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 2020

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, 2020 and 2019
99.2	Management’s Discussion and Analysis for the three months ended October 31, 2020
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 14, 2020	/s/ Sébastien St-Louis
	President and Chief Executive Officer

EX-99.1

Exhibit 99.1

Table of Contents

Condensed Interim Consolidated Statements of Financial Position	1
Condensed Interim Consolidated Statements of Net 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 Condensed Interim Consolidated Financial Statements:
1. Description of Business	5
2. Basis of Preparation	5
3. New Accounting Policies and Pronouncements	5
4. Restricted Funds	5
5. Commodity Taxes Recoverable and Other Receivables	6
6. Inventory	6
7. Biological Assets	6
8. Investments in Associates & Joint Ventures	7
9. Long-term Investments	7
10. Property, Plant and Equipment	8
11. Intangible Assets	8
12. Warrant Liabilities	9
13. Convertible Debentures	9
14. Lease Liabilities	10
15. Term Loan	10
16. Share Capital	11
17. Common Share Purchase Warrants	12
18. Share-based Compensation	12
19. Net Loss per Share	14
20. Financial Instruments	14
21. Operating Expenses by Nature	16
22. Related Party Disclosure	16
23. Capital Management	17
24. Commitments and Contingencies	17
25. Fair Value of Financial Instruments	18
26. Non-Controlling Interest	19
27. Revenue from Sale of Goods	19
28. Segmented Information	20
29. Operating Cash Flow	20
30. Comparative Information	20
31. Income Taxes	20
32. Subsequent Events	21

Condensed Interim Consolidated Statements of Financial Position

(Unaudited, expressed in thousands of Canadian Dollars)

As at	Note		October 31, 2020			July 31, 2020
Assets
Current assets
Cash and cash equivalents			$	149,773		$	184,173
Restricted funds		4		31,424			8,261
Trade receivables		25		21,967			19,426
Commodity taxes recoverable and other receivables		5		13,298			16,733
Prepaid expenses – current				6,816			4,606
Inventory		6		74,597			64,933
Biological assets		7		10,474			7,571
				308,349			305,703
Non-current assets
Property, plant and equipment		10		283,716			285,366
Intangible assets		11		16,027			16,008
Investment in associate and joint ventures		8		75,232			76,306
Lease receivable				3,842			3,865
License and prepaid royalty – HIP				931			1,020
Long-term investments		9		2,627			3,209
Prepaid expenses				3,049			1,392
				693,773			692,869
Liabilities
Current liabilities
Accounts payable and accrued liabilities				38,520			32,451
Excise taxes payable				4,136			7,121
Warrant liabilities		12		2,717			3,450
Lease liability – current		14		4,817			4,772
Term loan		15		3,084			29,930
Onerous contract		24		4,763			4,763
				58,037			82,487
Non-current liabilities
Lease liability		14		23,574			24,344
Convertible debentures		13		29,925			28,969
Term loan		15		26,025			—
Other long-term liabilities				199			393
				137,760			136,193
Shareholders’ equity
Share capital		16		1,023,588			1,023,788
Share-based payment reserve		18		64,191			65,746
Warrant reserve		17		95,617			95,617
Contributed surplus				32,295			27,377
Accumulated deficit				(663,428	)		(659,231	)
Non-controlling interest		26		3,750			3,379
				556,013			556,676
			$	693,773		$	692,869

Commitments and contingencies (Note 24)

Subsequent events (Note 32)

Approved by the Board of Directors

/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 Net Loss and Comprehensive Loss

(Unaudited, expressed in thousands of Canadian Dollars, except per share data)

For the three months ended	Note		October 31, 2020			October 31, 2019
Revenue from sale of goods		27	$	41,300		$	19,297
Excise taxes				(11,887	)		(4,839	)
Net revenue from sale of goods				29,413			14,458
Ancillary revenue				55			41
Net revenue				29,468			14,499
Cost of goods sold		6,21		17,544			35,826
Gross (loss)/profit before fair value adjustments				11,924			(21,327	)
Realized fair value amounts on inventory sold		6		4,806			6,663
Unrealized gain on changes in fair value of biological assets		7		(11,096	)		(7,051	)
Gross profit/(loss)			$	18,214		$	(20,939	)
Operating expenses
Selling, general and administrative		21		11,916			15,973
Marketing and promotion				2,082			6,220
Share-based compensation		21		2,930			8,164
Research and development				1,033			1,744
Depreciation of property, plant and equipment		10		1,078			1,333
Amortization of intangible assets		11		331			1,666
Restructuring costs				525			3,722
Impairment of property, plant and equipment		10		803			702
Loss on disposal of property, plant and equipment				78			—
			$	20,776		$	39,524
Loss from operations				(2,562	)		(60,463	)
Revaluation of financial instruments gain				733			297
Share of loss from investment in associate and joint ventures		8		(1,073	)		(1,682	)
Loss on convertible debenture receivable				—			(2,627	)
Unrealized loss on investments		9		(587	)		(1,671	)
Realized gain on investments				—			17
Foreign exchange gain/(loss)				(461	)		(46	)
Interest and financing expenses				(2,307	)		(435	)
Interest income				412			571
Other income				1,648			—
Loss and comprehensive loss attributable to shareholders before tax			$	(4,197	)	$	(66,039	)
Income tax recovery				—			6,023
Net loss and comprehensive loss			$	(4,197	)	$	(60,016	)
Comprehensive loss attributable to:
Shareholders of HEXO Corp.				(4,197	)		(60,016	)
Non-controlling interest				—			—
			$	(4,197	)	$	(60,016	)
Net loss per share, basic and diluted			$	(0.01	)	$	(0.23	)
Weighted average number of outstanding shares
Basic and diluted		19		483,399,018			256,996,663

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 thousands of Canadian Dollars, except per share data)

For the three months ended	Note		Number of common shares		Share capital			Share-based payment reserve			Warrant reserves		Contributed surplus		Non- controlling interest		Accumulated deficit			Shareholders’ equity
Balance at July 31, 2019				256,981,753	$	799,706		$	40,315		$	60,433	$	—	$	1,000	$	(112,742	)	$	788,712
Exercise of stock options		18		80,030		174			(69	)		—		—		—		—			105
Equity-settled share-based payments		18,21		—		—			10,825			—		—		—		—			10,825
Net loss and comprehensive loss				—		—			—			—		—		—		(60,016)			(60,016)
Balance at October 31, 2019				257,061,783	$	799,880		$	51,071		$	60,433	$	—	$	1,000	$	(172,758)		$	739,626
Balance at July 31, 2020				482,465,748	$	1,023,788		$	65,746		$	95,617	$	27,377	$	3,379	$	(659,231)		$	556,676
June 2020 at the market offering		16		979,500		—			—			—		—		—		—			—
Issuance fees				—		(200	)		—			—		—		—		—			(200	)
Expiry of stock options				—		—			(4,918	)		—		4,918		—		—			—
Equity-settled share-based payments		18,21		—		—			3,363			—		—		—		—			3,363
Non-controlling interest		26		—		—			—			—		—		371		—			371
Net loss and comprehensive loss				—		—			—			—		—		—		(4,197	)		(4,197	)
Balance at October 31, 2020				483,445,248	$	1,023,588		$	64,191		$	95,617	$	32,295	$	3,750	$	(663,428	)	$	556,013

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

3

Condensed Interim Consolidated Statements of Cash Flows

(Unaudited, expressed in thousands of Canadian Dollars)

For the three months ended	Note		October 31, 2020			October 31, 2019
Operating activities
Total net loss			$	(4,197	)	$	(60,016	)
Items not affecting cash		29		3,023			37,173
Changes in non-cash operating working capital items		29		(4,930	)		(11,376	)
Cash used in operating activities				(6,104	)		(34,219	)
Financing activities
Issuance fees				(200	)		—
Proceeds from the exercise of stock options		18		—			105
Payments on term loan		15		(875	)		(872	)
Debt interest payments				(285	)		—
Lease payments		14		(1,107	)		(369	)
Interest paid on unsecured convertible debentures		13		(803	)		—
Cash used financing activities				(3,270	)		(1,136	)
Investing activities
Settlement of short-term investments				—			12,535
Restricted cash				(23,163	)		3,574
Proceeds from sale of property, plant and equipment		10		196			—
Acquisition of property, plant and equipment				(1,709	)		(45,248	)
Purchase of intangible assets				(350	)		(147	)
Investment in associate and joint ventures		9		—			(7,650	)
Cash used in investing activities				(25,026	)		(36,936	)
Cash used				(34,400	)		(72,291	)
Cash and cash equivalents, beginning of year				184,173			113,568
Cash and cash equivalents, end of year			$	149,773		$	41,277

Supplemental cashflow information in Note 29.

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

4

Notes to the Consolidated Financial Statements

For the three months ended October 31, 2020 and 2019

(Unaudited, expressed in thousands of Canadian Dollars, 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 licensed to produce and sell cannabis and cannabis products under the Cannabis Act. Its head office is located at 3000 Solandt Road Ottawa, 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”.

COVID-19

In March 2020, the World Health Organization declared the outbreak of COVID-19 a global pandemic. In response to the outbreak, governmental authorities in Canada and internationally have introduced various recommendations and measures to try to limit the pandemic, including travel restrictions, border closures, non-essential business closures, quarantines, self-isolations, shelters-in-place and social distancing. These measures remain in effect as at October 31, 2020. The production and sale of cannabis in Canada has been deemed as an essential service.

The Company continuously monitors the impact of the pandemic on all aspects of its business and operations and as of October 31, 2020, we have not observed any material changes.

2. Basis of Preparation

Statement of Compliance

These condensed interim consolidated financial statements (“interim consolidated financial statements”) have been prepared in accordance with International Accounting Standard 34, Interim Financial Reporting (“IAS 34”), using accounting policies consistent with International Financial Reporting Standards (“IFRS”) as issued by the International Accounting Standards Board and IFRS Interpretations Committee (“IFRIC”). These interim consolidated financial statements do not contain all the disclosures required in annual consolidated financial statements and should be read in conjunction with the amended and restated annual consolidated financial statements of the Company for the year ended July 31, 2020, prepared in accordance with IFRS.

The interim consolidated financial statements have been prepared using accounting policies consistent with those described in the amended and restated annual consolidated financial statements for the year ended July 31, 2020.

These interim consolidated financial statements were approved and authorized for issue by the Board of Directors on December 14, 2020.

3. New Accounting Policies and Pronouncements

New Accounting Policy

CAPTIVE INSURANCE

Insurance coverage for the Company’s directors and officers has been secured through a Captive Cell program (“the Captive Program”). The Captive Program was effected by entering into a participation agreement with registered insurer for the purposes of holding and managing the Company’s coverage funds through a separate cell account (the “Cell Captive”). The Company applies IFRS 10 Consolidated Financial Statements in its assessment of control as it relates to the Cell Captive. The Company’s accounting policy is to consolidate the Cell Captive. Currently the Captive Program funds are held as cash in the Cell Captive with the possibility of reinvestment into short-term investments and/or marketable securities in the future. As the funds cannot be transferred to other parts of the group without providing 6 month notice, the funds are disclosed as Restricted cash. The Company recognizes gains and losses from, interest, foreign exchange activity and/or fair market value adjustments through the Statement of Loss and Comprehensive Loss.

New Accounting Procurement Not Yet Effective

AMENDMENTS TO IAS 37: ONEROUS CONTRACTS AND THE COST OF FULFILLING A CONTRACT

The amendment specifies that the ‘cost of fulfilling’ a contract comprises the ‘costs that relate directly to the contract’. Costs that relate directly to a contract consist of both the incremental costs of fulfilling that contract or an allocation of other costs that relate directly to fulfilling contracts. The amendment is effective for annual periods beginning on or after January 1, 2022 with early application permitted. The Company is currently evaluating the potential impact of these amendments on the Company’s consolidated financial statements.

4. Restricted Funds

	October 31, 2020		July 31, 2020
	$		$
Debt service reserve account – term loan (Note 15)		8,424		8,191
Letters of credit, collateral and guarantees for purchases		—		70
Captive insurance		23,000		—
Total		31,424		8,261

5

5. Commodity Taxes Recoverable and Other Receivables

	October 31, 2020		July 31, 2020
Commodity taxes recoverable		9,028		12,821
Lease receivable – current1		630		630
Other receivables		3,640		3,282
Total		13,298		16,733

¹  A related party capital lease receivable related to Truss Limited Partnership (Note 22).

6. Inventory

	As at October 31, 2020
	Capitalized cost		Biological asset fair value adjustment		Total
Dried cannabis	$	34,948	$	19,562	$	54,510
Purchased dried cannabis		1,301		—		1,301
Extracts		6,360		92		6,452
Purchased extracts		6,467		—		6,467
Hemp derived distillate		566		—		566
Packaging and supplies		5,301		—		5,301
	$	54,943	$	19,654	$	74,597

	As at July 31, 2020
	Capitalized cost		Biological asset fair value adjustment		Total
Dried cannabis	$	29,702	$	16,981	$	46,683
Purchased dried cannabis		1,956		—		1,956
Extracts		4,828		385		5,213
Purchased extracts		5,977		—		5,977
Hemp derived distillate		566		—		566
Packaging and supplies		4,538		—		4,538
	$	47,567	$	17,366	$	64,933

Capitalized costs relating to inventory expensed and included in Cost of goods sold and amounted to $19,087 for the three months ended October 31, 2020 (October 31, 2019 – $8,278). The unrealized fair value gain on biological asset fair value adjustments on the consolidated statement of loss for the three months ended October 31, 2020 was $11,096 (October 31, 2019 – $7,051). The realized fair value amounts on inventory sold on the consolidated statement of loss was $4,806 for the three months ended October 31, 2020 (October 31, 2019 – $6,663). During the three months ended October 31, 2020, the Company reversed certain prior period impairment losses of $1,543 (October 31, 2019 – $nil) recorded in costs of sales on the consolidated statement of loss and $688 (October 31, 2019 – $nil) of fair value recorded in fair value amounts on inventory sold.

Total share-based compensation capitalized to inventory in the three months ended October 31, 2020 was $239 (October 31, 2019 – $2,661). Total depreciation capitalized to inventory in the three months ended October 31, 2020 was $3,724 (October 31, 2019 – $2,551).

7. Biological Assets

The Company’s biological assets consist of cannabis plants throughout the growth cycle; from mother plants to plants in propagation, vegetative and flowering stages. The changes in the carrying value of biological assets are as follows:

	For the three months ended October 31, 2020			For the year ended July 31, 2020
	$			$
Balance, beginning of year		7,571			7,371
Production costs capitalized		7,764			38,638
Net increase in fair value due to biological transformation and estimates		11,096			29,356
Transferred to inventory upon harvest		(15,957	)		(67,131	)
Disposal of biological assets		—			(663	)
Balance, end of period		10,474			7,571

The valuation of biological assets is based on an income approach (Level 3) 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 the point of harvest is adjusted based on the stage of growth at period-end.

The significant estimates used in determining the fair value of cannabis plants are as follows:

6

• yield per plant;

• stage of growth percentage estimated as 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.

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

Unobservable inputs	Input values		An increase or decrease of 5% applied to the unobservable input would result in a change to the fair value of approximately
	October 31, 2020	July 31, 2020	October 31, 2020		July 31, 2020
Weighted average selling price Derived from actual retail prices on a per product basis using the expected Flower and Trim yields per plant.	$3.00 per dried gram	$3.23 per dried gram	$	768	$	550
Yield per plant Derived from historical harvest cycle results on a per strain basis.	55 – 149 grams per plant	46 – 135 grams per plant	$	521	$	376
Stage of growth Derived from the estimates of stage of completion within the harvest cycle.	Average of 45% completion	Average of 43% completion	$	521	$	376
Waste Derived from the estimates of planned removal and naturally occurring waste within the cultivation and production cycle.	0%–21% dependent upon the stage within the harvest cycle	0%–21% dependent upon the stage within the harvest cycle		No material variance		No material variance

8. Investments in Associates & Joint Ventures

	For the three months ended October 31, 2020								For the year ended July 31, 2020
	Truss LP			Other		Total			Truss LP			Other			Total
	$			$		$			$			$			$
Opening Balance		74,966			1,340		76,306			51,786			1,063			52,849
Cash contributed to investment		—			—		—			29,155			1,231			30,386
Capitalized transaction costs		—			—		—			—			109			109
Share of net (loss)/gain		(1,454	)		380		(1,074	)		(5,975	)		(356	)		(6,331	)
Impairment		—			—		—			—			(707	)		(707	)
Ending Balance		73,512			1,720		75,232			74,966			1,340			76,306

Truss LP

The Truss Limited Partnership (“Truss LP”) is a joint arrangement between the Company and Molson Coors Canada (the “Partner”) and is a standalone entity, incorporated in Canada, with its own board of directors and an independent management team. The Partner holds 57,500 common shares representing 57.5% controlling interest in Truss with the Company holding 42,500 common shares and representing the remaining 42.5%. Truss is a private limited partnership and its principal operating activities consist of pursuing opportunities to develop non-alcoholic, cannabis-infused beverages (Note 22).

9. Long-term Investments

	Units		Fair value July 31, 2020		Investment		Change in fair value			Fair value October 31, 2020
			$		$		$			$
Level 1 Investments
Fire and Flower common shares		1,319,377		1,292		—		(317	)		975
Inner Spirit common shares		8,994,500		1,260		—		(270	)		990
Other long-term investments		n/a		517		5		—			522
Level 3 Investments
Segra International Corp.		400,000		140		—		—			140
Total				3,209		5		(587	)		2,627

7

10. Property, Plant and Equipment

Cost	Land			Buildings			Leasehold improvements		Cultivation and production equipment			Furniture, computers, vehicles and equipment			Construction in progress			Right-of-Use assets		Total
	$			$			$		$			$			$			$		$
At July 31, 2019		5,339			150,834			627		42,029			10,368			57,550			—		266,747
Additions		—			24,432			1,395		14,969			9,404			66,246			24,405		140,851
Disposals		(3,683	)		(18,260	)		—		(13,402	)		(909	)		(5,428	)		—		(41,682	)
Transfers		—			7,943			22,417		(10,135	)		8			(20,233	)		—		—
At July 31, 2020		1,656			164,949			24,439		33,461			18,871			98,135			24,405		365,916
Additions		—			885			87		629			127			2,242			—		3,970
Disposals		—			—			—		(15	)		—			—			—		(15	)
Transfers		—			—			3,964		877			—			(4,841	)		—		—
At October 31, 2020		1,656			165,834			28,490		34,952			18,998			95,536			24,405		369,871
Accumulated depreciation and impairments
At July 31, 2019		—			4,392			130		2,216			1,216			—			—		7,954
Depreciation		—			7,395			879		3,702			3,562			—			2,522		18,060
Transfers		—			—			—		271			(271	)		—			—		—
Disposals		—			(17,081	)		—		(7,435	)		(366	)		—			—		(24,882	)
Impairments		307			19,006			—		9,937			—			48,990			1,178		79,418
At July 31, 2020		307			13,712			1,009		8,691			4,141			48,990			3,700		80,550
Depreciation		—			1,848			407		1,014			927			—			606		4,802
Impairments		—			—			—		—			—			42			761		803
At October 31, 2020		307			15,560			1,416		9,705			5,068			49,032			5,067		86,155
Net book value
At July 31, 2019		5,339			146,442			497		39,813			9,152			57,550			—		258,793
At July 31, 2020		1,349			151,237			23,430		24,770			14,730			49,145			20,705		285,366
At October 31, 2020		1,349			150,274			27,074		25,247			13,930			46,504			19,338		283,716

In the three months ended October 31, 2020, the Company capitalized $3,724 (July 31, 2020 – $11,988) of depreciation to inventory. During the three months ended October 31, 2020, depreciation expensed to the consolidated statement of loss and comprehensive loss was $1,078 (July 31, 2020 – $6,072).

Capitalized borrowing costs to buildings in the three months ended October 31, 2020 were $617 (July 31, 2020 – $2,385) at an average interest rate of 6.5% (July 31, 2020 – 7.22%).

