Company makes judgments about the degree of influence that it exerts directly or through an arrangement over the investees’ relevant activities.

Judgment was used to determine whether the joint venture arrangements described in Note 19 should be accounted for as a joint operation or a joint venture. Given the Company has rights to the net assets of the separate legal entities, the Company has concluded they will be accounted for as joint ventures. The Company will recognize the initial investment at cost and the carrying amount is increased or decreased to recognize the Company’s share of the profit or loss of the venture after the date of acquisition.

(b) FUNCTIONAL AND PRESENTATION CURRENCY

These consolidated financial statements are presented in Canadian dollars, the functional currency of the Company and its subsidiaries.

5

(c) BASIS OF CONSOLIDATION

Subsidiaries are entities controlled by the Company. Control exists when the Company has the power, directly and indirectly, to govern the financial and operating policies of an entity and be exposed to the variable returns from its activities. The financial statements of subsidiaries are included in the consolidated financial statements from the date that control commences until the date that control ceases.

MAJOR SUBSIDIARIES OF HEXO CORP.	JURISDICTION	INTEREST HELD
HEXO Operations Inc.1	Ontario, Canada		100	%
HEXO USA Inc.	Delaware, USA		100	%

¹ HEXO Operations Inc. holds the following interests;

60% interest in the joint venture Neal Up Brands Inc

60% interest in Keystone Isolation Technologies Inc. (“KIT”)

51% interest in HEXO MED (Note 19)

42.5% interest held in the associate Truss (Note 19)

3. Changes to Accounting Policies, Accounting Standards and Interpretations

Effective August 1, 2019, the Company has made no changes to the accounting policies, standards and interpretations as stated in Note 3 of the Annual Consolidated Financial Statements for the years ended July 31, 2019 and 2018, with the exception of the new policy and standard below.

RESTRICTED SHARE UNITS (“RSU’S”)

RSUs are equity-settled share-based payments granted to certain employees, directors and executives within the Company. RSUs are measured at their initial fair value on the date of the grant based upon a volume weighted market price, and is recognized as share-based compensation expense over the vesting period with a corresponding credit to share-based reserves. Upon the release of RSUs in the form of common shares, the related share-based reserve is transferred to share capital.

Amounts recorded for forfeited RSUs are transferred to deficit in the year of forfeiture or expiry.

New and Revised IFRS Effective August 1, 2019

IFRS 16, LEASES

The Company has applied IFRS 16 using the modified retrospective method and has elected to set the right-of-use asset equal to the lease liability. As such the cumulative effect of initial application recognized in the deficit at August 1, 2019 is $nil. Accordingly, the comparative information presented for the prior period has not been restated and is presented as previously reported under IAS 17 and related interpretations.

Prior to the adoption of IFRS 16, the Company utilized IFRIC 4 - Determining Whether an Arrangement Contains a Lease in its determination at contract inception whether an arrangement was or contained a lease. The Company now determines whether a contract is or contains a lease based on the new definition of a lease with IFRS 16. Under IFRS 16, a contract is or contains a lease if the contract conveys a right to control the use of an identified asset for a period of time in exchange for consideration.

The Company recognizes a right-of-use asset and a lease liability at the lease commencement date. The right-of-use asset is initially measured at cost, and subsequently at cost less any accumulated depreciation or impairment losses and adjusted for certain re-measurements of the lease liability. The Company recognizes the associated depreciation of the right-of-use assets on a straight-line basis over the course of the remaining lease term which ranges from 2.9 to 30 years. The lease liability is initially measured at the present value of the lease payments that are not paid at the commencement date, discounted using the interest rate implicit in the lease or, if that rate cannot be readily determined, the Company’s incremental borrowing rate (“IBR”). The Company has a determined a single IBR as the discount rate across all administrative real estate leases due to the leases containing similar characteristics. A separate IBR was used for the discounting of the Company’s production real estate property. The IBR’s utilized for administrative real estate and production real estate were 15.95% and 18.95%, respectively. The lease liability is subsequently increased by the interest cost on the lease liability and decreased by lease payments made. It is remeasured when there is a change in future lease payments arising from a change in an index or rate, a change in the estimate of the amount expected to be payable under a residual value guarantee, or as appropriate, changes in the assessment of whether a purchase or extension option is reasonably certain to be exercised or a termination option is reasonably certain not to be exercised.

The definition of leases as operating or finance has remained substantially unchanged from the preceding guidance under IAS 17. The Company applied IFRS 16 only to contracts that were previously identified as leases under IAS 17 and IFRIC 4.

The Company used the following additional practical expedients:

6

• Applied a single discount rate to each applicable portfolio of leases with similar characteristics;

• Applied the exemption not to recognize right-of-use assets and lease liabilities for short-term leases with terms less than 12 months and leases of low-value assets. The Company recognizes the lease payments associated with these leases as an expense on a straight-line or other systematic basis over the lease term;

• Excluded initial direct costs from the measurement of the right-of-use asset at the date of initial application;

• Used hindsight when determining the lease term if the contract contains options to extend or terminate the lease; and

• Election to separate non-lease components from lease components, and account for each lease component and any associated non-lease components as a single lease component.

The Company has applied judgment in determining the applicable discount rate. The discount rate is based on the Company’s IBR and reflects the current market assessments of the time value of money and the associated risks attributable to the Company and its industry.

On transition to IFRS 16, the Company recognized right-of-use assets and corresponding lease liabilities of $15,886 on August 1, 2019 for its administrative and production space lease agreements. The Company has recognized on a straight-line basis, depreciation expenses of $369 and $184 in finance costs in the condensed consolidated interim statements of operations and comprehensive loss for the three months ended October 31, 2019.

Total commitments as at July 31, 2019 was $192,230 which included certain contractual financial obligations related to service agreements, purchase agreements, operating lease agreements, and construction contracts. Of this total, $101,741 is related operating lease commitments. The following is a reconciliation of total operating lease commitments at July 31, 2019 to the lease liabilities recognised at August 1, 2019:

Total operating leases commitments as at July 31, 2019	$	101,741
Less: variable components of the operating leases		(49,330	)
Less: low value and/or short-term lease		(88	)
Add: IFRS 16 adjustments for renewal periods		27,273
Operating lease liability before discounting		79,596
Discounting factors using the IBR’s		(63,710	)
Total lease liabilities recognized under IFRS 16 as at August 1, 2019 (Note 28)	$	15,886

The impact of IFRS 16 on the consolidated statement of cash flows will be the increase of operating cash flows and reduction of financing cash flows through the additional depreciation and interest expenses, respectively.

4. Cash, Cash Equivalents and Short-Term Investments

Cash and cash equivalents are highly liquid investments with a maturity of 3 months or less. Short term investments are comprised of liquid investments with maturities of less than 12 months. Short term investments are recognized initially at fair value and subsequently adjusted to fair value through profit or loss.

	Interest rate	October 31, 2019		July 31, 2019
Operating cash	—	$	15,554	$	5,993
High interest savings accounts	1.45%–2.10%		25,723		107,575
Total cash and cash equivalents		$	41,277	$	113,568
Term deposits & GIC	2.85%–4.25% maturity of 3 to 12 months	$	13,402	$	25,937
Total short-term investments		$	13,402	$	25,937

Interest income earned in the period amounted to $571 (October 31, 2018 - $1,066).

7

5. Restricted Cash

As at October 31, 2019, the Company had $18,776 of restricted funds.

• The Company had a capital contribution of $4,076 held in trust as at October 31, 2019;

• A balance of $2,500 is held in trust related the Company’s joint venture Neal UP Brands Inc. (Note 27);

• A balance of $9,200 has been restricted due to a minimum balance to be held in a debt service reserve account as required under the Company’s term loan agreement (Note 16);

• A balance of $3,000 in escrow to facilitate a supply agreement with a vendor. The balance may be contributed to or drawn upon, in order to retain 15% of the future expected purchases of the agreement.

As at July 31, 2019, the Company had $22,350 of restricted funds designated as follows;

• A balance of $3,433 in escrow to facilitate the purchase of supply agreements with vendors. The amount of $433 shall be drawn down on a pro-rata basis based upon the delivery of goods to the Company. The remaining balance of $3,000 may be contributed to or drawn upon, in order to retain 15% of the future expected purchases;

• A balance of $3,141 has been restricted to secure the implementation of greenhouse infrastructure with a vendor (Note 23);

• The Company had a capital contribution of $4,076 held in trust as at July 31, 2019;

• A balance of $9,200 has been restricted due to a minimum balance to be held in a debt service reserve account as required under the Company’s term loan agreement (Note 16);

• A balance of $2,500 is held in trust related the Company’s joint venture Neal Brothers Inc (Note 28).

6. Commodity Taxes Recoverable and Other Receivables

	October 31, 2019		July 31, 2019
Commodity taxes recoverable	$	15,458	$	14,415
Accrued interest income		—		570
Other receivables		95		262
Total	$	15,553	$	15,247

7. Inventory

	October 31, 2019
	Capitalized cost		Biological asset fair value adjustment		Total
Dried cannabis	$	35,143	$	11,001	$	46,144
Oils		16,341		4,878		21,219
Hemp derived distillate		1,516		—		1,516
Purchased dried cannabis		12,788		—		12,788
Packaging and supplies		3,241		—		3,241
	$	69,029	$	15,879	$	84,908

The inventory expensed to cost of goods sold in the period ended October 31, 2019, was $8,278 (October 31, 2018 – $2,831). Total stock-based compensation capitalized to inventory in the period was $2,661. The realized fair value on inventory sold during the period was $6,663 (October 31, 2018 – $717). The Company recorded a write off of inventory of $2,175 and an impairment loss on inventory of $25,458, realized on cannabis purchased in which the cost exceeds its net realizable value.

	July 31, 2019
	Capitalized cost		Biological asset fair value adjustment		Total
Dried cannabis	$	28,996	$	21,766	$	50,762
Oils		17,377		5,366		22,743
Hemp derived distillate		1,523		—		1,523
Purchased dried cannabis		8,087		—		8,087
Packaging and supplies		3,156		—		3,156
	$	59,139	$	27,132	$	86,271

8

8. Biological Assets

The Company’s biological assets consist of cannabis plants from seeds all the way through to mature plants. The changes in the carrying value of biological assets are as follows:

	October 31, 2019			July 31, 2019
Balance, beginning of period	$	7,371		$	2,332
Acquired through acquisition1		—			3,291
Production costs capitalized		11,344			19,215
Unrealized gain on changes in fair value of biological assets		7,051			38,856
Transferred to inventory upon harvest		(18,494	)		(56,323	)
Impairment and destruction		(663	)		—
Balance, end of period	$	6,609		$	7,371

¹  Acquired through the Newstrike acquisition on May 24, 2019 (see Note 11)

As at October 31, 2019, the fair value of biological assets included $2 in seeds and $6,607 in cannabis plants ($2 in seeds and $7,369 in cannabis plants as at July 31, 2019). During the period the Company incurred an impairment loss on its biological assets of $438 due to the halting of production at the Niagara facility. As a result of this, destruction costs were also incurred in the amount $225 to dispose of the biological assets within the required guidelines as set by Health Canada. The significant estimates used in determining the fair value of cannabis plants are as follows:

• yield by plant;

• stage of growth estimated as the percentage of costs incurred as a percentage of total cost as applied to the estimated total fair value per gram (less fulfilment costs) to arrive at an in-process fair value for estimated biological assets, which have not yet been harvested;

• percentage of costs incurred for each stage of plant growth.

• fair value selling price per gram less cost to complete and cost to sell.

• destruction/wastage of plants during the harvesting and processing process.

All biological assets are classified as current assets in the statement of financial position and are considered Level 3 fair value estimates. As at October 31, 2019, it is expected that the Company’s biological assets will yield approximately 22,572 kilograms of cannabis (July 31, 2019 – 17,571 kilograms of cannabis). The Company’s estimates are, by their nature, subject to change. Changes in the anticipated yield will be reflected in future changes in the fair values of biological assets.

The valuation of biological assets is based on an income approach in which the fair value at the point of harvesting is estimated based on selling prices less the costs to sell. For in process biological assets, the fair value at point of harvest is adjusted based on the stage of growth at period end. Stage of growth is determined by reference to the cost incurred as a percentage of total cost as applied to estimated total fair value per gram (less fulfilment costs) to arrive at an in-process fair value for estimated biological assets, which have not yet been harvested.

Management’s identified significant unobservable inputs, their range of values and sensitivity analysis are presented in the tables below.

The following table summarizes the unobservable inputs for the period ended October 31, 2019:

Unobservable inputs	Input values	Sensitivity analysis
Average selling price Obtained through actual retail prices on a per strain basis.	$0.80 – $4.23 per dried gram.	An increase or decrease of 5% applied to the average selling price would result in a change of approximately $321 to the valuation.
Yield per plant Obtained through historical harvest cycle results on a per strain basis.	47 – 142 grams per plant.	An increase or decrease of 5% applied to the average yield per plant would result in a change up to approximately $321 in valuation.
Stage of growth Obtained through the estimates of stage of completion within the harvest cycle.	Average of 37% completion.	An increase or decrease of 5% applied to the average stage of growth per plant would result in a change of approximately $836 in valuation.
Wastage Obtained through the estimates of wastage within the cultivation and production cycle.	0%–30% dependent upon the stage within the harvest cycle.	An increase or decrease of 5% applied to the wastage expectation would result in a change of approximately $326 in valuation.

9

The following table summarizes the unobservable inputs for the period ended July 31, 2019:

Unobservable inputs	Input values	Sensitivity analysis
Average selling price Obtained through actual retail prices on a per strain basis.	$4.23 – $5.01 per dried gram.	An increase or decrease of 5% applied to the average selling price would result in a change of approximately $480 to the valuation.
Yield per plant Obtained through historical harvest cycle results on a per strain basis.	15 – 123 grams per plant.	An increase or decrease of 5% applied to the average yield per plant would result in a change up to approximately $344 in valuation.
Stage of growth Obtained through the estimates of stage of completion within the harvest cycle.	Average of 29% completion.	An increase or decrease of 5% applied to the average stage of growth per plant would result in a change of approximately $1,148 in valuation.
Wastage Obtained through the estimates of wastage within the cultivation and production cycle.	0%–30% dependent upon the stage within the harvest cycle.	An increase or decrease of 5% applied to the wastage expectation would result in a change of approximately $302 in valuation.

9. Property, Plant and Equipment

Cost	Balance at July 31, 2019		Additions		Adjustments			Balance at October 31, 2019
OWNED
Land	$	5,339	$	—	$	—		$	5,339
Buildings		150,834		7,845		2,757			161,436
Leasehold Improvements		627		25,526		—			26,153
Furniture and equipment		6,356		2,159		—			8,515
Cultivation and production equipment		42,029		2,206		—			44,235
Vehicles		1,031		—		—			1,031
Computers		2,981		638		—			3,619
Construction in progress		57,550		15,597		(2,757	)		70,390
	$	266,747	$	53,971	$	—		$	320,718
RIGHT-OF-USE
Real estate		—		22,813		(1,819	)		20,994
	$	266,747	$	76,784	$	(1,819	)	$	341,712
Accumulated depreciation	Balance at July 31, 2019		Depreciation		Adjustments			Balance at October 31, 2019
OWNED
Land	$	—	$	—	$	—		$	—
Buildings		4,392		1,926		—			6,318
Leasehold Improvements		130		44		—			174
Furniture and equipment		462		221		335			1,018
Cultivation and production equipment		2,216		1,025		(335	)		2,906
Vehicles		133		46		—			179
Computers		621		271		—			892
	$	7,954	$	3,533	$	—		$	11,487
RIGHT-OF-USE
Real estate		—		369		—			369
	$	7,954	$	3,902	$	—		$	11,856

10

Net Carrying Value	Balance at July 31, 2019		Net Additions / (Deductions)			Adjustments			Balance at October 31, 2019
OWNED
Land	$	5,339	$	—		$	—		$	5,339
Buildings		146,442		5,919			2,757			155,118
Leasehold Improvements		497		25,482			—			25,979
Furniture and equipment		5,894		1,938			(335	)		7,497
Cultivation and production equipment		39,813		1,181			335			41,329
Vehicles		898		(46	)		—			852
Computers		2,360		367			—			2,727
Construction in progress		57,550		15,597			(2,757	)		70,390
	$	258,793	$	50,438		$	—		$	309,231
RIGHT-OF-USE
Real estate		—		22,444			(1,819	)		20,625
	$	258,793	$	72,882		$	(1,819	)	$	329,856

As at October 31, 2019, there was $24,464 (July 31, 2019 – $21,265) of property, plant and equipment in accounts payable and accrued liabilities. During the three months ended October 31, 2019, the Company capitalized $2,551 (October 31, 2018 – $367) of depreciation to inventory and capitalized borrowing costs to buildings in the amount of $309 (July 31, 2019 – $511) at an average interest rate of 3.2% (July 31, 2019 – 3.2%). During the period depreciation expensed to the statement of loss was $1,333 (October 31, 2018 – $573).

Adjustments to construction in progress during the period, reflect the activation of an asset’s useful life, transitioning from construction in progress to the appropriate property, plant and equipment classification. Adjustments to the right-of-use assets in the period represent an impairment loss of $703 and the realization of a previously deferred rent liability of $1,116.

Cost	Balance at July 31, 2018		Additions from business acquisitions		Additions		Adjustments			Balance at July 31, 2019
Land	$	1,038	$	4,301	$	—	$	—		$	5,339
Buildings		32,536		18,855		11,365		88,078			150,834
Leasehold Improvements		206		—		421		—			627
Furniture and equipment		1,661		119		4,576		—			6,356
Cultivation and production equipment		4,031		9,913		28,085		—			42,029
Vehicles		151		—		880		—			1,031
Computers		659		529		1,793		—			2,981
Construction in progress		15,433		12,286		117,909		(88,078	)		57,550
	$	55,715	$	46,003	$	165,029	$	—		$	266,747
Accumulated depreciation	Balance at July 31, 2018		Additions from business acquisitions		Depreciation		Adjustments			Balance at July 31, 2019
Land	$	—	$	—	$	—	$	—		$	—
Buildings		533		—		3,859		—			4,392
Leasehold Improvements		9		—		121		—			130
Furniture and equipment		527		—		585		(650	)		462
Cultivation and production equipment		69		—		1,497		650			2,216
Vehicles		56		—		77		—			133
Computers		188		—		433		—			621
	$	1,382	$	—	$	6,572	$	—		$	7,954

11

Net Carrying Value	Balance at July 31, 2018		Additions from business acquisitions		Net Additions / (Deductions)		Adjustments			Balance at July 31, 2019
Land	$	1,038	$	4,301	$	—	$	—		$	5,339
Buildings		32,003		18,855		7,506		88,078			146,442
Leasehold Improvements		197		—		300		—			497
Furniture and equipment		1,134		119		3,991		650			5,894
Cultivation and production equipment		3,962		9,913		26,588		(650	)		39,813
Vehicles		95		—		803		—			898
Computers		471		529		1,360		—			2,360
Construction in progress		15,433		12,286		117,909		(88,078	)		57,550
	$	54,333	$	46,003	$	158,457	$	—		$	258,793

The adjustments reflect the activation of an asset’s useful life, transitioning from construction in progress to the appropriate property, plant and equipment classification.

10. Intangible Assets

Cost	Balance at July 31, 2019		Additions			Adjustments		Balance at October 31, 2019
Cultivating and processing license	$	116,433	$	—		$	—	$	116,433
Brand		8,440		—			—		8,440
Software		3,558		483			—		4,041
Domain names		585		—			—		585
Patents		1,231		815			—		2,046
	$	130,247	$	1,298		$	—	$	131,545
Accumulated amortization	Balance at July 31, 2019		Amortization			Adjustments		Balance at October 31, 2019
Cultivating and processing license	$	1,601	$	1,456		$	—	$	3,057
Software		1,269		174			—		1,443
Domain name		66		15			—		81
Patents		29		21			—		50
	$	2,965	$	1,666		$	—	$	4,631
Net Carrying Value	Balance at July 31, 2019		Net Additions / (Deductions)			Adjustments		Balance at October 31, 2019
Cultivating and processing license	$	114,832	$	(1,456	)	$	—	$	113,376
Brand		8,440		—			—		8,440
Software		2,289		309			—		2,596
Domain names		519		(15	)		—		504
Patents		1,202		794			—		1,996
	$	127,282	$	(368	)	$	—	$	126,914

Software includes $193 relating to managerial software (July 31, 2019 - $121) not yet available for use. Accordingly, no amortization has been taken during the three months ended October 31, 2019 on these inactive assets. As at October 31, 2019, there was $833 (July 31, 2019 – $422) of intangible assets in accounts payable and accrued liabilities.

Research and development expenses in the period amounted to $1,744 (July 31, 2018 - $Nil).

12

Cost	Balance at July 31, 2018		Additions from business acquisitions		Additions			Adjustments			Balance at July 31, 2019
Cultivating and processing license	$	2,545	$	113,888	$	—		$	—		$	116,433
Brand		—		8,440		—			—			8,440
Software		1,800		12		1,746			—			3,558
Domain names		585		—		—			—			585
Patents		—		—		1,231			—			1,231
Other longer term assets and capitalized transaction costs		312		—		—			(312	)		—
	$	5,242	$	122,340	$	2,977		$	(312	)	$	130,247
Accumulated amortization	Balance at July 31, 2018		Additions from business acquisitions		Amortization			Adjustments			Balance at July 31, 2019
Cultivating and processing license	$	403	$	—	$	1,198		$	—		$	1,601
Software		786		—		483			—			1,269
Domain name		9		—		57			—			66
Patents		—		—		29			—			29
	$	1,198	$	—	$	1,767		$	—		$	2,965
Net Carrying Value	Balance at July 31, 2018		Additions from business acquisitions		Net Additions / (Deductions)			Adjustments			Balance at July 31, 2019
Cultivating and processing license	$	2,142	$	113,888	$	(1,198	)	$	—		$	114,832
Brand		—		8,440		—			—			8,440
Software		1,014		12		1,263			—			2,289
Domain names		576		—		(57	)		—			519
Patents		—		—		1,202			—			1,202
Other longer term assets and capitalized transaction costs		312		—		—			—			—
	$	4,044	$	122,340	$	1,210		$	—		$	127,282

The adjustment represents $212 of capitalized transaction costs being allocated to the Truss investment in associate (Note 19a) and $100 other longer-term investment has been reclassified to long term investments.

11. Business Acquisition

Acquisition of Newstrike Brands Limited.

On May 24, 2019, the Company acquired 100% of the issued and outstanding common shares of Newstrike Brands Limited (“Newstrike”) pursuant to an arrangement agreement entered into on March 13, 2019. Newstrike is a licensed producer of cannabis operating in Ontario, Canada and was acquired for additional production capacity, established sales relationships and its brand. Under the arrangement, each former Newstrike common share was exchanged for 0.06332 of a HEXO common share (the “Exchange Ratio”), subject to certain exceptions. In addition, all issued and outstanding stock options of Newstrike were replaced with stock options of HEXO having the same terms but adjusted for the Exchange Ratio, and all issued and outstanding common share purchase warrants of Newstrike became exercisable for HEXO common shares adjusted for the Exchange Ratio.

The following table summarizes the preliminary values of the net assets acquired from Newstrike on the acquisition date. The fair values of the acquired property, plant and equipment, deferred tax liability, private investments and intangible assets are preliminary are subject to change within the one-year measurement.

	Note		Number of Shares, Warrants and Options		Share Price ($)		Amount ($)
Consideration
Shares issued		(i)		35,394,041		9.11		322,439
Warrants outstanding		(ii)		7,196,164				12,229
Replacement options issued		(iii)		2,002,365				7,134
Total fair value of consideration								341,802

13

Net assets acquired
Current assets
Cash and cash equivalents		49,366
Accounts receivable		1,204
Other receivables		4,585
Inventory		22,359
Biological assets		3,291
Long-term assets
Property, Plant and Equipment		46,003
Investments	(iv)	14,492
Convertible debenture receivable		1,220
Prepaid expenses		1,631
Prepaid expense and license		1,526
Software		10
Cultivation and processing license		113,888
Brand		8,440
Goodwill		111,877
Total assets		379,892
Current liabilities
Accounts payable and accrued liabilities		12,849
Payment received in advance		5
Long-term liabilities
Deferred tax liabilities		24,236
Total liabilities		37,090
Non-controlling interest		1,000
Total net assets acquired		341,802
Net accounts receivables acquired
Total accounts receivable		5,789
Expected uncollectible receivables		—
Net accounts receivables acquired		5,789

(i) Share price based upon the TSX market price of common shares as at May 24, 2019.

(ii) Warrants were valued using the Black-Scholes option pricing model as at the acquisition date May 24, 2019, using the following assumptions and inputs;

• Risk free rate of 1.48% – 1.57%

• Expected life of 0.73 – 4.07 years

• Volatility rate of 75%; determined using historical volatility data

• Exercise prices of $11.84 – $27.64

• Stock price of $9.11

(iii) All replacement options were valued using the Black-Scholes option pricing model as at the acquisition date of May 24, 2019, using the following assumptions and inputs;

• Risk free rate of 1.48% – 1.57%

• Expected life of 1.2 – 4.7 years

• Volatility rate of 75%; determined using historical volatility data

• Exercise prices of $6.00 – $17.37

• Stock price of $9.11

The fair value of the vested options as at the acquisition date was deemed consideration paid in the transaction. The fair value of those options not yet vested at the acquisition date was added to the Company’s share-based payment reserve to be expensed over the remaining vesting period of the options as permitted under IFRS 3 – Business Combinations.

14

(iv) Included in total investments were two level 3 private company investments (see ‘Greentank Technologies’ and ‘Neal Brothers Inc.’ in Note 20). There existed limited financial information over both investments at the acquisition date and at October 31, 2019. The preliminary fair values have been determined using the best available information.

Goodwill arising from the acquisition represents the expected synergies, future income and growth, and other intangibles that do not qualify for separate recognition. None of the goodwill arising on these acquisitions are expected to be deductible for tax purposes.

The NCI acquired at the acquisition date arises from Newstrike holding a 60% interest in Neal Brothers Inc. The net assets of Neal Brothers consist of cash only and the NCI was measured at its fair value (Note 27). The NCI acquired at the acquisition date arises from Newstrike holding a 60% interest in Neal Brothers Inc. as the NCI relates to the joint venture Neal Up Brands Inc.

Total non-capitalized transaction expenses amounted to $3,958 related to the acquisition during the year ended July 31, 2019 (October 31, 2019 - $nil).

12. Warrant liability

The warrant liability is derived from the USD denominated warrants attached to the 2017 secured convertible debentures issued on November 14, 2016 by the Company and have an expiry date of November 14, 2019.

	October 31, 2019			July 31, 2019
Opening balance	$	493		$	3,130
Exercised		—			(3,317	)
Revaluation due to foreign exchange		(297	)		5,091
Closing balance	$	196		$	493

During the three months ended October 31, 2019, no warrants were exercised.

The remaining warrant liability was revalued on October 31, 2019 using the Black-Scholes-Merton option pricing model (Level 2). The warrant liability was revalued to $196 (US$149); with a stock price of US$2.15; expected life of 14 days; $Nil dividends; 84% volatility based upon historical data; risk free interest rate of 1.59%; and USD/CAD exchange rate of 1.316. The loss on the revaluation of the warrant liability for the three months ended October 31, 2019 was ($297), which is recorded in the revaluation of financial instruments account on the statement of loss and comprehensive loss.

During the year ended July 31, 2019, 863,693, warrants were exercised for total proceeds of $863 (US$656, based on an exercise price of US$0.76). On the various dates of exercise, the warrant liability was revalued using the Black-Scholes-Merton option pricing model. Overall, the liability value of the warrants exercised was $6,367 (US$4,819); using the following variables:

• stock prices ranging from $5.90 to $10.36;

• expected life of 12 months;

• $Nil dividends;

• 75% volatility based upon comparative market indicators and historical data;

• risk free interest rates of 1.55% to 2.35%;

• USD/CAD exchange rate of various.

The exercise of these warrants resulted in an increase to share capital of $6,367.

The remaining warrant liability was revalued on July 31, 2019 using the Black-Scholes-Merton option pricing model (Level 2). The warrant liability was revalued to $493 (US$375); with a stock price of US$4.24; expected life of 12 months; $Nil dividends; 74% volatility based upon historical data; risk free interest rate of 1.61%; and USD/CAD exchange rate of 1.3148. The loss on the revaluation of the warrant liability for the year ended July 31, 2019 was ($3,730), which is recorded in the revaluation of financial instruments account on the statement of loss and comprehensive loss.

13. Share Capital

(a) Authorized

An unlimited number of common shares and an unlimited number of special shares, issuable in series.

15

(b) Issued and Outstanding

As at October 31, 2019, a total of 257,061,783 (July 31, 2019 – 256,981,753) common shares were issued and outstanding.

Common Share Purchase Warrants

For the three months October 31, 2019

During the first quarter of fiscal 2020, there was no warrant activity in the Company.

As at October 31, 2019, there were 29,585,408 warrants outstanding.

For the year ended July 31, 2019

During the first quarter of fiscal 2019, 3,137,746 warrants with exercise prices ranging from $0.75 to $5.60 and US$0.76 were exercised for proceeds of $5,589, resulting in the issuance of 3,137,746 common shares.

On January 30, 2019, the Company closed its offering of 7,700,000 common shares at a price of $6.50 per share for gross proceeds of $50,050. Included in the offering was an 1,155,000 over-allotment option pool with a price of $6.50 per share which was exercised in full on the closing date for $7,508 and total gross proceeds of $57,558 for total common shares issued of 8,855,000. Underwriting and legal fees accumulated to $3,827 for total net proceeds of $53,731.

During the second quarter of fiscal 2019, 682,678 warrants with exercise prices ranging from $0.75 to $5.60 and US$0.76 were exercised for proceeds of $1,307, which resulted in the issuance of 682,678 common shares.

During the third quarter of fiscal 2019, 3,661,761 warrants with exercise prices ranging from $0.75 to $5.60 and US$0.76 were exercised for proceeds of $8,425, resulting in the issuance of 3,661,761 common shares.

On May 24, 2019, the Company completed the acquisition of Newstrike Brands Ltd. (Note 11), resulting in the issuance of 35,394,041 common shares.

During the fourth quarter of fiscal 2019, 8,053,544 warrants with exercise prices ranging from $0.75 to $5.60 and US$0.76 were exercised for proceeds of $47,396, resulting in the issuance of 8,053,544 common shares.

In fiscal 2019 a total of 15,535,729 warrants with exercise prices ranging from $0.75 to $5.60 and US$0.76 were exercised for total proceeds of $69,259, resulting in the issuance of 15,535,729 common shares.

As at July 31, 2019, there were 29,585,408 warrants outstanding.

The following is a consolidated summary of warrants as at October 31, 2019.

	Number outstanding		Book value
Classified as Equity
2018 Equity financing
Exercise price of $ 5.60 expiring January 30, 2020		10,512,208	$	5,674
February 2018 financing warrants
Exercise price of $ 27.64 expiring February 16, 2020		4,413,498		1,331
June 2019 financing warrants
Exercise price of $ 15.79 expiring June 19, 2023		2,184,540		9,998
Broker / Consultant warrants
Exercise price of $ 20.85 expiring February 16, 2020		264,809		160
Exercise price of $ 11.84 expiring June 19, 2020		262,021		610
Exercise price of $ 0.75 expiring November 3, 2021		175,618		78
Exercise price of $ 0.75 expiring March 14, 2022		94,282		66
Exercise price of $ 15.79 expiring June 19, 2023		61		1
Inner Spirit warrants
Exercise price of $ 15.63 expiring July 21, 2020		71,235		129
Joint Venture Molson warrants
Exercise price of $ 6.00 expiring October 4, 2021		11,500,000		42,386
Classified as Liability		29,478,272		60,433
2017 secured convertible debenture warrants
Exercise price of USD$0.76 expiring November 14, 2019		107,136		196
		29,585,408	$	60,629

16

The following table summarizes warrant activity during the three months ended October 31, 2019 and year ended July 31, 2019.

	October 31, 2019				July 31, 2019
	Number of		Weighted average		Number of			Weighted average
	warrants		exercise price		warrants			exercise price
Outstanding, beginning of period		29,585,408	$	9.95		26,425,504		$	4.35
Expired during the period		—		—		(531	)		—
Acquired and reissued through acquisition1		—		—		7,196,164			23.10
Issued during the period		—		—		11,500,000			6.00
Exercised during the period		—		—		(15,535,729	)		3.61
Outstanding, end of the period		29,585,408	$	9.95		29,585,408		$	9.95

¹  Warrants acquired on May 24, 2019, via the acquisition of Newstrike.

Exercised during the three months ended October 31, 2019 were Nil (July 31, 2019 - 1,916,527) broker compensation warrants.

Stock Option Plan

The Company has a share option plan (the “Former Plan”) adopted in July 2018, that is administered by the Board of Directors who establish exercise prices and expiry dates, which are up to 10 years from issuance as determined by the Board at the time of issuance. In June 28, 2018, the Board of Directors put forth a new share option plan (the “Omnibus Plan”) which was subsequently approved by shareholders on August 28, 2019. Unless otherwise determined by the Board, options issued under the both the Former Plan and Omnibus Plan vest over a three-year period. The maximum number of common shares reserved for issuance for options that may be granted under the Omnibus Plan is 10% of the issued and outstanding common shares or 25,706,178 common shares as at October 31, 2019. Options issued prior to July 2018 under the outgoing plan and the options assumed through the acquisition of Newstrike do not contribute to the available option pool reserved for issuance. As of October 31, 2019, the Company had 19,403,395 issued and outstanding under the Omnibus Plan.

The following table summarizes the stock option grants during the three months ended October 31, 2019 and the year ended July 31, 2019.

			Options granted
Grant date	Exercise price		Executive and directors		Non-executive employees		Vesting terms		Expiry period
September 17, 2018	$	7.93		650,000		523,500		Terms A		10 years
November 22, 2018	$	5.92		—		440,000		Terms A		10 years
December 17, 2018	$	5.09		74,000		227,500		Terms A, D		10 years
February 19, 2019	$	7.13		615,000		626,000		Terms A		10 years
February 21, 2019	$	7.46		3,333,333		—		Terms E		10 years
March 20, 2019	$	8.50		325,000		1,077,500		Terms A		10 years
April 17, 2019	$	8.24		—		1,132,500		Terms A		10 years
July 18, 2019	$	6.54		650,000		2,768,785		Terms A		10 years
July 26, 2019	$	5.88		250,000		—		Terms A		10 years
October 29, 2019	$	3.30		829,034		2,732,277		Terms B		10 years

Vesting terms A	–	One-third of the options will vest on the one-year anniversary of the date of grant and the balance will vest quarterly over two years thereafter.
Vesting terms B	–	One-third of the options will vest on each of the one-year anniversaries of the date of grant over a three year period.
Vesting terms C	–	Based upon organizational milestones.
Vesting terms D	–	54,000 of the options granted to a director will fully vest 6-months from the grant date.
Vesting terms E	–	In addition to the standard vesting terms A, the grant defines an achievement condition in which vesting may only occur once a volume weighted average trading price of $10 or greater is achieved for a 20-day period prior to a vesting date. All unvested options will carry over and vest if the condition is met at a future vesting date.

17

The following table summarizes stock option activity during the three months ended October 31, 2019 and the year ended July 31, 2019.

	October 31, 2019					July 31, 2019
	Options issued			Weighted average exercise price		Options issued			Weighted average exercise price
Opening balance		24,288,919		$	5.87		14,388,066		$	3.02
Granted		3,561,311			3.30		12,693,118			7.27
Acquired and reissued through acquisition1		—			—		2,002,365			9.49
Forfeited		(2,385,241	)		15.82		(1,226,763	)		6.33
Exercised		(80,030	)		1.33		(3,567,867	)		1.20
Closing balance		25,384,959		$	4.93		24,288,919		$	5.87

¹  Stock options assumed on May 24, 2019, via the acquisition of Newstrike.

The following table summarizes information concerning stock options outstanding as at October 31, 2019.

Exercise price		Number outstanding		Weighted average remaining contractual life (years)		Number exercisable		Weighted average remaining contractual life (years)
$	0.58		372,900		0.07		363,000		0.25
	0.75		1,175,000		0.30		1,121,250		1.01
	1.27		478,704		0.13		366,012		0.36
	3.15		4,748		0.00		4,748		0.00
	6.00		891,833		0.03		891,833		0.09
	1.37		109,360		0.03		109,360		0.12
	2.48		86,332		0.03		33,007		0.04
	2.69		850,000		0.27		313,335		0.35
	4.24		202,506		0.07		133,684		0.15
	17.37		189,951		0.02		189,951		0.09
	3.89		325,000		0.11		162,502		0.19
	16.58		31,659		0.00		23,742		0.00
	16.74		37,990		0.00		28,488		0.01
	4.27		775,902		0.26		434,427		0.51
	4.89		4,951,097		1.71		2,476,426		2.99
	5.14		105,920		0.04		44,694		0.05
	10.42		39,198		0.00		39,198		0.01
	10.42		110,806		0.01		71,230		0.02
	11.84		18,995		0.00		9,496		0.00
	7.93		925,169		0.33		456,186		0.56
	8.21		47,488		0.00		23,744		0.01
	5.92		205,000		0.07		—		—
	5.09		231,500		0.08		54,000		0.07
	6.94		94,979		0.02		—		—
	8.84		32,293		0.01		—		—
	7.13		1,038,500		0.38		—		—
	7.46		3,333,333		1.23		—		—
	8.50		1,110,000		0.41		—		—
	8.24		750,000		0.28		—		—
	6.54		3,047,485		1.17		—		—
	5.88		250,000		0.10		—		—
$	3.30		3,561,311		1.41		—		—
			25,384,959		8.56		7,350,313		6.75

18

Restricted Share Units (“RSU’s”)

Under the Omnibus Plan the Board of Directors are authorized to issue RSU’s up to 10% of the issued and outstanding common shares, inclusive of the outstanding stock options. At the time of issuance, the Board of Directors establish conversion values and expiry dates, which are up to 10 years from the date of issuance. The restriction criteria of the units are at the discretion of the Board of Directors and from time to time may be inclusive of Company based performance restrictions, employee-based performance restrictions or no restrictions to the units.

The following table summarizes stock option activity during the three months ended October 31, 2019 and the year ended July 31, 2019.

	Units		October 31, 2019 Value of units		Units		July 31, 2019 Value of units
Opening balance		—	$	—		—	$	—
Granted		1,428,449		3.30		—		—
Closing balance		1,428,449	$	3.30		—	$	—

The following table summarizes the RSU’s granted during the three months ended October 31, 2019 and the year ended July 31, 2019.

			RSU’s granted
Grant date	Unit value		Executive and directors		Non-executive employees		Vesting terms		Expiry period
October 29, 2019	$	3.30		1,428,449		—		Terms A		10 years

Vesting terms A – The units vest in full on the third year anniversary after the grant date.

Share-based Compensation

For the three months ended October 31, 2019, the Company recorded $10,825 (October 31, 2018 – $4,689) in share-based compensation, which are measured at fair value at the date of grant and are expensed over the vesting period (See Note 18 for share-based compensation allocation by expense group). In determining the amount of share-based compensation, the Company used the Black-Scholes-Merton option pricing model to establish the fair value of options granted by applying the following assumptions:

	October 31, 2019			July 31, 2019
Exercise price	$	3.30		$	0.75–$8.95
Stock price	$	3.03		$	5.09–$8.50
Risk-free interest rate		1.62	%		1.54%–2.42	%
Expected life of options (years)		5			5-7
Expected annualized volatility		84	%		64%–76	%

Volatility was estimated using the average historical volatility of the Company and comparable companies in the industry that have trading history and volatility history.

For the three months ended October 31, 2019, the Company allocated to inventory $2,661 (October 31, 2018 – $111) of share-based compensation applicable to direct and indirect labour in the cultivation and production process.

14. Net Loss per Share

The following securities could potentially dilute basic net loss per share in the future but have not been included in diluted loss per share because their effect was anti-dilutive:

	October 31, 2019		July 31, 2019
Options		25,384,959		24,288,919
RSU’s		1,428,449		—
2017 Secured convertible debenture warrants		107,136		107,136
2018 Equity warrants		10,512,208		10,512,208
2018 February 2018 financing warrants		4,413,498		4,413,498
2019 June financing warrants		2,184,540		2,184,540
Joint venture and Inner Spirit issued warrants		11,571,235		11,571,235
Convertible debenture broker/finder warrants		796,791		796,791
		56,398,816		53,874,327

19

15. Convertible Debentures Receivable

12% CONVERTIBLE DEBENTURE

On July 26, 2018, the Company purchased $10,000 in the form of unsecured and subordinated convertible debentures to an unrelated entity, Fire and Flower (“F&F”). The convertible debenture bears interest at 8%, paid semi-annually, matures July 31, 2020 and includes a conversion feature to convert the debenture into common shares of F&F at the lower of $1.15 and the share price as defined within the agreement. The Company obtained the debenture as a part of a strategic investment into the private retail cannabis market. The debentures may be converted into common shares or a loan on July 31, 2020, which bears interest at 12%, at the holders option.

For the three months ended October 31, 2019, the Company’s debenture decreased by $2,347 (October 31, 2018 – increased $3,434) due to fair value adjustments. At period end, the level 2 instrument convertible debenture receivable was fair valued using the F&F October 31, 2019 quoted share price of $1.05 (July 31, 2019—$1.33) and totalled $9,677 (July 31, 2019 – $12,024). Accrued unpaid interest and the unrealized gain amounted to $397 and $1,627 respectively.

ZERO INTEREST CONVERTIBLE DEBENTURE

On February 13, 2019, the Company purchased $800 in the form of unsecured and subordinated convertible debentures to F&F. The convertible debenture bears zero interest and matures November 30, 2019 and includes a conversion feature to convert the debenture into common shares of F&F at $0.80 as defined within the agreement. The debentures may be partially or converted in-full into common shares at the maturity date at the holder’s option. The Company acquired the zero-interest convertible debenture through the acquisition of Newstrike on May 24, 2019 which carried a fair value of $1,220.

During the three months ended October 31, 2019 the Company’s zero interest debenture decreased by $280 (October 31, 2018 – $Nil) due to fair value adjustments. At period end, the level 2 instrument convertible debenture receivable was fair valued using the F&F July 31, 2019 quoted share price of $1.05 (July 31, 2019 – $1.33) and totalled $1,050 (July 31, 2019 – $1,330).

16. Term Loan

Term Loan

On February 15, 2019, the Company entered into a syndicated credit facility with Canadian Imperial Bank of Commerce (“CIBC”) as Sole Bookrunner, Co-Lead Arranger and Administrative Agent and Bank of Montreal as Co-Lead Arranger and Syndication Agent (together “the Lenders”). The Lenders will provide the Company up to $65 million in secured debt financing at a rate of interest that is expected to average in the mid-to-high 5% per annum range. The credit facility consists of a $50 million term loan and a $15 million revolving loan with an uncommitted option to increase the facility up to $135 million. Both loans mature in 2022. The Company may repay the loan without penalty, at any time and contains customary financial and restrictive covenants. The Company shall repay at minimum 2.5% of the outstanding balance each quarter per the terms of the credit facility agreement. The term loan possess several covenants which the Company has met as of October 31, 2019.

On February 14, 2019, the Company received $35,000 and incurred financing costs to secure the loan of $1,347.

As of July 31, 2019, the Company has drawn a total of $35,000 on the term loan, of which $3,500 is due within 12 months in according with the terms of the credit facility. Carrying value net of deferred financing costs of total term loan is $33,374.

The total interest expense and total interest capitalized was $252 and $511, respectively. The total accretion of deferred financing costs was $387 for the year ended July 31, 2019.

The following table illustrates the continuity schedule of the term loan as October 31, 2019:

	Current			Long term
Term loan		$			$
Opening balance July 31, 2019		3,413			30,712
Adjustments		3			—
Repayments		(88	)		(787	)
Total term loan		3,328			29,925
Deferred financing costs		$			$
Total deferred financing costs		(296	)		(455	)
Additions		—			(30	)
Adjustments		—			8
Realized expense		—			71
Total deferred financing costs		(296	)		(406	)
Total net term loan October 31, 2019		3,032			29,519

20

The following table illustrates the continuity schedule of the term loan as July 31, 2019:

	Current			Long term
Term loan		$			$
Opening balance July 31, 2018		—			—
Additions		—			35,000
Adjustments		3,500			(3,500	)
Repayments		(87	)		(788	)
Total term loan		3,413			30,712
Deferred financing costs		$			$
Opening balance July 31, 2018		—			—
Additions		(296	)		(1,347	)
Adjustments		—			296
Realized expense		—			596
Total deferred financing costs		(296	)		(455	)
Total net term loan July 31, 2019		3,117			30,257

17. Financial Instruments

Market Risk

Interest Risk

The Company has exposure to interest rate risk related to any investments of surplus cash. The Company may invest surplus cash in highly liquid investments with short terms to maturity that would accumulate interest at prevailing rates for such investments. The Company also has exposure to interest rate risk related to the outstanding balance of the term loan. The fluctuation of the interest rate may result in a material increase to the associated interest. As at October 31, 2019, the Company had short term investments of $13,402 and a long-term loan of $32,551. All interest rates are fixed. An increase or decrease of 5% to the applicable interest rates would not result in a material variance to net loss.

Price Risk

Price risk is the risk of variability in fair value due to movements in equity or market prices. The Company’s level 1 and 2 investments are susceptible to price risk arising from uncertainties about their future outlook, future values and the impact of market conditions. The fair value of marketable securities and derivatives held in publicly traded entities are based on quoted market prices which the shares of the investments can be exchanged for.