11. Intangible Assets

Cost	Cultivating and processing license		Brand		Software			Domain names		Patents			Total
	$		$		$			$		$			$
At July 31, 2019		116,433		8,440		3,558			585		1,231			130,247
Additions		—		—		702			—		875			1,577
Disposals		—		—		(550	)		—		(173	)		(723	)
At July 31, 2020		116,433		8,440		3,710			585		1,933			131,101
Additions		—		—		184			—		166			350
Disposals		—		—		(872	)		—		—			(872	)
At October 31, 2020		116,433		8,440		3,022			585		2,099			130,579
Accumulated amortization
At July 31, 2019		1,601		—		1,269			66		29			2,965
Amortization		3,167		—		697			59		16			3,939
Impairment		106,189		2,000		—			—		—			108,189
At July 31, 2020		110,957		2,000		1,966			125		45			115,093
Amortization		128		—		159			15		29			331
Disposals		—		—		(872	)		—		—			(872	)
At October 31, 2020		111,085		2,000		1,253			140		74			114,552

8

Net book value	Cultivating and processing license		Brand		Software		Domain names		Patents		Total
At July 31, 2019		114,832		8,440		2,289		519		1,202		127,282
At July 31, 2020		5,476		6,440		1,744		460		1,888		16,008
At October 31, 2020		5,348		6,440		1,769		445		2,025		16,027

Research and development expenses in the three months ended October 31, 2020 amounted to $1,033 (October 31, 2019 - $1,744).

12. Warrant Liabilities

	USD$25,000 Registered Direct Offering			USD$20,000 Registered Direct Offering			Total
	$			$			$
Balance as at July 31, 2020		1,917			1,533			3,450
Gain on revaluation of financial instruments		(408	)		(325	)		(733	)
Balance as at October 31, 2020		1,509			1,208			2,717

The warrants are classified as a liability because the exercise price is denominated in US dollars, which is different to the functional currency of the Company.

The warrant liabilities were revalued on October 31, 2020 using the Black-Scholes-Merton option pricing model (Level 2) using the following assumptions:

• stock price of USD$0.61;

• expected life of 2.5 years;

• $nil dividends;

• 96% volatility based upon historical data;

• risk-free interest rate of 0.24%; and

• USD/CAD exchange rate of 1.3318.

USD$20,000 Registered Direct Offering – Warrants

On October 31, 2020 the Company had 5,988,024 common share purchase warrants outstanding (Note 17) with an exercise price of USD$2.45 per share with a five year-term.

The loss on the revaluation of the warrant liability during the three months ended October 31, 2020 was $325 (October 31, 2019 - $nil) which is recorded in Other income and losses on the consolidated statements of loss and comprehensive loss.

USD$25,000 Registered Direct Offering – Warrants

On October 31, 2020 the Company had 7,485,032 common share purchase warrants outstanding (Note 17) with an exercise price of USD$2.45 per share with a five year-term.

The loss on the revaluation of the warrant liability during the three months ended October 31, 2020 was $408 (October 31, 2019 - $nil) which is recorded in Other income and losses on the consolidated statements of loss and comprehensive loss.

13. Convertible Debentures

Balance as at July 31, 2020	$	28,969
Interest expense		1,759
Interest paid		(803	)
Balance as at October 31, 2020	$	29,925

On December 5, 2019, the Company closed a $70,000 private placement of convertible debentures. The Company issued a total of $70,000 principal amount of 8.0% unsecured convertible debentures 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. Upon 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 five trading days immediately preceding the payment date.

9

In May 2020, the Company provided notice to all holders of the Debentures of an option to voluntarily convert their Debentures into units of the Company (the “Conversion Units”) at a discounted early conversion price of $0.80 (the “Early Conversion Price”) calculated based on the 5-day volume weighted average HEXO Corp. market prices (the “VWAP”) preceding the announcement. The VWAP unitized data from both the TSX and NYSE. Each Conversion Unit will provide the holder one common share and one half common share purchase warrant (with an exercise price of $1.00 and term of three years). The early conversion occurred in two phases, the first being on June 10, 2020 followed by the second and final phase June 30, 2020. During phases one and two, $23,595 principal amount, or approximately 34%, and $6,265 principal amount, or approximately 9% of the Debentures were converted under the Early Conversion Price into 29,493,750 and 7,831,250 common shares and 14,746,875 and 3,915,625 common share purchase warrants of HEXO Corp, respectively.

On October 31, 2020, there remains $40,140 in principal debentures, the net present value of the debt was $26,600 and the remaining balance of $13,540, was allocated to the conversion feature.

The accrued and unpaid interest as at October 31, 2020 was $220.

14. Lease Liabilities

The following is a continuity schedule of lease liabilities for the three months ended October 31, 2020:

	$
Balance as at July 31, 2020		29,116
Lease disposals		(419	)
Lease payments		(1,107	)
Interest expense on lease liabilities		801
Balance as at October 31, 2020		28,391
Current portion		4,817
Long-term portion		23,574

The Company’s leases consist of administrative real estate leases and a production real estate property. Effective August 1, 2020, the Company exited a real estate lease and the corresponding liability was written off for a realized a gain $419 recognized in Other income and losses on the consolidated statements of loss and comprehensive loss. The Company expensed variable lease payments of $871 for the three months ended October 31, 2020 (October 31, 2019 – $961).

The following table is the Company’s lease obligations over the next five fiscal years and thereafter as at October 31, 2020:

Fiscal year	2021		2022 – 2023		2024 – 2025		Thereafter		Total
	$		$		$		$		$
Lease obligations		3,415		9,267		8,749		31,082		52,513

15. Term Loan

Term Loan

On February 14, 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 provided the Company with up to $65,000 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 consisted of an up to $50,000 term loan (“Term Loan”) and up to a $15,000 in a revolving credit facility which since expired in the year end July 31, 2020. The credit facility matures in February 14, 2022. The Company may repay the loan without penalty, at any time and the loan is secured against the Company’s property, plant and equipment. The Company shall repay at minimum 2.5% of the initial amount drawn each quarter per the terms of the credit facility agreement. On February 14, 2019, the Company received $35,000 on the Term Loan and incurred financing costs of $1,347.

During the year ended July 31, 2020 the Company amended its credit facility which resulted in:

(i) The modification of financial covenants which require the Company to:

i. Maintain a Tangible Net Worth Ratio of not more than 1:00 to 1:00 at all times;

ii. Maintain a Cash Balance of more than $15,000 at all times; and

iii. Maintain certain EBITDA requirements (as defined in the Credit Facility Agreement) with respect to each Fiscal Quarter.

The Company was in compliance with the revised financial covenants noted above as at October 31, 2020.

On July 31, 2020 the Company was not in compliance with an administrative banking covenant which mandated that the Company does not utilize a Canadian dollar operating bank account with any institution other than the Lenders. The Company was subject to the

10

covenant 90 days after entering the syndicated credit facility on February 14, 2019. The Company received an amendment on October 29, 2020 allowing it to rectify this administrative breach by April 27, 2021. Therefore, since the amendment was received after July 31, 2020 and within the three months ended October 31, 2020 the Company classified its Term Loan as a current liability on July 31, 2020 and has classified the Term Loan between current and long term liabilities as appropriate at October 31, 2020. As at October 31, 2020 the Company continues working towards satisfying the terms of the above amendment.

In the three months ended October 31, 2020, the total interest expense and total interest capitalized were $346 (October 31, 2019 - $252) and $186 (October 31, 2019 - $511), respectively. The non-cash interest expense relating to the amortization of deferred financing costs was $100 for the three months ended October 31, 2020 (October 31, 2019 - $387).

The following table illustrates the continuity schedule of the term loan as at October 31, 2020 and July 31, 2020:

	October 31, 2020			July 31, 2020
Term loan	$			$
Opening balance		30,625			34,125
Repayments		(875	)		(3,500	)
Ending balance		29,750			30,625
Deferred financing costs		$			$
Opening balance		(695	)		(751	)
Additions		(46	)		(445	)
Amortization of deferred finance costs		100			501
Ending balance		(641	)		(695	)
Total term loan		29,109			29,930
Current portion		3,084			29,930
Long-term portion		26,025			—

16. Share Capital

(a) Authorized

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

(b) Consolidation Announcement

On October 30, 2020 the Company announced a proposed share consolidation of its common shares on basis of eight pre-consolidation common shares for one post-consolidation common share (8:1). The purpose of the proposed share consolidation is to increase the Company’s common share price to regain compliance with the USD$1.00 minimum share price continued listing standard of the New York Stock Exchange. The Consolidation will be effected by the filing of articles of amendment to the Company’s articles under the Business Corporations Act (Ontario) and is subject to shareholder approval by way of a special resolution. The Consolidation will be submitted to the Company’s shareholders for approval at an annual and special meeting of shareholders scheduled to be held on December 11, 2020 (Note 32). The Consolidation is also subject to the approval of the NYSE and the Toronto Stock Exchange.

(c) Issued and Outstanding

As at October 31, 2020, a total of 483,445,248 (July 31, 2020 – 482,465,748) common shares were issued and outstanding. No special shares have been issued or are outstanding.

			Number of shares		Share Capital
Balance at July 31, 2020				482,465,748	$	1,023,788
June 2020 at the market offering	(i	)		979,500		—
Issuance fees						(200	)
Balance at October 31, 2020				483,445,248	$	1,023,588

(i) June 2020 At-the-market (“ATM”) Offering

On June 16, 2020, the Company established an ATM equity program allowing the Company to issue up to $34,500 (or its U.S. dollar equivalent) of common shares to the public. The common shares sold through the ATM program were sold through the TSX, the NYSE and other marketplaces on which the common shares were listed, quoted or otherwise traded, at the prevailing market price at the time of sale. The program closed on July 31, 2020 and a total of approximately $34,551 (after foreign exchange gains) was generated through the issuance of 32,942,479 common shares in the year ended July 31, 2020. On July 31, 2020 a receivable of $883 remained for irrevocable sales which occurred prior to year end and subsequently settled on August 5, 2020, at which time the remaining 979,500 shares were issued.

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17. Common Share Purchase Warrants

The following table summarizes warrant activity during the three months ended October 31, 2020 and year ended July 31, 2020.

	October 31, 2020				July 31, 2020
	Number of warrants		Weighted average exercise price1		Number of warrants			Weighted average exercise price1
Outstanding, beginning of year		133,517,607	$	1.90		29,585,408		$	9.95
Expired		—		—		(15,559,483	)		12.25
Issued		—		—		123,905,556			1.24
Exercised		—		—		(4,413,874	)		0.97
Outstanding, end of year		133,517,607	$	1.90		133,517,607		$	1.90

¹  USD denominated warrant’s exercise price have been converted to the CAD equivalent as at the period end for presentation purposes.

The following is a consolidated summary of warrants outstanding as at October 31, 2020 and July 31, 2020.

	October 31, 2020				July 31, 2020
	Number outstanding		Book value		Number outstanding		Book value
Classified as Equity			$				$
June 2019 financing warrants
Exercise price of $15.79 expiring June 19, 2023		2,184,540		10,022		2,184,540		10,022
April 2020 underwritten public offering warrants
Exercise price of $0.96 expiring April 13, 2025		56,017,500		18,906		56,017,500		18,906
May 2020 underwritten public offering warrants
Exercise price of $1.05 expiring May 21, 2025		31,410,050		10,805		31,410,050		10,805
Conversion Unit warrants
Exercise price of $1.00 expiring June 10, 2023		14,746,875		11,426		14,746,875		11,426
Exercise price of $1.00 expiring June 30, 2023		3,915,625		1,928		3,915,625		1,928
Broker / Consultant warrants
Exercise price of $0.75 expiring November 3, 2021		175,618		78		175,618		78
Exercise price of $0.75 expiring March 14, 2022		94,282		66		94,282		66
Exercise price of $15.79 expiring June 19, 2023		61		—		61		—
Molson warrants
Exercise price of $6.00 expiring October 4, 2021		11,500,000		42,386		11,500,000		42,386
	120,044,551		95,617		120,044,551		95,617
Classified as Liability
Exercise price of USD$2.45 expiring December 31, 2024		7,485,032		1,509		7,485,032		1,917
USD$20m Registered Direct Offering Warrants
Exercise price of USD$2.45 expiring January 22, 2025		5,988,024		1,208		5,988,024		1,533
		13,473,056		2,717		13,473,056		3,450
		133,517,607		98,334		133,517,607		99,067

18. Share-based Compensation

Stock Options

The following table summarizes stock option activity during the three months ended October 31, 2020 and the year ended July 31, 2020.

	October 31, 2020					July 31, 2020
	Number of options			Weighted average exercise price		Number of options			Weighted average exercise price
Opening balance		30,014,703		$	4.07		24,288,919		$	5.87
Granted		2,660,031			0.97		11,946,027			1.62
Forfeited		(1,133,970	)		2.94		(4,582,440	)		5.55
Expired		(800,230	)		7.58		(1,521,271	)		9.16
Exercised		—			—		(116,532	)		1.15
Closing balance		30,740,534		$	3.76		30,014,703		$	4.07

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The following table summarizes the stock option grants during the three months ended October 31, 2020.

Options granted

Grant date

Exercise price ($)

Executives and directors

Non-executive employees

Total

Vesting terms

Expiry period

October 30, 2020

0.97

1,398,606

1,261,425

2,660,031

Terms A

10 years

Total

1,398,606

1,261,425

2,660,031

Vesting terms A – One-third of the options will vest on each of the one-year anniversaries of the date of grant over a three-year period.

The following table summarizes information concerning stock options outstanding as at October 31, 2020.

Exercise price	Number outstanding		Weighted average remaining life (years)		Number exercisable		Weighted average remaining life (years)
$0.58–$2.69		13,507,430		8.89		2,648,583		5.82
$3.30–$6.54		11,252,676		8.16		6,902,597		7.90
$7.13–$8.50		5,866,831		8.29		1,539,183		8.24
$8.84–$17.37		113,597		1.06		108,846		1.06
		30,740,534				11,199,209

Restricted Share Units (“RSUs”)    

Under the Omnibus Plan, the Board of Directors is authorized to issue RSUs 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 establishes 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 RSU activity during the three months ended October 31, 2020 and the year ended July 31, 2020.

	Units			October 31, 2020 Value of units on grant date		Units			July 31, 2020 Value of units on grant date
Opening balance		2,348,431		$	2.10		—		$	—
Granted		28,645			0.81		2,438,544			2.13
Forfeited		(139,204	)		3.30		(90,113	)		2.94
Closing balance		2,237,872		$	2.03		2,348,431		$	2.10

The following table summarizes the RSUs granted during the three months ended October 31, 2020.

			RSUs granted
Grant date	Unit value		Executive and directors		Non-executive employees		Vesting terms		Expiry period
October 30, 2020	$	0.79		28,645		—		Terms A		10 years
Total				28,645

Vesting terms A – One-third of the units vest on each of the one-year anniversaries for the first three years after the grant date.

Share-based Compensation

Share-based compensation is measured at fair value at the date of grant and are expensed over the vesting period (See Note 21 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 stock options and RSUs granted at grant date by applying the following assumptions:

	October 31, 2020			October 31, 2019
Exercise price (weighted average)	$	3.37		$	3.30
Stock price (weighted average)	$	5.28		$	3.03
Risk-free interest rate (weighted average)		1.53	%		1.62	%
Expected life (years) of options (weighted average)		5			5
Expected annualized volatility (weighted average)		80	%		84	%

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, 2020, the Company allocated to inventory $239 (October 31, 2019 – $2,661) of share-based compensation applicable to direct and indirect labour in the cultivation and production process.     

13

The cash-settled share-based compensation liability is presented in Other liabilities. The following table summarizes the Company’s equity-settled and cash-settled share-based payments for the three months ended October 31, 2020 and 2019.

	October 31, 2020			October 31, 2019
	$			$
Stock option share-based compensation		3,363			10,825
RSU share-based compensation		—			—
Total equity-settled share-based compensation		3,363			10,825
RSU share-based compensation		(194	)		—
Total cash-settled share-based compensation		(194	)		—

19. 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:

Instrument	October 31, 2020		July 31, 2020
Stock Options		30,794,534		29,996,748
RSUs		2,237,872		2,348,434
2019 June financing warrants		2,184,540		2,184,540
USD$25m registered direct offering warrants		7,485,032		7,485,032
USD$20m registered direct offering warrants		5,988,024		5,988,024
2020 April underwritten public offering warrants		56,017,500		56,017,500
2020 May underwritten public offering warrants		31,410,050		31,410,050
Warrants issued under conversion of debentures		18,662,500		18,662,500
Joint venture and Inner Spirit issued warrants		11,500,000		11,500,000
Convertible debenture broker/finder warrants		269,961		269,961
		166,550,013		165,862,789

20. Financial Instruments

Market Risk

Interest Risk

The Company has minimal exposure to interest rate risk related to any investments of cash and cash equivalents and its term loan. The Company may invest cash in highly liquid investments with short terms to maturity that would accumulate interest at prevailing rates for such investments. As at October 31, 2020, the Company had a term loan with a carrying value of $29,109 (July 31, 2020 – $29,930) (Note 15). All interest rates are fixed. An increase or decrease of 1% 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 is based on quoted market prices, which the shares of the investments can be exchanged for. The Company elected an early conversion option in the year ended July 31, 2020 in which $29,860 of the aggregate principal amount of its 8% unsecured convertible debentures (Note 13) were converted, which partially mitigates the Company’s Price Risk.

There would be no material impact (July 31, 2020 – no material impact) if the fair value of these financial assets were to increase or decrease by 10% as of October 31, 2020. The price risk exposure as at October 31, 2020 and July 31, 2020 is presented in the table below.

	October 31, 2020			July 31, 2020
	$			$
Financial assets		2,627			2,692
Financial liabilities		(2,717	)		(3,450	)
Total exposure		(90	)		(758	)

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, 2020, the Company was exposed to credit related losses in the event of non-performance by the counterparties.

14

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, and adult use sales are transacted with crown corporations, the Company has limited credit risk.

Cash and cash equivalents, certain restricted funds and short-term investments are held with four Canadian commercial banks that hold Dun and Bradstreet credit ratings of AA (July 31, 2020 – AA) and $145 is held with a credit union that does not have a publicly available credit rating. Certain restricted funds in the amount of $23,000 are managed by an insurer and are held as a cell captive within a Bermuda based private institution which does not have a publicly available credit rating, however the utilized custodian is Citibank which holds a credit rating of A+. The majority of the trade receivables balance is held with crown corporations of Quebec, Ontario and Alberta. Creditworthiness 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 three months ended October 31, 2020 is $34 (July 31, 2020—$35).

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 have similar 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 and trade receivables represents the maximum exposure to credit risk and as at October 31, 2020; this amounted to $203,164 (July 31, 2020 – $211,860).

The following table summarizes the Company’s aging of trade receivables as at October 31, 2020 and July 31, 2020:

	October 31, 2020		July 31, 2020
	$		$
0–30 days		14,089		15,253
31–60 days		6,976		2,972
61–90 days		199		412
Over 90 days		703		789
Total		21,967		19,426

Economic Dependence Risk

Economic dependence risk is the risk of reliance upon a select number of customers, which significantly impacts the financial performance of the Company. For the three months ended October 31, 2020, the Company’s recorded sales to the crown corporations; Société québécoise du cannabis (“SQDC”) the Ontario Cannabis Store (“OCS”) and the Alberta Gaming, Liquor and Cannabis agency (“ALGC”) representing 54%, 15% and 18%, respectively of total applicable periods gross cannabis sales (October 31, 2019 – three crown corporations representing 93%).

The Company holds trade receivables from the crown corporations SQDC, OCS and the AGLC representing 32%, 29% and 13% of total trade receivable, respectively as at October 31, 2020 (July 31, 2020 – the two crown corps SQDC and OCS representing 47% and 25% of total trade receivables, respectively).

Liquidity Risk

Liquidity risk is the risk that the Company will not be able to meet its financial obligations as they come due. The Company manages its liquidity risk by reviewing on an ongoing basis its capital requirements. As at October 31, 2020, the Company had $149,773 (July 31, 2020 – $184,173) of cash and cash equivalents and $21,967 (July 31, 2020 – $19,426) in trade receivables.

The Company has current liabilities of $58,037 and contractual commitments of $10,488 due before July 31, 2022. The Company’s existing cash and cash equivalents and trade receivables are expected to provide sufficient liquidity to meet cash outflow requirements over the next twelve months.

The Company’s success in executing on its longer-term strategy is dependent upon its ability to fund the repayment of existing borrowings and to generate positive cash flows from operations. If additional liquidity is required, management plans to secure the necessary financing through the issuance of new public or private equity or debt instruments. There is no assurance that additional future funding will be available to the Company, or that it will be available on terms which are acceptable to management.