If the fair value of these financial assets were to increase or decrease by 10% as of October 31, 2019, the Company would incur an associated increase or decrease in comprehensive loss of approximately $1,230 (July 31, 2019—$340). The price risk exposure as at October 31, 2019 is presented in the table below.

	October 31, 2019			July 31, 2019
		$			$
Financial assets		12,381			16,756
Financial liabilities		(196	)		(493	)
Total exposure		12,185			16,263

Credit Risk

Credit risk is the risk of financial loss to the Company if a customer or counterparty to a financial instrument fails to meet its contractual obligations and arises principally from the Company’s trade receivables and convertible debentures receivable. As at October 31, 2019, the Company was exposed to credit related losses in the event of non-performance by the counterparties.

The Company provides credit to its customers in the normal course of business and has established credit evaluation and monitoring processes to mitigate credit risk. Since the majority of the medical sales are transacted with clients that are covered under various insurance programs, the Company has limited credit risk.

Cash, cash equivalents and short-term investments are held by some of the largest cooperative financial groups in Canada. Since the inception of the Company, no losses have been incurred in relation to cash held by the financial institution. The majority of the trade receivables balance are held with crown corporations of Quebec, Ontario and Alberta as well as one of the largest medical insurance companies in Canada. Credit worthiness of a counterparty is evaluated prior to the granting of credit. The Company has estimated the expected credit loss using a lifetime credit loss approach. The current expected credit loss for the period ended October 31, 2019 is $19 (July 31, 2019 - $37).

21

In measuring the expected credit losses, the adult-use cannabis trade receivables have been assessed on a per customer basis as they consist of a low number of material contracts. Medical trade receivables have been assessed collectively as they possess share credit risk characteristics. They have been grouped based on the days past due.

Credit risk from the convertible debenture receivable arises from the possibility that principal and/or interest due may become uncollectible. The Company mitigates this risk by managing and monitoring the underlying business relationship.

The carrying amount of cash and cash equivalents, restricted cash, short-term investments, trade receivables and convertible debentures receivable represents the maximum exposure to credit risk and as at October 31, 2019; this amounted to $92,197.

The following table summarizes the Company’s aging of trade receivables as at October 31, 2019 and July 31, 2019:

	October 31, 2019		July 31, 2019
		$		$
0–30 days		5,130		14,102
31–60 days		1,860		1,826
61–90 days		800		166
Over 90 days		225		3,599
Total		8,015		19,693

The following table summarizes the Company’s ECL by aging group as at October 31, 2019 and July 31, 2019.

	October 31, 2019		July 31, 2019
		$		$
0–30 days		2		3
31–60 days		1		7
61–90 days		2		3
Over 90 days		14		24
Total		19		37

Economic Dependence Risk

Economic dependence risk is the risk of reliance upon a select number of customers which significantly impact the financial performance of the Company. The Company recorded sales from three crown corporations representing 93% (October 31, 2018 – 84%) of total sales for the three months ended October 31, 2019.

The Company holds trade receivables from three crown corporations representing 76% of total trade receivables as of October 31, 2019 (July 31, 2019 – 79%).

Liquidity Risk

Liquidity risk is the risk that the Company will not be able to meet its financial obligations as they become due. The Company manages its liquidity risk by reviewing on an ongoing basis its capital requirements. As at October 31, 2019, the Company had $54,676 (July 31, 2019 – $139,505) of cash and cash equivalents and short-term investments.

The Company is obligated to pay accounts payable and accrued liabilities, excise taxes payable and current portions of the term loan and lease liabilities with total carrying amounts and contractual cash flows amounting to $61,633 due in the next 12 months.

The carrying values of cash, trade receivable, accounts payable and accrued liabilities approximate their fair values due to their short term to maturity. The carrying value of the term loan approximates its fair value as there has been no change the Company’s risk profile and no changes to the market interest rate.

22

18. Operating Expenses by Nature

For the three months ended	October 31, 2019		October 31, 2018
Salaries and benefits	$	10,767		3,246
Share-based compensation		8,164	$	4,689
Marketing and promotion		4,395		9,589
Consulting		2,349		1,438
Professional fees		2,777		825
Facilities		1,359		923
General and administrative		1,350		273
Amortization of intangible assets		1,666		150
Depreciation of property, plant and equipment		1,333		573
Travel		940		329
Total	$	35,100	$	22,035

The following table summarizes the nature of share-based compensation in the period:

For the three months ended	October 31, 2019		October 31, 2018
General and administrative related stock-based compensation	$	7,946	$	4,459
Marketing and promotion related stock-based compensation		218		230
Total operating expense related stock-based compensation		8,164		4,689
Stock based compensation capitalized to inventory		2,661		111
Total stock-based compensation	$	10,825	$	4,800

The following table summarizes the total payroll related wages and benefits by nature in the period:

For the three months ended	October 31, 2019		October 31, 2018
General and administrative related wages and benefits	$	5,847	$	2,088
Marketing and promotion related wages and benefits		3,939		1,158
Research and development related wages and benefits		981		—
Total operating expense related wages and benefits		10,767		3,246
Wages and benefits capitalized to inventory		6,132		1,268
Total wages and benefits in the period	$	16,899	$	4,514

19. Investment in Associate and Joint Ventures

(a) Truss – Investment in Associate

	October 31, 2019			July 31, 2019
Opening Balance	$	51,786		$	—
Cash consideration of investment		7,650			11,476
Fair value of warrant consideration		—			42,386
Capitalized transaction costs		—			721
Share of net loss		(1,578	)		(2,797	)
Ending Balance	$	57,858		$	51,786

On October 4, 2018, the formation of the entity Truss between the Company and Molson Coors Canada (the “Partner”) was finalized. Truss is a standalone start-up company with its own board of directors and an independent management team and is incorporated in Canada. Truss is private company and its principle activities consist of pursuing opportunities to develop non-alcoholic, cannabis-infused beverages and as at October 31, 2019 are operating in Gatineau, Quebec.

23

The Partner holds 57,500 common shares representing 57.5% controlling interest in Truss with the Company holding 42,500 common shares and controlling the remaining 42.5%. In connection with the transaction the Company has granted the Partner 11,500,000 common share warrants at an exercise price of $6.00 for a period of 3 years.

Included in the initial investment cost is the capitalized fair value $42,386 of warrant consideration (see Note 13 for fair value inputs and assumptions).

During the three months ended October 31, 2019 the third capital call occurred which resulted in additional cash contribution of $7,650. Transaction costs of $Nil (July 31, 2019 - $721) in respect to the definitive agreement to form the joint venture were capitalized.

The joint venture is accounted for using the equity method. During the three months ended October 31, 2019, the Company’s share in the net loss of Truss was ($1,578) (July 31, 2019 – ($2,796)).

(b) Belleville Complex Inc - Joint Venture

On October 31, 2018, the Company acquired a 25% interest in the joint venture Belleville Complex Inc. (“BCI”) with a related party Olegna Holdings Inc., owned and controlled by a director of the Company, holding the remaining 75% in BCI. The joint venture purchased a configured 1.5 million sq. ft. facility through a $20,279 loan issued by the Company on September 7, 2018, bearing an annual 4% interest rate and interest payable monthly. The loan and all remaining accrued interest were repaid in full during the year ended July 31, 2019.

As a part of the initial agreement, the Company will be the anchor tenant for a period of 20 years, with an option to renew for 10 years that the Company is reasonably expected to exercise. On October 22, 2019 the lease agreement was amended to a 15 year anchor tenant period, with an option to renews for 15 years that the Company is reasonably expected to exercise, and additional space to rent. As a result, the lease was reassessed resulting in an addition to the right of use asset and lease liability (refer to Note 28).

Consideration for the 25% interest on the joint venture is deemed $Nil. The carrying value of BCI as at October 31, 2019 is $Nil (July 31, 2019 - $Nil).

(c) HEXO MED - Joint Venture

	October 31, 2019			July 31, 2019
Opening Balance	$	1,063		$	—
Cash consideration of investment		—			1,106
Capitalized transaction costs		—			125
Share of net loss		(104	)		(168	)
Ending Balance	$	959		$	1,063

HEXO MED is a Greece based joint venture established with partner QNBS P.C. (formerly Qannabos) and will serve as the Company’s entry point into the European medical cannabis markets. During the fiscal year 2019, the Company contributed a total of EUR$250 in cash and accrued consideration of EUR$500 for a 33.34% interest in HEXO MED in cash. During the three months ended October 31, 2019, the Company’s interest in HEXO MED was increased to 51% upon the payment of the accrued EUR$500 ($729). The carrying value of HEXO MED as at October 31, 2019 is $959 (July 31, 2019 - $1,063).

20. Long-term Investments

	Cost July 31, 2019		Fair value July 31, 2019		Investment		Divesture/ Transfer			Subtotal October 31, 2019		Change in fair value			Fair value October 31, 2019
		$		$		$		$			$		$			$
Level 1 Investments
Inner Spirit common shares		2,850		3,000		—		(78	)		2,922		(1,350	)		1,572
Level 2 Investments
Inner Spirit common share purchase warrants		414		403		—		—			403		(321	)		84
Level 3 Investments						—
Greentank Technologies		6,723		6,574		—		—			6,574		—			6,574
Neal Brothers Inc.		4,000		4,000		—		—			4,000		—			4,000
Segra International Corp.		—		300		—		—			300		—			300
Total		13,987		14,277		—		(78	)		14,199		(1,671	)		12,528

24

	Cost July 31, 2018		Fair value July 31, 2018		Investment		Divesture/ Transfer			Subtotal July 31, 2019		Change in fair value			Fair value July 31, 2019
		$		$		$		$			$		$			$
Level 1 Investments
Fire & Flower Inc. common shares		—		—		2,970		(2,493	)		477		(477	)		—
Fire & Flower Inc. common share purchase warrants1		—		—		505		(262	)		243		(243	)		—
Inner Spirit common shares1		—		—		2,850		—			2,850		150			3,000
Level 2 Investments
Inner Spirit common share purchase warrants1		—		—		414		—			414		(11	)		403
Level 3 Investments
Greentank Technologies1		—		—		6,723		—			6,723		(149	)		6,574
Neal Brothers Inc. 1		—		—		4,000		—			4,000		—			4,000
Segra International Corp.		—		100		—		—			100		200			300
Total		—		100		17,462		(2,755	)		14,807		(530	)		14,277

¹ Acquired in the Newstrike acquisition on May 24, 2019 at fair market value

Inner Spirit Holding Inc.

Common Shares

On May 24, 2019, through the acquisition of Newstrike, the Company obtained 15,000,000 common shares in the entity Inner Spirit Holdings Inc. which held a fair value of $2,850. During the three months ended October 31, 2019, the Company disposed of 711,000 common shares at an average of $0.13 per share and incurred a realized gain of $16 (October 31, 2018 - $nil) and an unrealized loss due to change in fair market value of ($1,350) (October 31, 2019 - $nil). The remaining shares as at October 31, 2019 were valued based upon the market price of $0.11 (July 31, 2019 - $0.20) per common share resulting in a decrease in fair value of ($1,350).

Common Share Purchase Warrants

On May 24, 2019, through the acquisition of Newstrike, the Company obtained 7,500,000 common share purchase warrants in the entity Inner Spirit Holdings Inc. Each warrant entitles the Company to a common share at a ratio of 1:1. The warrants held an initial fair value of $414. The investment is fair valued through the Black Scholes-Merton model and held an unrealized loss of ($321) (July 31, 2019 - $(11)) as at October 31, 2019 based upon the following assumptions and inputs:

• market price of $0.11 per share;

• expected life of 10 months;

• $Nil dividends;

• 100% volatility based upon comparative market indicators and historical data;

• risk free interest rate of 1.55%.

Greentank Technologies.

On February 22, 2019, Newstrike acquired 1,953,125 preferred shares of Greentank Technologies for cash consideration of $6,622 (USD$5,000). The investment is strategic and long term in nature. The investments initial fair value upon the acquisition of Newstrike was $6,723 and is measured through fair value through profit and loss. The fair value was established using the information from a recent financing which demonstrates the same underlying preferred share value as the original investment consideration. During the three months ended October 31, 2019, there was no change in fair value (July 31, 2019 – ($149)). A variance of 5% to the underlying preferred share price would result in a change of $331 (July 31, 2019 - $331) to the investments fair value.

Neal Brothers Inc.

The Company also acquired 19.9% of the shares of Neal Brothers Inc. through the acquisition of Newstrike on May 24, 2019. The Company holds no board seat. The initial investment was for cash consideration of $5,604. The Company has measured these investments at fair value upon the date of acquisition which was determined to be $4,000. During the three months ended October 31, 2019, there was no change in fair value (July 31, 2019 - $Nil). A variance of 5% to the underlying investment would result in a change of $200 (July 31, 2019 - $200) to the investments fair value.

Segra International Corp.

The Company holds 400,000 shares in the private entity Segra International Corp. The investment represents a strategic long-term investment in the cannabis micropropogation entity. The initial investment was made for $0.25 per share. The Company has measured this investment to its fair value of $0.75 per share which totalled $300 as at October 31, 2019 (July 31, 2019 – $300). The fair value

25

measurement was based upon the most recent financing information and resulted in no gain or loss (July 31, 2019—$200) through profit and loss. A variance of 5% to the underlying share price would result in a nominal change to the investments fair value.

Fire & Flower Inc.

Common Shares

On November 1, 2018, the Company obtained 1,980,000 subscription receipts in the entity F&F for proceeds of $2,970. The subscription receipts converted to common shares of F&F at a 1:1 ratio on February 19, 2019 upon the commencement of trading on the TSX Venture and held an initial fair value of $2,970. On July 25, 2019, the Company liquidated the investment in full resulting in a cash injection net of fees of $2,493. The Level 1 long term investment and associated realized loss as at July 30, 2019, were $Nil and ($477), respectively.

Common Share Purchase Warrants

On May 24, 2019, through the acquisition of Newstrike, the Company obtained 1,000,000 common share purchase warrants in the entity F&F. Each warrant entitles the Company to a common share at a ratio of 1:1. The warrants held an initial fair value of $505. The investment was fair valued through the Black Scholes-Merton model at $243 and disposed of as at July 30, 2019. The Company realized a loss of ($243) as at July 30, 2019 based upon the following assumptions and inputs:

• market price of $1.33;

• expected life of 0.70 year;

• $Nil dividends;

• 100% volatility based upon comparative market indicators and historical data;

• risk free interest rate of 1.46%.

21. Related Party Disclosure

Key Management Personnel Compensation

Key management personnel are those persons having the authority and responsibility for planning, directing and controlling the Company’s operations, directly or indirectly. The key management personnel of the Company are the members of the executive management team and Board of Directors, and they control approximately 6.15% of the outstanding shares of the Company as at October 31, 2019 (July 31, 2019 – 6.15%).

Compensation provided to key management during the period was as follows:

For the three months ended	October 31, 2019		October 31, 2018
Salary and/or consulting fees	$	792	$	669
Bonus compensation		42		214
Stock-based compensation		5,351		3,289
Total	$	6,185	$	4,172

These transactions are in the normal course of operations and are measured at the exchange amount, which is the amount of consideration established and agreed by the related parties.

Unless otherwise stated the below granted stock options will vest on the one-year anniversary of the date of grant and the balance will vest quarterly over two years thereafter.

On October 29, 2019, the Company granted certain of its executives a total of 829,034 stock options and 1,428,449 RSU’s with an exercise price/unit value of $3.30. One-third of the stock options will vest on each of the one-year anniversaries of the date of grant over a three year period. The RSU’s vest in full on the third year anniversary after the grant date.

On July 26, 2019, the Company granted certain of its directors a total 250,000 stock options with an exercise price of $5.88

On July 18, 2019, the Company granted certain of its executives a total 650,000 stock options with an exercise price of $6.54.

On March 20, 2019, the Company granted certain of its executives a total 325,000 stock options with an exercise price of $8.50.

On February 21, 2019, the Company granted the CEO 3,333,333 stock options with an exercise price of $7.46. Additional to the standard vesting terms as defined in Note 11, is an achievement condition in which vesting may only occur once a volume weighted average trading price of $10 or greater is achieved for a 20-day period prior to a vesting date. All unvested options will carry over and vest if the condition is met at a future vesting date.

On February 19, 2019, the Company granted certain of its executives a total 615,000 stock options with an exercise price of $7.13.

On December 17, 2018, the Company granted certain of its executives a total 74,000 stock options with an exercise price of $5.09. Of which, 54,000 stock options will fully vest at the 6-month anniversary of the grant date.

26

On September 17, 2018, the Company granted certain executives of the Company a total of 650,000 stock options with an exercise price of $7.93.

The Company loaned $20,279 on September 7, 2018, to the related party BCI to be used in the purchase of a facility in Belleville, Ontario and was repaid in full during the third quarter of fiscal 2019.    

22. Capital Management

The Company’s objective is to maintain sufficient capital so as to maintain investor, creditor and customer confidence and to sustain future development of the business and provide the ability to continue as a going concern. Management defines capital as the Company’s shareholders’ equity. The Board of Directors does not establish quantitative return on capital criteria for management. The Company has not paid any dividends to its shareholders. The Company is not subject to any externally imposed capital requirements.

As at October 31, 2019 total managed capital was comprised of shareholders’ equity of $725,253 (July 31, 2019 – $776,756).

The Company has undergone an operational restructuring in which operational costs have been assessed and budgets adjusted accordingly in order to reduce total expenses. The Company’s approach to capital management during the period has therefore shifted towards accommodating this approach.

23. Commitments and Contingencies

COMMITMENTS

The Company has certain contractual financial obligations related to service agreements, purchase agreements, rental agreements and construction contracts.

Some of these contracts have optional renewal terms that the Company may exercise at its option. The annual minimum payments payable under these obligations over the next five years is as follows:

2020	$	16,483
2021		4,408
2022		2,840
2023		2,365
2024		2,337
Thereafter		20,287
	$	48,720

Lease commitments accounted for as operating leases under IFRS 16 amounted to $77.

Letter of Credit

On June 28, 2018, the Company executed a letter of credit with a Canadian credit union as required under an agreement with a public utility provider entitling the Company up to a maximum limit of $3,141 subject to certain operational requirements. The letter of credit has a one-year expiry from the date of issuance with an autorenewal feature and was still in effect as at July 31, 2019. The credit facility was secured by a guaranteed investment certificate (“GIC”) as at July 31, 2019. As at October 31, 2019, the credit facility was secured by the term loan (Note 16). The letter of credit has not been drawn upon as at October 31, 2019 (July 31, 2019 – $Nil) and is in compliance with the specified requirements.

Surety Bond

Effective July 3, 2019, the Company renewed its commercial surety bond with a North American insurance provider entitling the Company up to a maximum of $4,500. The bond bears a premium at 0.3% annually. The Company obtained the surety bond as required under the Canada Revenue Agency’s excise tax laws for the transporting of commercial goods throughout Canada. The bond expires on July 3, 2020, one year from the renewal date.

CONTINGENCIES

The Company may be, from time to time, subject to various administrative and other legal proceedings arising in the ordinary course of business. Contingent liabilities associated with legal proceedings are recorded when a liability is probable, and the contingent liability can be reasonably estimated.

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24. Fair Value of Financial Instruments

The carrying values of the financial instruments as at October 31, 2019 are summarized in the following table:

	Note		Amortized costs		Financial assets designated as FVTPL		Financial liabilities designated as FVTPL		Total
Assets				$		$		$		$
Cash and cash equivalents		4		41,277		—		—		41,277
Restricted cash		5		18,776		—		—		18,776
Short-term investments		4		—		13,402		—		13,402
Trade receivables				8,015		—		—		8,015
Commodity taxes recoverable and other receivables		6		15,553		—		—		15,553
Convertible debenture receivable		15		—		10,727		—		10,727
Long term investments		20		—		12,528		—		12,528
Liabilities				$		$		$		$
Accounts payable and accrued liabilities				51,350		—		—		51,350
Warrant liability		12		—		—		196		196
Term loan		16		32,551		—		—		32,551

The carrying values of the financial instruments as at July 31, 2019 are summarized in the following table:

	Note		Amortized costs		Financial assets designated as FVTPL		Financial liabilities designated as FVTPL		Total
Assets				$		$		$		$
Cash and cash equivalents		4		113,568		—		—		113,568
Restricted cash		5		22,350		—		—		22,350
Short-term investments		4		—		25,937		—		25,937
Trade receivables				19,693		—		—		19,693
Commodity taxes recoverable and other receivables		6		15,247		—		—		15,247
Convertible debenture receivable		15		—		13,354		—		13,354
Long term investments		20		—		14,277		—		14,277
Liabilities				$		$		$		$
Accounts payable and accrued liabilities				45,581		—		—		45,581
Warrant liability		12		—		—		493		493
Deferred rent liability				946		—		—		946
Term loan		16		33,374		—		—		33,374

The carrying values of trade receivables, accounts payable, accrued liabilities and the term loan approximate their fair values due to their relatively short periods to maturity.

25. Ancillary Revenue

Ancillary revenues are those sales outside of the primary business of the Company as outlined in Note 1. During the three months ended October 31, 2019 the Company realized net revenues of $41 (October 31, 2018 – $47) related to management fees.

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26. License and Prepaid Royalty – HIP    

On May 24, 2019, through the acquisition of Newstrike, the Company inherited a royalty agreement with the Tragically Hip (the “Hip Agreement”) with an effective date of January 12, 2017, expiring after five years with an option of renewal for a two-year period. Newstrike’s initial consideration was 3,000,000 common shares with an initial fair value of $2,655 and an ongoing royalty of 2.5% of revenues of cannabis products sold by the Company inspired by the Tragically Hip. The issuance of the 3,000,000 common shares includes a payment of 1,000,000 common shares that will be applied against future royalties’ payable. The fair value of the license and prepaid asset as at the acquisition date of May 24, 2019 was $926 and $600, respectively. During the stub period ended July 31, 2019, the Company recorded amortization of $59 of the license, and $58 was drawn down on the prepaid royalty.

During the three months ended October 31, 2019, the Company recorded amortization expense of $89 using the straight-line method over a five-year term from the effective date of the license, and $36 was drawn down on the prepaid royalty

	October 31, 2019		July 31, 2019
License – HIP, net of amortization	$	778	$	867
Prepaid Royalty – HIP		506		542
License and prepaid royalty – HIP	$	1,284	$	1,409

27. Non-Controlling Interest

The following table summarizes the information relating to the Company’s subsidiary Neal Up Brands Inc., before intercompany eliminations.