The carrying values of cash and cash equivalents, trade receivables and accounts payable and accrued liabilities approximate their fair values due to their short-term to maturity.

Foreign Currency Risk

On October 31, 2020, the Company holds certain financial assets and liabilities denominated in United States Dollars (“USD”) which consist of cash and cash equivalents, and warrant liabilities. The Company does not currently use foreign exchange contracts to hedge its exposure of its foreign currency cash flows as management has determined that this risk is not significant. The Company closely monitors relevant economic information to minimize its net exposure to foreign currency risk. The Company is exposed to unrealized foreign exchange risk through its cash and cash equivalents. As at October 31, 2020, approximately $34,755 USD ($46,286) (July 31,

15

2020 – $42,981 USD ($57,652)) of the Company’s cash and cash equivalents was in USD. A 1% change in the foreign exchange rate would result in a change of $463 to the unrealized gain or loss on foreign exchange or on the gain or loss on financial instrument revaluation of USD denominated warrants.

21. Operating Expenses by Nature

The following table disaggregates the selling, general and administrative expenses as presented on the Statement of Loss and Comprehensive Loss into specified classifications based upon their nature:

For the three months ended	October 31, 2020		October 31, 2019
	$		$
Salaries and benefits		3,765		4,169
Selling, general and administrative		2,719		4,341
Consulting		858		2,349
Professional fees		2,481		2,777
Facilities		1,975		1,397
Travel		118		940
Total		11,916		15,973

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

For the three months ended	October 31, 2020		October 31, 2019
	$		$
General and administrative related share-based compensation		2,722		7,946
Marketing and promotion related share-based compensation		208		218
Total operating expense related share-based compensation		2,930		8,164
Share based compensation capitalized to inventory		239		2,661
Total share-based compensation		3,169		10,825

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

For the three months ended	October 31, 2020		October 31, 2019
	$		$
General and administrative related wages and benefits		3,765		4,169
Marketing and promotion related wages and benefits		1,354		3,939
Research and development related wages and benefits		564		981
Total operating expense related wages and benefits		5,683		9,089
Wages and benefits capitalized to inventory		4,270		6,132
Total wages and benefits		9,953		15,221

22. 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.

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

For the year ended	October 31, 2020		October 31, 2019
	$		$
Salary and/or consulting fees		768		792
Termination benefits		525		616
Bonus compensation		—		42
Stock-based compensation		1,927		5,351
Total		3,220		6,801

Belleville Complex Inc.

The Company holds a 25% interest in Belleville Complex Inc. (“BCI”) with the related party Olegna Holdings Inc., a company owned and controlled by a director of the Company, holding the remaining 75% in BCI. BCI purchased a configured 2,004,000 sq. ft. facility through a $20,279 loan issued and repaid during the year ended July 31, 2019. The Company will be the anchor tenant for a 15-year, with an option to renew for 15 years and additional space to rent. The Company has also subleased a portion of the space to Truss Limited Partnership (Note 8). Consideration for the 25% interest on the joint venture is deemed $nil. The carrying value of BCI as at October 31, 2020 is $nil (July 31, 2020 - $nil).

16

The Company leases a space in Belleville from a related party BCI, that supports its manufacturing activities and is based in Belleville, Ontario. Under this lease arrangement, the Company incurred $1,075 in lease and operating expenses during the three months ended October 31, 2020 (October 31, 2019 - $907). This lease liability is recognized on the Company’s balance sheet under IFRS 16 (Note 14).

Truss LP

The Company owns a 42.5% interest in Truss LP and accounts for the interest as an investment in an associate (Note 8).

The Company subleases section of its Belleville lease to Truss LP this sublease is recognized as a finance lease receivable on the Company’s balance sheet (Note 5). The Company recognizes a recovery on its partnership with Truss LP in Other receivables and Other income.

Under a Temporary Supply and Services Agreement (“TSSA”) with Truss LP, the Company produces and packages cannabis infused beverages in the CIB Facility (located at the Belleville Facility) and in the Gatineau Facility, an markets and sells beverages for the legal adult-use markets in Canada, in each case subject to the terms of its regulatory approvals and applicable laws, all for its own account and as a stand-alone division of HEXO. Truss LP applied to be a licensed producer of Cannabis during the period, but until the time where Truss LP obtains all regulatory approval required under the Cannabis Act (Canada), the TSSA will remain in place. Under the TSSA, Truss LP will be an exclusive supplier to the Company of all property and all services required to carry on the business, other than specific services which are required to be provided by HEXO. As a result of this arrangement, there is a receivable from Truss of $3,610 at October 31, 2020 (July 31, 2020 – $3,405). During the three months ended October 31, 2020, the Company purchased $4,289 (October 31, 2019 – $nil) of raw materials from Truss LP under the arrangement and received $1,220 (October 31, 2019 – $nil) of Income.

23. Capital Management

The Company’s objectives when managing capital are to (1) safeguard their ability to continue as a going concern, so that they can continue to provide returns for shareholders and benefits for other stakeholders, and (2) maintain an optimal capital structure to reduce the cost of capital.

Management defines capital as the Company’s shareholders’ equity and interest-bearing debt. 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, with the exception of covenants related to the Company’s Term Loan as set out in Note 15.

As at October 31, 2020, total managed capital was $556,013 (July 31, 2020 – $556,676).

24. 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 fiscal years and thereafter are as follows:

July 31, 2022	$	10,488
July 31, 2023		3,666
July 31, 2024		3,444
July 31, 2025		3,444
July 31, 2026		2,450
Thereafter		19,274
	$	42,766

See Note 14 for recognized contractual commitments regarding the Company’s lease obligations under IFRS 16.

Letter of Credit

On August 21, 2019, the Company entered into a five-year letter of credit with a Canadian financial institution to provide a maximum of $250 that amortizes $50 annually until its expiry on July 14, 2024. The letter of credit has not been drawn upon as at October 31, 2020. As at October 31, 2020, the letter of credit is secured by a combination of the Company’s credit facility (Note 15).

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.

17

As of October 31, 2020, the Company is named as a defendant in securities class actions that have been filed in superior courts of the provinces of Quebec and Ontario and in the Supreme Court of the State of New York and the U.S. District Court for the Southern District of New York. One or more of the Company’s current and/or former officers and directors, and/or certain underwriters of past public offerings by the Company, are also named as defendants in certain of the actions. The lawsuits assert causes of action under Canadian and U.S. securities legislation, and at common law, in connection with statements made by the defendants that are alleged to have been materially false and/or misleading statements and their alleged failure to disclose material adverse facts. The alleged misrepresentations relate to, among other things, the Company’s forward-looking information, including but not limited to the Company’s forecast revenues for Q4 2019 and fiscal 2020, its inventory, “channel stuffing” and the Company’s supply agreement with the Province of Quebec. As at the date hereof, the amounts claimed for damages in each of these actions have not been quantified. These actions are in a preliminary stage and have not yet been certified as class actions.

As of October 31, 2020, the Company was named as a defendant in a proposed consumer protection class action filed on June 18, 2020 in the Court of Queens’ Bench in Alberta on behalf of residents of Canada who purchased cannabis products over specified periods of time. Several other licensed producers are also named as co-defendants in the action. The lawsuit asserts causes of action, including for breach of contract and breach of consumer protection legislation, arising out of allegations that the Tetrahydrocannabinol (THC) or Cannabidiol (CBD) content of medicinal and recreational cannabis products sold by the Company and the other defendants to consumers was different from what was advertised on the products’ labels. Many of the cannabis products sold by the Company and other defendants were allegedly sold to consumers in containers using plastic bottles or caps that may have rapidly absorbed or degraded the THC or CBD content within them. By allegedly over-representing the true amount of THC or CBD in the products, the plaintiff claims that consumers would be required to consume substantially more product than they otherwise would have in order to obtain the desired effects or, in the alternative, would have consumed the product without obtaining the desired effects. The action has not yet been certified as a class action.

While the Company cannot predict the outcome of the actions discussed above, it intends to assert all available defences and vigorously defend these proceedings. Defending litigation, whether or not meritorious, is time-consuming for our management and detracts from our ability to fully focus our internal resources on our business activities. In addition, legal fees and costs incurred in connection with such activities may be significant and we could, in the future, be subject to judgments or enter into settlements of claims for significant monetary damages. Further, the Company’s underwriting agreement with the underwriters contains contractual indemnification provisions that may require the Company to indemnify the underwriters with respect to the claims against them and their legal costs of defending the actions. A decision adverse to our interests could result in the payment of substantial damages and could have a material adverse effect on our cash flow, results of operations and financial position, and the limits of available insurance may be insufficient to cover our eventual liability.

ONEROUS CONTRACT

During the year ended July 31, 2020, the Company recognized a $4,763 onerous contract provision related to a fixed price supply agreement for the supply of certain cannabis products. The supply agreement is currently the subject of legal proceedings as disclosed above. The costs and purchase obligations under the contract exceed the economic benefits expected to be received. The related loss has been included in Other gains and losses. The onerous contract liability remains as at October 31, 2020.

25. Fair Value of Financial Instruments

The carrying values of the financial instruments as at October 31, 2020 are summarized in the following table:

	Amortized cost		FVTPL		Financial liabilities designated as FVTPL		Total
Assets		$		$		$		$
Cash and cash equivalents		149,773		—		—		149,773
Restricted funds		31,424		—		—		31,424
Trade receivables		21,967		—		—		21,967
Commodity taxes recoverable and other receivables		13,298		—		—		13,298
Lease receivable – long term		3,842		—		—		3,842
Long – term investments		—		2,627		—		2,627
Liabilities		$		$		$		$
Accounts payable and accrued liabilities		38,520		—		—		38,520
Warrant liability		—		2,717		—		2,717
Lease liability – current		4,817		—		—		4,817
Lease liability – long term		23,574		—		—		23,574
Convertible debentures		29,925		—		—		29,925
Term loan – current		3,084		—		—		3,084
Term loan – long term		26,025		—		—		26,025
Other long-term liabilities		—		—		199		199

18

The carrying values of the financial instruments as at July 31, 2020 are summarized in the following table:

	Amortized cost		FVTPL		Financial liabilities designated as FVTPL		Total
Assets		$		$		$		$
Cash and cash equivalents		184,173		—		—		184,173
Restricted funds		8,261		—		—		8,261
Trade receivables		19,426		—		—		19,426
Commodity taxes recoverable and other receivables		16,773		—		—		16,773
Lease receivable – long term		3,865		—		—		3, 865
Long – term investments		—		3,209		—		3,209
Liabilities		$		$		$		$
Accounts payable and accrued liabilities		32,451		—		—		32,451
Warrant liability		—		3,450		—		3,450
Lease liability – current		4,772		—		—		4,772
Lease liability – long term		24,344		—		—		24,344
Convertible debentures		28,969		—		—		28,969
Term loan – current		29,930		—		—		29,930
Other long-term liabilities		—		—		393		393

The carrying values of cash and cash equivalents, restricted funds, short term investments, trade and other receivables, lease receivables, accounts payable and accrued liabilities, lease liabilities and term loan approximate their fair values due to their relatively short periods to maturity.

26. Non-Controlling Interest

The following table summarizes the information relating to the Company’s non-controlling interests, before intercompany eliminations.

	October 31, 2020			July 31, 2020
Current assets	$	—		$	—
Non-current assets		7,825			7,455
Current liabilities		—			—
Non-current liabilities		—			—
Non-controlling interest (%)		40	%		40	%
Non-controlling interest	$	3,750		$	3,379

The Company holds a 60% interest in Keystone Isolation Technology Inc. (“KIT”) which is intended to principally operate out of Belleville Facility, and the remaining 40% represents the non-controlling interest held by Chroma Global Technologies Ltd (the “Partner”). Under the terms of the shareholder agreement, the Company has contributed cash of $4,075 (USD$3,100), subject to foreign exchange rates. The non-controlling interest value of $3,750 represents the value of the Partners contribution in kind for their respective equity interest in the entity. During the three months ended October 31, 2020, the Partner contributed capital equipment in-kind of $371 as required under the terms of the shareholders agreement. There remains approximately $325 of an in-kind commissioning contribution to satisfy the acquisition terms of the shareholders agreement. KIT had no revenues or expenses during the three months ended October 31, 2020 and the year ended July 31, 2020.

27. Revenue from Sale of Goods

The Company disaggregated it’s revenues from the sale of goods between sales of cannabis beverages (“Cannabis beverage sales”) and dried flower, vapes, and other cannabis products (“Cannabis sales excluding beverages”). The Company’s cannabis beverage sales are derived from the Cannabis Infused Beverage (“CIB”) line, which was established in order to manufacture, produce and sell cannabis beverage products. CIB operates under the Company’s cannabis licensing and in compliance with Health Canada and the Cannabis Act’s regulations. The Company has assessed the beverage revenue stream to be realized by the Company and presented on a gross basis as defined under IFRS 15. The Company will continue to operate CIB until Truss has obtained its independent licensing to manufacture and sell cannabis products, at which point these operations will shift to Truss.

For the three months ended			October 31, 2020						October 31, 2019
Revenue stream	Cannabis sales excluding beverages		Cannabis beverage sales		Total		Cannabis sales excluding beverages		Cannabis beverage sales		Total
	$		$		$		$		$		$
Retail		35,898		3,302		39,200		18,250		—		18,250
Medical		574		—		574		1,047		—		1,047
Wholesale		401		—		401		—		—		—
International		1,125		—		1,125		—		—		—
Total revenue from sale of goods		37,998		3,302		41,300		19,297		—		19,297

19

Total revenue from the sale of goods is presented net of provisions for sales returns and price concessions. During the three months ended October 31, 2020, the Company incurred $786 (October 31, 2019 - $1,978) of net sales provisions and price concessions.

28. Segmented Information

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

29. Operating Cash Flow

The following items comprise the Company’s operating cash flow activity for the periods herein.

For the three months ended	October 31, 2020			October 31, 2019
	$			$
Items not affecting cash
Income tax recovery		—			(6,023	)
Depreciation of property, plant and equipment		1,078			1,333
Depreciation of property, plant and equipment in cost of sales		2,406			—
Amortization of intangible assets		331			1,666
Loss/(gain) on convertible debentures		—			2,627
Unrealized gain on changes in fair value of biological assets		(11,096	)		(7,051	)
Unrealized fair value adjustment on investments		587			1,671
Amortization of deferred financing costs		54			49
Accrued interest income		2,579			—
Gain on investment		—			(17	)
License depreciation and prepaid royalty expenses		89			125
Write-off of inventory and biological assets		—			2,838
Write (up)/down of inventory to net realizable value		(1,543	)		23,041
Realized fair value amounts on inventory sold		4,806			6,663
Loss from investment in associate and joint ventures		1,073			1,682
Share-based compensation		2,930			8,164
Revaluation of financial instruments (gain)/loss		(733	)		(297	)
Impairment losses		803			702
Loss on disposal of property, plant and equipment		78			—
Gain on exit of lease		(419	)		—
Total items not affecting cash		3,023			37,173
Changes in non-cash operating working capital items
Trade receivables		(2,541	)		11,678
Commodity taxes recoverable and other receivables		3,458			(211	)
Prepaid expenses		(3,768	)		(2,044	)
Inventory		(12,688	)		(32,823	)
Biological assets		8,193			7,150
Accounts payable and accrued liabilities		5,401			1,421
Excise taxes payable		(2,985	)		3,453
Total non-cash operating working capital		(4,930	)		(11,376	)

Additional supplementary cash flow information is as follows:

For the	three months ended July 31, 2020		year ended July 31, 2020
	$		$
Property, plant and equipment in accounts payable		4,898		19,751
Right-of-use asset additions		—		24,405
Capitalized borrowing costs		617		2,385
Interest paid		1,068		2,527

30. Comparative Information

The Company has reclassified Impairment loss on inventory within Cost of goods sold, to conform with the current presentation. The amount is disclosed in Note 6. The Company has reclassified purchased extracts inventory from extracts to conform with the current presentation, the amount is disclosed in Note 6.

31. Income Taxes

The Company’s effective income tax rate was nil% for the three months ended October 31, 2020 (October 31, 2019 – 8.8%). The effective tax rate is different than the statutory rate primarily due to the non-recognition of deferred tax assets.

20

32. Subsequent Events

Approval of Share Consolidation

On December 11, 2020, by special resolution requiring approval by not less than two-thirds (66 2/3%) of the votes casted during its annual general and special meeting of shareholders, the Company’s shareholders authorized and approved the filing of articles of amendment to consolidate the Company’s issued and outstanding common shares on the basis of four (4) old common shares for one (1) new common share (the “Consolidation”). The Consolidation will become effective by the filing of articles of amendment to the Company’s articles under the Business Corporations Act (Ontario) on December 15, 2020, and it is expected it will be implemented soon thereafter. The Company will not be issuing fractional post-Consolidation common shares in connection with the Consolidation. Where the Consolidation would otherwise result in a shareholder being entitled to a fractional common share, the number of post Consolidation common shares issued to such shareholder shall be rounded up or down to the nearest whole number of common shares. Fractional interests of 0.5 or greater will be rounded up to the nearest whole number of common shares and fractional interests of less than 0.5 will be rounded down to the nearest whole number of common shares.

21

EX-99.2

Exhibit 99.2

Management’s Discussion & Analysis

Table of Contents

INTRODUCTION & DISCLAIMERS	3
COMPANY OVERVIEW	4
VISION, MISSION AND VALUES	5
STRATEGIC PRIORITIES	5
OPERATIONAL EXCELLENCE	7
INNOVATION	7
MARKET LEADERSHIP	8
HEXO GROUP OF FACILITIES	10
CANADIAN CANNABIS BUSINESS	11
HEXO USA	12
COVID-19 UPDATE	13
CORPORATE SOCIAL RESPONSIBILITY	14
OTHER CORPORATE HIGHLIGHTS AND EVENTS	14
OPERATIONAL AND FINANCIAL HIGHLIGHTS	18
SUMMARY OF RESULTS	19
ADJUSTED EBITDA	27
QUARTERLY RESULTS SUMMARY	28
FINANCIAL POSITION	28
LIQUIDITY AND CAPITAL RESOURCES	29
CAPITAL RESOURCES	30
CAPITALIZATION TABLE	31
OFF-BALANCE SHEET ARRANGEMENTS AND CONTRACTUAL  OBLIGATIONS	32
FINANCIAL RISK MANAGEMENT	33
CRITICAL ACCOUNTING ASSUMPTIONS	35
RELATED PARTY TRANSACTIONS	35
INTERNAL CONTROLS OVER FINANCIAL REPORTING	36
RISK FACTORS	39

2    MD&A

Management’s Discussion and Analysis of Financial Condition and Results of Operations for the three months ended October 31, 2020

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

Introduction & Disclaimers

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, 2020. 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 interim consolidated financial statements for the three months ended October 31, 2020 and our audited consolidated financial statements for the year ended July 31, 2020. Our consolidated financial statements are prepared in accordance with International Financial Reporting Standards (“IFRS”) as issued by the International Accounting Standards Board.

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, as well as statements with respect to:

• 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 partnerships 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 expected production capacity of the Company;

• the expected sales mix of offered products;

• the development and authorization of new products, including cannabis edibles, beverages and extract products (“cannabis derivatives”), and the timing of launch of such new products;

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

• the Company’s business ventures with Molson Coors through each of the Truss entities 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 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 filing of trademark and patent applications and the successful registration of same;

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

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

• securities class action and other litigation to which the Company is subject;

• the Company’s ability to remain listed on the NYSE and the impact of any actions it may be required to take to remain listed; and

• the impact of the COVID-19 coronavirus pandemic on the operations of the Company.

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, improvements or buildout of its owned and leased facilities on time and on budget;

• 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;

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

• the absence of material adverse changes in the industry or global economy, including as a result of the COVID-19 pandemic.

3    MD&A

Although any 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 14, 2020.

Company Overview

HEXO is a consumer-packaged goods (“CPG”) cannabis company. Our goal is to become a global cannabis industry leader with one of the highest market shares in Canada. We currently hold the top four market share position nationally for adult use cannabis¹. Our global growth strategy is to leverage our regulatory moat to create unique consumer experiences through regulated molecules that can be inserted in any consumable product through advanced platform technologies. Our path to market is to partner with existing fortune 500 CPG companies to introduce Powered by HEXO products across their existing manufacturing and distribution infrastructure. Our first partner is Molson Coors with whom we’ve already achieved the number one market share position in Canada for cannabis beverages². We’ve also begun CBD beverage manufacturing and distribution in Colorado, powered by HEXO leveraging Molson Coors infrastructure in the USA. We look forward to the US legal landscape evolving to permit national distribution, where our advanced knowledge of the technology of cannabis, paired with Molson’s consumer insights and distribution will create significant operating leverage.

In Canada, HEXO is focused on selling adult use cannabis to consumers who count on us for safe and reputable, high-quality products. We have taken the HEXO brand international with our medical cannabis product offerings in Israel. We have developed an extensive and award-winning product range, and gained valuable experience and knowledge, while serving our customers.

HEXO’s operations are split between Quebec and Ontario, we are licensed to cultivate, process, market, research and develop and sell adult-use and medical cannabis, cannabis-derived extracts and derivative products in Canada under the provisions of the Cannabis Act and globally where applicable international and Canadian regulations permit.

HEXO believes in a few years a handful of companies will control a significant portion of the global market share, and that we are positioning ourselves to be one of these companies³. We believe that having strong standards of operational excellence, executing at scale, growing low-cost high-quality cannabis, having strong CPG partnerships and becoming profitable in Canada is critical to attaining global success. Our presence covers over 95% of the Canadian population through most major Canadian markets via our governmental and private retail distribution agreements and five-year contract as a preferred supplier with Quebec’s Société québécoise du cannabis (“SQDC”).

As at the date of this MD&A, the cultivation, manufacturing and sale of medical and adult-use cannabis have been recognized as essential services across Canada. We remain vigilant to continue delivering our products in a safe and reliable manner to our partners, medical patients and customers. All of the Company’s facilities in Canada and internationally continue to be operational and we continue to work closely with local, national and international government authorities to ensure that we are following the required protocols and guidelines related to the COVID-19 pandemic within each region.

We are currently dual listed on the TSX and the NYSE⁴ and in doing so have increased our 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 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 (Revised) - Issuers with U.S. Marijuana-Related Activities and will only do so in the future to the extent fully legal under all applicable U.S. federal or state laws.

¹  Derived from recently available financial information of the Company’s top 5 direct competitors’ Canadian adult-use net revenue.

²  Source: https://www.bnnbloomberg.ca/cannabis-canada-weekly-slow-start-for-pot-drinks-sentiment-shifts-for-u-s-global-legalization-1.1532064

³  Based on: (i) analyst commentary on the development of the cannabis industry in Canaccord Genuity Corp.’s report entitled “Cannabis Monthly, February 2019”, dated February 20, 2019; (ii) the example of how the alcohol industry developed and consolidated post-prohibition, general commentary and analysis about the adult-use cannabis industry to the effect that, as a similar regulated industry, it can be expected to develop and consolidate in a similar fashion, and evidence that this is currently the trend in the industry; (iii) the Company’s review of existing and developing cannabis sales by other licensed producers since the legalization of the adult-use cannabis market; (iv) the Company’s current position in the adult-use market and its belief as to its competitive advantages arising from: (A) being a market leader in Quebec, its expansion into other select markets in Canada particularly Ontario, and increasing market share of sales in those markets; (B) offering a selection of products at a variety of price points; (C) maintaining a competitive cost structure; and (D) its joint venture with Molson Coors.

⁴  On April 7, 2020 the Company was no longer in compliance with the NYSE’s US$1.00 share price continued listing standard (the “Price Listing Standard”) as a result of the average closing price of its common shares on the NYSE falling below US$1.00 for a consecutive 30 trading-day period. See section ‘Non-Compliance with NYSE Listing Notification.’

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Vision, Mission and Values

MISSION

To enhance people’s enjoyment of life by creating globally trusted brands of easy-to-use and easy-to-understand cannabis products.

VISION

To create branded, consistent, quick onset and offset cannabis experiences for sleep, sport, sex and fun delivered through a full range of “Powered by HEXO” products developed in-house and in partnership with Fortune 500 partners.

OUR VALUES

Execution - deliver on our commitments;

Collaboration - work towards our common goals, grow through radical and respectful honesty and share in our collective success;

Innovation - innovate through our products and our business solutions. We take risks, learn, grow from failure and continuously strive for excellence; and

Integrity - do the right thing, for our people, our shareholders, our consumers, our community and our planet.

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 which allows us to offer adult-use consumers and medical cannabis patients uncompromising quality and safety.

Our strategy is built on three pillars: operational excellence, innovation and market leadership. In striving to achieve operational excellence our immediate focus remains on effective demand planning and production. We are continuously looking to implement more effective techniques to streamline operations, align production with market demand, lower production costs, drive meaningful improvements in yields and improve inventory velocity; all as a part of the Company’s focus on profitability. The innovation department consistently working towards developing modern, cutting edge cannabis products for the Canadian cannabis derivatives market. We plan to invest in even better, science-backed cannabis experiences and platform technology, as we continue to develop advanced ingredients formulations for use with our partners. To expand our market leadership, we will use our dominant position in the province of Quebec to strengthen distribution in select major markets across the country with our brands, UP Cannabis, HEXO Plus, HEXO and Original Stash to drive market share and profitability.

We adapt and adjust our approach, as needed, to achieve our goals under these three pillars in response to the evolving cannabis market and acquired data. An example of this is the newest brand offerings by the Company, HEXO Plus which was conceived and launched into Quebec, in response to strong market demand for high THC content cannabis products⁵ and subsequently, the reintroduction of UP Cannabis to the market, also catering to the 20%+ THC market.

Truss Beverage Co.

We sought from the early onset of legalized adult-use cannabis in Canada to position ourselves to meet the cannabis beverage market head on. This was accomplished through the formation of Truss Limited Partnership (“Truss” or “Truss Beverage Co.”) our Canadian business venture with Molson Coors Canada (“Molson Canada”). Currently, offering one of the widest portfolios of cannabis infused beverages and extract products in the Canadian market, these “Powered by HEXO^TM” beverages have begun to be rolled out across select Canadian provinces.

The average consumers appetite for smoke free alternatives to cannabis consumption⁶ continues to shift and solidify through the introduction of Cannabis 2.0 products into Canada. HEXO believes that through Truss beverages, a range of experiences from high CBD found in Veryvell sparkling flavored water to the latest offering XMG, which offers 10mg of THC per beverage well positions the Company meet this demand through a well-balanced, broad suite of beverage offerings.

Truss is committed to developing and producing a range of cannabis beverages that focus on great taste, consistency and choice for consumers. The CBD and THC products within the portfolio have been developed with consumer input at every stage of development. The current portfolio consists of the following five brands:

Little Victory: Vibrant, naturally flavoured sparkling beverages to toast to any of life’s little victories;

House of Terpenes: A range of sparkling tonics with botanically sourced terpenes that celebrate the flavours of cannabis;

Mollo: Crisp with an easy drinking taste;

Veryvell: A complete line-up of products to support your self-care journey; and

XMG: Bold and high intensity flavoured beverages.

⁵  Based upon the Company’s analysis of target demographics and internal sales velocity within the province of Quebec.

⁶  Surveyed likely users of adult-use cannabis responded that they were 37% inclined to consume legal cannabis infused beverages per Deloitte’s “Nurturing new growth: Canada gets ready for Cannabis 2.0” report.

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During the period, additional beverage products under the Mollo and House of Terpenes brand were made available for public consumption, the release of Little Victory, XMG and additional Veryvell products followed thereafter.

The Truss beverages are produced and distributed from HEXO’s Belleville facility. Currently, the beverage related operations are conducted by HEXO (through the operations of HEXO Cannabis Infused Beverages or “HEXO CIB”) under HEXO’s licensing, until Truss obtains its own separate license (see section ‘Cannabis Infused Beverage (“CIB”)’). We expect Truss to acquire the appropriate selling license from Health Canada during calendar year 2021⁷, at which point sales and operations will transfer to Truss. Truss submitted their independent application to Health Canada on October 26, 2020.

We continue to believe in the potential of partnership opportunities in the cannabis space. We are now opening ourselves up to explore other types of partnership opportunities with CPG companies. As this approach continues to evolve, we are looking forward to introducing new formulations into the cannabis market.

THREE STRATEGIC PILLARS

Our strategic pillars reflect our belief that companies that achieve large-scale distribution and a well-rounded spectrum of products are the best positioned to create high brand value which 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.

⁷  Due to the experienced delay in obtaining the Belleville facility’s sales license, in part, due to Health Canada and the COVID-19 pandemic related delays, the expected timing for Truss acquiring their independent license has been delayed. The Company expects to receive licensing within the 2021 calendar year. The assumption of acquiring this licensing is derived through the Company’s internal expertise and historical experience in obtaining licensing from Health Canada.

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Operational Excellence

We have been cultivating cannabis since 2014 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, improve yields and decrease costs.

We chose to initially locate in Gatineau, Quebec, because we believe the province offers the ideal conditions for cannabis production: an abundant supply of renewable electricity at competitive rates, combined with abundant water resources and the availability of skilled people. These 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.

On the border of Canada’s two largest consumer markets, Quebec and Ontario, our main campus in Gatineau positions us in close proximity to three of the country’s major urban areas, Montreal, Ottawa and Toronto. 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.

Innovation

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

Our focus on research, innovation, technology and product development also reflects our strategic priorities. Our Innovation team benefits from experience 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. We continue to invest in our technology platform, focusing on the future of cannabis, and our proven ability to create new products and formulations that meet the increasing demands of the global cannabis consumer. We possess one of the cannabis industry’s top cannabis IP portfolio’s.⁸

HEXO has launched its initial derivative products consisting of Original Stash hash products, KLIK⁹, softgels, vapes and the beverage products as disclosed in section “Truss Beverages.” Original Stash’s hash products represented the first of its kind, being dry sift hash products. The Original Stash dried flower 28g value format was one of Canada’s first bulk product offerings.

Through HEXO’s proven innovation capability and quality cannabis that the 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 product options.

We continue to assess market demands and research new and exciting ways to bring our HEXO and Powered by HEXO^TM products to capitalize on opportunities in the cannabis derivatives market.

Beyond the funds required for our currently planned capital 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 continued development of our Belleville, Ontario facility, which, houses manufacturing and distribution of the Company’s legacy and cannabis 2.0 products, as well as the operations of HEXO CIB and potential future CPG partnerships. This will directly support our continued leadership position in the Canadian cannabis market as it now allows for increased logistical efficiency and cost effectiveness – as both a distributor and a product innovator.

Keystone Isolation Technologies Inc.

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 cannabis and hemp of harmful pesticides, and isolating cannabinoids, which we believe enables us to bring these quality extracts to our potential future partners. 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 global market for cannabis derivatives.

Innovation and Trim Management

Cannabis trim is a product of the harvesting process in which the flower and trim is removed from the plant along with other extraneous plant matter. As trim is a by-product, the total volume of trim, by its nature, is subject to overall cultivation volumes of the Company and therefore, from harvest to harvest may increase relative to total harvested volumes. Towards the end of fiscal 2020 a trim management initiative was established to increase the Company’s trim utilization and also systematically reduce the balance of this inventory on hand. This inventory is being used as the primary ingredient in the manufacturing of our Original Stash products, hash and pre-rolls.

During the first quarter of fiscal 2021, the Company utilized more trim than it produced, thus reducing the on hand inventory balance period over period. The Company continues to look towards improving cultivation processes and maximizing the potency (content of cannabinoids within the plants) of produced flower and trim. Historically, the buildup of trim in inventory lead to increased cost of sales, impairment losses and decreased gross margin due to limited value adding options for trim usage. Thus, the effort in tactically reducing

⁸  Based upon a third-party report which compares the Company’s published patent applications relative to its peers in the Canadian Cannabis market using the recently available public data.

⁹  KLIK is a high-quality distillate which includes purified THC and CBD and plant derived terpenes and comes in a convenient, easy-to-use applicator for mess-free, metered dosing. OS. KLIK distillate can be vaporized or inhaled.

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our trim inventory is aimed to normalize these metrics. Going forward, trim is expected to be utilized within select additional Original cannabis 2.0 products. Previously the Company anticipated the potential utilization of trim for distillate creation purposes, however current forecasting predicts this will not be necessary to meet utilization targets or market demand.

Market Leadership

We believe these initial formative years, post legalization in Canada, are proving to be the most critical in determining the future shape of the cannabis industry in Canada and that country-wide distribution and financial strength will be critical to securing a top market position. The regulatory environment for the sale of adult-use cannabis across Canada, the number of large-scale licensed producers and the continuously evolving Canadian cannabis industry’s supply and demand conditions, amongst other factors, makes it clear that market penetration and brand awareness are essential during this period. For this and other reasons, we have deliberately set out to build a strong position in our initial jurisdiction, Quebec, where we maintain the number one adult-use market share¹⁰ while expanding to all ten Provinces of Canada through provincial supply agreements and arrangements. In the current period, we have increased our gross sales outside of Quebec to 46% from 39% in the previous quarter and believe we will continue to diversify our revenue base. We believe by offering a diverse house of brands that resonate with consumers across market segments, representing innovation, quality and consistency of experience, we will obtain a leading Canadian market share.

¹⁰  Based upon sales volumes obtained from the SQDC.

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HEXO GROUP OF FACILITIES

The following provides information about HEXO’s facilities:

Gatineau, Quebec	HEXO’s Gatineau, Quebec facility is its main cultivation facility, featuring 1,292,000 sq. ft. of greenhouse cultivation space on a 143-acre campus. The greenhouse space is comprised of a 7,000 sq. ft. greenhouse, a 35,000 sq. ft. greenhouse completed in 2016, a 250,000 sq. ft. greenhouse completed in June 2018 and a 1 million sq. ft. greenhouse completed in December 2018, known as Building 9 or B9. Except as noted below, the facility is licensed by Health Canada (Standard Cultivation, Standard Processing, Sale for Medical Purposes, (current license was amended during the period and was effective April 7, 2020 and expires April 7, 2023), and Research (the previous license obtained October 25, 2019 was amended to include the Belleville and Vaughn facilities, with the result that the current license is effective August 27, 2020 and expires October 25, 2024)) and fully operational. The finalization of the security system, along with other fit ups are required to have the final phase licensed. These activities were estimated to resume in the second quarter of fiscal 2021, however, due to an alignment of the Company’s inventory needs relative to market demand and future planned product launch dates the new expected completion for the project is estimated to occur towards the end of fiscal 2021. As at October 31, 2020 the Gatineau facility is operational and directly and/or indirectly generates sales for the Company, with the exception of B9’s 5th phase. As at October 31, 2020 the approved budget was increased for phase 5 nominally by $295 to $5,845 with approximately $4,682 to be realized over the remaining course of fiscal 2021. The actual spend on phase 5 during the period was $190 which leaves the remaining approved budget capacity at $4,782.
Brantford, Ontario (R&D)	HEXO’s Brantford, Ontario facility is currently serving as a strain development site (with additional cultivation capability) facility, featuring 14,000 sq. ft. of indoor growing space on 1 acre of land. The facility was designed and engineered to permit pharmaceutical-quality management standards utilized by Canada’s pharmaceutical manufacturers to be used in the production of cannabis in all acceptable forms. The facility is fully licensed by Health Canada (Standard Cultivation, Standard Processing and Sale for Medical Purposes (current licence effective December 6, 2019 and expiring December 6, 2022)).
Belleville, Ontario (HEXO and Truss)	HEXO’s Belleville, Ontario facility is its centralized processing, manufacturing and distribution centre, featuring 932,190 sq. ft. of leased commercial space within a larger approximately 1.5 million sq. ft. industrial facility, with rights of first offer and first refusal to lease the remaining space in the facility. The facility acts as the Company’s main production facility for processing, extraction and packaging, and the manufacturing of cannabis derivative products. Truss, the Company’s venture with Molson Canada, is planned to operate at this facility once it obtains a separate license from Health Canada and it currently effectively operates under HEXO’s license through HEXO CIB. The Company has subleased 183,600 sq. ft. to Truss, which Truss has then subleased back to HEXO CIB pending Truss’ licensing. The facility is owned by Belleville Complex Inc., 25% of which is owned by the Company and the balance of which is owned by Olegna Holdings Inc. a company affiliated with a director of the Company, Vincent Chiara. The Belleville facility is licensed by Health Canada for Standard Processing and Sale for Medical Purposes (current licence effective October 21, 2020 and expiring October 21, 2023) as well as for Cannabis Research (effective August 27, 2020 and expires October 25, 2024). HEXO received an amendment to the licence to authorize non-medical sale of additional cannabis product types, including derivative products on May 29, 2020. Accordingly, the facility is now operational manufacturing and selling activity, the remaining budget relates to continuous improvements to operations and administrative areas.
Belleville, Ontario (KIT)	KIT is expected to operate out of a separate area within the Belleville facility and provide the Company with high quality extraction technology to facilitate production transformation of certain of the Company’s derivative products. KIT will effectively operate under the Company’s license as described in section ‘Belleville, Ontario (HEXO)’. KIT remains non-operational as at October 31, 2020. The initially drafted budget was targeted at approximately $5,500 to take KIT operational. However, as previously disclosed, the budget was in its early stages of formulation and was subject to material change. During the period management has revised the KIT budget to an approximate $10,550 based upon current construction and equipment needs. The budget has been built using industry comparables and remains in draft and therefore subject to refinement as progress is made towards activating the build. As of the date of this MD&A, management plans to have KIT operational before the end of fiscal 2021.

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Montreal, Quebec (SQDC distribution)	HEXO’s Montreal Quebec distribution facility is a warehouse and distribution centre, featuring 58,000 sq. ft. of leased commercial space. The facility serves as a warehouse and distribution centre for Quebec adult-use webstore orders for the SQDC, which are managed for the SQDC by HEXO and Metro Supply Chain Group Inc. It houses product from all the licensed producers who have contracts with the SQDC and serves as the sole distribution point for all direct-to-consumer shipments within the Province of Quebec for orders placed through the SQDC online webstore. This facility is fully operational and is regulated by the SQDC and does not require licensing by Health Canada.
Vaughan, Ontario	HEXO’s Vaughan, Ontario facility is its planned cannabis research laboratory for the development of edible products and related intellectual property, featuring 14,200 sq. ft. of leased commercial space. The facility includes a sensory testing area and a complete commercial kitchen. The facility received its Cannabis Research license on August 27, 2020 which is effective until October 25, 2024.
Ottawa, Ontario (Corporate headquarters)	HEXO leases approximately 40,036 sq. ft. of office space in Ottawa, Ontario for its corporate head office.

Canadian Cannabis Business

Adult-Use

The Canadian adult-use cannabis industry was legalized on October 17, 2018. All provinces and territories established their respective cannabis market retail approach, ranging from private entities to government-owned retail, as well as a combined approach in several jurisdictions. The Company holds supply agreements and arrangements within all ten provinces of Canada allowing for market access within the major populations of Canada. The availability of products may change within certain provinces from time to time, based up on the Company’s current demands and strategic focus.

Legalized Canadian cannabis has grown into an approximated annual $2.9 billion retail industry since its inception, gaining $0.7 billion in value over the course of 2020¹¹. However, there have been several changes in market conditions and assumptions which have created significant challenges for the cannabis industry in Canada, including HEXO. Revenue growth in the Canadian market continues to be hindered by slower than expected store openings, particularly in Ontario and Quebec¹², which are the most populous provinces in Canada. Dry flower and cannabis derivative products pricing levels experience volatility and continue adjust to accommodate supply and demand levels since legalization and with initial consumer sell through being slower than expected. The illegal market continues to hold a significant share of the total Canadian cannabis market¹³. HEXO launched Original Stash, a quality brand, one of the first of its kind, that is designed to compete with the illegal cannabis market and increase our overall market share.

During the period the Company maintained the top market position in Quebec at 29% by sales volume¹⁴. Cannabis beverage sales The Company improved market share in another major Canadian market, Alberta during the period to approximately 7% from 5.5% in the previous quarter¹⁵. The Ontario market share remained consistent at an approximate 4.5%, however, the Company obtained a top five position of dried flower sales in the province¹⁶. Through the release of the Truss beverages, the Company captured market shares of 58% and 21% in the two largest Canadian markets Quebec¹¹ and Ontario¹³, respectively.