	October 31, 2019			July 31, 2019
Current assets	$	2,500		$	2,500
Non-current assets		—			—
Current liabilities		—			—
Non-current liabilities		—			—
Net assets		2,500			2,500
Non-controlling interest (%)		40	%		40	%
Non-controlling interest	$	1,000		$	1,000

28. Lease Liabilities

The following is a continuity schedule of implicit lease liabilities for the three months ended October 31, 2019:

	$
Balance as at July 31, 2019	—
IFRS transition (Note 3)	15,886
Lease additions	6,926
Lease payments	(369	)
Interest expense on lease liabilities	184
Balance as at October 31, 2019	22,627
Current portion	304
Long-term portion	22,373

29

29. Gross Revenue

Three months ended	October 31, 2019		October 31, 2018
Gross Cannabis Revenue		$		$
Retail		18,250		5,194
Medical		1,047		1,436
Total gross revenue from sale of goods		19,297		6,630

Gross revenue is inclusive of sales returns and recoveries. During the three months ended October 31, 2019, the Company incurred $1,978 (October 31, 2018 - $Nil) of sales provisions and price concessions.

30. Segmented Information

The Company operates in one operating segment. All property, plant and equipment and intangible assets are located in Canada.

31. Restructuring Costs

	$
Balance payable as at July 31, 2019	—
Total restructuring costs	3,722
Less: Payments made	—
Balance payable as at October 31, 2019	3,722

During to the period restructuring efforts were undertaken to right size the Company. These expenses amounted to $3,722 and are comprised of severance and other payroll related termination costs. The restructuring costs are recorded in full as accrued liabilities as at October 31, 2019. The Company expects the settlement of these costs to occur within the current fiscal year.

32. Income Taxes

The Company’s effective income tax rate was 8.8% for the three months ended October 31, 2019 (October 31, 2018 – Nil%). The effective tax rate is different than the statutory rate primarily due to the recognition of $6,023 of deferred tax assets to offset deferred tax liabilities. The Company has identified an error related to the deferred tax liability as at July 31, 2019 and October 31, 2019, see Notice to Reader. The deferred tax liability is overstated by $14,373 as at July 31, 2019 and October 31, 2019.

33. Subsequent Events

Closing of $70 Million Private Placement

On December 6, 2019, the Company closed the private placement of 8.0% unsecured convertible debentures for gross aggregate proceeds of $70 million, maturing on December 5, 2022 (the “Debentures”). The Debentures are convertible at the option of the holder at any time after December 7, 2020 and prior to maturity at a conversion price of $3.16 per share (the “Conversion Price”), subject to adjustment in certain events. The Company may force the conversion of all of the then outstanding Debentures at the Conversion Price at any time after December 7, 2020 and prior to maturity on 30 days’ notice if the daily volume weighted average trading price of the common shares of the Company is greater than $7.50 for any 15 consecutive trading days.

At any time on or before December 4, 2020, the Company may repay all, but not less than all, of the principal amount of the Debentures, plus accrued and unpaid interest.

On maturity, the holders of the Debentures have the right to require the Company to repay any principal amount of their Debentures through the issuance of common shares of the Company in satisfaction of such amounts at a price equal to the volume weighted average trading price of the common shares on the TSX for the 5 trading days immediately preceding the payment date. In accordance with the rules of the TSX, shareholder approval will be required for the issuance of any common shares where: (i) the number of common shares issuable would exceed 25% of the number of common shares outstanding prior to the closing date; or (ii) the number of common shares issuable to insiders would exceed 10% of the number of common shares outstanding prior to the Closing Date. All securities issued in connection with the Offering are subject to a four month hold period expiring April 6, 2020.

Under the Offering, certain insiders of the Company purchased and were issued, directly or indirectly, $8.02 million principal amount of Debentures, which constituted “related party transactions” within the meaning of Multilateral Instrument 61-101 - Protection of Minority Security Holders in Special Transactions (“MI 61-101”). The issuance to the insiders is exempt from the formal valuation and minority shareholder approval requirements of MI 61-101, as the fair market value of the Debentures issued to, and the consideration paid by, such persons did not exceed 25% of the Company’s market capitalization.

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EX-99.2

Exhibit 99.2

Management’s Discussion & Analysis For the three months ended October 31, 2019 and 2018

Management’s Discussion & Analysis

For the three months ended October 31, 2019

(In thousands of Canadian dollars, except share and per share amounts, and where otherwise noted)

This management’s discussion and analysis (“MD&A”) of the financial condition and results of operations of HEXO Corp and our subsidiaries (collectively, “we” or “us” or “our” or “Company” or “HEXO”) is for the three months ended October 31, 2019. HEXO is a publicly traded corporation, incorporated in Ontario, Canada. The common shares of HEXO trade under the symbol “HEXO” on both the Toronto Stock Exchange (“TSX”) and the New York Stock Exchange (“NYSE”). This MD&A is supplemental to, and should be read in conjunction with, our condensed consolidated interim financial statements for the three months ended October 31, 2019 and our audited consolidated financial statements for the fiscal year ended July 31, 2019. Our consolidated financial statements are prepared in accordance with International Financial Reporting Standards (“IFRS”) as issued by the International Accounting Standards Board. All amounts presented herein are stated in Canadian dollars, unless otherwise indicated.

Notice to Reader - the Company has identified an error related to the deferred tax liability as at July 31, 2019 which has not been corrected in the condensed interim consolidated financial statements as at October 31, 2019 and July 31, 2019. The Company will reissue the consolidated annual financial statements for the year ended July 31, 2019, and these condensed interim consolidated statements for the period ending October 31, 2019 correcting for this error.

This MD&A has been prepared by reference to the MD&A disclosure requirements established under National Instrument 51-102, Continuous Disclosure Obligations, of the Canadian Securities Administrators. Additional information regarding the Company is available on our websites at hexocorp.com/investors or through the SEDAR website at sedar.com or the EDGAR website at www.sec.gov/edgar.

Certain information in this MD&A contains or incorporates comments that constitute forward-looking information within the meaning of applicable securities legislation. Forward-looking information, in general, can be identified by the use of forward-looking terminology such as “may”, “expect”, “intend”, “estimate”, “anticipate”, “believe”, “should”, “plans”, “continue”, “objective”, or similar expressions suggesting future outcomes or events. They include, but are not limited to, statements with respect to expectations, projections or other characterizations of future events or circumstances; our objectives, goals, strategies, beliefs, intentions, plans, estimates, projections and outlook, including statements relating to our plans and objectives; estimates or predictions of actions of customers, suppliers, competitors or regulatory authorities; and statements regarding our future economic performance.

• the competitive and business strategies of the Company;

• the intention to grow the business, operations and potential activities of the Company, including entering into joint ventures and leveraging the brands of third parties through joint ventures and partnerships;

• the ongoing expansion of the Company’s facilities, its costs and receipt of approval from Health Canada to complete such expansion and increase production and sale capacity;

• the expansion of business activities, including potential acquisitions;

• the integration of our acquisition of Newstrike Brands Ltd. (“Newstrike”) into our operations;

• the expected production capacity of the Company;

• the expected sales mix of offered products;

• the development and authorization of new products, including cannabis edibles and extracts (“cannabis derivatives”);

• the competitive conditions of the industry, including the Company’s ability to maintain or grow its market share;

• the establishment of the Company’s investment in association with Molson Coors Canada and the future impact thereof;

• the establishment of the Company’s joint venture with QNBS P.C. (formerly Qannabos) for the Company’s Eurozone processing, production and distribution centre in Greece and the future impact thereof;

• the expansion of the Company’s business, operations and potential activities outside of the Canadian market, including but not limited to the U.S., Europe, Latin America and other international jurisdictions;

• whether the Company will have sufficient working capital and its ability to raise additional financing required in order to develop its business and continue operations;

• the applicable laws, regulations and any amendments thereof;

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

• the anticipated future gross margins of the Company’s operations; and

• the performance of the Company’s business and operations.

Such statements are not historical facts but instead represent management beliefs regarding future events, many of which, by their nature, are inherently uncertain and beyond management control. We have based these forward-looking statements on our current expectations about future events and certain assumptions including, but not limited to:

• the Company’s ability to implement its growth strategies;

• the Company’s ability to complete the conversion or buildout of its facilities on time and on budget;

1    MD&A

• the Company’s competitive advantages;

• the development of new products and product formats for the Company’s products;

• the Company’s ability to obtain and maintain financing on acceptable terms;

• the impact of competition;

• the changes and trends in the cannabis industry;

• changes in laws, rules and regulations;

• the Company’s ability to maintain and renew required licences;

• the Company’s ability to maintain good business relationships with its customers, distributors and other strategic partners;

• the Company’s ability to keep pace with changing consumer preferences;

• the Company’s ability to protect intellectual property;

• the Company’s ability to manage and integrate acquisitions, particularly Newstrike;

• the Company’s ability to retain key personnel; and

• the absence of material adverse changes in the industry or global economy.

Although the forward-looking statements contained in this MD&A are based on what we believe are reasonable assumptions, these assumptions are subject to a number of risks beyond our control, and there can be no assurance that actual results will be consistent with these forward-looking statements. Factors that could cause actual results to differ materially from those set forth in the forward-looking statements and information include, but are not limited to, financial risks; industry competition; general economic conditions and global events; product development, facility and technological risks; changes to government laws, regulations or policies, including tax; agricultural risks; supply risks; product risks; dependence on senior management; sufficiency of insurance; and other risks and factors described from time to time in the documents filed by us with securities regulators. For more information on the risk factors that could cause our actual results to differ from current expectations, see “Risk Factors”. All forward-looking information is provided as of the date of this MD&A. We do not undertake to update any such forward-looking information whether as a result of new information, future events or otherwise, except as required by law.

This MD&A is dated December 15, 2019.

2    MD&A

Company Overview

HEXO is helping shape an entirely new legal cannabis market – in Canada and abroad. We are working to change the world; and we are just getting started.

Just six years ago, two entrepreneurs set out to corner the cannabis market in Canada. Laying roots in the province of Quebec, the Company was influential in stimulating market acceptance and support, raising significant capital in the public markets since the beginning of fiscal 2018. We have agreements and arrangements in place to supply cannabis in all ten provinces, including a five-year contract as a preferred supplier with Quebec’s Société québécoise du cannabis (“SQDC”). In total, we have governmental and private retail distribution agreements which together cover most major Canadian markets, reaching over 95% of the Canadian population. Our brands – HEXO, Original Stash and Up – are available to Canadians across the country.

Today, HEXO is a vertically integrated consumer-packaged goods (“CPG”) cannabis technology company in Canada with global ambitions. We believe that having a strong foothold in operational excellence, being able to execute at scale, to grow low-cost high-quality cannabis, and become profitable in Canada, is critical to ensuring a successful global platform. We are continuing to reinvest in our technology platform, focusing on the future of cannabis, and our ability to create new products that meet the increasing demands of the global cannabis consumer.

We believe that building a brand comes primarily from a strong distribution system and product quality, and from making a meaningful commitment to sustainability. Through our Hub and Spoke strategy, we are centralizing our intellectual property and branding it “powered by HEXO” and as we have done with Molson Coors Canada (“Molson”) we plan to partner with Fortune 500 companies in different facets of the CPG market, to participate in the cannabis market beginning in Canada and around the world. Fundamentally, we bring our brand value, cannabinoid isolation, formulation and delivery technology, licensed infrastructure and regulatory expertise to established companies, and in turn, we plan to leverage a capital light approach with their international distribution, base products and their deep understanding of consumer markets.

We aim to provide a clear, legal regulatory path into worldwide markets and best in class technology to our current and future partners. We believe the U.S. represents a significant market in the evolution of the cannabis industry, and that to establish global cannabis brands, our goal is to be successful there. As the U.S. market continues to develop, we intend to bring American consumers innovative, consistent, and high-quality hemp-derived cannabidiol (“CBD”) infused products “powered by HEXO”. Through these partnerships, we plan to focus on large-scale CBD extraction from hemp, providing high quality ingredients to our current and future Fortune 500 partners.

We have a history of innovation driven by our experienced management team. Under their leadership, we are building a robust research and development team to deliver the cannabis experiences sought by the market. We are among the cannabis industry’s top innovators, with award-winning products such as Elixir, Canada’s first line of cannabis peppermint oil sublingual sprays, and decarb, an activated cannabis powder designed for oral consumption. We were one of the first Canadian licensed producers to offer the market a cannabis based sexual health product with our Fleur de Lune and have won top awards for the quality of our pre-rolled cannabis products. Our Innovation team is structured across three pillars, Clinical Evaluation, Advanced Research and Applied Research. We employ researchers and PHDs from extensive product development backgrounds driving the execution of better, scientifically supported, cannabis-based experiences.

Our goal is to become a top global cannabis company with a top market share in Canada. After establishing a strong presence within our home market of Quebec, we are expanding nationally on a larger scale. Our objective is to execute on our existing supply agreements and arrangements with entities across all ten Canadian provinces, and to successfully manage our distribution centre responsible for all SQDC online sale cannabis distribution. This private retail presence will allow us to expand our expected distribution presence within these provinces.

The acquisition of Newstrike Brands Ltd (“Newstrike”) further strengthened HEXO’s presence within Canada by adding Up, a reputable brand already established within the cannabis adult-use market and the Company’s premium brand offering within its house of brands. Along with the brand, HEXO acquired several supply agreements and arrangements to its national distribution network.

Ultimately, we know that if we want to achieve our goals, we need to think about more than just our products and prices. We must also examine the way our operations impact the natural and social environment on a local, provincial and national level. HEXO is monitoring and reporting on its greenhouse gas emissions, setting targets to reduce them, and offsetting its footprint. As members of the Global Cannabis Partnership, we will also be reporting on other Environment, Social and Governance (ESG) impact areas based on Global Reporting Initiatives (GRI) standards.

The global cannabis market is estimated to reach $250 billion in the next ten years. HEXO believes that in a few years, a handful of companies will control 70% of global market share and we believe HEXO is poised to be one of those companies.

3    MD&A

To date, we have sold over 15,100 kg of adult-use and medical cannabis to thousands of Canadians who count on us for safe and reputable, high-quality products. We have developed an extensive and award-winning product range, and gained valuable experience and knowledge, while serving our customers.

We currently hold approximately 1.3 million sq. ft. of operating space at our home base Gatineau campus, and an additional 469,000 sq. ft. in Brantford and Niagara. In addition, we have leased 912,600 sq. ft. of industrial real estate for manufacturing and distribution needs in Belleville, Ontario, of which we have subleased 183,600 sq. ft. to Truss for their production lines, and maintain rights of first offer and first refusal to lease the remaining space in the facility; another 58,000 sq. ft. of leased distribution space in Montreal, Quebec. HEXO also operates a 14,200 sq. ft. food research laboratory in Vaughan, Ontario and a 19,600 sq. ft. laboratory in Montreal, Quebec, which are both currently licensed for research and development purposes.

We are currently dual listed on the TSX and the NYSE and in doing so have increased HEXO’s access to the United States and global investors.

We do not, and do not intend to, engage in direct or indirect business with any business that derives revenue, directly or indirectly, from the sale of cannabis, cannabis products or cannabinoid-containing products in any jurisdiction where the sale of cannabis is unlawful under applicable laws. HEXO does not currently engage in any unlawful U.S. marijuana-related activities as defined in Canadian Securities Administrators Staff Notice 51-352, and will only do so in the future to the extent fully legal under all applicable U.S. federal and state laws.

Strategic Priorities

Since inception, we have laid the foundation to be a world leader that serves both adult-use and medical cannabis markets. In everything we do – innovation, cultivation, production, product development, distribution – we exercise rigor in order to offer adult-use consumers and medical cannabis patients uncompromising quality and safety. We believe that we can leverage our demonstrated success in Canada as we expand to global cannabis markets.

Our strategy is built on three pillars: operational scalability, innovative products and brand leadership. In striving to achieve operational scalability our immediate focus remains on demand planning and production. We continue to implement more effective techniques to streamline operations and drive meaningful improvements in yields and continue to lower production costs. We have established a seasoned and robust innovation department which currently is working towards developing innovative products for the Canadian cannabis derivatives market. We plan to invest in even better, science-backed cannabis experiences, and we look to partner with Fortune 500 companies to leverage their base products, international distribution platforms and deep understanding of the consumer occasion in their respective verticals. To achieve brand leadership, we will set up the legal, physical, and human capital infrastructure to participate in legal markets across the globe. We continue to broaden our market penetration across Canada with brands, Up, HEXO and Original Stash.

Given the different regulations governing the sale of adult-use cannabis across Canada, the number of large-scale licensed producers and continuously evolving Canadian cannabis economy’s supply and demand conditions, among other factors, we believe the initial years following legalization will be the most critical in determining the future shape of the cannabis industry in Canada, and that early distribution and financial performance will be critical to securing a market leader position.

For this and other reasons, we have deliberately set out to build a strong position in our initial jurisdiction, Quebec, while making strategic inroads in select other markets across the country through provincial supply agreements and private retail partnerships. Now having entered the adult-use market as one of the largest producers and suppliers by market capitalization, we are looking beyond the Canadian border to take HEXO international, where regulations permit. We are making continuous efforts to assess global opportunities in current and future medical and adult-use markets.

We have positioned ourselves to meet the smokeless cannabis demand through our venture with Molson, our first partner within our Hub and Spoke business model. We expect to launch a full line of beverage products in partnership with Molson through our venture, Truss. We currently expect to begin introducing these products to market during the first six months of calendar 2020. We continue to explore other opportunities for analogous ventures to introduce into the cannabis market. Even as we continue to execute on our business plans in Quebec, Ontario and across the country, we believe we have established ourself as a desirable business partner for cannabis control authorities, private retail, and potential Fortune 500 joint-arrangement partners in Canada.

As the cannabis and cannabis derivative markets evolve, we are constantly assessing and implementing ways to integrate our quality products with the product offerings of Fortune 500 companies and become a premium branded partner for CPG companies. We will seek to accomplish this through several means: by providing our prospective partners regulatory access to legal markets as well as distribution infrastructure and delivery systems across most provinces; by offering best in class technology through innovative product development and a strong IP portfolio.

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HEXO CORP HUB AND SPOKE BUSINESS MODEL

We have taken steps to ensure that we are prepared to meet the future demand of the CBD derivative product markets within Canada and other jurisdictions.

We established the venture Keystone Isolation Technologies Inc. (“KIT”) of which HEXO holds a 60% interest. Through KIT we believe we have obtained high capacity, top echelon technology for cleaning outdoor field hemp of harmful pesticides, which we believe gives us an edge in bringing quality extracts to the U.S. We believe KIT will provide the Company with high quality extraction technology to facilitate an efficiently processed and consistent supply of CBD and THC to supply the Canadian and U.S. markets for cannabis derivatives.

We have eight high CBD hemp strains in tissue culture in partnership with the University of Guelph as we are preparing the groundwork to evolve to a field sourced, forward contract supply model in the U.S., applying our strong quality assurance, control protocols, and hemp genetics to our farming partnerships.

Our commitment to quality and safety is supported by our compliance with Health Canada’s stringent quality control requirements, our top of the line production system, full seed-to-sale traceability, third party independent testing and an online system to post our product testing results.

HEXO U.S.

The U.S. cannabis market represents the Company’s next significant growth opportunity.

During the period the Company established its wholly owned U.S. based entity HEXO USA Inc on May 19, 2019, to be a leading partner for CPG expansion.

KIT will allow HEXO to supply future American CPG partners with “powered by HEXO” hemp-derived cannabidiol (“CBD”) experiences and enter the market in a strategic position to begin generating revenues by leveraging the Company’s experience in cannabis. KIT’s purpose is to provide a scalable, efficient, cost effective and reliable extraction and isolation of CBD from hemp to fulfil demand for our powered by HEXO emulsifications.

We believe that strategic partners will be able to benefit from HEXO’s innovative product development, advanced research and development, intellectual property portfolio (pending patent approvals), low production cost, licensed infrastructure and regulatory know-how. These same strategic partnerships will provide the Company with established global distribution platforms and product expertise.

The Company is aiming to enter select U.S. states over the course of the next calendar year and is taking important strides to offer its “powered by HEXO” products through KIT and our future partners, to the U.S. CBD markets, to the extent that such activities fully comply with applicable U.S. federal and state laws, including U.S. Food and Drug Administration requirements.

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THREE STRATEGIC PILLARS

Scalability

We have been cultivating cannabis for five years under the Cannabis Act of 2018 regulatory regime and its predecessor (“Cannabis Regulations”), growing and producing high-quality cannabis. We are constantly evaluating and updating our cultivating practices and technology to further drive efficiencies, improved yields and decrease costs.

We chose to initially locate in Gatineau, Quebec, because we believe the province offers the ideal conditions for cannabis production: is an abundant supply of renewable electricity at competitive rates, combined with abundant water resources and the availability of skilled people. The conditions allow us to continue to focus on ensuring that we maintain our low-cost production and move towards achieving profitability in the Canadian market. A focus that we believe will allow us to successfully expand into international markets.

On the border of Canada’s two largest consumer markets, Quebec and Ontario, our main campus in Gatineau positions us in close proximity to two of the country’s major urban areas, Greater Montreal and the National Capital Region. Furthermore, our 912,600 sq. ft. Centre of Excellence in Belleville, Ontario which is currently undergoing leasehold retrofitting and Health Canada licensing, is ideally situated between the National Capital Region and Toronto.

Our Gatineau campus includes several facilities representing a total of 1,310,000 sq. ft. The Gatineau campus includes our original 7,000 sq. ft. greenhouse, a 35,000 sq. ft. greenhouse, a 250,000 sq. ft. greenhouse, a warehouse, two stand-alone laboratories, two modular buildings for final packaging and customer service, and our 1 million sq. ft. greenhouse all located on our 143-acre land parcel.

Our Newstrike campuses located in Brantford and Niagara Ontario contribute 14,000 sq. ft. and 455,000 sq. ft. (once fully retrofitted) respectively, across 17.6 acres of land. Operations at the Niagara facility are currently halted under the Company’s restructuring efforts.

We have accumulated a strong and skillful workforce, as well as a top management group which provides cannabis-specific industry expertise and other relevant business knowledge derived from a variety of industries and markets.

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HEXO GROUP OF FACILITIES

(1) Temporarily suspended cultivation activities in Niagara and in 200,000 sq. ft. in Gatineau

(2) HEXO has leased 912,600 sq. ft., with an option on an additional approximately 587,000 sq. ft.Truss subleases and occupies 183,600 sq. ft within the HEXO leased area of the facility

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Product Innovation

Empowering the world to have safe and pleasurable cannabis experiences powered by HEXO technology.

Our strategic priorities reflect our belief that companies that achieve large-scale distribution and high brand awareness will drive long-term shareholder value in our industry. We aim to be the best partner for provincial cannabis distribution and retail authorities, while being recognized for delivering our “powered by HEXO” experiences across the full spectrum of products, price points and delivery methods.

We continue to prepare to take advantage of opportunities in the cannabis derivatives market and are expecting to launch new products in Canada during the first half of 2020. Products that we intend to introduce include, but are not limited to vapes, edibles such as confectionary and baked goods, cosmetics, and non-alcoholic beverages through our venture with Molson Coors Canada.

Our focus on research, innovation, technology and product development also reflects our strategic priorities. Our Innovation team benefits from vast experiences in CPG innovation and is actively exploring ways to increase our expertise related to cannabis applications and forms of delivery, and to expand our product range and brand portfolio. Activities include current and potential partnerships, ventures and strategic acquisitions of intellectual property and related transactions.

To date the Company has filed 44 patent applications related to various formulations, vape devices, beverages, cultivation and extraction technologies as well as other areas.

We recently leased two research facilities to further strengthen our IP portfolio and produce unique value-added products to the cannabis derivative market. Once fully retrofitted, the new 14,200 sq. ft facility in Vaughan, Ontario will serve as the Company’s food laboratory in which confectionary and edible product research and development will take place. The second additional facility in Montreal, Quebec will also house general research and development activity in the 19,600 sq. ft. space, once fully completed.

The cannabis industry has already recognized us as an innovative leader, as demonstrated by our award-winning products Elixir and decarb. We also offer Fleur de Lune, one of Canada’s first intimate-use cannabis oils.

Beyond the funds required for our currently planned investments in cultivation, distribution and processing capacity, we expect to allocate the majority of our capital to product innovation, development and production. An element of this focus is the development of our Belleville, Ontario facility, which, will house manufacturing and distribution for the Company and its future products, as well as the operations of our Truss venture. The facility is currently undergoing construction and will be licensed using a phased approach, it has currently received its first license, and is awaiting its license to manufacture edible products. This approach will directly support our continued leadership position in the Canadian cannabis market – as both a distributor and a product innovator.

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Brand Leadership

Striving to create a sustainable, notable and beloved brand.

The goal of HEXO Corp is to continue to offer a diverse house of brands, representing innovation, quality and consistency of experience, and become a leading Canadian market share brand with a top three global market share position. We believe that the key to doing this is by creating brands that resonate with consumers across market segments.

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Original Stash ADULT-USE HEXO recently broadened its house of brands to include Original Stash, a mass market brand that goes back to why we consume cannabis: for the simple pleasure it gives us. Original Stash is focused on frequent Canadian cannabis consumers, who want quality cannabis, but are conscious of legal market premiums. PRODUCT OFFERINGS Under our Original Stash brand, HEXO continues to disrupt the market with our first product offering of OS.210, a 28-gram blend of cannabis flower. This volume format is the first of its kind in the legal Canadian market, and HEXO is proud to be able to bring it to Canadian consumers. QUALITY WEED. TOTALLY LEGIT.

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HEXO Adult-use & Medical During the first quarter of fiscal 2019, the Company announced HEXO as the adult-use brand name that will serve the legalized Canadian adult-use market. As a brand, HEXO shares the same focus on award-winning product innovation and high-quality cannabis that the market has come to expect from its former medical sister brand, Hydropothecary. The former Hydropothecary medical brand has integrated under the HEXO brand name. Product Offerings Currently, HEXO offers 37 product offering variations of its dried cannabis and cannabis-derived products under two product types: dried – flower, milled and pre roll; and oils – Elixir and Fleur de Lune. Flower, Milled and Pre Roll – The HEXO adult-use brand offers a relatively wide spectrum of CBD and THC levels, through sativa, hybrid and indica plant strains. HEXO offers flower products and milled cannabis products in 3.5g and 15g formats. HEXO also carries pre roll products. Elixir and Fleur de Lune—Elixir, a cannabis oil sublingual spray product line, includes both a high tetrahydrocannabinol (“THC”), high CBD and 1:1 content, and is Canada’s only peppermint-based cannabis oil product. All three products are also available in an MCT carrier oil. Fleur de Lune is one of Canada’s first cannabis-based THC intimate oils. Both products provide alternative, smokeless methods to consume cannabis. HEXO offers six oil-based spray products as well as an intimate-use oil product.

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UP Adult-use During the fourth quarter of fiscal 2019, the Company added the Up brand to its suite of offerings. The Up brand lives within HEXO Corp’s house of brands portfolio, and is rapidly establishing itself as a prominent player in the adult-use cannabis market. With a strong connection to music, its premium quality products are “grown on tunes”, a unique growing methodology that runs through the entire plant’s lifecycle. That, together with a strategic partnership with the Tragically Hip, provides a solid foundation for clear market differentiation. Product Offerings Currently, Up offers 12 dried flower and pre-roll products across 8 provinces. Similar to the HEXO offerings, the Up adult-use brand offers a spectrum of CBD and THC levels, through its sativa, hybrid and indica plant strains. These products are offered in a range of 1g, 3.5g and 7g formats.

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Distribution

The processing and distribution capacity of the Company has significantly increased over the past twelve months. Our Gatineau campus now consists of 1.3 million sq. ft. of greenhouse and operational space. The Company received the renewal of its Health Canada licensing for the Gatineau facilities on October 16, 2019 and continues to retrofit the Belleville Centre of Excellence ahead of licensing for the purposes of manufacturing value-added cannabis products and increasing capacity for distribution and storage. The Company currently holds a lease to 912,600 sq. ft. of the Belleville facility, sub leases 183,600 sq. ft. to Truss, and has rights of first offer and first refusal to lease the remaining space in the building.

During the period, the Belleville facility received its first licensing which allows for the production and selling of cannabis. Currently, the Company is undergoing the application process to amend the Belleville licensing for the inclusion of its cannabis derivate products, expected to be received in Q2 of fiscal 2020. Once licensed and completed, the Belleville Centre of Excellence will act as the main development and processing facility for HEXO’s cannabis derivative products.

The process of licensing the Belleville Centre of Excellence occurs in phases, with the first phase of licensing having occurred during the period. This will provide the Company with the opportunity to offer its prospective partners with turn-key access to a cannabis sector ready facility. The centralized location of the facility, the Company’s first outside of Quebec is ideally situated along primary shipping routes to distribute our products and fulfill commitments across Canada. This facility further delivers on our national expansion strategy and ensures necessary capacity for the manufacture of advanced cannabis products, including vapes, non-alcoholic beverages, other edible cannabis products and cosmetics.

The Company has also bolstered its distribution capacity with the establishment of a distribution and storage centre in Montreal, Quebec formed with Metro Supply Chain Inc. This 58,000 sq. ft. facility was strategically acquired for logistical purposes. Through it, we supply cannabis for all direct-to-customer sales placed in Quebec through the SQDC’s online store. Additionally, we house, supply and distribute direct-to-customers the cannabis products of all licensed producers who have contracts with the SQDC through this distribution centre.

The Company now holds supply agreements and arrangements with entities across ten provinces. The Company is currently present within all 24 private cannabis retailers across Ontario, approximately 130 within the province of Alberta and an estimated 136 retailers across all remaining provinces.

Canadian Cannabis Market

On October 17, 2018, Canada became the largest nation in the world to offer medical and non-medical, adult-use cannabis nationally. In the first 10 months of the legalization of the adult-use market, sales in excess of $676 million have been realized across Canada according to Statistics Canada. With the legalization of the cannabis derivatives market on the horizon, HEXO believes it is strategically positioned to serve these markets through our partnerships, production capacity and innovative products.

All provinces and territories have established their respective cannabis market retail approach, ranging from private entities to government-owned retail, as well as a combined approach in several jurisdictions. We have positioned ourselves through supply agreements and arrangements for distribution within Ontario, Alberta, British Columbia, Nova Scotia, New Brunswick, Prince Edward Island, Manitoba, Saskatchewan and Quebec.

The result: our award-winning and innovative products are available in ten provinces in Canada.

RETAIL DISTRIBUTION CHANNELS BY PROVINCE & TERRITORY

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RETAIL DISTRIBUTION BY PROVINCE

QUEBEC

In Quebec, the SQDC operates the sale and distribution of adult-use cannabis. The SQDC has established 27 retail locations throughout the province, for in-store cannabis sales. It expects to increase this number to 43 locations by March 2020. It also sells cannabis online.

The Company has a five-year preferred supplier agreement in place with the SDQC. During the first year, HEXO achieved approximately 33% market share based on volume sold, which was is line with our goal. We are, and will remain, a preferred supplier of the SQDC as we continue to expand our product offerings based on the demands of consumers.

We currently supply the SQDC with HEXO and Original Stash products. Currently, HEXO’s product offerings include the award-winning Elixir, THC and CBD formulas, and dried cannabis products. New during the period, is Original Stash, the newest brand in HEXO’s suite of brands which was initially introduced to the adult-use market through the SQDC. We’re currently offering os.210, a 28-gram bag mid-range THC dry cannabis sold for $4.49 per gram or $126 per ounce.

In addition, we hold a distribution agreement with the SQDC, which provides the storage and distribution all of the SQDC’s online product sales to end-users. This includes the product of all licensed producers with established supply agreements held with the SQDC.

ONTARIO

In Ontario, a dual private–government approach is used to serve the adult-use market. The government currently offers consumers a variety of cannabis products through online sales by the Ontario Cannabis Store (“OCS”). The province allows privately owned retail including 24 initially licensed locations that serve the adult-use market. Initial product listings include dried cannabis, oil and capsule products, pre-rolled, and clones and seeds.

We currently hold supply agreements with the OCS, in which we supply the province with HEXO’s Elixir, THC and CBD formulas and Fleur de Lune, and dried cannabis products, as well as a variety of dried flower products under the Up brand.

Most recently, HEXO added the first product offering of Original Stash to its Ontario listings. The Ontario adult-use market now has access to the low price, 28-gram bag product which is aimed to help further reduce the black markets share of the Canadian cannabis economy.

HEXO, Original Stash and Up, combined are currently present within all 24 private retailers throughout the province.

With the Company’s presence within both private retail and the OCS, we are situated to serve the entire market of Ontario with our listings of combustible and smokeless cannabis products.

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ALBERTA

Alberta, which accounts for the highest levels of Canadian cannabis sales, utilizes a dual private–government approach to serve its adult-use market. The Company has received cannabis representative status with the Alberta Gaming, Liquor and Cannabis Board (“ALGC”) to supply it with products offered online and in stores. This will allow HEXO to supply our award-winning THC and CBD oil-based Elixir products as well as nine dried flower cannabis products. HEXO, Original Stash and Up products are also present within approximately 130 private retail stores, further increasing our distribution capability across the province.

BRITISH COLUMBIA

In British Columbia, the adult-use cannabis market is served through a dual private–government approach. The British Columbia Liquor Distribution Branch (“BCLDB”) manages the distribution of cannabis and cannabis-based products. We hold supply agreements with the BCLDB, in which we supply our HEXO THC and CBD oil-based Elixir and HEXO Fleur de Lune products, Original Stash and Up brand products. HEXO and Up are present within an estimated 75 private retail locations across the province.

OTHER OBTAINED CANADIAN MARKETS

We currently have established distribution channels within five additional provincial markets including Saskatchewan, Nova Scotia, New Brunswick, Manitoba and Prince Edward Island which represent 12% of the Canadian population. These channels include both supply agreements and supplier arrangements with provincial governments and private retailers.

HEXO and Up brands are currently offering in an estimated 61 private retailers across the remaining five provinces allocated as follows;

Saskatchewan – 15 locations

Nova Scotia – 12 locations

New Brunswick – 20 locations

Manitoba – 10 locations

Prince Edward Island – 4 locations

Subsequent to the period on November 26, 2019, HEXO established a supply agreement with the province of Newfoundland and Labrador. With this the Company now holds distribution channels across all ten provinces.

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* the above depicts a preliminary product image that is subject to change.

Canadian legalization of additional cannabis derivative product categories occurred in October 2019, and distribution is expected to commence over the first six months of calendar 2020. The Company is working to ensure it meets expected market demands and continues to prepare for its Canadian cannabis market 2.0 product offerings. Initially, HEXO intends to meet the cannabis derivative market with our premium vapes and beverage products, followed by the roll out of our edible offerings. We plan to add additional product offerings to the portfolio over time. Through HEXO’s proven innovation capability and quality cannabis that the current adult-use market has come to expect, this new platform for cannabis derivative products offers us the ability to target curious new adult-use clientele and attract consumers who may otherwise purchase cannabis from unlicensed dispensaries and black market participants. We will do this by offering legal, safe, consistent, tested and appealing new product options.

Having previously announced its intention to focus on research, development and innovation, HEXO took another step towards this goal in establishing two new laboratory and development centres in Montreal, Quebec and Vaughan, Ontario, both of which were licensed for research and development during the period. Once the retrofitting of these facilities are completed, the locations will serve as global research and development hubs for the Company’s Innovation, Development and Engineering (IDE). The team brings together extensive experience in research and development, sensory science, clinical evaluation, biotechnology and food engineering.

The HEXO IDE team has sweeping experience in the food, pharma and CPG industries with accumulated career experience with Coca Cola, Altria Group, Mondelez International, Kellogg’s, Unilever, Church and Dwight, Shopper’s Drugmart, Loblaws, Kerr’s Bros. and Campbell’s Soup Company. With more than 20 years of experience in food innovation and product development. HEXO is also proud to have its own in-house cannabis-infused chocolates expert. Focused on creating a cannabis chocolates experience, our Canna Chocolatier is working on formulating fast-acting, consistent and delectable chocolates.

HEXO is focused on developing a product portfolio with best in class technology that is guided by a deep understanding of consumer needs. To better understand these needs, a variety of research methodologies have been deployed by a third-party research provider in select markets in Canada and the U.S. These methodologies include, but are not limited to:

• Segmentation: A way of viewing the market as a series of sub-groups rather than a whole. Members of each sub-group had similar traits but were distinct from other sub-groups.

• Qualitative Research & Ethnographies: A methodology of collecting consumer insights which involves face- to-face interaction and the observation (and questioning) of behaviours to better understand the person.

Leveraging the insights we’ve collected – and will continue to collect – HEXO is committed to developing products and formulations that not only meet, but exceed, the evolving needs of consumers.

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Recognizing that innovation is always evolving, HEXO will make significant investments in fine-tuning our technologies to enhance consistency, predictability, and safety across our range of cannabis products and experiences.

To ensure it can bring an expanded offering to market, the Company boasts a multi-year extraction agreement with Valens GroWorks Corp. Once licensed and completed, the Company will also have mass-scale extraction capabilities at its Centre of Excellence in Belleville, Ontario.

Corporate Restructuring

During the period, the Company initiated a comprehensive evaluation of its operations in order to adjust to the new economic conditions of the Canadian cannabis industry. As a result, the Company is rightsizing its operations to adjust to this evolving market and regulatory environment with a view towards profitability and long-term stability. Subsequently, as part of these changes to its operations, the Company has eliminated approximately 200 positions across its departments and locations and currently is halting harvesting and production activity at the Niagara location. The actions taken are intended to rightsize the organization to match the revenue the Company expects to achieve in fiscal 2020.The Company continues to monitor the changing Canadian cannabis economic landscape whilst implementing its new budgetary and operating initiatives for fiscal 2020, in attempts to meet its goal of a positive adjusted EBITDA in calendar 2020.

Corporate Social Responsibility

At HEXO Corp, our goal is to be one of Canada’s leading cannabis producers and processors. We know that if we want to achieve our goal, we need to think about more than just our products and prices. We must also examine the way our operations impact the natural and social environment on a local, provincial and national level. HEXO is monitoring and reporting on its greenhouse gas emissions, setting targets to reduce them, and offsetting its footprint. We will also be reporting on other Environment, Social and Governance (ESG) impact areas based on Global Reporting Initiatives (GRI) standards. Our Corporate Social Responsibility Charter focuses on four priorities: People, Public, Products and Planet.

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PEOPLE	PUBLIC
•   Job creator award •   Significant contribution to the local economy of Masson-Angers, QC and Belleville, ON •   Career development, profit sharing and shareholder programs for employees •   Volunteer and team building opportunities for employees •   Reduced pricing on products for employee medical clients	•   Academic education and research investments •   Education programs for our retail partners •   Responsible use program investments •   Support to food security organizations •   Support to health organizations •   Community emergency support via the Red Cross •   Support to social justice initiatives

PLANET	PRODUCTS
•   Use of solar energy to minimize electricity consumption •   Recycling and composting programs •   Greenhouse gas (GHG) Inventory and Reporting (based on ISO14064 standards) •   Water conservation (rainwater capture and water recycling) •   Reforestation project with Tree Canada •   Solar energy project with Ottawa Food Bank •   Sustainability partner of Ottawa Riverkeeper	•   Naturally grown and rigorously tested cannabis •   Innovative smoke-free options •   Excise tax absorbed on products for medical clients •   Cannabis product of the year at the 2018 Canadian Cannabis Awards for our Elixir CBD

Other Corporate Highlights

HEXO launches new cannabis value brand, Original Stash, with 1 oz product

On October 16, 2019, the Company announced the launch of its new value brand Original Stash which became publicly available in Quebec on October 17, 2019. Original Stash is the Company’s low-cost product line, aiming to attract consumers who may otherwise purchase cannabis from unlicenced dispensaries and black market participants. Original stash will be offered in 28 gram (1 oz) quantities at black market prices.

Truss announces first product offering – Flow Glow

On October 17, 2019, Truss announced its first partnership with Flow Glow Beverages Inc. – the team behind Flow Alkaline Spring Water – to manufacture and distribute a CBD-infused spring water. Flow Glow Beverages’ flavoured CBD-infused spring water will be one of six cannabis beverage brands within the Truss product portfolio. Expected to be launched during the first six months of calendar 2020, Flow Glow will be available in two flavours: Goji+Grapefruit and Raspberry+Lemon. Each unit will contain 10mg of CBD. Flow Glow is sourced from natural spring water and natural ingredients and is packaged in nearly 70% renewable-resource-based, 100% recyclable paperboard containers. Flow Glow will be manufactured and distributed at HEXO’s Centre of Excellence in Belleville, Ontario.

Closing of $70 Million Private Placement

On December 6, 2019, the Company closed the private placement of 8.0% unsecured convertible debentures for gross aggregate proceeds of $70 million, maturing on December 5, 2022 (the “Debentures”). The Debentures are convertible at the option of the holder at any time after December 7, 2020 and prior to maturity at a conversion price of $3.16 per share (the “Conversion Price”), subject to

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adjustment in certain events. The Company may force the conversion of all of the then outstanding Debentures at the Conversion Price at any time after December 7, 2020 and prior to maturity on 30 days’ notice if the daily volume weighted average trading price of the common shares of the Company is greater than $7.50 for any 15 consecutive trading days.

At any time on or before December 4, 2020, the Company may repay all, but not less than all, of the principal amount of the Debentures, plus accrued and unpaid interest.

On maturity, the holders of the Debentures have the right to require the Company to repay any principal amount of their Debentures through the issuance of common shares of the Company in satisfaction of such amounts at a price equal to the volume weighted average trading price of the common shares on the TSX for the 5 trading days immediately preceding the payment date. In accordance with the rules of the TSX, shareholder approval will be required for the issuance of any common shares where: (i) the number of common shares issuable would exceed 25% of the number of common shares outstanding prior to the closing date; or (ii) the number of common shares issuable to insiders would exceed 10% of the number of common shares outstanding prior to the Closing Date. All securities issued in connection with the Offering are subject to a four month hold period expiring April 6, 2020.

Under the Offering, certain insiders of the Company purchased and were issued, directly or indirectly, $8.02 million principal amount of Debentures, which constituted “related party transactions” within the meaning of Multilateral Instrument 61-101 - Protection of Minority Security Holders in Special Transactions (“MI 61-101”). The issuance to the insiders is exempt from the formal valuation and minority shareholder approval requirements of MI 61-101, as the fair market value of the Debentures issued to, and the consideration paid by, such persons did not exceed 25% of the Company’s market capitalization.

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Non-IFRS Measures

We have included certain non-IFRS performance measures in this MD&A, including adjusted gross margin, as defined in this section.

We employ these measures internally to measure our operating and financial performance.

We believe that these non-IFRS financial measures, in addition to conventional measures prepared in accordance with IFRS, enable investors to evaluate our operating results, underlying performance and future prospects in a manner similar to management.

As there are no standardized methods of calculating these non-IFRS measures, our methods may differ from those used by others, and accordingly, these measures may not be directly comparable to similarly titled measures used by others. Accordingly, these non-IFRS measures are intended to provide additional information and should not be considered in isolation or as a substitute for measures of performance prepared in accordance with IFRS.

GROSS SALES

Gross sales are the revenues derived from the sale of adult-use, medical and whole sale cannabis under the normal course of business and are inclusive of sales return provisions and exclusive of excise taxes.

ADJUSTED GROSS MARGIN

We use adjusted gross margin to provide a better representation of performance in the period by excluding non-cash fair value measurements as required by IFRS. We believe this measure provides useful information as it represents the gross margin for management purposes based on cost to produce, package and ship inventory sold, exclusive of any fair value measurements as required by IFRS. The metric is calculated by removing all amounts related to biological asset fair value accounting under IFRS, including gains on transformation of biological assets and the cost of finished harvest inventory sold, which represents the fair value measured portion of inventory cost (“fair value cost adjustment”) recognized as cost of goods sold.

ADJUSTED EANRINGS BEFORE INTEREST, TAXES, DEPRECIATION AND AMORTIZATION (“EBITDA”)

The Company has identified the non-IFRS metric of adjusted EBITDA as a relevant performance indicator and has defined it as the following. Adjusted EBITDA is computed using the standard EDITDA calculation of net earnings adjusted for the impact of interests, income tax, depreciation and amortization, however, due to the unique nature of the cannabis industry and the material impact of non-cash fair value adjustments and impairments to biological assets and inventory these financial line items have been removed as well. Other significant non-cash items such as share-based compensation and the Company’s share of the losses in joint ventures and associate have been adjusted for as well in the computation. Significant extraordinary items such as restructuring costs are used in the calculation of adjusted EBITDA for normalization purposes.

EXPECTED PLANT YIELD

The expected plant yield is utilized in the valuation of biological assets on hand as at the period end. This represents an unobservable input to a level 3 fair value estimate and is derived from the Company’s historical harvests as well as the expertise of the appropriate personnel. A sensitivity analysis over this input was performed and included in the ‘Biological Assets – Fair Value Measurement’ section below.

PRODUCTION CAPACITY

The production capacity disclosed throughout this report represents management’s best estimate and is derived from the historical actual output of production as well as the use of cultivation expertise existing within the Company.

KILOGRAMS PRODUCED

The kilograms harvested during the period representing the amount of dried gram and dried gram equivalents harvested and produced from biological assets but not necessarily sold during the period.

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Operational and Financial Highlights

KEY FINANCIAL PERFORMANCE INDICATORS

Summary of results for the three months ended October 31, 2019 and 2018:

	For the three months ended
Income Statement Snapshot	October 31, 2019			October 31, 2018
	$			$
Gross cannabis revenue		19,297			6,630
Excise taxes		(4,839	)		(1,014	)
Net revenue from sale of goods		14,458			5,663
Ancillary revenue		41			47
Gross margin before fair value adjustments		4,552			2,832
Gross margin		(23,356	)		7,237
Operating expenses		35,100			22,035
Loss from operations		(58,456	)		(14,797	)
Restructuring costs		(3,722	)		—
Other income/(expenses and losses)		(6,278	)		1,994
Net loss before tax		(68,456	)		(12,803	)
Tax recovery1		6,023			—
Total Net loss		(62,433	)		(12,803	)

¹  The income tax recovery figure represents the correct amount of recovery in the period and will not be subject to change upon the restatement of the July 31, 2019 and October 31, 2019 MDA’s. See Notice to Reader within the interim condensed consolidated financial statements for the three months ended October 31, 2019 dated December 15, 2019.