¹¹  Stats Canada August 2020 Report

¹²  Source: www.mjbizdaily.com/ontario-to-double-pace-of-new-cannabis-store-approvals.

¹³  Source: https://financialpost.com/cannabis/cannabis-business/illicit-pot-still-dominates-after-two-legal-years

¹⁴  Per SQDC derived metrics based on volumes sold during the period of Sept 13, 2020 to Dec 5, 2020.

¹⁵  Per internal review of accumulated private retail data.

¹⁶  Per internal review of OCS derived data.

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THE COMPANY’S DISTRIBUTION BY PROVINCE AND BRAND

* As at October 31, 2020, Up was listed but not available in the provinces of BC, MB, SK, PEI, NS and NFLD.

UPDATE ON QUEBEC

As previously disclosed, at the onset of adult-use legalization in Canada, the Company established a five-year supply contract with the SQDC in which it was anticipated that 20 tonnes and 35 tonnes were to sold to the SQDC in years 1 and 2, respectively. This ultimately was not achieved (as previously disclosed) due to changes to the economic landscape surrounding the cannabis industry and market conditions which include but are not limited to, fewer brick and mortar SQDC stores (150 revised down to 100) than originally scheduled for initial rollout and evolving and more restrictive provincial regulation over cannabis consumption. We no longer expect to achieve the originally anticipated 45 tonnes in the third year of legalization under our contract with the SQDC. The Company notes, these volumes are non-binding targets and there are no requirements for the SQDC to purchase these amounts. Until there is greater clarity and stability of market conditions, it is difficult for the Company to predict with any degree of certainty what sales levels may be expected or achieved. In any event, we remain a preferred supplier of the SQDC as we continue to expand our product offerings and strive to achieve maximum sales based on the demands of consumers and maintain market leadership. We currently supply the SQDC with HEXO, HEXO Plus and Original Stash products as well as Truss beverage products (currently offered through HEXO CIB).

The Company continues to hold a distribution agreement with the SQDC under which, along with Metro Supply Chain Group Inc., we manage the warehouse and distribution of products from all licensed producers selling through the SQDCs direct-to-consumer adult-use online webstore within the province of Quebec. For the management of the warehouse and distribution of these online sales, the Company earns management fees from the SQDC, which are reflected as ancillary revenue in our financial statements.

Medical

Since our inception as a medical cannabis company in 2013 we have prided ourselves on our dedication to serving the medical market and its patients. We continue acting upon this dedication through offering select products from our adult-use portfolio to expand our medical offerings and provide a broader range of options to our valued patients. We proudly offer a variety of quality dried flower in the 30g packing format (as mandated by Health Canada, a medical cannabis authorized patent is allowed the lesser of 150 grams or a 30-day supply of dried cannabis (or the equivalent in cannabis product) in addition to the 30 grams allowed for adult-use purposes) ensures our patients an easy and efficient alternative to obtain their medical cannabis.

HEXO USA

The Company’s wholly owned U.S. based entity HEXO USA Inc (“HEXO USA”) was established to facilitate expansion into the US hemp market. 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 and to offer its “powered by HEXO” products via 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. Our first entry was gained in April 2020, through the creation of our Truss CBD USA venture in the State of Colorado with partner Molson Coors.

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Truss CBD USA Joint Business Venture

The Company and Molson Coors Beverage Company (“Molson Coors”) created a second business venture, Truss CBD USA LLC (“Truss CBD USA”). The venture was conceived to explore opportunities for non-alcoholic, hemp-derived CBD beverages in the State of Colorado. Established in Colorado, Truss CBD USA is majority owned by Molson Coors and operates as a stand-alone entity with its own board of directors, management team, resources and go-to-market strategy. All production and distribution for Truss CBD USA will be kept within Colorado state lines since it is one of a few states that has an established regulatory framework for hemp-derived CBD in food and beverages. Truss CBD USA and HEXO’s activities in relation to it will be conducted in accordance with all applicable laws.

The operations of Truss CBD USA were not material in the period.

The Company does not currently have and is not in the process of developing marijuana-related activities in U.S., even in U.S. states where such activity has been authorized within a state regulatory framework. As such, the Company is not and would not be considered in the future a “U.S. Marijuana Issuer” within the meaning set forth in CSA Staff Notice 51-352 (Revised) Issuers with U.S. Marijuana-Related Activities.

COVID-19 Update

During the three months ended October 31, 2020, the COVID-19 pandemic across Canada began what is being commonly referred to as its “second wave.” The second wave represents a period of increased COVID-19 cases for a myriad of reasons and has caused provincial governments to enact or re-enact COVID restrictions and protocols. As of the date of this MD&A, the cannabis industry remains to be deemed an essential service to Canadians.

During the period, the Company’s results, operations and financial position were not materially impacted by the COVID-19 global pandemic. Due to the speed with which the COVID-19 situation is developing and the uncertainty of its magnitude, outcome and duration, it is not possible to estimate the future impact on our business, operations or financial results; however, the impact could be material. Refer to the section “Risk Factors” section for further COVID-19 related risks to the business.

People

In response to the pandemic we established a COVID-19 response team which is tasked to manage the Company’s information flow of COVID-19 updates, review public health and safety protocols as outlined by the appropriate governmental authorities and develop in house action plans to mitigate these risks and comply accordingly. We have transferred all functions which can do so, to work from home and operate purely from stay at home, web-based/teleconferencing platforms. For those functions which require to remain ‘on site’ from day one we increased our focus on social distancing, additional personal sanitation stations and through full personal safety equipment such as gloves and masks, as well as, additional hand sanitizing stations throughout our manufacturing and administrative facilities. We have implemented travel restrictions for work related travel where deemed unnecessary and restricted visitor access to our facilities. We implemented mandatory 14-day quarantines for all workers returning from vacations or out of country visits during the onset of the pandemic. We initiated a program ‘Hero Pay’ to support our cultivation and manufacturing employees who continue to work during the pandemic.

Operations

We performed a full review of all Health & Safety Standard Operating Procedures with specific focus on personal protective equipment as a result of the COVID-19 outbreak. We implemented protocols in early March 2020 that exceeded government health authorities’ recommendations, which remain in effect. HEXO’s operations have been minimally impacted by COVID-19 related issues. We currently do not foresee any impact to supply to the market and therefore, continue our cultivation, manufacturing and producing activities.

Distribution

The Provincial bodies have deemed cannabis retail as an essential service. As such our provincial distribution remains relatively unimpeded. It remains uncertain as to whether COVID-19 will ultimately increase or diminish demand and sales of cannabis across Canada, however, we continue to work with provincial and private entities towards the goal of penetrating deeper into all markets and allow for the public to safely and reliably consume our products.

Supply Chain

On a day-to-day basis, we continually monitor the economic response to COVID-19 and work together with our valued supply chain partners in order to mitigate various potential disruptions to our operations. To date, there have been no indicators of material issues to our supply chain.

Liquidity

At the date of this MD&A management believes that we possess sufficient resources and capital to meet any continuing COVID-19 health requirements in order to remain operationally compliant with the healthy authorities mandated regulations.

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Corporate Social Responsibility

At HEXO, 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.

Other Corporate Highlights and Events

FIRST QUARTER OF FISCAL 2021

Appointment of New CFO

On October 9, 2020, the Company appointed Mr. Trent MacDonald as acting CFO, taking over the position from Mr. Stephan Burwash. Upon the receipt of his Health Canada clearance on November 8, 2020, Mr. MacDonald was moved into the permanent role of CFO. Mr. MacDonald brings more than 15 years of financial executive experience to HEXO, working for both publicly listed and private enterprises. Most recently, he served as the CFO for Rx Drug Mart, a private pharmacy operator/consolidator that was recently named the Globe and Mail’s fastest growing company in Canada, helping to guide it through significant growth in sales. Prior to that, he served as Vice President Finance of Indigo (TSX: IDG) and Vice President Finance for some of Sobeys’ (TSX: EMP.A) largest divisions and regions. Throughout his career, Trent has focused extensively on strategic, profitable growth, designing and implementing processes and solutions to ensure operational effectiveness and scalability.

Appointment of New Director

On October 23, 2020 the Company appointed Emilio Imbriglio to its Board of Directors. Mr. Imbriglio’s appointment fills the vacancy on the Board of Directors created by Natalie Bourque’s resignation as a director earlier this year. Mr. Imbriglio has also been appointed as a member of the Board of Director’s Audit Committee. Mr. Imbriglio remains a non-voting member of the Board of Directors until he receives security clearance from Health Canada, which is currently in progress. Mr. Imbriglio is currently the President and CEO of Raymond Chabot Grant Thornton, a position he has held since 2013. He is a member of the Strategy Committee and Board of Governors of Grant Thornton International Ltd, representing over 140 countries, as well as Chair of its Budget and Audit Committee. An entrepreneur himself, Mr. Imbriglio has played a leading role in developing efficient teams and was the head of the Corporate Finance Consulting Group for almost 10 years. During this time, he spearheaded large-scale mergers, acquisitions and financing transactions, and served as a key government infrastructure and financing adviser, notably for the construction of the Centre hospitalier de l’Université de Montréal (CHUM) research centre and hospital. In addition to his financial executive experience, Mr. Imbriglio was a professor at Concordia and McGill universities for 18 years. He is actively involved in the community and is a member of the Board of Directors of Société Générale Canada and Finance Montréal. He has been a member of the TELUS Board of Directors and Community Investment Committee in Montréal, the Board of Directors of the Fondation du Centre hospitalier de l’Université de Montréal (CHUM) Capital Campaign Cabinet, the Board of Directors of Les amis de la montagne, the Green Municipal Fund (GMF) Council of the Federation of Canadian Municipalities (FCM) and the FCM’s Investment Committee, the Board of Directors of the Canadian Council for Public-Private Partnerships, as well as a member of the Santa Cabrini Hospital Board of Directors from 1997 to 2012, where he was Board Chairman from 2007 to 2012.

Proposal of Share Consolidation

On October 30, 2020 the Company announced a proposed consolidation of its common shares on the basis of eight pre-consolidation shares for one post-consolidation share (8:1) (the “Original Consolidation Ratio”). The purpose of the Consolidation is to increase the Company’s common share price to regain compliance with the US$1.00 minimum share price continued listing standard (the “NYSE Price Listing Standard”) of the New York Stock Exchange (the “NYSE”). On April 7, 2020, the Company received notification from the NYSE that it was no longer in compliance with the NYSE Price Listing Standard as a result of the average closing price of the Company’s common shares on the NYSE falling below US$1.00 for a consecutive 30 trading-day period. The Company believes curing the non-compliance with the NYSE Price Listing Standard and avoiding a delisting of the common shares from the NYSE is in the best interests of the Company and its shareholders, and the Consolidation is the most effective means of curing the non-compliance.

The Consolidation will be effected by the filing of articles of amendment to the Company’s articles under the Business Corporations Act (Ontario) and is subject to shareholder approval by way of a special resolution. The Consolidation was submitted to the Company’s shareholders for approval at an annual and special meeting of shareholders on December 11, 2020. The Consolidation is also subject to the approval of the NYSE and the Toronto Stock Exchange. Assuming the receipt of all approvals required for the Consolidation, it is expected the Consolidation will be implemented soon after the shareholders meeting. The Company will announce further details with respect to the implementation of the Consolidation once all required approvals have been obtained.

The Company will not be issuing fractional post-Consolidation common shares in connection with the Consolidation. Where the Consolidation would otherwise result in a shareholder being entitled to a fractional common share, the number of post-Consolidation common shares issued to such shareholder shall be rounded up or down to the nearest whole number of common shares. Fractional interests of 0.5 or greater will be rounded up to the nearest whole number of common shares and fractional interests of less than 0.5 will be rounded down to the nearest whole number of common shares.

14    MD&A

SUBSEQUENT TO THE PERIOD

Restructuring

On November 17, 2020 the Company built upon the restructuring which began in the first quarter of fiscal 2021 by taking another necessary step in reorganizing the Company as progression towards positive adjusted EBITDA continues. The Company underwent a restructuring of its human resources department in which the department was scaled down from 23 employees to 9. Included in this was the departure of the Company’s Chief Human Officer, Dominique Jones. This activity rightsizes the human resources department to adequately support the ongoing operations and people of the Company, while simultaneously allowing the Company to proceed with leaning out its general and administrative expenses. The estimated severance and other related payroll activity for the restructuring is approximately $813, to be realized in the second quarter of fiscal 2021.

Revision and Approval of Share Consolidation

On December 7, 2020, the Company announced the revision to the previously proposed Original Consolidation Ratio. The Company believes the Original Consolidation Ratio should be revised downward in light of the recent increase in the trading price of the Common Shares and in order to maintain a liquid share float and reflect the Company’s confidence that it can execute on its growth strategy. The ratio was therefore changed for the proposed consolidation of the Common Shares from the Original Consolidation Ratio of eight (8) old Common Shares for one (1) new Common Share to a ratio of four (4) old Common Shares for one (1) new Common Share (the “New Consolidation Ratio”).

The Company’s annual general meeting was held on December 11, 2020, and the special resolution authorizing and approving the New Consolidation Ratio was passed. The Consolidation will become effective by the filing of articles of amendment to the Company’s articles under the Business Corporations Act (Ontario) on December 15, 2020, and it is expected it will be implemented soon thereafter.

15    MD&A

Non-IFRS Measures

We have included certain non-IFRS performance measures in this MD&A, 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.

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

The Company has identified Adjusted EBITDA as a relevant industry performance indicator. Adjusted EBITDA is a non-GAAP financial measure that does not have any standardized meaning prescribed by IFRS and may not be comparable to similar measures presented by other companies. The Company calculates Adjusted EBITDA as Total net loss, plus (minus) income taxes (recovery), plus (minus) finance expense (income) net, plus depreciation, plus amortization, plus (minus) investment (gains) losses, plus (minus) non-cash fair value adjustments, plus (minus) non-recurring expenses, plus (minus) other non-cash items. See Adjusted EBITDA table for those items comprising investment (gains)/losses, non-cash fair value adjustments, non-recurring expenses and other non-cash items. Management believes this measure provides useful information as it is a commonly used measure in the capital markets to approximate operating earnings.

GROSS PROFIT BEFORE ADJUSTMENTS

This measure is utilized for those reasons as presented in “Gross profit before fair value adjustments” with the adjustment that this metric excludes the write-offs of inventory and biological assets, write downs to net realizable value and destruction costs. The Company has identified this metric as useful and relevant information as it represents the gross profit for operational purposes based on costs to produce, package and ship inventory sold, exclusive of impairments and other write downs due to changes to internal or external influences impacting the net realizable value of inventory and inventory disposal costs.

Key Operating Performance Indicators

We have included certain key operating performance indicators within this MD&A, as defined in this section. We utilize these metrics internally for a range of purposes such as critical inputs in fair valuation techniques to evaluating the operating performance results in a given period.

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 MD&A 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.

Other Defined Additional IFRS Measure

We have included the below additional IFRS measures as these represent cannabis industry financial statement line items and are present within the Company’s statement of loss and comprehensive loss for the three months ended October 31, 2020.

GROSS PROFIT BEFORE FAIR VALUE ADJUSTMENTS

We utilize this measure to provide a representation of performance in the period by excluding the fair value measurements as required by IFRS, realized fair value amounts on inventory sold and unrealized gain on changes in fair value of biological assets. We believe this measure provides useful information as it represents the gross profit 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. In accordance with CSA Staff Notice 51-357 issued in October 2018, we utilize an adjusted gross profit to provide a 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 profit 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 as well as fair value adjustments to net realizable value, which represents the fair value measured portion of inventory cost (“fair value cost adjustment”) recognized as cost of goods sold.

17    MD&A

ADULT-USE NON-BEVERAGE REVENUES & BEVERAGE REVENUES

We utilize this differentiation to allow the user to identify the revenue streams generated by the Company’s perpetual sales activity vs. the future “to be” discontinued sales stream, cannabis infused beverages. As discussed in section ‘Beverage Based Adult-Use Sales,’ the cannabis infused beverage revenues, as at the date of this MD&A, are intended to cease to be recognized by the Company as direct sales at the point in time when the business venture Truss obtains the appropriate cannabis licensing under Health Canada.

Operational and Financial Highlights

KEY FINANCIAL PERFORMANCE INDICATORS

Summary of results for the three months ended October 31, 2020, July 31, 2020 and October 31, 2019:

For the three months ended
Income Statement Snapshot	October 31, 2020			July 31, 2020			October 31, 20191
	$			$			$
Revenue from sale of goods		41,300			36,140			19,297
Excise taxes		(11,887	)		(9,082	)		(4,839	)
Net revenue from sale of goods		29,413			27,058			14,458
Ancillary revenue		55			87			41
Total revenue		29,468			27,145			14,499
Gross profit before adjustments2		10,381			8,104			4,552
Gross profit/(loss) before fair value adjustments2		11,924			(36,012	)		(21,327	)
Gross profit/(loss)2		18,214			(34,690	)		(20,939	)
Operating expenses		(20,776	)		(71,509	)		(39,524	)
Loss from operations		(2,562	)		(106,199	)		(60,463	)
Other expenses and losses		(1,635	)		(63,333	)		(5,576	)
Net loss before tax		(4,197	)		(169,532	)		(66,039	)
Tax recovery		—			—			6,023
Total Net loss		(4,197	)		(169,532	)		(66,016	)

¹  The Company has adjusted the presentation of gross profit before fair value adjustments by removing inventory and biological asset write offs and impairment losses.

² See section ‘Cost of Sales, Excise Taxes and Fair Value Adjustments’ for reconciliation of gross profits

Operational Results

For the three months ended	October 31, 2020		July 31, 2020		April 30, 2020		January 31, 2020		October 31, 2019
Total kilograms produced of dried gram equivalents (kg)		17,462		16,540		19,130		22,305		16,107
As at	October 31, 2020		July 31, 2020		April 30, 2020		January 31, 2020		October 31, 2019
	$		$		$		$		$
Total cash and cash equivalents		149,773		184,173		94,325		80,426		41,277
Working Capital		250,312		223,216		215,661		189,210		150,244
Inventory		74,597		64,933		105,928		93,536		84,908

QUARTERLY FINANCIAL HIGHLIGHTS

• Total net revenue in the current period increased by $2,323 from the previous quarter.

• Total net revenue increased 103% from the comparative period of fiscal 2020.

• The Company strengthened its reach outside of Quebec in several key Canadian markets during the period. The following represents the Company’s percentage of total adult-use sales per province in the current period compared to the fourth quarter of fiscal 2020;

• Increase to 15% from 11% in Ontario;

• Increase to 18% from 13% in Alberta; and

• Increase to 6% from 2% in British Columbia.

• The Company’s total Adjusted EBITDA loss improved to ($419) from ($3,250) in the previous quarter.

• The Company recorded improved gross profits to $18,214 in the quarter, a betterment from gross losses of $34,690 and $20,939 in the previous quarter and the first quarter of fiscal 2020, respectively.

• The period’s net loss was reduced by 94% as compared to the comparative period of fiscal year 2020.

18    MD&A

• The Company’s harvested kg increased 5% quarter over quarter, as the planned reduction in the number of plants on hand during the previous period is phased out. The Company also notes that historically lower harvests are experienced in the first quarter of the fiscal year as a result of harvesting the lots produced during the warmer summer months.