For the three months ended

Operational Results	October 31, 2019		July 31, 2019		April 30, 2019		January 31, 2019		October 31, 2018
Avg. gross selling price of adult-use dried gram & gram equivalents ($)		4.35		4.74		5.29		5.83		5.45
Kilograms sold of adult-use dried gram & gram equivalents (kg)		4,196		4,009		2,759		2,537		952
Avg. gross selling price of medical dried gram & gram equivalents ($)		8.12		8.34		9.11		9.15		9.12
Kilograms sold of medical dried gram & gram equivalents (kg)		129		137		145		152		158
Avg. gross selling price of wholesale dried gram & gram equivalents ($)		—		0.56		—		—		—
Kilograms sold of wholesale dried gram & gram equivalents (kg)		—		672		—		—		—
Total kilograms produced of dried gram equivalents (kg)		16,107		16,824		9,804		4,938		3,550

Q1 PERIOD HIGHLIGHTS

• Total gross revenue in the quarter increased 191% to $19,297 when compared to the same quarter of fiscal 2019.

• Total shipped revenue in the quarter was $21,276, gross sales include a sales and return provision in the amount of $1,979, yielding gross sales of $19,297.

• Adult-use grams and gram equivalents sold increased 5% to 4,196 kg from the previous quarter.

• As at October 31, 2019, the Company held working capital of $150,244.

• Production levels remaining moderately flat at 16,107 of harvested kg. Historically, the Company realizes its lowest harvest yields in the first quarter of the fiscal year due to the impact of late summers climate.

21    MD&A

Summary of Results

Revenue

	Q1’20			Q4’ 19			Q3 ’19			Q2 ’19			Q1 ’19
ADULT-USE
Adult-use cannabis gross revenue	$	18,250		$	18,997		$	14,607		$	14,792		$	5,194
Adult-use excise taxes		(4,666	)		(4,937	)		(2,741	)		(2,587	)		(970	)
Adult-use cannabis net revenue		13,584			14,060			11,866			12,205			4,224
Dried grams and gram equivalents sold (kg)		4,196			4,009			2,759			2,537			952
Adult-use gross revenue/gram equivalent	$	4.35		$	4.74		$	5.29		$	5.83		$	5.45
Adult-use net revenue/gram equivalent	$	3.24		$	3.51		$	4.30		$	4.81		$	4.44
MEDICAL
Medical cannabis gross revenue	$	1,047		$	1,142		$	1,323		$	1,387		$	1,436
Medical cannabis excise taxes		(173	)		(185	)		(233	)		(216	)		(44	)
Medical cannabis net revenue		874			957			1,090			1,171			1,392
Dried grams and gram equivalents sold (kg)		129			137			145			152			158
Medical gross revenue/gram equivalent	$	8.12		$	8.34		$	9.11		$	9.15		$	9.12
Medical net revenue/gram equivalent	$	6.78		$	6.99		$	7.52		$	7.73		$	8.84
WHOLESALE
Wholesale cannabis gross revenue	$	—		$	378		$	—		$	—		$	—
Wholesale cannabis excise taxes		—			—			—			—			—
Wholesale cannabis net revenue		—			378			—			—			—
Dried grams and gram equivalents sold (kg)		—			672			—			—			—
Wholesale gross revenue/gram equivalent	$	—		$	0.56		$	—		$	—		$	—
Wholesale net revenue/gram equivalent	$	—		$	0.56		$	—		$	—		$	—
ANCILLARY REVENUE1	$	41		$	29		$	61		$	62		$	47
Total net sales	$	14,499		$	15,424		$	13,017		$	13,438		$	5,663

¹  Revenue outside of the primary operations of the Company.

Total net revenue in the first quarter of fiscal 2020 increased to $14,499 from $5,663 in the same period of fiscal 2019. The driving force behind the difference is a full quarter of adult-use sales in fiscal 2020 as opposed to only two weeks of said market contributing to fiscal 2019 due to the market being legalized on October 17, 2018. Adult-use sales in the quarter accounted for 95% of total revenue, an increase of 19% from the first quarter of fiscal 2019, in which adult-use revenues contributed 75% of total net revenue. Adult-use revenues are impacted by sales provisions incurred in the period. These provisions are derived from managements estimates based upon price concessions and expected returns.

Non-cannabis ancillary sales remained relatively flat at $41 when compared $47 in the first quarter of fiscal 2019, in which these sales first began for the Company. This revenue is derived from a management agreement held by the Company with arms-length partners.

OUTLOOK

The Company expects to be EBITDA positive in calendar 2020, subject to certain assumptions regarding store count, operational improvements and cost saving initiatives.

ADULT-USE SALES

During the three months ended October 31, 2019, the company recorded gross shipped revenue of $20,229 ($22,808 in the three months ended July 31, 2019), which was reduced by $1,245 ($2,847 in the three months ended July 31, 2019) related to price concessions and $734 ($965 in the three months ended July 31, 2019) related to return provisions, which yielded gross adult-use sales of $18,250 ($18,997 in the three months ended July 31, 2019). Inclusive of the returns provision were actual sales returns of $552 ($Nil in the three months ended July 31, 2019) which were reversed from the provision for returns made during the previous quarter. Overall during the period gross adult use sales decreased moderately by 4%. The provisions are reflective of a general best estimate provision for returns and price adjustments based on the Company’s assessment of sell-through and slow-moving inventory.

22    MD&A

Adult-use sales has increased 251% to $18,250 compared with $5,194 in the same period in prior fiscal year in which there existed a two-week stub period of adult-use sales between the date of legalization October 17, 2018 to October 31, 2018. The Company increased its adult-use market penetration with sales made to the AGLC of $2,151, which were not present in the comparable period. Also contributing to the increase in the period are the sales of Newstrike in the amount of $2,033. Newstrike was acquired in the fourth quarter of fiscal 2019 on May 24, 2019.

Sales volume in the first quarter of 2020 increased 5% to 4,196 kg from 4009 kg equivalents sold in the previous quarter. Sales volumes to the SQDC increased to 3,080 kg from 2,311 kg in the prior quarter, representing 73% of volumes compared with 58% in the prior quarter. Sales volumes to the ALGC were 474 kg in the period, a decrease from 1,192 kg in the previous quarter, representing 11% of volumes compared with 30% in the prior quarter. Sales volumes to the OCS increased to 518 kg from 329 kg in the previous quarter, representing 12% of volumes compared with 8% in the prior quarter. Sales volumes to other provinces and private retailers decreased to 124 kg from 177 kg in the previous quarter, remaining relatively flat at 3% of total volumes compared with 4% in the prior quarter.

Sales volume in the first quarter of fiscal 2020 increased 341% from 952 kg equivalents sold in the first quarter of fiscal 2019. The significant driver to this increase year over year, represents a full quarter of adult-use sales as compared to a two-week stub period from the date of legalization October 17, 2018 to October 31, 2018 in fiscal 2019. The Company also diversified its geographical market penetration when compared to the same period of the previous fiscal year, primarily with the addition of sales to the ALGC. The Company also saw increased sales to the OCS which increased to 16% of the Company’s total gross adult-use sales vs. 9% in the first quarter of fiscal 2019.

While dried gram volume sold increased by 15%, due to pricing adjustments made to meet the new economic demands of the Canadian cannabis market, and a provision for sales returns, the price per gram sold decreased by $0.89 on average from $5.66 in the fourth quarter of fiscal 2019.

	Q1’ 20			Q4’ 19			Q1’ 19
Shipped Revenue	$	20,228		$	22,808		$	5,194
Total gram and gram equivalents sold		4,196			4,009			952
Shipped revenue per gram and gram equivalent sold	$	4.82		$	5.69		$	5.45
Less: price concessions (1)		(0.30	)		(0.71	)		—
Less: provision for sales returns (1)		(0.17	)		(0.24	)		—
Adult-use gross revenue per gram and gram equivalent sold	$	4.35		$	4.74		$	5.45

(1) Computed as the price concession or provision for returns per gram and gram equivalent sold in the period.

During the three months ended October 31, 2019, gross adult-use revenue per gram equivalent decreased to $4.35 from $5.45 in the same period of fiscal 2019. This decrease is primarily reflective of the price reductions across the cannabis marketplace as well as price concessions and provision for sales returns recorded in the period against gross sales, which was not applicable to the first quarter of fiscal 2019. The provision is reflective of a general best estimate provision for returns and price adjustments based on the Company’s assessment of sell-through and slow-moving inventory. This was partially countered by the addition of the premium brand Up which commanded revenue of $7.03 per gram on dried flower sold in the period.

Quarter over quarter, adult-use revenue per gram decreased by $0.39 per gram and gram equivalent due to the pricing adjustments noted above.

MEDICAL SALES

Gross medical revenue in the three months ended October 31, 2019 decreased 27% to $1,047 compared to $1,436 in the same period in fiscal 2019. Grams and gram equivalents sold decreased 18% to 129 kg from 158 kg in the first quarter of fiscal 2019. The decrease in gross medicals revenues is due to a decrease in gram and gram equivalents sold and a reduction to the revenue per gram on both dried and oil products. Dried cannabis sales decreased 30 kg and revenue per gram decreased 8% to $7.86. Total bottles sold in the period when compared to the first quarter of fiscal 2019, were reduced by 13% to 28 kg of gram equivalents, this was paired with a 23% decrease to revenue per gram equivalent to $9.16. The driving force of these reductions to the revenue per gram and gram equivalents is a general reduced selling price as the legalized adult-use market was just two weeks old as at October 2018 and the medical market and pricing has been adapted to reflect the new more competitive, economic conditions.

Gross medical sales decreased by 8% from $1,142 quarter over quarter as grams sold also decreased at a slightly low rate of 6% from 137 kg.

23    MD&A

WHOLESALE SALES

These sales pertain to transactions held between the Company and other licensed producers. The characteristics of such sales are generally large quantities at reduced prices per gram and gram equivalent. These sales are also free of excise taxes as this burden belongs to the acquirer and ultimately the seller of the cannabis products.

There was no wholesaling activity in the first quarter of fiscal 2020. Currently, the Company’s primary focus remains on the adult-use retail market, however, additional wholesaling opportunities are being assessed and evaluated as they arise.

Cost of Sales, Excise Taxes and Fair Value Adjustments

Cost of goods sold includes the direct and indirect costs of materials and labour related to inventory sold, and includes harvesting, processing, packaging, shipping costs, depreciation and applicable stock-based compensation and direct and indirect overhead.

Fair value adjustment on sale of inventory includes the fair value of biological assets included in the value of inventory transferred to cost of sales.

Fair value of biological assets represents the increase or decrease in fair value of plants during the growing process less expected cost to complete and selling costs and includes certain management estimates.

For the three months ended	October 31, 2019			October 31, 2018
	$			$
Excise taxes		4,839			1,014
Cost of sales		9,947			2,831
Realized fair value amounts on inventory sold		6,663			717
Unrealized gain on changes in fair value of biological assets		(7,051	)		(5,123	)
Write off of biological assets and destruction costs		663			—
Write off of inventory		2,175			—
Impairment loss on inventory		25,458			—

Excise taxes began to be incurred upon legalization on October 17, 2018 and are applicable to the adult-use revenues and medical sales achieved thereafter. Excised taxes are presented against gross revenue to derive the Company’s net revenues on cannabis sales. Therefore, the current periods excise taxes which totaled $4,839, when compared to the first quarter of fiscal 2019, increased by 377% due to the comparable quarter only containing a stub period of two weeks of excise tax applicable sales activity. Excise taxes are a function of fixed provincial and territorial rates based upon the gram equivalents sold as well as a variable ad valorem component which is dependent upon the selling price of the products.

Cost of sales for the quarter ended October 31, 2019 were $9,947, compared to $2,831 for the same quarter ended in fiscal 2019. The increase in cost of sales is the result of increased sales volumes due to the legalized adult-use market being only applicable to the stub period of October 17, 2018 to October 31, 2018 in the comparative period. Also impacting the cost of sales were higher overhead allocated costs to inventory and increases to transformation costs were incurred as oil and other value-added products production mix has increased from the same quarter of fiscal 2019. The acquisition of Newstrike added an additional $610 of expenses, which were not present in the comparative period.

The realized fair value adjustment on inventory sold for the first quarter ended October 31, 2019 was $6,663 compared to $717 for the same period of fiscal 2019. This variance is primarily due to increased sales volumes of 3,244 kg related to inventory sold when compared to the same quarter in fiscal year 2019. This increase is offset on a net basis by a decrease in the inherent fair value per gram and gram equivalent sold when compared to the first quarter of fiscal 2019, due to pricing adjustments reflecting current market conditions.

The unrealized gain on changes in fair value of biological assets for the current quarter was ($7,051) compared to ($5,123) for the same quarter ended in fiscal 2019. This variance is due to an increase in the total number of plants on hand due to increased production space held by the Company. However, this increase to the total number of plants is offset by the general reduced fair value of these plants as the selling price used in the fair value calculation has decrease per the above.

During the period, the Company incurred a write off on its biological assets and inventory of $663 and $2,175, respectively due to the halted production at the Niagara facility as discussed in section – Corporate Restructuring. This amount is comprised of $438 of biological asset impairment, $225 incurred associated to destruction costs of biological assets and $2,175 incurred for the destruction of inventory.

The Company incurred an impairment loss on inventory of $25,458 during the three months ended October 31, 2019. The impairment loss was realized on the Company’s inventory in comprised of the following;

• Impairment of a surplus of cannabis trim (Trim is the accumulation of the cannabis’ sugar leaves during the dry trimming process. Trim is primarily used for extraction purposes) and milled products the amount of $16,433 due to an excess of stock relative to the Company’s short-term demand for cannabis distillate production;

24    MD&A

• Impairment of bulk purchased product of $4,400 due, in part, to an oversupply in the market of bulk products with lower potencies as well as a relatively low value when compared to competing bulk goods with a higher potency in the current adult-use market;

• Impairment of oil based finished goods of $3,436 due a surplus of finished goods as oil-based products haven’t captured the market share as originally estimated. Also contributing to the impairment is the decision made by certain provinces to return oil products with packaged dates greater than 3 to 4 months old and

• Impairment of finished goods of $1,186 which are required to be archived as at October 31, 2019 and possess a net realizable value of $nil.

Operating Expenses

For the three months ended	October 31, 2019		October 31, 2018
General and administration	$	15,973	$	4,912
Marketing and promotion		6,220		11,711
Stock-based compensation		8,164		4,689
Research and development		1,744		—
Amortization of intangible assets		1,666		150
Depreciation of property, plant and equipment		1,333		573
Total	$	35,100	$	22,035

Operating expenses include general and administrative expenses, marketing and promotion, stock-based compensation, research and development, and depreciation/amortization expenses. Marketing and promotion expenses include customer acquisition costs, customer experience costs, salaries for marketing and promotion staff, and general corporate communications expenses. General and administrative expenses include salaries for administrative staff and executive salaries as well as general corporate expenditures including legal, insurance and professional fees.

GENERAL AND ADMINISTRATIVE

General and administrative expenses increased to $15,973 in the three months ended October 31, 2019, compared to $4,912 in the comparative period. This increase reflects the significant increase to the scale of our operations, including an increase in management, general, finance and administrative staff which lead to an increase of $5,614 to wages and payroll related expenses. An increase of $2,614 was realized for additional directors and officer’s insurance due to the NYSE listing when compared to the first quarter of fiscal 2019. Commercial property insurance increased by $885 due to additional capital assets acquired as compared to the prior fiscal years first quarter.

MARKETING AND PROMOTION

Marketing and promotion expenses decreased to $6,220 in the current quarter, compared to $11,711 for the same period of fiscal 2019. The decreased expenses in fiscal 2020 as compared to the prior year is due to the timing of legalization to the Canadian cannabis adult-use market. During the first quarter of fiscal 2019, the Company continued its efforts to establish its market presence and build the brand of HEXO through several marketing campaigns leading up to legalization. These efforts have been appropriately scaled back and continue to move closer to reflecting a normalized quarterly cost to the Company. An additional $429 of expenses were contributed by the acquisition of Newstrike and its brands. Marketing and promotional expenses in the current period are reflective of the appropriate staff and travel-related expenses, printing and promotional materials as well as advertisement costs.

RESEARCH AND DEVELOPMENT (“R&D”)

The Company incurred R&D related expensed of $1,744 during the three months ended October 31, 2019. The Company began realizing its first significant R&D expenses during the fourth quarter of fiscal 2019. Quarter over quarter R&D expenses decreased by $503 from $2,247 in the fourth quarter of fiscal 2019. This increase is the result elevated activity as the Company continues to prepare for its cannabis derivates 2.0 market offerings. These activities include vape formulas, confectionary prototypes and sensory testing.

STOCK-BASED COMPENSATION

Stock-based compensation increased to $8,164 as compared to $4,689 for the same period in fiscal 2019. This increase is a result of the increased number of issued and outstanding stock options when compared to the prior period. The underlying market prices and therefore, the expensed fair value of the outstanding options in the period, on average are significantly higher than those outstanding in the first quarter of fiscal 2019.

DEPRECIATION OF PROPERTY, PLANT AND EQUIPMENT

Amortization of property, plant and equipment increased to $1,333 in the quarter, compared with $573 for the same period in fiscal 2019. The increase is due to the general increased scale of operations of the Company and the acquisition of Newstrikes capital assets at fair market value which took place on May 24, 2019. The resultant additions to office furniture, vehicles and other equipment in which the associated depreciation is not capitalized to inventory increased the total depreciation when compared to the prior fiscal years first

25    MD&A

quarter. Also, reflected in the increase is the depreciation of the right-of-use assets of $369 in the period due to the adoption of IFRS 16 – Leases as of August 1, 2019.

AMORTIZATION OF INTANGIBLE ASSETS

Amortization of intangible assets increased significantly to $1,666 in the quarter, compared with $150 for the same period in fiscal 2019. The primary influence of this increase is the result of amortization incurred on the fair market value of the identified $113,888 cultivation and license intangible asset acquired through Newstrike on May 24, 2019.

Loss from Operations

Loss from operations for the fourth quarter was ($58,456), compared to ($14,797) for the same period in fiscal 2019. This increase is attributable to the larger magnitude of the Company’s operations and the expanding scale production and sales in the period. Gross margin was impacted by consolidated price concessions and return provisions in the amount of $1,979 which were not present in the comparative period. Gross margin was also impacted by increased cost of sales and other items amounting to an increase of $29,483 see section - Cost of Sales, Excise Taxes and Fair Value Adjustments. Total Operating expenses increased $13,065 as compared to the first quarter of fiscal 2019. The increased headcount of the Company contributed $7,254 in salaries and wages expenses and increased stock-based compensation expenses of $3,475 were realized due to an increased number of outstanding share-based options. The Company also incurred significant R&D expenditures of $1,744.

RESTRUCTURING COSTS

Unique to the period were restructuring costs incurred. These expenses are the result of the restructuring efforts as discussed in the section – Corporate Restructuring. These costs amounted to $3,722, primarily comprised of severance and other payroll related termination costs. These expenses are deemed non-operating related as they are not result of the Company normal operating activities and therefore, have not been included in the net operating loss.

Other Income/Expenses

Other income/(expenses) was ($6,278) for the three months ended October 31, 2019 compared to $1,994 in the same period of fiscal 2019. Revaluation gain on financial instruments of $297 in the period as compared to a loss of ($2,337) in the comparative period reflects the revaluation of an embedded derivative related to USD denominated warrants and is a function of a reduced number of outstanding warrants the fluctuating USD/CAD currency rate. During the period the Company earned $571 of interest and other income on our various highly liquid interest generating assets, a decrease of $892 when compared to $1,066 in fiscal 2019. The Company’s share in the loss of its respective joint ventures and associates increased to ($1,682), an increase of ($1,521) from the comparative period. The Company’s convertible debenture incurred an unrealized loss of ($2,627) in period, a variance of $6,061 as the Company incurred a gain of $3,434 upon valuation as at October 31, 2018. The Company also incurred unrealized losses on its investments amounting to ($1,671) due to reduced underlying market prices.

Adjusted EBITDA

	Q1’ 20			Q4’ 19			Q3’ 19			Q2’ 19			Q1’ 19
	$			$			$			$			$
Total Net loss		(62,433	)		(56,685	)		(7,751	)		(4,325	)		(12,803	)
Interest income		(571	)		(1,575	)		(1,242	)		(1,304	)		(1,066	)
Taxes		(6,023	)		(3,840	)		—			—			—
Depreciation		1,333			581			140			452			573
Amortization		1,666			1,407			137			74			150
Standard EBITDA		(66,028	)		(60,112	)		(8,716	)		(5,103	)		(13,146	)
Adjustments:
Share-based compensation		8,164			10,197			8,162			4,960			4,689
Share of losses from joint ventures and associates		1,682			1,252			1,121			815			2,337
Restructuring costs		3,722			—			—			—			—
Realized fair value amounts on inventory sold		6,663			7,285			4,665			3,690			717
Unrealized gain on changes in fair value of biological assets		(7,051	)		(5,322	)		(20,057	)		(8,354	)		(5,123	)
Write off of inventory, biological assets and destruction costs		28,296			16,918			—			—			—
Adjusted EBITDA		(24,552	)		(29,782	)		(14,825	)		(3,992	)		(10,526	)
Adjusted EBITDA as a % of net loss		39	%		53	%		191	%		92	%		82	%
Net revenue from cannabis sales		14,458			15,395			12,956			13,376			5,616

26    MD&A

	Q1’ 20			Q4’ 19			Q3’ 19			Q2’ 19			Q1’ 19
	$			$			$			$			$
Adjusted EBITDA margin (%)		(59	%)		(52	%)		(87	%)		(335	%)		(53	%)

During the three months ended October 31, 2019, the Company’s calculated adjusted EBITDA results were ($24,552) or 39% of the net loss in the period. This represents a 43% decrease as compared to the same period in fiscal 2019, most influenced by the one-time restructuring costs incurred in the period and for those reasons as explained in section – Operating Expenses. Adjusted EBITDA decreased by 14% from the previous quarter.

The adjusted EBITDA’s gross margin decreased to (59%), a decrease of 6% from the same comparative period from fiscal 2019 and 7% from the previous quarter.