Summary of Results

Revenue

	Units		Q1’21			Q4’20			Q3’20			Q2’20			Q1’20
ADULT-USE (EXCLUDING BEVERAGES)
Adult-use cannabis gross revenue		$		35,898			31,164			29,316			22,983			18,250
Adult-use excise taxes		$		(11,554	)		(8,589	)		(8,702	)		(6,722	)		(4,666	)
Adult-use cannabis net revenue		$		24,344			22,575			20,614			16,261			13,584
Dried grams and gram equivalents sold (kg)		kg		11,241			7,661			9,271			6,579			4,196
Adult-use net revenue/gram equivalent		$		2.17			2.95			2.22			2.47			3.24
ADULT-USE (BEVERAGES)
Adult-use cannabis gross revenue		$		3,302			2,386			465			—			—
Adult-use excise taxes		$		(245	)		(397	)		(34	)		—			—
Adult-use cannabis net revenue		$		3,057			1,989			431			—			—
Dried grams and gram equivalents sold (kg)		kg		3,872			334			67			—			—
Adult-use net revenue/gram equivalent		$		0.79			5.96			6.43			—			—
MEDICAL
Medical cannabis gross revenue		$		574			644			774			834			1,047
Medical cannabis excise taxes		$		(88	)		(96	)		(81	)		(139	)		(173	)
Medical cannabis net revenue		$		486			548			693			695			874
Dried grams and gram equivalents sold (kg)		kg		83			90			104			107			129
Medical net revenue/gram equivalent		$		5.86			6.09			6.66			6.50			6.78
WHOLESALE
Wholesale cannabis gross revenue		$		401			655			340			—			—
Wholesale cannabis excise taxes		$		—			—			—			—			—
Wholesale cannabis net revenue		$		401			655			340			—			—
Dried grams and gram equivalents sold (kg)		kg		160			258			156			—			—
Wholesale net revenue/gram equivalent		$		2.51			2.54			2.18			—			—
INTERNATIONAL
International cannabis gross revenue		$		1,125			1,291			—			—			—
International cannabis excise taxes		$		—			—			—			—			—
International cannabis net revenue		$		1,125			1,291			—			—			—
Dried grams and gram equivalents sold (kg)		kg		450			493			—			—			—
International net revenue/gram equivalent		$		2.50			2.62			—			—			—
ANCILLARY REVENUE1		$		55			87			54			51			41
Total net revenue		$		29,468			27,145			22,132			17,007			14,499

¹ Revenue outside of the primary operations of the Company. These revenues are derived from a management agreement held by the Company with arms-length partners.

HEXO CIB (Cannabis Infused Beverages)

Sales from the Company’s HEXO CIB revenue stream effectively represents the sales activity of the Company’s Truss joint business venture with Molson Canada. These sales began in the third quarter of the 2020 fiscal year. HEXO CIB was established in order to manufacture, produce and sell cannabis beverage products until Truss obtains its own separate licence from Health Canada. HEXO CIB operates under the Company’s cannabis licensing and in compliance with Health Canada and the Cannabis Act’s regulations. The Company has assessed the beverage revenue stream is to be realized by the Company and presented on a gross basis as defined under IFRS 15 (see the Company’s revenue recognition and presentation policy in Note 3 of the Company’s annual financial statements for the year ended July 31, 2020). The Company will continue to operate HEXO CIB until Truss has obtained its independent licensing to manufacture and sell cannabis products from Health Canada, at which point these operations will shift to Truss.

19    MD&A

OUTLOOK

The Company expects to be Adjusted EBITDA positive for the three months ended January 31, 2021, subject to certain assumptions (outlined below) regarding store count, product output, operational improvements, cost saving initiatives and the potential economic impact of COVID-19.

Assumptions built into the forecasted Adjusted EBITDA are partially based on the following: forecasted store rollouts based on conversations with provincial cannabis agencies; THC improvement from cultivation which are expected to lead to improved sales of favourably priced products; new product rollouts of Vapes, Extracts, Edibles/Beverages and Pre-rolls as well as the successful capture of market share of these products; Growth in sales to provinces outside Quebec; Changes to captive D&O Insurance resulting in cost savings; Trim utilization initiatives and operating expense driven by restructuring, reduced travel and consultants.

These assumptions are exclusive of the effects of COVID-19, which could be material.

ADULT-USE SALES

Non-Beverage Adult-Use Sales

In the three months ended October 31, 2020, the Company increased its gross adult-use sales from cannabis and cannabis products, (exclusive of cannabis infused beverages) by 15% quarter over quarter.

The sales increase in the current quarter as compared to the previous quarter was primarily influenced by the following factors;

• Dried flower sales increased by approximately $2,006 showing growth of 7% period over period. This can be attributed to sales growth of the Company’s Original Stash brand, specifically the 28g product offerings which grew 28% and the 14g product offering which grew 42% during the quarter. The growth in the Original Stash 28g products is directly attributable to the 47% increase in the volume sold during the period.

• The Company’s Original Stash Hash sales were increased by $1,789 due to growth of 163% in Ontario and 68% increase in Quebec.

• Also contributing to the growth was the relaunching of the 20%+ THC content dried flower, UP brand to select markets during the period.

• Additional vape and KLIK cannabis 2.0 product SKUs were launched into the market as the Company continues to diversify its cannabis offerings. This helped increase related oil product sales by $528 or 34%.

• Pre-roll sales also saw positive growth of 14% increasing to $893, mainly due to the Company’s launching of Original Stash pre-rolls during the period. These generated just under half of the total pre-roll sales in the period and are a contributor to the Company’s reduction plan on carrying trim volume.

• The average revenue contribution per gram and gram equivalent decreased by $0.78 from $2.95. This was, in part, due to the increase in value bulk formatted product sales in the quarter, as explained above.

The current period gross adult-use sales for non-beverage cannabis products almost doubled, growing 97% when compared the first quarter of fiscal 2020. This was due, in part, to the above factors for newly issued products since the comparative period and due to the following;

• The Company’s focus on capturing market share, introducing new, diverse and innovative cannabis 2.0 products led to an increase of 168%, representing an increase of over 7,000 kg, in the Company’s non-beverage adult-use volume sold.

• In the first quarter of fiscal 2020, the Company continued to be materiality impacted by the cannabis industry’s economic conditions which lead to price concessions and return provisions. This led to provisions against sales of $1,978 and was dictated by the slower than expected retail network roll-out throughout the industry, and the prevailing competitive pricing conditions of the legalized Canadian cannabis market.

Beverage Based Adult-Use Sales

The Company generated cannabis infused beverage net revenue growth of 54% in the current period when compared to the previous quarter.

The Company realized its first full quarter of cannabis infused beverage sales in the previous quarter (the fourth quarter of fiscal 2020). The current periods $3,302 of cannabis infused beverage revenue was derived from a diversified product mix when compared to the prior quarter in which only the Veryvell oil droppers were available to the market. In the current period, the Company introduced all five of Truss’s announced bottle/can format brands to the market, which aided in generating the additional sales and hence, is the driver of the reduction in the revenue per gram sold value.

20    MD&A

During the current period the new bottled products introduced generate a lower revenue per gram contribution between a range of $0.54 - $1.40. These new product offerings represented 86% of total adult-use beverage sales in the period. In the previous quarter, the Veryvell dropper products, which contain multiple servings, made up the entirety of the beverage sales generated, and possess a relatively higher revenue per gram as seen in the prior quarter.

There were no beverage sales in the comparative period of the three months ended October 31, 2019.

MEDICAL SALES

Medical net revenue for the three months ended October 31, 2020 decreased 11% to $574 from $644 from the previous quarter as a result of a lower total sales volume. Sales volumes decreased marginally by 7 kg and the revenue per gram fell by $0.23/g from the previous quarter. The medical sales dried flower price per gram was constant quarter over quarter, however, medical oil sales price per gram decreased by $0.97, thus the reduction of the net revenue per gram sold contribution in the period.

Compared to the first quarter of fiscal 2020, net medical sales decreased 44% from $874. This decrease is the result of the following factors; the first is a reduction in medical product pricing, in part, due to the competitive adult-use market thus lower net revenue per gram sold. The second factor is the Company’s shift towards focusing its resources on the adult-use market. Finally, bulk, value based product offerings have been introduced beginning in the third quarter of fiscal 2020, such as the Company’s 28 gram sized dried flower offerings.

WHOLESALE SALES

Wholesaling activity consists of 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 and therefore by nature contribute a higher net revenue per gram sold.

During the three months ended October 31, 2020, the Company continued its wholesaling activity with licensed producers and recognized $401 of bulk trim sales. The period’s sales decreased from $655 of bulk dried bud and distillate in the prior quarter, however, the net revenue per gram sold remained consistent. There was no wholesaling activity in the first quarter of fiscal year 2020.

Currently, the Company’s primary focus remains on the adult-use retail market, however, additional wholesaling opportunities continue to be assessed and evaluated as they arise and may or may not continue to be realized in future periods.

INTERNATIONAL SALES

The Company began selling internationally in the fourth quarter of fiscal 2020 with its sales to Israel. These sales continued in the period, remaining relatively flat at $1,125 and contributed $2.50 per gram sold compared to $1,291 and $2.62, in the previous quarter, respectively.

These sales currently arise from a 24-month purchase agreement established with an Israel based medical cannabis company at the end of fiscal year 2020. These sales are also free of excise taxes as this burden belongs to the acquirer and ultimately the seller of the cannabis products and therefore by nature contribute a higher net revenue per gram sold.

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.

The following table summarizes and reconciles the Company’s gross profit line items per IFRS to the Company’s selected non-IFRS measures gross profit before adjustments and gross profit before fair value adjustments. Refer to section ‘Non-IFRS Measures’ for definitions.

21    MD&A

For the  three months ended	October 31, 2020			July 31, 2020			October 31, 2019
	$			$			$
Revenue from sale of goods		41,300			36,140			19,297
Excise taxes		(11,887	)		(9,082	)		(4,839	)
Net revenue		29,413			27,058			14,458
Ancillary revenue		55			87			41
Cost of sales		(19,087	)		(19,041	)		(9,947	)
Gross profit before adjustments		10,381			8,104			4,552
Write off of biological assets and destruction costs		—			—			663
Write off of inventory		—			2,217			2,175
Write down/(up) of inventory to net realizable value		(1,543	)		41,899			23,041
Gross (loss)/profit before fair value adjustments		11,924			(36,012	)		(21,327	)
Realized fair value amounts on inventory sold		4,806			6,656			6,663
Unrealized gain on changes in fair value of biological assets		(11,096	)		(7,978	)		(7,051	)
Gross (loss)/profit		18,214			(34,690	)		(20,939	)

EXCISE TAXES

Excise taxes are applicable to the adult-use and medical sales. Excise taxes are presented against the revenue generated by the sale of cannabis to derive the Company’s net revenues on cannabis sales. Excise taxes for flower-based products 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. Excised taxes for distillate, oil-based products, such as the adult-use cannabis infused beverages are applied on the basis of a fixed amount per mg of THC, whereas CBD products are free of excise taxes.

Wholesale and International based sales are free of the excise tax burden.

Excise taxes as a percentage of beverage-based adult-use sales in the quarter decreased 10% quarter over quarter. The reason for this is due to the previous periods’ beverage sales were comprised of Veryvell oil dropper products only, which possess a higher excise tax burden due to the content of THC mg’s per unit when compared to the bottled/canned cannabis beverage products. The current periods beverage sales mix was 86% bottled/canned products which possess the excise tax burden applicable to a maximum of 5-10mg per unit, which has driven the excise taxes per revenue ratio down to 7%.

As a result of the approximate doubling of adult-use non-beverage sales in the period when compared to the first quarter of fiscal 2020, excise taxes corresponded by increasing 148%. As a percentage of revenues, excise taxes have grown to approximately 32% compared to around 28% and 26% in the previous quarter and comparative years period, respectively. The increase is, in part, driven by the impact of the Original Stash high volume value products representing a larger percentage of the total sales. These products possess a relatively low sales price per gram and thus inflates the excise tax expenses per sales dollar earned.

COST OF SALES & GROSS MARGIN BEFORE ADJUSTMENTS

The following table illustrates the breakout of gross profit before adjustments (non-IFRS measure) by sales stream for the three months ended October 31, 2020 and July 31, 2020;

For the three months ended	Adult-Use (excluding beverages)			Medical			International			Wholesale			Total non- beverage			Adult-use beverages			Company total
October 31, 2020	$			$			$			$			$			$			$
Net revenue		24,344			486			1,125			401			26,356			3,057			29,413
Cost of sales		15,497			123			317			113			16,050			3,037			19,087
Gross profit before adjustments ($)		8,847			363			808			288			10,306			20			10,326
Gross margin before adjustments (%)		36	%		75	%		72	%		72	%		39	%		1	%		35	%
July 31, 2020	$			$			$			$			$			$			$
Net revenue		22,575			548			1,291			655			25,069			1,989			27,058
Cost of sales		13,663			119			642			222			14,646			4,395			19,041
Gross profit before adjustments ($)		8,912			429			649			433			10,423			(2,406	)		8,017
Gross margin before adjustments (%)		39	%		78	%		50	%		66	%		42	%		(121	%)		30	%

Cost of sales for the three months ended October 31, 2020 remained consistent with previous quarter. The costs of sales remaining static and gross sales increasing by 14% is the result of the following factors. The first being an increase to CIB related sales and improvement of gross margin. The second factor being the reduction in gross margin of the adult-use non-beverage sales stream. Finally, the bolstered gross margins of international and wholesale sales also contributed

22    MD&A

Cost of sales for the current quarter increased 92% from $9,947 in the comparative period of fiscal 2020, which is consistent with the significant increase in gross sales during that period.

The Company’s consolidated gross margin for the three months ended October 31, 2020 improved to 35% from 30%, quarter over quarter. This increase is directly attributable to an improved gross profit of CIB during the period, which is the result of the increased sales and production levels, as the ramp up to optimal monthly production rates continues, thus reducing the fixed costs of production per unit.

During the period the Company’s total non-beverage gross margin declined approximately 3% from 42% in the previous quarter. The major contributing factor to this, was the Company’s non-beverage adult-use gross margin decreasing 3% to 39% in the period. This was due to the Company’s sales mix in the period increasing towards higher sales of value brand bulk dried flower. Also, the increase in hash of 168% period over period and other distillate-based products such as vapes and KLIK, led to a reduced margin. This is due to the flow through of higher costing gram equivalents being utilized within these products which are now being sold. The Company continues to make operational efficiencies and increase production output. These advancements, when realized, will result in improved applicable gross margins.

International sales to Israel continued in the period, which contained a 72% gross margin, up from 50% in the previous quarter. The increase is due to additional packaging costs incurred in the prior period which was adjusted for prospectively. As previously disclosed, wholesale activity and the associated gross margins may vary from period to period as they are dependent upon the specific wholesale agreements with other licensed producers. Medical sales gross margin remained relatively consistent, period over period dropping slightly by 3% due to a reduction in oils sales in the period.

IMPAIRMENTS AND WRITE OFFS

The Company recorded a reversal of impairment in the three months ended October 31, 2020 of $1,543. The reversal was due to the Company selling previously impaired adult-use dried flower product in the current period.

The Company write downs on inventory to net realizable value of $23,041 during the three months ended October 31, 2019. The impairment losses were realized on the Company’s inventory and were comprised of the following;

• Write down of a surplus of cannabis trim (trim was primarily used for extraction purposes) and milled products the amount of $14,016 due to an excess of stock relative to the Company’s short-term demand for cannabis distillate production;

• Write down 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;

• Write down 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;

• Write down 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; and

• 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, which was ultimately sold. This amount is comprised of $438 of biological asset impairment, $225 incurred associated with destruction costs of biological assets and $2,175 incurred for the destruction of inventory.

The continuing evolution of the cannabis industry and market conditions represent ongoing uncertainties that may affect the Company’s future financial results and impairments. See “Risk Factors” for additional economic and inventory risks.

FAIR VALUE ADJUSTMENTS

The realized fair value adjustment on inventory sold for the quarter ended October 31, 2020 decreased by 17% from $6,656 in the previous quarter. This variance relates to the increased sales mix of the value brand product formats such as 28g and 14g formatted Original Stash dried flower sales which possess a relatively low fair value per gram. The sale of trim derived products and distillate based products such as vapes, which also contribute a lower fair value adjustment on sales compared to the prior quarter, partially offset by increased total sales in the quarter.

The realized fair value adjustment on inventory sold for the quarter ended October 31, 2020 decreased by 18% from $6,663 in the comparative quarter of fiscal 2020. This variance is due to the above stated factors, as well as increased sales volumes offset by the decrease in the fair value per gram and gram equivalent sold when compared to the fourth quarter of fiscal 2020, due to pricing adjustments.

The unrealized gain on changes in fair value of biological assets for the current quarter increased to $11,096 compared to $7,978 for the prior quarter. The estimated yields on biological assets also increased in the period, as expected, due to the cyclical nature of climate change as we move past the warmer summer months, historically the Company’s lowest yields are experienced in the fourth fiscal quarter due to this. The use of higher yielding strains also contributed to the increase. The total number of plants on hand rose to 325,909 from 318,778, between quarters also aiding in the increase to the unrealized gain.

23    MD&A

The unrealized gain on changes in fair value of biological assets increased significantly from $7,051 in the same quarter of fiscal 2020 due to increased total number of plants on hand, increased expected yields as the Company continuously improves harvesting.

Operating Expenses

For the three months ended	October 31, 2020		July 31, 2020			October 31, 2019
	$		$			$
Selling, general and administration		11,916		12,436			15,973
Marketing and promotion		2,082		2,375			6,220
Share-based compensation		2,930		4,373			8,164
Research and development		1,033		677			1,744
Depreciation of property, plant and equipment		1,078		1,179			1,333
Amortization of intangible assets		331		249			1,666
Restructuring costs		525		(79	)		3,722
Impairment of property, plant and equipment		803		46,414			702
Impairment of intangible assets		—		2,000			—
Realization of onerous contract		—		1,763			—
Disposal of long-lived assets		78		122			—
Total		20,776		71,509			39,524

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

SELLING, GENERAL AND ADMINISTRATIVE

During the three months ended October 31, 2020, the Company’s selling, general and administrative expenses decreased by 25% from $15,973 compared the first quarter of fiscal 2020. The Company executed a strategic plan in the later half of the prior fiscal in moving towards the goal of being adjusted EBITDA positive and reducing its operating expenses.

• Total insurance expenses were reduced by $2,614, due to reduced directors and officer’s insurance as the Company was insured through a captive program;

• General consulting expenses were reduced by $1,491 as the Company has reduced certain ongoing initiatives and its total vendors utilized by roughly 50% due to the maturity of its operations; and

• Travel related expenses were reduced by $822 due to a general reduction in corporate travelling which, in part, is impacted by the COVID-19 pandemic.

The quarter over quarter selling, general and administrative expenses were reduced 4% as the Company continues to establish streamlined operations and lean out its operating expenses.

MARKETING AND PROMOTION

As compared to the three months ended October 31, 2019, marketing and promotion expenses decreased 67% from $6,220. This decrease is attributable to the rightsizing and cost reduction activities undertaken during the first and second quarters of fiscal year 2020. Promotional and sponsorship expenses in the comparative period were higher by $3,300 due to continuous marketing activities related to the cannabis 2.0 market which was legalized in mid-October 2019 as well as additional campaigns to increase brand awareness for new offerings such as Original Stash. Subsequent periods have experienced a more stable, reduced marketing and promotional expenses as a result.

Quarter over quarter marking and promotion expenses decreased $12% or $293. The decrease is attributable to reduced promotional activity in the period.

RESEARCH AND DEVELOPMENT (“R&D”)

During the three months ended October 31, 2020, R&D related expenses increased 53% period over period. This increase is the result of recasting of the Company’s Brantford facility as an R&D facility in which future strain development takes place. These associated costs are expensed rather than capitalized to inventory as a result have increased expense by $342 in the current period.

Compared to the first quarter of fiscal 2020, R&D expenses declined by 41%. This decrease is reflective of the rightsizing of the R&D and innovation departments during the second quarter of fiscal 2020, resulting in lower payroll related expenses across the department. Therefore, in the comparative period, the R&D and innovation expenses were still reflective of the Company preparing for the legalization of cannabis 2.0 in Canada and building the associated portfolio to launch into the new market.

SHARE-BASED COMPENSATION

In the three months ended October 31, 2020, share-based compensation decreased 33% and 64% from $4,373 in the previous quarter and $8,164 in the comparative period of fiscal 2020, respectively. The decrease is attributable to the vesting structuring of high value stock option grants issued in fiscal 2019 winding down towards less expensive vesting periods. Share-based expenses are weighted more significantly in the first twelve months after issuance due to their vesting structure, thus, critical vesting milestones have been

24    MD&A

reached. Subsequent grants in fiscal 2020 possess a lower call option burden to the Company due to lower market prices, and therefore lower contribution of expenses over time.

DEPRECIATION OF PROPERTY, PLANT AND EQUIPMENT

The expensed depreciation of property, plant and equipment remained relatively consistent quarter over quarter and as compared to the first quarter of fiscal 2020.

AMORTIZATION OF INTANGIBLE ASSETS

During the three months ended October 31, 2020 the amortization of intangible assets remained consistent quarter over quarter.

The amortization of intangible assets decreased by $1,335 in the quarter when assessed against the comparative period of 2020. This decrease is the result of the disposal of the acquired cultivation licenses of the Niagara facility which was sold in June 2020 and therefore a lower cost base to which amortization is being applied.

RESTRUCTURING COSTS

During the period the Company began its first step in executing a restructuring of the business which resulted in costs of $525 for executive severance. An additional restructuring phase was undertaken subsequent to the period (see section ‘Restructuring’).

During the three months ended July 31, 2020, the Company realized a minor recovery on previously provisioned restructuring costs associated to the rightsizing of operations which took place in the first quarter of fiscal 2020.

These expenses were the result of the restructuring efforts to rightsize the Company as previously disclosed in the Company’s annual MD&A of fiscal 2020 in section ‘Corporate Restructuring.’ These costs were primarily comprised of severance, consulting fees and other payroll related termination costs.

IMPAIRMENT OF PROPERTY, PLANT AND EQUIPMENT

Impairment losses on property, plant and equipment in the three months ended October 31, 2020 were $803 and driving this loss was a $761 impairment loss on the abandoned Montreal facility lease. The Company is currently assessing its options which may result in subletting the facility for the remainder of the lease agreement. The Company experienced similar impairment losses in the comparative period of fiscal 2020 in which the Company impaired the leases associated to the previous administrative office spaces in Hull Quebec.

During the previous quarter, impairment losses amounted to $46,414. On July 31, 2020, there existed indication of impairment to the Company’s CGU. During this review, management identified certain idle and/or redundant property, plant and equipment which did not contribute the Company’s future cash flows and does not currently align with the Company’s forecasted output. These assets were then impaired to their recoverable amount.

ONEROUS CONTRACT

The Company incurred no losses on onerous contracts during the three months ended October 31, 2020 and 2019.

During the three months ended July 31, 2020 the Company recognized onerous contract provisions of $1,763 relating to a fixed price supply agreement for the supply of certain cannabis products to which the Company is currently liable to receive. The onerous portion of the supply agreement is the deemed excess contract price over the current market pricing. The supply agreement is currently the subject of legal proceedings (see section – ‘Litigation’). The costs and purchase obligations under the contract exceed the economic benefits expected to be received.

Other Income and Losses

For the three months ended	October 31, 2020			July 31, 2020			October 31, 2019
	$			$			$
Revaluation of financial instruments gain/(loss)		733			(1,433	)		297
Share of loss from investment in associates and joint ventures		(1,073	)		(1,863	)		(1,682	)
Loss on inducement of convertible debentures		—			(54,283	)		—
Unrealized loss on convertible debenture receivable		—			(86	)		(2,627	)
Unrealized loss on investments		(587	)		(4,345	)		(1,671	)
Realized gain on investments		—			—			17
Foreign exchange gain/(loss)		(461	)		(1,623	)		(46	)
Interest and financing expenses		(2,307	)		(2,731	)		(435	)
Interest income		412			662			571
Other income		1,648			2,369			—
Total non-operating income/(loss)		(1,635	)		(63,333	)		(5,576	)

25    MD&A

REVALUATION OF FINANCIAL INSTRUMENTS

On October 31, 2020, the Company revalued its financial instruments which resulted in a gain of $733 as the result of a reduction in the Company’s market price to $0.81 as compared to $0.91 at July 31, 2020. The USD denominated warrants result in a liability to the Company and are valued using the Black-Scholes Model at period end. Therefore, the loss incurred in the previous quarter was due to the increase in market price to $0.91 from $0.69 as at April 30, 2020.

The revaluation gain increased when compared to the first quarter of fiscal 2020, due to the decrease in the underlying market price in the current period being greater than the reduction witnessed in the comparative period. The underlying number of USD backed warrants have also increased to 13,473,056 due to the private placements executed in the second quarter of fiscal 2020, from 107,136 in the comparative period.

SHARE OF LOSS FROM INVESTMENT IN ASSOCIATES AND JOINT VENTURES

The line item represents the Company’s share of the operational results of our held interests in associates and joint ventures and therefore are a function of their respective financial results for the period. In the current period, these losses were reduced moderately by the Company’s share of rent recovery income through the BCI joint venture. Excluding this, the losses from the Truss and Truss CBD USA remained relatively constant period over period and as compared to the three months ended October 31, 2019. The Company notes that the prior and comparative period reflect losses from the newly dissolved in the period, HEXO MED joint venture.

LOSS ON INDUCEMENT OF CONVERTIBLE DEBENTURES

There was no loss on early inducement on the Company’s outstanding convertible debentures during the three months ended October 31, 2020 and 2019.

In the prior quarter the Company finalized the early inducement of $29,860 aggregate principal amount of the convertible debentures. Debenture holders who participated in the early conversion were given a conversion factor rate of $0.80 compared to the original factor of $3.16. The early conversion participants were also granted one half-warrant for each common share issued. Effectively, this increase in the fair market value of the debentures resulted in a loss of $54,283 to the Company upon the revaluation of the debentures.

LOSSES ON CONVERTIBLE DEBENTURES RECEIVABLE

Prior to the conversion and disposal of the Company’s convertible debentures receivable, the instruments were marked-to-market at each period end date, resulting in an unrealized gain or loss. The Company convertible and disposed of these assets during the third quarter fiscal year 2020 thus there were no outstanding debentures receivable as of October 31, 2020 and July 31, 2020 and therefore no associated material gain/loss in the period.

In the comparative period the $10,000 of convertible debentures were outstanding and when marked-to-market an unrealized loss of $2,627 was recorded as the result of volatility in the underlying securities market price.

UNREALIZED LOSSES ON INVESTMENTS

During the three months ended October 31, 2020, the unrealized losses on investments were generated through unfavorable volatility in the underlying market prices of held securities. The decrease in these losses compared the comparative period of fiscal 2020 was due to a lower number of common shares and warrants held along with a larger fall in market price on said securities.

In the prior quarter, the majority of the loss was comprised of impairment of a level 3 private investment to its fair value of $nil for a loss of $4,000. The Company also impaired its joint venture investment in HEXOMED down to $nil for a loss of $707 as the joint venture was disbanded during the current period.

FOREIGN EXCHANGE GAIN/(LOSS)

Year over year there was a significant increase in the Company’s USD cash balances due to the two private placements executive in the second quarter of fiscal 2020 which generated gross proceeds of USD$45,000 as well as the June 2020 At-the-Market public offering which raised USD$12,751. As a result, foreign exchange loss activity became material beginning in the prior quarter. The reduction in the loss on foreign exchange quarter over quarter is due to the unfavorable decreased to the USD/CAD FX rate which fell to $1.33 from $1.34. Another driving factor was a reduction in the total USD cash on hand of $11,365 primarily due to foreign exchange rate risk management activity.

INTEREST AND FINANCING EXPENSES

These expenses are comprised of accrued and accreted interest generated the Company’s outstanding convertible debentures issued in December 2019 and therefore these were not present within the comparative period of fiscal 2020. The reduction of these expenses quarter over quarter is due to a full quarter realized of a reduced outstanding balance of convertible debentures after the early conversion of $29,860 in June 2020

OTHER INCOME

During the three months ended October 31, 2020 the Company There was a $1,219 recovery on partnership recognized is Other Income as the result of the Company’s arrangement with Truss in which the Company recovers its net loss incurred due to the operations of HEXO CIB (see section Cannabis Infused Beverage (“CIB”)”). This activity began in the prior period and has been reduced by realized efficiencies in production and fewer unabsorbable fixed and variable costs to CIB as the beverage options work

26    MD&A

towards reaching optimal capacity for output. The Company also realized a gain of $419 through exiting a former administrative office lease, penalty free on August 1, 2020.

Tax Recovery

In the comparative period of October 31, 2019, the Company realized a tax recovery of $6,023 to offset the remaining differed tax liability generated through the acquisition of Newstrike brands in fiscal year 2019. There no were tax recoveries in the current period.

Adjusted EBITDA

As defined under section ‘Non-IFRS Measures’ Adjusted EBITDA is a non-GAAP financial measure that does not have any standardized meaning prescribed by IFRS and may not be comparable to similar measures presented by other companies. The Company calculates Adjusted EBITDA as total net loss, plus (minus) income taxes (recovery), plus (minus) finance expense (income), plus depreciation, plus amortization, plus (minus) investment (gains) losses, plus (minus) non-cash fair value adjustments on the sale of in inventory and biological assets, plus (minus) restructuring costs as these are the associated costs for the severance and other payroll related expenses to restructure the Company in such a manner that they are not expected to be a part of the Company’s continuous operations, plus (minus) certain non-cash items, as determined by management as follows:

	Q1’21			Q4’20			Q3’20			Q2’20			Q1’20
	$			$			$			$			$
Total net loss		(4,197	)		(169,532	)		(18,837	)		(297,867	)		(60,016	)
Income taxes (recovery)		—			—			—			—			(6,023	)
Finance expense (income), net		1,895			2,069			2,926			3,281			(136	)
Depreciation, included in cost of sales		2,406			1,254			950			920			433
Depreciation, included in operating expenses		1,078			1,179			1,566			1,992			1,333
Amortization, included in operating expenses		331			249			341			1,683			1,666
Investment (gains) losses
Revaluation of financial instruments loss/(gain)		(733	)		1,433			(4,955	)		(2,714	)		(297	)
Share of loss from investment in joint venture		1,073			1,863			1,195			1,591			1,682
Loss/(gain) on convertible debentures		—			86			212			413			2,627
Unrealized loss on investments		587			4,345			311			6,553			1,671
Realized loss/(gain) on investments		—			—			1,217			242			(17	)
Foreign exchange loss/(gain)		461			1,623			(2,443	)		(617	)		46
Loss on inducement of convertible debentures		—			54,283			—			—			—
Non-cash fair value adjustments
Realized fair value amounts on inventory sold		4,806			6,656			10,764			5,447			6,663
Unrealized gain on changes in fair value of biological assets		(11,096	)		(7,978	)		(6,379	)		(7,948	)		(7,051	)
Restructuring costs		525			(79	)		865			259			3,722
Other non-cash items
Share-based compensation, included in operating expenses		2,930			4,373			5,651			7,603			8,164
Share-based compensation, included in cost of sales		596			511			396			964			238
Write-off biological assets and destruction costs		—			—			—			—			663
Write-off of inventory		—			2,217			—			—			2,175
Write (up)/down of inventory to net realizable value		(1,543	)		41,899			(1,331	)		16,089			23,041
Impairment loss on right-use-assets		761			2,000			—			476			702
Gain on exit of lease		(419	)		—			—			—			—
Impairment loss on property, plant and equipment		42			46,414			220			31,606			—
Impairment of intangible assets		—			—			—			106,189			—
Impairment of goodwill		—			—			—			111,877			—
Recognition of onerous contract		—			1,763			—			3,000			—
Disposal of long-lived assets		78			122			3,237			497			—
Adjusted EBITDA		(419	)		(3,250	)		(4,094	)		(8,464	)		(18,704	)

From total net loss, standard EBITDA items such as interest, taxes, depreciation and amortization were added back. Additional investment gains and losses were adjusted as these items are considered non-operating and/or in the start-up phase of operations. Non-cash fair value adjustments to inventory and biological assets were adjusted as these were non-cash. Restructuring costs were adjusted as they are considered non-recurring charges as they relate to one-time severance and payroll related costs outside of the Company’s ongoing operations. Other non-cash items are removed to arrive at Adjusted EBITDA which is a measure used by industry to approximate operating earnings.

During the three months ended October 31, 2020, the Company’s Adjusted EBITDA loss continued to improve as management works towards profitability of the Company. This improvement was driven by increased gross margin before fair value adjustments, as well as

27    MD&A

increased non-cash depreciation expensed through costs of sales due to the impact of produced inventory in periods with higher depreciation being sold. (See section Revenue, Excise taxes and Cost of Sales).

Quarterly Results Summary

The following table presents certain unaudited financial information for each of the eight fiscal quarters up to and including the quarter ended July 31, 2020. Past performance is not a guarantee of future performance, and this information is not necessarily indicative of results for any future period.

	Q1 ’21 October 31, 2020			Q4 ’20 July 31, 2020			Q3 ’20 April 30, 2020			Q2 ’20 January 31, 2020
Net revenue	$	29,468		$	27,145		$	22,132		$	17,007
Total net loss		(4,197	)		(169,532	)		(18,837	)		(297,647	)
Loss per share – basic		(0.01	)		(0.40	)		(0.07	)		(1.13	)
Loss per share – fully diluted		(0.01	)		(0.40	)		(0.07	)		(1.13	)
	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		(60,016	)		(44,729	)		(7,751	)		(4,325	)
Loss per share – basic		(0.23	)		(0.21	)		(0.04	)		(0.02	)
Loss per share – fully diluted		(0.23	)		(0.21	)		(0.04	)		(0.02	)

The net loss in the period was reduced significantly quarter over quarter mostly due to the previous period incurring $144,813 of total impairments and losses composed of; $54,283 of loss on inducement of convertible debentures (see ‘Other Income and Losses’); $46,414 of property, plant and equipment impairment (see ‘Operating Expenses’) and $44,116 of write offs and write downs of inventory in the period (see ‘Cost of Sales, Excise Taxes and Fair Value Adjustments’). The net of Q3 fiscal 2020 decreased significantly from the previous quarter as a result of $250,850 in impairments to goodwill, property, plant and equipment, intangible assets associated with the Niagara, ON facility realized in that period. The first quarter’s loss of fiscal 2020 was mostly impacted by $25,879 of inventory and biological asset impairment losses and write offs.

Financial Position

The following table provides a summary of our condensed interim consolidated financial position as at October 31, 2020 and July 31, 2020:

	October 31, 2020			July 31, 2020
Total assets	$	693,773		$	692,869
Total liabilities		137,760			136,193
Share capital		1,023,588			1,023,788
Share-based payment reserve		64,191			65,746
Warrants		95,617			95,617
Contributed Surplus		32,295			27,377
Non-controlling interest		3,750			3,379
Deficit	$	(663,428	)	$	(659,231	)

Total Assets

On October 31, 2020, total assets remained moderately flat, increasing less than 1% or $904 from $692,869 as at July 31, 2020. The following activities and events resulted in the nominal net increase during the period comprised of following variances:

• The Company’s cash balance decreased $34,400 due to a captive insurance deposit of $23,000 (classified as restricted cash on the balance sheet) for a net decrease of $11,237;

• Inventory increased $9,664 as the result of and increased to hash production of approximately $6,500 and an increase of $1,208 cannabis infused beverages both continue to build inventory to meet market demand. Packing materials increased approximately $600 as the Company transitions to pouch packaging from jars;

• Biological assets increased by $2,903 due to expected yields increased period over period due to entering a higher yielding, weather favorable season to harvest;

• Property, plant and equipment was decreased on a net basis of $1,650 as depreciation and impairments were greater than the periods additions of $3,955;

• Investments in joint venture and associates decreased by $1,074 due to the Company’s shares of losses picked up through the equity method of accounting; and

• Long term prepaid expenses increased by $1,657 due to a deposit made in the same amount to an insurance provider in place of a surety bond as required by the Canadian Tax Agency’s excise tax laws.

Total Liabilities

Current liabilities at October 31, 2020 decreased 30% from $82,487 at July 31, 2020. The significant reduction in the current liabilities balance since July 31, 2020 was caused by the Company not being in breach of its debt covenants as at October 31, 2020 (Note 15 of

28    MD&A

the condensed interim consolidated financial statements for the three months ended October 31, 2020), which was not the case at July 31, 2020. Hence is why, the long-term liability balance was proportionally increased in the period. This reclassification was offset by a nominal 2% increase due to a general increase in accounts payable and accrued liabilities due to increased activity in the CIB division as operations continue to scale. Offsetting this increase was the decrease of $2,985 in excise taxes payable as the Company held 2 months of excise taxes payable as at July 31, 2020 compared to just the one month at the period end.

Long term liabilities increased during the period to $79,723 from $53,706 as at July 31, 2020. The increase is due to the above as well as the convertible debentures accretion activity of $956, offset by the payments made against the Company’s term loan $875 and the reduction of the warrant liability of $733.

Share Capital

There were no material changes to the share-based payment reserve between the period end dates October 31, 2020 and July 31, 2020.

Share-Based Payment Reserve

The shares-based payment reserve decreased on a net basis by $1,555 compared to the balance of $65,746 as at July 31, 2020. The net decrease is the result of expired vested stock options of $4,918 exceeding the $3,363 of share-based compensation issued in the period. The high value of expired vested stock options in the period is the result of the restructuring activity which occurred in October 2019. The Company’s standard policy is vested stocks options expire after the one-year anniversary date of termination/voluntary exiting.

Warrants Reserve

There were no changes to the warrant reserve between the period end dates October 31, 2020 and July 31, 2020.

Contributed Surplus

The Company’s contributed surplus increased by $4,918 during the three months ended October 31, 2020 due to the expired stock options as stated above.

Liquidity and Capital Resources

Liquidity

Our objectives when managing our liquidity and capital structure are to maintain sufficient cash to fund our working capital needs, capital asset development and contractual obligations.

For the three months ended	October 31, 2020			October 31, 2019
	$			$
Operating activities		(6,104	)		(34,219	)
Financing activities		(3,270	)		(1,136	)
Investing activities		(25,026	)		(36,936	)

Operating Activities

Net cash used in operating activities for the three months ended October 31, 2020 decreased by 82% from ($34,219) in the comparative period as a result following:

• A reduction in the period’s net loss of $61,819;

• Net revenue increase of $14,969;

• Changes to items note affected cash of $3,023 (October 31, 2019 –$37,173) composed primarily of;

• Impairment and write offs of inventory added back were $1,543 of reversed impairment (October 31, 2019 – $25,879 of impairments and write offs);

• Share-based compensation add back reduced to $2,930 (October 31, 2019 –$8,164);

• Changes to non-cash working capital of ($4,930) (October 31, 2019 – ($11,376)) composed of;

• Increase of inventories carried of ($12,688) (October 31, 2019 – increase ($32,823));

• Increase in commodity taxes and other receivable collection of $3,669; and

• Offset by a reduction in cash collection of accounts receivable by $14,219

Financing Activities

Net cash used in financing activities for the three months ended October 31, 2020 was $3,270, increasing from net cash used in the comparative period of $1,136 due to the following transactions.

• Term loan payments of principal and interest amounted to $1,160 (October 31, 2019 – $872);

• Interest on the December 2019 issued convertible debentures in the period was $803 (October 31, 2019 – $nil); and

29    MD&A

• Lease payments and the respective interest payments were $1,107 (October 31, 2019 – $369).

Investing Activities

Cash used for investing activities in the three months ended October 31, 2020 was $25,026, an increase from cash outflows of $36,939 in the comparative period. The reduction in cash outflows was due of the following;

• A deposit of $23,000 was made to fund the Company’s captive insurance (October 31, 2019 – $nil);

• Acquired of property, plant and equipment for continuing capital projects was $1,709 (October 31, 2019 – cash used was $45,248); and

• Capital calls were made to the Company’s joint ventures and investments in associates of were $nil (October 31, 2019 – $7,650).

Capital Resources

As at October 31, 2020, working capital totaled $250,312. The exercise of all the in-the-money warrants and stock options of the Company issued and outstanding as of October 31, 2020, using the closing market price of the common shares on the TSX of $0.81 on October 31, 2020, would result in an increase of cash of approximately $202 and $3,183, respectively.

The current periods operational cash outflows were reduced by $28,115 when compared to the three months ended October 31, 2019. The Company is continuously assessing its operational expenditures in order to streamline the business and cut down operational losses each period on the path to generating earnings per share. This is evidenced by the declining adjusted EBITDA over the past five fiscal quarters.

The following table provides information about the Company’s remaining funds from recent public offering and private placement and the actual use of proceeds from those financings compared to the intended use of proceeds from the offerings. The remaining cash related to financings raised for general corporate and working capital needs are prorated based timing of funds raised and the current periods cash flow.