Biological Assets – Fair Value Measurements

As at October 31, 2019, the changes in the carrying value of biological assets are as follows:

	October 31, 2019			July 31, 2019
Carrying amount, beginning of period	$	7,371		$	2,332
Acquired through acquisition(1)		—			3,291
Production costs capitalized		11,344			19,215
Net increase in fair value due to biological transformation less cost to sell		7,051			38,856
Transferred to inventory upon harvest		(18,494	)		(56,323	)
Impairment and destruction		(663	)		—
Carrying amount, end of period	$	6,609		$	7,371

¹  Acquired through the Newstrike acquisition on May 24, 2019

Our biological assets consist of cannabis plants, from seeds all the way through to mature plants. As at October 31, 2019, the carrying amount of biological assets consisted of $2 in seeds and $6,607 in cannabis plants ($2 in seeds and $7,369) in cannabis plants as at July 31, 2019). The increase in the carrying amount of biological assets is attributable to an increase in production costs and offset by the market selling price decrease as a result of the adult-use market. The significant estimates used in determining the fair value of cannabis on plants are as follows:

• yield by plant;

• stage of growth estimated as the percentage of costs incurred as a percentage of total cost as applied to the estimated total fair value per gram (less fulfillment costs) to arrive at an in-process fair value for estimated biological assets which have not yet been harvested;

• percentage of costs incurred for each stage of plant growth;

• fair value selling price per gram less cost to complete and cost to sell; and

• destruction/wastage of plants during the harvesting and processing process.

We view our biological assets as Level 3 fair value estimates and estimate the probability of certain harvest rates at various stages of growth. As at October 31, 2019, it is expected that our biological assets will yield approximately 22,572 kilograms (July 31, 2019 – 17,571 kilograms). Our estimates are, by their nature, subject to change. Changes in the anticipated yield will be reflected in future changes in the fair values of biological assets.

The valuation of biological assets is based on an income approach in which the fair value at the point of harvesting is estimated based on selling prices less the costs to sell. For in-process biological assets, the fair value at point of harvest is adjusted based on the stage of growth at period end. Stage of growth is determined by reference to the plant’s life relative to the cost incurred as a percentage of total cost as applied to estimated total fair value per gram (less fulfilment costs) to arrive at an in-process fair value for estimated biological assets, which have not yet been harvested.

Management’s identified significant unobservable inputs, their range of values and sensitivity analysis for the period ended October 31, 2019 are presented in the table below:

Unobservable inputs	Input values	Sensitivity analysis
Average selling price Obtained through actual retail prices on a per strain basis	$0.80 – 4.23 per dried gram	An increase or decrease of 5% applied to the average selling price would result in a change of approximately $321 to the valuation.

27    MD&A

Yield per plant Obtained through historical harvest cycle results on a per strain basis	47 – 142 grams per plant	An increase or decrease of 5% applied to the average yield per plant would result in a change up to approximately $321 in valuation.
Stage of growth Obtained through the estimates of stage of completion within the harvest cycle	Average of 37% completion	An increase or decrease of 5% applied to the average stage of growth per plant would result in a change of approximately $836 in valuation.
Wastage Obtained through the estimates of stage of wastage within the cultivation and production cycle	0% – 30% dependent upon the stage within the harvest cycle	An increase or decrease of 5% applied to the wastage expectation would result in a change of approximately $326 in valuation.

Quarterly Results

The following table presents certain unaudited financial information for each of the eight fiscal quarters up to and including the quarter ended October 31, 2019. Past performance is not a guarantee of future performance, and this information is not necessarily indicative of results for any future period.

	Q1’ 20 October 31, 2019			Q4’ 19 July 31, 2019			Q3’ 19 April 30, 2019			Q2’ 19 January 31, 2019
Net revenue	$	14,499		$	15,424		$	13,017		$	13,438
Total Net loss		(62,433	)		(56,685	)		(7,751	)		(4,325	)
Loss per share – basic		(0.24	)		(0.28	)		(0.04	)		(0.02	)
Loss per share – fully diluted		(0.24	)		(0.28	)		(0.04	)		(0.02	)
	Q1’ 19 October 31, 2018			Q4’ 18 July 31, 2018			Q3’ 18 April 30, 2018			Q2’ 18 January 31, 2018
Net revenue	$	5,663		$	1,410		$	1,240		$	1,182
Total Net loss		(12,803	)		(10,509	)		(1,971	)		(8,952	)
Loss per share – basic		(0.07	)		(0.05	)		(0.01	)		(0.10	)
Loss per share – fully diluted		(0.07	)		(0.05	)		(0.01	)		(0.10	)

The Company’s net revenues have increased considerably during the previous five quarters when compared to the first quarter of fiscal 2019 and beyond. This is due to the legalization of adult-use cannabis in Canada and the Company’s introduction into this market beginning on October 17, 2018.

The net loss in the three months ended October 31, 2019 increased as the result of the increased impairment of inventory and was partially offset by a reduction to operating expenses in the period. The significant loss realized in the fourth quarter of fiscal 2019 was primarily due to approximately $23 million in additional operating expenses the $25,458 impairment loss on inventory. The third quarter of fiscal 2019 saw increased general, administrative and stock based compensation expenses due to the growth of scale in the Company’s operations. In the second quarter of fiscal 2019 a stabilization in marketing/branding expenses occurred from the previous quarter thus reducing the net loss, offset by increased gross margin due to the Company’s first full quarter of adult-use sales. The Company experienced a ramp up of expenses to prepare for the legalized adult-use market primarily in the first quarter of fiscal 2019 and quarter four of fiscal 2018 resulting in increased net losses. The three quarters presented for fiscal year 2018 ended July 31, 2018 pertain to the Company’s operations within the medical market only and included in the first quarter of fiscal 18 were tremendous scaling efforts to meet the coming demand of the adult-use market.

28    MD&A

Financial Position

The following table provides a summary of our interim condensed financial position as at October 31, 2019 and July 31, 2019:

	October 31, 2019			July 31, 2019
Total assets	$	853,347		$	881,040
Total liabilities		128,094			104,284
Share capital		799,880			799,706
Share-based payment reserve		51,071			40,315
Warrants		60,433			60,433
Non-controlling interest		1,000			1,000
Deficit	$	(187,131	)	$	(124,698	)

Total Assets

Total assets increased to $853,347 as at October 31, 2019 from $881,040 as at July 31, 2019. Cash and cash equivalents decreased cumulatively by $72,285 see section – Liquidity and Capital Resources. Short term investments decreased by $12,535, due to the partial liquidation of the Company’s GICs. Property plant and equipment increased by $50,392 due to continued leasehold improvements to the Belleville Centre of Excellence and the associated required additional production equipment required within the facility. New in the fiscal year 2020, right of use assets contributed a net book value of $20,994. During the period the Company contributed $7,650 to its associated Truss, the increase in investment was offset by $1,682 in equity loss pickups from Truss and the Company’s joint ventures.

Total Liabilities

Total liabilities increased to $128,094 as at October 31, 2019 from $104,284 as at July 31, 2019. The increase was driven by the excise taxes payable balance containing two periods of expenses to be remitted, resulting to an increase of $3,453 to $6,947 when compared to July 31, 2019 which only held one period of remittable tax expenses. The period end excise taxes payable balance has been fully settled as of date of this report. Trade accounts payable decreased by $447, however, this was offset by the restructuring costs accrued in the period $3,722 and an overall increase to accounts payable and accrued liabilities of $5,769. New the fiscal year is the adoption a new lease accounting standard (see section IFRS 16 – Leases) which resulted in the recognition of an assumed lease liability in the amount of $22,677.

Share Capital

Share capital increased to $799,880 as at October 31, 2019 from $799,706 at July 31, 2019. The increase of $174 was solely due to the exercising of stock options during the period.

Share-Based Payment Reserve

The share-based payment reserve increased to $51,071 as at October 31, 2019 from $40,315 as at July 31, 2019. This increase is the results of share-based compensation expensed in the period for an increase of $10,756. A total of 3,561,311 stock options and 1,428,449 restricted share units were granted on October 29, 2019 resulting in a nominal impact to increase to the share-based reserve.

Warrants Reserve

The warrant reserve remained at $60,433 as at October 31, 2019 as compared to July 31, 2019.There existed no warrant activity during the three months period ended October 31, 2019.

Liquidity and Capital Resources

Liquidity

Our objectives when managing our liquidity and capital structure are to maintain sufficient cash to fund our core operating activities, innovation strategies and to meet contractual obligations. Our ability to reach profitability is dependent on successful implementation of our business strategy. While management is confident in the future success of the business, there can be no assurance that our products will gain adequate market penetration or acceptance or generate sufficient revenue to reach profitability.

29    MD&A

For the three months ended	October 31, 2019			October 31, 2018
	$			$
Operating activities		(34,219	)		(20,764	)
Financing activities		(1,136	)		5,951
Investing activities		(36,936	)		(1,251	)

Operating Activities

Net cash used in operating activities for the three months ended October 31, 2019 was $34,219 as a result of the loss before taxes for the period ended of $68,456, and a decrease in non-cash working capital of ($11,376), as well as net non-cash expenses of $39,590. The reduction of non-cash working capital was driven primarily by the significant impairment of inventory of $25,458, contributing to the decrease in inventory of ($32,823). This was offset by the settlement of trade receivables which contributed $11,678 as well as the reduction of biological assets on hand of $7,150. Increases to operating cash used were offset by the stock-based compensation add back of $8,164 and the fair market value adjustment to inventory sold of $6,663. In the same prior year period, cash used in operating activities was ($20,764), reflecting the net loss of ($12,803), net non-cash expenses reduction was ($34), and a decrease in working capital of ($7,927).

Financing Activities

Net cash used in financing activities for the quarter ended October 31, 2019 was $1,136. The cash generated from the exercised stock options amounted to $105. During the period payments of $872 were made towards the term loan and $369 of payments on leases liabilities were made. The net cash generated in the same prior year period amounted to $5,951, reflecting the proceeds generated through the exercising of warrants and stock options for $5,589 and $362, respectively.

Investing Activities

During the three months ended October 31, 2019, $36,936 was used for investing activities. Net cash of $12,535 was acquired through the disposal of short-term investments. This is offset by the third capital call to the Company’s associate Truss in which $7,650 was contributed during the period. During the period, we continued additions of ($45,248) to our property, plant and equipment balances as significant leasehold improvements and the associated required production equipment were acquired to bring the Belleville Centre of Excellence online. Cash in the amount of $3,574 was released from restriction for the purposes of satisfying a supply agreement. The net cash utilized for investing activities in the same prior year period was $1,251. This amount was comprised of the cash gained from the disposal of short-term investments of $56,838. Offsetting the increase cash position was the cash used to issue a promissory note of $20,334, acquired property, plant and equipment of $25,341 and the total cash invested into an associate and joint ventures of $7,035.

Capital Resources

As at October 31, 2019, working capital totaled $150,224. The exercise of all the in-the-money as at October 31, 2019, issued and outstanding warrants, restricted share units and stock options would result to an increase of cash of approximately $310, nil and $4,356, respectively.

On December 6, 2019, the Company closed the private placement of 8.0% unsecured convertible debentures for gross aggregate proceeds of $70 million, maturing on December 5, 2022 (the “Debentures”). The Debentures are convertible at the option of the holder at any time after December 7, 2020 and prior to maturity at a conversion price of $3.16 per share (the “Conversion Price”), subject to adjustment in certain events. The Company may force the conversion of all of the then outstanding Debentures at the Conversion Price at any time after December 7, 2020 and prior to maturity on 30 days’ notice if the daily volume weighted average trading price of the common shares of the Company is greater than $7.50 for any 15 consecutive trading days.

At any time on or before December 4, 2020, the Company may repay all, but not less than all, of the principal amount of the Debentures, plus accrued and unpaid interest.

On maturity, the holders of the Debentures have the right to require the Company to repay any principal amount of their Debentures through the issuance of common shares of the Company in satisfaction of such amounts at a price equal to the volume weighted average trading price of the common shares on the TSX for the 5 trading days immediately preceding the payment date. In accordance with the rules of the TSX, shareholder approval will be required for the issuance of any common shares where: (i) the number of common shares issuable would exceed 25% of the number of common shares outstanding prior to the closing date; or (ii) the number of common shares issuable to insiders would exceed 10% of the number of common shares outstanding prior to the Closing Date.

All securities issued in connection with the Offering are subject to a four month hold period expiring April 6, 2020.

Under the Offering, certain insiders of the Company purchased and were issued, directly or indirectly, $8.02 million principal amount of Debentures, which constituted “related party transactions” within the meaning of Multilateral Instrument 61-101 - Protection of Minority Security Holders in Special Transactions (“MI 61-101”). The issuance to the insiders is exempt from the formal valuation and minority shareholder approval requirements of MI 61-101, as the fair market value of the Debentures issued to, and the consideration paid by, such persons did not exceed 25% of the Company’s market capitalization.

30    MD&A

Management believes that current working capital along with the recently completed financings, sufficiently provides the level of funding required for current expansion projects and meet contractual obligations for the next 12 months. We periodically evaluate the opportunity to raise additional funds through the public or private placement of equity capital to strengthen our financial position and to provide sufficient cash reserves for growth and development of the business.

Our authorized share capital is comprised of an unlimited number of common shares. The table below outlines the number of issued and outstanding common shares, warrants and options as at July 31, 2019, October 31, 2019 and December 15, 2019.

	December 15, 2019		October 31, 2019		July 31, 2019
Common shares		257,134,709		257,061,783		256,981,753
Warrants		29,478,272		29,585,408		29,585,408
Options		24,881,464		25,384,959		24,288,919
Restricted share units		1,428,449		1,428,449		—
Total		312,922,894		313,460,599		310,856,080

Off-Balance Sheet Arrangements and Contractual Obligations

The Company does not have any off-balance sheet arrangements.

As of the date of this MD&A, the Company has a $65,000 credit facility (inclusive of a $50,000 term loan and $15,000 revolving loan) in place with a syndicate of Canadian chartered banks of which the Company has up to $15,000 of the revolving loan remaining.

We have certain contractual financial obligations related to service agreements and construction contracts for the construction in progress shown in Note 9 of the audited financial statements and the accompanying notes for the three months ended October 31, 2019.

These contracts have optional renewal terms that we may exercise at our option. The annual minimum payments payable under these contracts over the next five years are as follows:

	$
2020		16,483
2021		4,408
2022		2,840
2023		2,365
2024		2,337
Thereafter		20,287
		48,720

Financial Risk Management

We are exposed to risks of varying degrees of significance which could affect our ability to achieve our strategic objectives for growth. The main objectives of our risk management process are to ensure that risks are properly identified and that the capital base is adequate in relation to these risks. The principal financial risks to which we are exposed are described below.

Market Risk

Interest Risk

The Company has exposure to interest rate risk related to any investments of surplus cash. The Company may invest surplus cash in highly liquid investments with short terms to maturity that would accumulate interest at prevailing rates for such investments. The Company also has exposure to interest rate risk related to the outstanding balance of the term loan. The fluctuation of the interest rate may result in a material increase to the associated interest. As at October 31, 2019, the Company had short term investments of $13,402 and a long-term loan of $32,551. All interest rates are fixed. An increase or decrease of 5% to the applicable interest rates would not result in a material variance to net loss.

Price Risk

Price risk is the risk of variability in fair value due to movements in equity or market prices. The Company’s level 1 and 2 investments are susceptible to price risk arising from uncertainties about their future outlook, future values and the impact of market conditions. The

31    MD&A

fair value of marketable securities and derivatives held in publicly traded entities are based on quoted market prices which the shares of the investments can be exchanged for.

If the fair value of these financial assets were to increase or decrease by 10% as of October 31, 2019, the Company would incur an associated increase or decrease in comprehensive loss of approximately $1,230 (July 31, 2019 - $340). The price risk exposure as at October 31, 2019 is presented in the table below.

	October 31, 2019			July 31, 2019
	$			$
Financial assets		12,381			16,756
Financial liabilities		(196	)		(493	)
Total exposure		12,185			16,263

Credit Risk

Credit risk is the risk of financial loss to the Company if a customer or counterparty to a financial instrument fails to meet its contractual obligations and arises principally from the Company’s trade receivables and convertible debentures receivable. As at October 31, 2019, the Company was exposed to credit related losses in the event of non-performance by the counterparties.

The Company provides credit to its customers in the normal course of business and has established credit evaluation and monitoring processes to mitigate credit risk. Since the majority of the medical sales are transacted with clients that are covered under various insurance programs, the Company has limited credit risk.

Cash, cash equivalents and short-term investments are held by some of the largest cooperative financial groups in Canada. Since the inception of the Company, no losses have been incurred in relation to cash held by the financial institution. The majority of the trade receivables balance are held with crown corporations of Quebec, Ontario and Alberta as well as one of the largest medical insurance companies in Canada. Credit worthiness of a counterparty is evaluated prior to the granting of credit. The Company has estimated the expected credit loss using a lifetime credit loss approach. The current expected credit loss for the year ended October 31, 2019 is $19 (July 31, 2019 - $37).

In measuring the expected credit losses, the adult-use cannabis trade receivables have been assessed on a per customer basis as they consist of a low number of material contracts. Medical trade receivables have been assessed collectively as they possess share credit risk characteristics. They have been grouped based on the days past due.

Credit risk from the convertible debenture receivable arises from the possibility that principal and/or interest due may become uncollectible. The Company mitigates this risk by managing and monitoring the underlying business relationship.

The carrying amount of cash and cash equivalents, restricted cash, short-term investments, trade receivables and convertible debentures receivable represents the maximum exposure to credit risk and as at October 31, 2019; this amounted to $92,197.

The following table summarizes the Company’s aging of trade receivables as at October 31, 2019 and July 31, 2019:

	October 31, 2019		July 31, 2019
0–30 days		$		$
0–30 days		5,130		20,469
31–60 days		1,860		1,826
61–90 days		800		166
Over 90 days		225		3,599
Total		8,015		26,060

Economic Dependence Risk

Economic dependence risk is the risk of reliance upon a select number of customers which significantly impact the financial performance of the Company. The Company recorded sales from three crown corporations representing 93% (October 31, 2018 – 84%) of total sales for the three months ended October 31, 2019.

The Company holds trade receivables from three crown corporations representing 80% of total trade receivables as of October 31, 2019 (July 31, 2019 – 79%).

32    MD&A

Liquidity Risk

Liquidity risk is the risk that the Company will not be able to meet its financial obligations as they become due. The Company manages its liquidity risk by reviewing on an ongoing basis its capital requirements. As at October 31, 2019, the Company had $54,679 (July 31, 2019 – $139,505) of cash and cash equivalents and short-term investments.

The Company is obligated to pay accounts payable and accrued liabilities, excise taxes payable and current portions of the term loan and lease liability with total carrying amounts and contractual cash flows amounting to $61,633 due in the next 12 months.

The carrying values of cash, trade receivable, accounts payable and accrued liabilities approximate their fair values due to their short term to maturity. The carrying value of the term loan approximates its fair value as there has been no change the Company’s risk profile and no changes to the market interest rate.

Critical Accounting Assumptions

Our financial statements are prepared in accordance with IFRS. Management makes estimates and assumptions and uses judgment in applying these accounting policies and reporting the amounts of assets and liabilities, revenue and expenses, and the related disclosure of contingent assets and liabilities. Significant estimates in the accompanying financial statements relate to the valuation of biological assets and inventory, stock-based compensation, warrants, the estimated useful lives of property, plant and equipment, and intangible assets. Actual results could differ from these estimates. Our critical accounting assumptions are presented in Note 3 of the Company’s annual audited consolidated financial statements for the fiscal year ended July 31, 2019, which is available under HEXO’s profile on SEDAR and EDGAR. Changes to the accounting assumptions and their underlying methodologies and inputs are presented in Note 3 of the unaudited condensed interim consolidated financial statements for the three months ended October 31, 2019.

Adopted and Upcoming Changes in Accounting Standards

IFRS 16, Leases

The Company has applied IFRS 16 using the modified retrospective method and has elected to set the right-of-use asset equal to the lease liability. As such the cumulative effect of initial application recognized in retained earnings at August 1, 2019 is $nil. Accordingly, the comparative information presented for the prior period has not been restated and is presented as previously reported under IAS 17 and related interpretations.

Prior to the adoption of IFRS 16, the Company utilized IFRIC 4 - Determining Whether an Arrangement Contains a Lease in its determination at contract inception whether an arrangement was or contained a lease. The Company now determines whether a contract is or contains a lease based on the new definition of a lease with IFRS 16. Under IFRS 16, a contract is or contains a lease if the contract conveys a right to control the use of an identified asset for a period of time in exchange for consideration.

The Company recognizes a right-of-use asset and a lease liability at the lease commencement date. The right-of-use asset is initially measured at cost, and subsequently at cost less any accumulated depreciation or impairment losses and adjusted for certain remeasurements of the lease liability. The Company recognizes the associated depreciation of the right-of-use assets on a straight-line basis over the course of the remaining lease term which ranges from 2.9 to 30 years The lease liability is initially measured at the present value of the lease payments that are not paid at the commencement date, discounted using the interest rate implicit in the lease or, if that rate cannot be readily determined, the Company’s incremental borrowing rate (“IBR”). The Company has a determined a single IBR as the discount rate across all administrative real estate leases due to the leases containing similar characteristics. A separate IBR was used for the discounting of the Company’s production real estate property. The IBR’s utilized for administrative real estate and production real estate were 15.95% and 18.95%, respectively. The lease liability is subsequently increased by the interest cost on the lease liability and decreased by lease payments made. It is remeasured when there is a change in future lease payments arising from a change in an index or rate, a change in the estimate of the amount expected to be payable under a residual value guarantee, or as appropriate, changes in the assessment of whether a purchase or extension option is reasonably certain to be exercised or a termination option is reasonably certain not to be exercised.

The definition of leases as operating or finance has remained substantially unchanged from the preceding guidance under IAS 17. The Company applied IFRS 16 only to contracts that were previously identified as leases under IAS 17 and IFRIC 4.

The Company used the following additional practical expedients:

• Applied a single discount rate to a portfolio of leases with similar characteristics;

• Applied the exemption not to recognize right-of-use assets and lease liabilities for short-term leases with terms less than 12 months and leases of low-value assets. The Company recognizes the lease payments associated with these leases as an expense on a straight-line or other systematic basis over the lease term;

• Excluded initial direct costs from the measurement of the right-of-use asset at the date of initial application;

• Used hindsight when determining the lease term if the contract contains options to extend or terminate the lease; and

• Election to separate non-lease components from lease components, and account for each lease component and any associated non-lease components as a single lease component.

33    MD&A

The Company has applied judgment in determining the applicable discount rate. The discount rate is based on the Company’s IBR and reflects the current market assessments of the time value of money and the associated risks attributable to the Company and its industry.

On transition to IFRS 16, the Company recognized right-of-use assets and corresponding lease liabilities of $15,886 on August 1, 2019 for its administrative and production space lease agreements. The Company has recognized on a straight-line basis, depreciation expenses of $369 and $184 in finance costs in the condensed consolidated interim statements of operations and comprehensive loss for the three months ended October 31, 2019.

Total commitments as at July 31, 2019 was $192,230 which included certain contractual financial obligations related to service agreements, purchase agreements, operating lease agreements, and construction contracts. Of this total, $101,741 is related operating lease commitments. The following is a reconciliation of total operating lease commitments at July 31, 2019 to the lease liabilities recognised at August 1, 2019:

Total operating leases commitments as at July 31, 2019	$	101,741
Less: variable components of the operating leases		(49,330	)
Less: low value and/or short-term lease		(88	)
Add: IFRS 16 adjustments for renewal periods		27,273
Operating lease liability before discounting		79,596
Discounting factors using the IBR’s		(63,710	)
Total lease liabilities recognized under IFRS 16 as at August 1, 2019 (Note 28)	$	15,886

The impact of IFRS 16 on the consolidated statement of cash flows will be the reduction of operating cash flows and increasing financing cash flows through the additional depreciation and interest expenses, respectively.

Related Party Transactions

Key Management Personnel Compensation

Key management personnel are those persons having the authority and responsibility for planning, directing and controlling the Company’s operations, directly or indirectly. The key management personnel of the Company are the members of the executive management team and Board of Directors, and they control approximately 6.15% of the outstanding shares of the Company as at October 31, 2019 (July 31, 2019 – 6.15%).

Compensation provided to key management during the period was as follows:

For the fiscal year ended	October 31, 2019		October 31, 2018
Salary and/or consulting fees	$	792	$	669
Bonus compensation		42		214
Stock-based compensation		5,351		3,289
Total	$	6,185	$	4,172

Unless otherwise stated, the below granted stock options will vest on the one-year anniversary of the date of grant and the balance will vest quarterly over two years thereafter.

On October 29, 2019, the Company granted certain of its executives a total of 829,034 stock options and 1,428,449 RSU’s with an exercise price/unit value of $3.30. One-third of the stock options will vest on each of the one-year anniversaries of the date of grant over a three-year period. The RSU’s vest in full on the third-year anniversary after the grant date.

On July 26, 2019, the Company granted certain of its directors a total 250,000 stock options with an exercise price of $5.88.

On July 18, 2019, the Company granted certain of its executives a total 650,000 stock options with an exercise price of $6.54.

On March 20, 2019, the Company granted certain of its executives a total 325,000 stock options with an exercise price of $8.50.

34    MD&A

On February 21, 2019, the Company granted the CEO 3,333,333 stock options with an exercise price of $7.46. Additional to the standard vesting terms as defined in Note 11, is an achievement condition in which vesting may only occur once a volume weighted average trading price of $10 or greater is achieved for a 20-day period prior to a vesting date. All unvested options will carry over and vest if the condition is met at a future vesting date.

On February 19, 2019, the Company granted certain of its executives a total 615,000 stock options with an exercise price of $7.13.

On December 17, 2018, the Company granted certain of its executives a total 74,000 stock options with an exercise price of $5.09. Of which, 54,000 stock options will fully vest at the 6-month anniversary of the grant date.

On September 17, 2018, the Company granted certain executives of the Company a total of 650,000 stock options with an exercise price of $7.93.

Internal Controls over Financial Reporting

In accordance with National Instrument 52-109 Certification of Disclosure in Issuers’ Annual and Interim Filings (“NI 52-109”), the establishment and maintenance of Disclosure Controls and Procedures (“DCP”) and Internal Control Over Financial Reporting (“ICFR”) is the responsibility of management. The DCP and ICFR have been designed by management based on the 2013 Internal Control Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”) to provide reasonable assurance that the Company’s financial reporting is reliable and that its financial statements have been prepared in accordance with IFRS.

Regardless of how well the DCP and ICFR are designed, internal controls have inherent limitations and can only provide reasonable assurance that the controls are meeting the Company’s objectives in providing reliable financial reporting information in accordance with IFRS. These inherent limitations include, but are not limited to, human error and circumvention of controls and as such, there can be no assurance that the controls will prevent or detect all misstatements due to errors or fraud, if any.

The Company maintains a set of disclosure controls and procedures designed to provide reasonable assurance that information required to be publicly disclosed is recorded, processed, summarized and reported on a timely basis. An evaluation of the design of Disclosure Controls was done under the supervision and with the participation of management, including our Chief Executive Officer and Chief Financial Officer. Based upon this evaluation, the material changes to the control environment and the material weakness in our internal control over financial reporting as at October 31, 2019, are set forth below.

Material Changes to the Control Environment

During the period the Company continued to embark on a transformation project, enabled by a new end to end Enterprise Resource Planning (“ERP”) system. When completed, the project will provide an integrated system for inventory tracking and valuation from seed to sale. The project was launched in November 2017 to standardize and automate business processes and controls across the organization. As at October 31, 2019, the system’s Finance, Sales and Procurement processes were functional. It will continue to be rolled out for inventory tracking and processing throughout the fiscal year. The project is a major initiative that is utilizing third party consultants, and a solution designed specifically for the cannabis industry. The new ERP is intended to facilitate improved reporting and oversight and enhance internal controls over financial reporting.

Identified Material Weaknesses and Remediation Plan

A material weakness in internal control over financial reporting is a deficiency, or a combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of a company’s annual or interim financial statements will not be prevented or detected on a timely basis by the company’s internal controls.

Management has performed a detailed risk assessment to identify key account and business processes and related controls, which was informed by process flow mapping with key control owners.

As of the three months ended October 31, 2019, management has identified the following material weaknesses in the Company’s internal control over financial reporting and implemented the associated remediation activity as outlined below.

35    MD&A

COMPLEX SPREADSHEET CONTROLS

Management concluded that the Company did not implement and maintain effective controls surrounding complex spreadsheets. Spreadsheets are inherently prone to error due to the manual nature and increased risk of human error. The Company’s controls related to complex spreadsheets did not address all identified material risks associated with manual data entry, documentation and review of assumptions, processes and estimate methodology, completeness of data entry, and the accuracy of formulas.

The Company has engaged a third party to aid in the identification, assessment and remediation over the design and implementation effectiveness of complex spreadsheet internal controls over financial reporting. The Company intends to move towards an ERP which possesses specific functionality to remove the manual nature and usage of complex spreadsheets in future periods.

IMPLEMENTATION OF AN ERP

The Company did not have effective information technology (IT) general controls over all operating systems, databases, and IT applications supporting financial reports. Accordingly, process-level automated controls and manual controls that were dependent upon the information derived from IT systems were also determined to be ineffective.

The Company has engaged a third party to aid in the identification, assessment and remediation over the design and implementation effectiveness of IT related internal controls over financial reporting. The Company intends to fully implement the ERP during fiscal 2020 and will only take reliance upon such controls once the appropriate level of testing is reached.

INVENTORY COUNT

The Company did not have effective controls around its year-end inventory count procedures, specifically with respect to its reconciliation of the ERP system, due to the details outlined in the previous change to control environment section.

To further strengthen controls surrounding inventory, management has initiated or enhanced the following procedures;

• Segregation of duties to initiate work, production orders and inventory adjustments will be strengthened;

• Work, production orders and inventory adjustments will be reviewed and approved by the relevant supervisor;

• Further enhancements to the ERP inventory processing, tracking and reporting functionality and supporting work procedures in order to ensure their sustainability;

• Additional training, guidance and communications to internal teams and third-party inventory count providers regarding inventory management, count and reconciliation procedures.

PROCUREMENT

The Company did not maintain effective controls over the purchasing of capital goods and services, including the authorization of purchases, processing and payment of vendor invoices, the classification of various expenses and capitalization of assets.

To strengthen the controls surrounding the procurement process, management has initiated or enhanced the following procedures;

• Enhancements to the ERP’s purchasing functionality; including segregation of duties to initiate and release purchase orders;

• Additional training, guidance and communications to internal teams regarding the Company’s procurement policies and required adherence to the Governance Authority Matrix.

FINANCIAL REPORTING

The Company did not maintain effective process level and management review controls over manual financial reporting processes and the application of IFRS and accounting measurements related to certain significant accounts and non-routine transactions.

To strengthen the controls surrounding the financial reporting process, management has initiated the following;

• Assessing the financial and accounting resources in order to identify the areas and functions that lack sufficient personnel and other resources.

• Hiring additional personnel, to be dedicated to the implementation, maintenance and monitoring of disclosure and financial controls, including our current efforts to recruit a Director of Finance; and,

• Engaging third-party advisors with appropriate expertise to assist in the application of complex accounting measurements and non-routine transactions.

36    MD&A

Risk Factors

Our overall performance and results of operations are subject to various risks and uncertainties which could cause actual performance, results and achievements to differ materially from those expressed or implied by forward-looking statements and forward-looking information, including, without limitation, the following factors, some of which, as well as other factors, are discussed in our Annual Information Form dated October 28, 2019 available under our profile on www.sedar.com, which risk factors should be reviewed in detail by all readers:

• Our business operations are dependent on our licence under the Cannabis Regulations. The license must be renewed by Health Canada. Our current license expires on April 15, 2021. Failure to comply with the requirements of the license or any failure to renew the license would have a material adverse impact on our business, financial condition and operating results.

• Achievement of our business objectives is contingent, in part, upon compliance with regulatory requirements enacted by these governmental authorities and obtaining all regulatory approvals, where necessary, for the production and sale of our products. We cannot predict the time required to secure all appropriate regulatory approvals for our products, or the extent of testing and documentation that may be required by governmental authorities.

• While to the knowledge of our management, the Company is currently in compliance with all laws, regulations and guidelines relating to the marketing, acquisition, manufacture, management, transportation, storage, sale and disposal of cannabis as well as including laws and regulations relating to health and safety, the conduct of operations and the protection of the environment, changes to such laws, regulations and guidelines due to matters beyond our control may cause adverse effects to our operations.

• We operate in a dynamic, rapidly changing environment that involves risks and uncertainties, and as a result, management expectations may not be realized for a number of reasons.

• Reliance on management’s and key persons’ ability to execute on strategy. This exposes us to management’s ability to perform, as well as the risk of management leaving the Company.

• We face intense competition from licensed producers and other companies, some of which may have greater financial resources and more industry, manufacturing and marketing experience than we do.

• The number of licenses granted, and the number of licensed producers ultimately authorized by Health Canada could have an impact on our operations. We expect to face additional competition from new market entrants that are granted licences under the Cannabis Regulations or existing license holders which are not yet active in the industry.

• We may be subject to growth-related risks including capacity constraints and pressure on our internal systems and controls. Our ability to manage growth effectively will require it to continue to implement and improve our operational and financial systems and to expand, train and manage our employee base.

• Given the nature of our business, we may from time to time be subject to claims or complaints from investors or others in the normal course of business which could adversely affect the public’s perception of the Company.

• We may become party to litigation from time to time in the ordinary course of business which could adversely affect our business.

• Failure to adhere to laws and regulations may result in possible sanctions including the revocation or imposition of conditions on licenses to operate our business; the suspension or expulsion from a particular market or jurisdiction or of our key personnel; and the imposition of fines and censures.

• International operations will result in increased operational, regulatory and other risks.

• There may be a risk of corruption and fraud in the emerging markets in which the Company operates.

• The Company’s operations in emerging markets international markets may pose an increased inflation risk on the business.

• The development of our business and operating results may be hindered by applicable restrictions on sales and marketing activities imposed by Health Canada.

• Our activities and resources are currently primarily focused on our facilities on the Gatineau, Belleville and Newstrike campuses, and we will continue to be focused on this facility for the foreseeable future. Adverse changes or developments affecting the Gatineau campus would have a material and adverse effect on our business, financial condition and prospects.

• We expect to derive a significant portion of our future revenues from the legalized adult-use cannabis industry and recently legalized edible cannabis 2.0 market in Canada, including through our agreements various provincial governing bodies do not contain purchase commitments or otherwise obligate the purchaser to buy a minimum or fixed volume of products from HEXO.

• We expect to derive a significant portion of our future revenues from the sale of future products of which are still being actively developed and put into production. Failure to adequately meet market demand for edible product in a timely fashion may adversely impact the Company’s profitability.

• We have incurred operating losses since commencing operations and may incur losses in the future and may not achieve profitability.

37    MD&A

• Our growth strategy contemplates outfitting the Company’s multiple facilities with additional production resources. There is a risk that these additional resources will not be completed on time, on budget, or at all.

• A key aspect of our business is growing cannabis, and as such we are exposed to the risks inherent in any agriculture business, such as disease spread, hazards, pests and similar agricultural risks that may create crop failures and supply interruptions for our customers.

• Our cannabis growing operations consume considerable energy, making us vulnerable to rising energy costs. Volatility of energy costs and the loss of preferred rate status may adversely impact our business and our ability to operate profitably.

• We believe the cannabis industry is highly dependent upon consumer perception regarding the safety, efficacy and quality of the cannabis produced. Consumer perception of our products can be significantly influenced by scientific research or findings, regulatory investigations, litigation, media attention and other publicity regarding the consumption of cannabis products. There can be no assurance that future scientific research, findings, regulatory proceedings, litigation, media attention or other research findings or publicity will be favourable to the cannabis market or any particular product, or consistent with earlier publicity.

• As a manufacturer and distributor of products designed to be ingested or inhaled by humans, we face an inherent risk of exposure to product liability claims, regulatory action and litigation if our products are alleged to have caused significant loss or injury. In addition, the manufacture and sale of our products involve the risk of injury or loss to consumers due to tampering by unauthorized third parties, product contamination, unauthorized use by consumers or other third parties.

• Manufacturers and distributors of products are sometimes subject to the recall or return of their products for a variety of reasons, including product defects, such as contamination, unintended harmful side effects or interactions with other substances, packaging safety and inadequate or inaccurate labelling disclosure.

• Our business is dependent on a number of key inputs and their related costs including raw materials and supplies related to our growing operations, as well as electricity, water and other local utilities. Any significant interruption or negative change in the availability or economics of the supply chain for key inputs could materially impact our business, financial condition and operating results.

• We must rely largely on our own market research to forecast sales as detailed forecasts are not generally obtainable from other sources at this early stage of the medical marijuana industry in Canada.

• Conflicts of interest may arise between the Company and its directors.

• We may not pay any dividends on our common shares in the foreseeable future.

• Our common shares are listed on the TSX and NYSE; however, there can be no assurance that an active and liquid market for the common shares will be maintained, and an investor may find it difficult to resell such shares.

• There is no assurance the Company will continue to meet the listing requirements of the TSX and the NYSE.

• The Company is subject to restrictions from the TSX and NYSE which may constrain the Company’s ability to expand its business internationally.

• The market price for our common shares may be volatile and subject to wide fluctuations in response to numerous factors, including governmental and regulatory regimes, community support for the cannabis industry, variations in our operating results, changes in our business prospects, as well as many other factors that are beyond our control.

• An investment in our securities is speculative and involves a high degree of risk and uncertainty.

• We may issue additional common shares in the future, which may dilute a shareholder’s holdings in the Company.

• The Company may not be successful in the integration of the acquired Company into our business.

• The Company may be unable to successfully achieve the objectives of our strategic alliances.

• The Company’s operations are subject to increased risk as a result of international expansion.

• We maintain various types of insurance such as, but not limited to, errors and omissions insurance; directors’ and officers’ insurance; property coverage; and general commercial insurance, recall insurance, cyber security insurance, warehouseman insurance and cargo insurance. A judgment against any member of the Company in excess of available coverage could have a material adverse effect on us in terms of damages awarded and the impact on our reputation.

• Based upon the nature of the Company’s current business activities, the Company does not believe it is currently an “investment company” (“IC”) under the United States (“U.S.”) Investment Company Act of 1940. However, the tests for determining IC status are based upon the composition of the assets of the Company and its subsidiaries and affiliates from time to time, and it is difficult to make accurate predictions of future assets. Accordingly, there can be no assurance that the Company will not become an IC in the future. A corporation generally will be considered an IC if; more than 40% of the value of its total assets excluding cash and U.S. government securities are comprised of investment securities, which generally include any securities of an entity the corporation does not control. If the Company were to become an IC, it would not be able to conduct public offerings of securities in the U.S.

38    MD&A

• Our operations are subject to environmental and safety laws and regulations concerning, among other things, emissions and discharges to water, air and land, the handling and disposal of hazardous and non-hazardous materials and wastes, and employee health and safety. We will incur ongoing costs and obligations related to compliance with environmental and employee health and safety matters. Failure to comply with environmental and safety laws and regulations may result in additional costs for corrective measures, in penalties or in restrictions on our manufacturing operations.

• In the fiscal year 2018, the Company initiated the implementation of new ERP systems. The implementation is expected to be completed in the fiscal year ended July 31, 2020. Upon full commencement of the implementation, the scoping, requirements definition, business process definition, design and testing of the integrated ERP system could result in problems which could, in turn, result in disruption, delays and errors to the operations and processes within the business and/or inaccurate information for management and financial reporting.

• We are exposed to the risk that our employees, independent contractors and consultants may engage in fraudulent or other illegal activity. Misconduct by these parties could include intentional, reckless and/or negligent conduct or disclosure of unauthorized activities to the Company that violates: (i) government regulations; (ii) manufacturing standards; (iii) federal and provincial healthcare fraud and abuse laws and regulations; or (iv) laws that require the true, complete and accurate reporting of financial information or data.

• The Company is subject to continuous evolving corporate governance, internal controls and disclosure regulations that may increase the risk of non-compliance, which could adversely impact the Company, its market perception and valuation.

• With the recently acquired credit facility, which could include risks that the Company’s cash flows could be insufficient to satisfy required payments of principal and interest, exposure of the Company to the risk of increased interest rates as certain of the Company’s borrowings would likely be at variable rates of interest, and enforcement risk in the event of default.

• The credit facility contains covenants that will require the Company to maintain certain financial ratios. If the Company does not maintain such ratios, it could have consequences for the availability of credit under the credit facility or result in repayment requirements that the Company may not be able to satisfy.

39    MD&A

EX-99.3

Exhibit 99.3

Form 52-109F2

Certification of Interim Filings

Full Certificate

I, Sébastien St. Louis, Chief Executive Officer of HEXO Corp., certify the following:

1. Review: I have reviewed the interim financial report and interim MD&A (together, the “interim filings”) of HEXO Corp. (the “issuer”) for the interim period ended October 31, 2019.

2. No misrepresentations: Based on my knowledge, having exercised reasonable diligence, the interim filings do not contain any untrue statement of a material fact or omit to state a material fact required to be stated or that is necessary to make a statement not misleading in light of the circumstances under which it was made, with respect to the period covered by the interim filings.

3. Fair presentation: Based on my knowledge, having exercised reasonable diligence, the interim financial report together with the other financial information included in the interim filings fairly present in all material respects the financial condition, financial performance and cash flows of the issuer, as of the date of and for the periods presented in the interim filings.

4. Responsibility: The issuer’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (DC&P) and internal control over financial reporting (ICFR), as those terms are defined in National Instrument 52-109 Certification of Disclosure in Issuers’ Annual and Interim Filings, for the issuer.

5. Design: Subject to the limitations, if any, described in paragraphs 5.2 and 5.3, the issuer’s other certifying officer(s) and I have, as at the end of the period covered by the interim filings

(a) designed DC&P, or caused it to be designed under our supervision, to provide reasonable assurance that

(i) material information relating to the issuer is made known to us by others, particularly during the period in which the interim filings are being prepared; and

(ii) information required to be disclosed by the issuer in its annual filings, interim filings or other reports filed or submitted by it under securities legislation is recorded, processed, summarized and reported within the time periods specified in securities legislation; and

(b) designed ICFR, or caused it to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with the issuer’s GAAP.

5.1 Control framework: The control framework the issuer’s other certifying officer(s) and I used to design the issuer’s ICFR is the Internal Control – Integrated Framework (COSO Framework 2013) published by The Committee of Sponsoring Organizations of the Treadway Commission (COSO).

5.2 ICFR – material weakness relating to design: The issuer has disclosed in its interim MD&A for each material weakness relating to design existing at the end of the interim period

(a) a description of the material weakness;

1

(b) the impact of the material weakness on the issuer’s financial reporting and its ICFR; and

(c) the issuer’s current plans, if any, or any actions already undertaken, for remediating the material weakness.

5.3 Limitation on scope of design: N/A

6. Reporting changes in ICFR: The issuer has disclosed in its interim MD&A any change in the issuer’s ICFR that occurred during the period beginning on August 1, 2019 and ended on October 31, 2019 that has materially affected, or is reasonably likely to materially affect, the issuer’s ICFR.

Date: December 15, 2019

/s/ Sébastien St. Louis

Sébastien St. Louis

Chief Executive Officer

2

EX-99.4

Exhibit 99.4

Form 52-109F2

Certification of Interim Filings

Full Certificate

I, Stephen Burwash, Chief Financial Officer of HEXO Corp., certify the following:

1. Review: I have reviewed the interim financial report and interim MD&A (together, the “interim filings”) of HEXO Corp. (the “issuer”) for the interim period ended October 31, 2019.

2. No misrepresentations: Based on my knowledge, having exercised reasonable diligence, the interim filings do not contain any untrue statement of a material fact or omit to state a material fact required to be stated or that is necessary to make a statement not misleading in light of the circumstances under which it was made, with respect to the period covered by the interim filings.

3. Fair presentation: Based on my knowledge, having exercised reasonable diligence, the interim financial report together with the other financial information included in the interim filings fairly present in all material respects the financial condition, financial performance and cash flows of the issuer, as of the date of and for the periods presented in the interim filings.

4. Responsibility: The issuer’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (DC&P) and internal control over financial reporting (ICFR), as those terms are defined in National Instrument 52-109 Certification of Disclosure in Issuers’ Annual and Interim Filings, for the issuer.

5. Design: Subject to the limitations, if any, described in paragraphs 5.2 and 5.3, the issuer’s other certifying officer(s) and I have, as at the end of the period covered by the interim filings

(a) designed DC&P, or caused it to be designed under our supervision, to provide reasonable assurance that

(i) material information relating to the issuer is made known to us by others, particularly during the period in which the interim filings are being prepared; and

(ii) information required to be disclosed by the issuer in its annual filings, interim filings or other reports filed or submitted by it under securities legislation is recorded, processed, summarized and reported within the time periods specified in securities legislation; and

(b) designed ICFR, or caused it to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with the issuer’s GAAP.

5.1 Control framework: The control framework the issuer’s other certifying officer(s) and I used to design the issuer’s ICFR is the Internal Control – Integrated Framework (COSO Framework 2013) published by The Committee of Sponsoring Organizations of the Treadway Commission (COSO).

5.2 ICFR – material weakness relating to design: The issuer has disclosed in its interim MD&A for each material weakness relating to design existing at the end of the interim period

1

(a) a description of the material weakness;

(b) the impact of the material weakness on the issuer’s financial reporting and its ICFR; and

(c) the issuer’s current plans, if any, or any actions already undertaken, for remediating the material weakness.

5.3 Limitation on scope of design: N/A

6. Reporting changes in ICFR: The issuer has disclosed in its interim MD&A any change in the issuer’s ICFR that occurred during the period beginning on August 1, 2019 and ended on October 31, 2019 that has materially affected, or is reasonably likely to materially affect, the issuer’s ICFR.

Date: December 15, 2019

/s/ Stephen Burwash

Stephen Burwash

Chief Financial Officer

2