Date	Type	Gross Proceeds	Initially Intended Use of Net Proceeds	Actual Usage of Proceeds
April 13, 2020	Underwritten public offering (see below)	$46,046	The net proceeds generated from the public offering amounted to $43,290. The Company’s stated intended use of the net proceeds were for working capital and general corporate purposes.	Management has not adjusted its originally intended use of the net proceeds of the financing. To the extent that the Company has negative operating cash flows in future periods, it may need to deploy a portion of the net proceeds from the Offering and/or its existing working capital to fund such negative cash flow. Management will have significant discretion and flexibility in applying the net proceeds from the underwritten public offering. During the period the Company established a cell captive insurance program which resulted in the deposit of $23,000 which is currently held as restricted cash for director and officer insurance. This has been applied against raised capital. After applying the current periods adjusted net loss and due to the timing of the financing the Company utilizing raised funds for general purposes on a first in, first out basis, the raise funds have been utilized as at October 31, 2020.
May 21, 2020	Underwritten public offering (see below)	$57,545	The net proceeds generated from the financing amounted to $54,493. The Company expects to use the net proceeds from the Offering for working capital and other general corporate purposes.	The Company has remained compliant with its stated intended use as at October 31, 2020 and management has not undertaken new direction over the intended use of these funds as at the reporting date. Due to the timing of the financing the Company utilizing raised funds for general purposes on a first in, first out basis, there is an estimated $49,879 remaining at period end.

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July 16, 2020 to July 31, 2020 At-the-market public offering   (see below) $34,551 The net proceeds generated from the financing amounted to $33,236.   The Company expects to use the net proceeds from the ATM Program for general corporate purposes, which may include: (i) working capital; (ii) capital expenditures; and (iii) debt repayments. The Company has remained compliant with its stated intended use as at October 31, 2020 and management has not undertaken new direction over the intended use of these funds as at the reporting date.   Debt repayments on the Company’s term loan was $875 in the period and was applied against the financing.   Due to the timing of the financing the Company utilizing raised funds for general purposes on a first in, first out basis, there is an estimated $32,388 remaining at period end.

April 2020 Underwritten Public Offering

On April 13, 2020, the Company closed an underwritten public offering for the purchase and sale of 59,800,000 units at a price of $0.77 per unit for gross proceeds of $46,046 before deducting fees and other estimated offering expenses, including 7,800,000 units sold pursuant to the exercise in full of an over-allotment option on closing. Each unit was comprised of one common share and one common share purchase warrant. The warrants have a five year-term and an exercise price of $0.96 per share.

May 2020 Underwritten Public Offering

On May 21, 2020 the Company closed an underwritten public offering for total gross proceeds or $57,545 through the issuance of 63,940,000 units at a price of $0.90 per unit. Each unit contained one common share and one common share purchase warrant (Note 22). Total issuance costs amounted to $3,065.

June 2020 ATM Offering

On June 16, 2020, the Company established the ATM program allowing the Company to issue up to $34,500 (or its U.S. dollar equivalent) of common shares to the public. The common shares sold through the ATM program were to be sold through the TSX, the NYSE and other marketplaces on which the common shares were listed, quoted or otherwise traded, at the prevailing market price at the time of sale. The program closed on July 31, 2020 and a total of approximately $34,551 (after foreign exchange gains were applied) was generated through the issuance of 32,942,479 common shares in the year ended July 31, 2020. On July 31, 2020 a receivable of $883 remained for irrevocable sales which occurred prior to year-end and subsequently settled on August 5, 2020, at which time the remaining 979,500 shares were issued. Total issuance costs and broker fees amounted to $1,274.

Capitalization Table

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, options and restricted share units as at December 14, 2020, October 31, 2020 and July 31, 2020.

	December 14, 2020		October 31, 2020		July 31, 2020
Common shares		488,645,748		483,445,248		482,465,748
Warrants		128,322,107		133,517,607		133,517,607
Options		29,825,533		30,740,534		30,014,703
Restricted share units		2,237,872		2,237,872		2,348,343
Convertible debentures		13,830,696		13,830,696		13,830,696
Total		662,861,956		663,771,957		662,177,097

As stated in section “Other Corporate Highlights and Events” for the current period, the Company issued a proposed 4 to 1 share consolidation to its shareholders, which was voted on and approved on December 11, 2020. The below table represents the estimated result of the post consolidation balances of issued and outstanding common shares and related securities as at December 14, 2020, October 31, 2020 and July 31, 2020.

	December 14, 2020		October 31, 2020		July 31, 2020
Common shares		122,161,437		120,861,312		120,616,437
Warrants		32,080,527		33,379,402		33,379,402
Options		7,456,383		7,685,134		7,503,676
Restricted share units		559,468		559,468		587,086
Convertible debentures		3,457,674		3,457,674		3,457,674
Total		165,715,849		165,942,990		165,544,275

Estimates are subject to change due to rounding activity.

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Off-Balance Sheet Arrangements and Contractual Obligations

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

On February 14, 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 provided the Company with up to $65,000 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 consisted of an up to $50,000 term loan (“Term Loan”) and up to a $15,000 in a revolving credit facility which since expired in the year end July 31, 2020. The credit facility matures in February 14, 2022. The Company may repay the loan without penalty, at any time and the loan is secured against the Company’s property, plant and equipment. The Company shall repay at minimum 2.5% of the initial amount drawn each quarter per the terms of the credit facility agreement. On February 14, 2019, the Company received $35,000 on the Term Loan and incurred financing costs of $1,347.

During the year ended July 31, 2020 the Company amended its credit facility which resulted in:

(i) The modification of financial covenants which require the Company to:

i. Maintain a Tangible Net Worth Ratio of not more than 1:00 to 1:00 at all times;

ii. Maintain a Cash Balance of more than $15,000 at all times; and

iii. Maintain certain EBITDA requirements (as defined in the Credit Facility Agreement) with respect to each Fiscal Quarter.

The Company was in compliance with the revised financial covenants noted above as at October 31, 2020.

On July 31, 2020 the Company was not in compliance with an administrative banking covenant which mandated that the Company does not utilize a Canadian dollar operating bank account with any institution other than the Lenders. The Company was subject to the covenant 90 days after entering the syndicated credit facility on February 14, 2019. The Company received an amendment on October 29, 2020 allowing it to rectify this administrative breach by April 27, 2021. Therefore, since the amendment was received after July 31, 2020 and within the three months ended October 31, 2020 the Company classified its Term Loan as a current liability on July 31, 2020 and has classified the Term Loan between current and long term liabilities as appropriate at October 31, 2020. As at October 31, 2020 the Company continues working towards satisfying the terms of the above amendment.

Commitments

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

Year ended July 31,	2021		2022 – 2023		2024 – 2025		Thereafter		Total
	$		$		$		$		$
Accounts payable and accrued liabilities		38,520		—		—		—		38,520
Excise taxes payable		4,136		—		—		—		4,136
Onerous contract		4,763		—		—		—		4,763
Convertible debentures		—		46,405		—		—		46,405
Term loan		2,625		26,250		—		—		28,875
Lease obligations		3,415		9,267		8,749		31,082		52,513
Capital projects (1)		4,737		—		—		—		4,737
Capital calls		2,975		—		—		—		2,975
Service contracts		4,426		1,222		213		—		5,861
Purchase contracts		127		—		—		—		127
Lease based operating expenses (2)		2,747		7,088		5,894		19,274		35,003
		68,491		90,232		14,856		50,356		223,935

(1) Note the Company presents in commitments on capital projects on the basis of committed amounts to enacted purchase orders and therefore, inherently there may be differences between committed capital and approved budgets for capital projects. Refer ‘HEXO GROUP OF FACILTIES” for a general summary of these projects and their respective remaining approved capital budgets.

(2) Lease based operating expense represent the variable operating expenses associated with the lease obligation under IFRS 16, Under IFRS all amounts charged that have no minimum fixed charge are considered variable and not capitalized.

32    MD&A

LITIGATION

Class Actions

As of October 31, 2020, the Company is named as a defendant in securities class actions that have been filed in superior courts of the provinces of Quebec and Ontario and in the Supreme Court of the State of New York and the U.S. District Court for the Southern District of New York. One or more of the Company’s current and/or former officers and directors, and/or certain underwriters of past public offerings by the Company, are also named as defendants in certain of the actions. The lawsuits assert causes of action under Canadian and U.S. securities legislation, and at common law, in connection with statements made by the defendants that are alleged to have been materially false and/or misleading statements and their alleged failure to disclose material adverse facts. The alleged misrepresentations relate to, among other things, the Company’s forward-looking information, including but not limited to the Company’s forecast revenues for Q4 2019 and fiscal 2020, its inventory, “channel stuffing” and the Company’s supply agreement with the Province of Quebec. As at the date hereof, the amounts claimed for damages in each of these actions have not been quantified. These actions are in a preliminary stage and have not yet been certified as class actions.

While the Company cannot predict the outcome of the actions discussed above, it intends to assert all available defences and vigorously defend these proceedings. Defending litigation, whether or not meritorious, is time-consuming for our management and detracts from our ability to fully focus our internal resources on our business activities. In addition, legal fees and costs incurred in connection with such activities may be significant and we could, in the future, be subject to judgments or enter into settlements of claims for significant monetary damages. Further, the Company’s underwriting agreement with the underwriters contains contractual indemnification provisions that may require the Company to indemnify the underwriters with respect to the claims against them and their legal costs of defending the actions. A decision adverse to our interests could result in the payment of substantial damages and could have a material adverse effect on our cash flow, results of operations and financial position, and the limits of available insurance may be insufficient to cover our eventual liability.

As of October 31, 2020, the Company was named as a defendant in a proposed consumer protection class action filed on June 18, 2020 in the Court of Queens’ Bench in Alberta on behalf of residents of Canada who purchased cannabis products over specified periods of time. Several other licensed producers are also named as co-defendants in the action. The lawsuit asserts causes of action, including for breach of contract and breach of consumer protection legislation, arising out of allegations that the Tetrahydrocannabinol (THC) or Cannabidiol (CBD) content of medicinal and recreational cannabis products sold by the Company and the other defendants to consumers was different from what was advertised on the products’ labels. Many of the cannabis products sold by the Company and other defendants were allegedly sold to consumers in containers using plastic bottles or caps that may have rapidly absorbed or degraded the THC or CBD content within them. By allegedly over-representing the true amount of THC or CBD in the products, the plaintiff claims that consumers would be required to consume substantially more product than they otherwise would have in order to obtain the desired effects or, in the alternative, would have consumed the product without obtaining the desired effects. The action has not yet been certified as a class action.

MediPharm

On January 24, 2020, the Company was served with a statement of claim commenced by a vendor in respect of a supply agreement that was purportedly entered into between UP Cannabis and the vendor prior to the Company’s acquisition of Newstrike on May 24, 2019. The statement of claim filed against the Company is seeking payment of invoices alleged to be owing. In response, the Company filed a statement of defence and counterclaim on February 26, 2020. The supply agreement purports to contemplate that the Company would purchase certain cannabis products until February 2020. The Company intends to vigorously defend itself against such claim and intends to actively advance its counterclaim which alleges, among other things, that the supply agreement is void as it was entered into in bad faith.

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 minimal exposure to interest rate risk related to any investments of cash and cash equivalents and its term loan. The Company may invest cash in highly liquid investments with short terms to maturity that would accumulate interest at prevailing rates for such investments. As at October 31, 2020, the Company had a term loan with a carrying value of $29,109 (July 31, 2020 – $29,930). All interest rates are fixed. An increase or decrease of 1% 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 is based on quoted market prices, which the shares of

33    MD&A

the investments can be exchanged for. The Company elected an early conversion option in the year ended July 31, 2020 in which $29,860 of the aggregate principal amount of its 8% unsecured convertible debentures were converted, which partially mitigates the Company’s Price Risk.

There would be no material impact (July 31, 2020 – no material impact) if the fair value of these financial assets were to increase or decrease by 10% as of October 31, 2020. The price risk exposure as at October 31, 2020 and July 31, 2020 is presented in the table below.

	October 31, 2020			July 31, 2020
	$			$
Financial assets		2,627			2,692
Financial liabilities		(2,717	)		(3,450	)
Total exposure		(90	)		(758	)

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, 2020, 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, and adult use sales are transacted with crown corporations, the Company has limited credit risk.

Cash and cash equivalents and short-term investments are held with four Canadian commercial banks that hold Dun and Bradstreet credit ratings of AA (July 31, 2020 – AA) and $145 is held with a credit union that does not have a publicly available credit rating. The majority of the trade receivables balance is held with crown corporations of Quebec, Ontario and Alberta. Creditworthiness 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 three months ended October 31, 2020 is $34 (July 31, 2020—$35).

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 have similar 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 and trade receivables represents the maximum exposure to credit risk and as at October 31, 2020; this amounted to $203,164 (July 31, 2020 – $211,860).

The following table summarizes the Company’s aging of trade receivables as at October 31, 2020 and July 31, 2020:

	October 31, 2020		July 31, 2020
	$		$
0–30 days		14,089		15,253
31–60 days		6,976		2,972
61–90 days		199		412
Over 90 days		703		789
Total		21,967		19,426

Economic Dependence Risk

Economic dependence risk is the risk of reliance upon a select number of customers, which significantly impacts the financial performance of the Company. For the three months ended October 31, 2020, the Company’s recorded sales to the crown corporations; Société québécoise du cannabis (“SQDC”) the Ontario Cannabis Store (“OCS”) and the Alberta Gaming, Liquor and Cannabis agency (“ALGC”) representing 54%, 15% and 18%, respectively of total applicable periods gross cannabis sales (October 31, 2019 – three crown corporations representing 93%).

The Company holds trade receivables from the crown corporations SQDC, OCS and the AGLC representing 32%, 29% and 13% of total trade receivable, respectively as at October 31, 2020 (July 31, 2020 – the two crown corps SQDC and OCS representing 47% and 25% of total trade receivables, respectively).

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Liquidity Risk

Liquidity risk is the risk that the Company will not be able to meet its financial obligations as they come due. The Company manages its liquidity risk by reviewing on an ongoing basis its capital requirements. As at October 31, 2020, the Company had $149,773 (July 31, 2020 – $184,173) of cash and cash equivalents and $21,967 (July 31, 2020 – $19,426) in trade receivables.

The Company has current liabilities of $58,037 and contractual commitments of $10,488 due before July 31, 2022. The Company’s existing cash and cash equivalents and trade receivables are expected to provide sufficient liquidity to meet cash outflow requirements over the next twelve months.

The Company’s success in executing on its longer-term strategy is dependent upon its ability to fund the repayment of existing borrowings and to generate positive cash flows from operations. If additional liquidity is required, management plans to secure the necessary financing through the issuance of new public or private equity or debt instruments. There is no assurance that additional future funding will be available to the Company, or that it will be available on terms which are acceptable to management.

The carrying values of cash and cash equivalents, trade receivables and accounts payable and accrued liabilities approximate their fair values due to their short-term to maturity.

Foreign Currency Risk

On October 31, 2020, the Company holds certain financial assets and liabilities denominated in United States Dollars (“USD”) which consist of cash and cash equivalents, and warrant liabilities. The Company does not currently use foreign exchange contracts to hedge its exposure of its foreign currency cash flows as management has determined that this risk is not significant. The Company closely monitors relevant economic information to minimize its net exposure to foreign currency risk. The Company is exposed to unrealized foreign exchange risk through its cash and cash equivalents. As at October 31, 2020, approximately $34,755 USD ($46,286) (July 31, 2020 – $42,981 USD ($57,652)) of the Company’s cash and cash equivalents was in USD. A 1% change in the foreign exchange rate would result in a change of $463 to the unrealized gain or loss on foreign exchange or on the gain or loss on financial instrument revaluation of USD denominated warrants.

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 amended and restated annual audited consolidated financial statements for the fiscal year ended July 31, 2020, which is available under HEXO’s profile on SEDAR and EDGAR.

New & Upcoming Changes in Accounting Standards

New Accounting Policy

CAPTIVE INSURANCE

Insurance coverage for the Company’s directors and officers has been secured through a Captive Cell program (“the Captive Program”). The Captive Program was effected by entering into a participation agreement with registered insurer for the purposes of holding and managing the Company’s coverage funds through a separate cell account (the “Cell Captive”). The Company applies IFRS 10 Consolidated Financial Statements in its assessment of control as it relates to the Cell Captive. The Company’s accounting policy is to consolidate the Cell Captive. Currently the Captive Program funds are held as cash in the Cell Captive with the possibility of reinvestment into short-term investments and/or marketable securities in the future. As the funds cannot be transferred to other parts of the group without providing 6 month notice, the funds are disclosed as Restricted cash. The Company recognizes gains and losses from, interest, foreign exchange activity and/or fair market value adjustments through the Statement of Loss and Comprehensive Loss.

New Accounting Procurement Not Yet Effective

AMENDMENTS TO IAS 37: ONEROUS CONTRACTS AND THE COST OF FULFILLING A CONTRACT

The amendment specifies that the ‘cost of fulfilling’ a contract comprises the ‘costs that relate directly to the contract’. Costs that relate directly to a contract consist of both the incremental costs of fulfilling that contract or an allocation of other costs that relate directly to fulfilling contracts. The amendment is effective for annual periods beginning on or after January 1, 2022 with early application permitted. The Company is currently evaluating the potential impact of these amendments on the Company’s consolidated financial statements.

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 5.24% of the outstanding shares of the Company as at October 31, 2020 (July 31, 2020 – 5.25%).

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

For the year ended	October 31, 2020		October 31, 2019
	$		$
Salary and/or consulting fees		768		792
Termination benefits		525		616
Bonus compensation		—		42
Stock-based compensation		1,927		5,351
Total		3,220		6,801

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.

On October 30, 2020, the Company granted to an executive and a director a total 1,398,606 stock options with an exercise price of $0.97. 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. On this date, 28,645 restricted share units (“RSUs”) were granted to certain directors at a market price of $0.79 on the day of grant.

On June 26, 2020, the Company granted certain of its directors and executives a total 1,800,000 and 1,255,025, respectively stock options with an exercise price of $1.02. 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. A total of 1,010,101 RSU’s were issued on the same date with a unit value of $0.99. The RSUs vest in full on the third-year anniversary after the grant date.

On April 28, 2020, the Company granted certain of its executives a total 900,000 stock options with an exercise price of $0.69. 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.

On October 29, 2019, the Company granted certain of its executives a total of 829,034 stock options and 1,428,449 RSUs with an 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 RSUs vest in full on the third-year anniversary after the grant date.

Belleville Complex Inc.

The Company holds a 25% interest in Belleville Complex Inc. (“BCI”) with the related party Olegna Holdings Inc., a company owned and controlled by a director of the Company, holding the remaining 75% in BCI. BCI purchased a configured 2,004,000 sq. ft. facility through a $20,279 loan issued and repaid during the year ended July 31, 2019. The Company will be the anchor tenant for a 15-year, with an option to renew for 15 years and additional space to rent. The Company has also subleased a portion of the space to Truss Limited Partnership. Consideration for the 25% interest on the joint venture is deemed $nil. The carrying value of BCI as at October 31, 2020 is $nil (July 31, 2020 - $nil).

The Company leases a space in Belleville from a related party BCI, that supports its manufacturing activities and is based in Belleville, Ontario. Under this lease arrangement, the Company incurred $1,075 in lease and operating expenses during the three months ended October 31, 2020 (October 31, 2019 - $907). This lease liability is recognized on the Company’s balance sheet under IFRS 16.

Truss LP

The Company owns a 42.5% interest in Truss LP and accounts for the interest as an investment in an associate (Note 8).

The Company subleases section of its Belleville lease to Truss LP this sublease is recognized as a finance lease receivable on the Company’s balance sheet (Note 5). The Company recognizes a recovery on its partnership with Truss LP in Other receivables and Other income.

Under a Temporary Supply and Services Agreement (“TSSA”) with Truss LP, the Company produces and packages cannabis infused beverages in the CIB Facility (located at the Belleville Facility) and in the Gatineau Facility, an markets and sells beverages for the legal adult-use markets in Canada, in each case subject to the terms of its regulatory approvals and applicable laws, all for its own account and as a stand-alone division of HEXO. Truss LP applied to be a licensed producer of Cannabis during the period, but until the time where Truss LP obtains all regulatory approval required under the Cannabis Act (Canada), the TSSA will remain in place. Under the TSSA, Truss LP will be an exclusive supplier to the Company of all property and all services required to carry on the business, other than specific services which are required to be provided by HEXO. As a result of this arrangement, there is a receivable from Truss of $3,610 at October 31, 2020 (July 31, 2020 – $3,405). During the year, the Company purchased $4,289 (October 31, 2019 – $nil) of raw materials from Truss LP under the arrangement and received $1,220 (October 31, 2019 – $nil) of Income.

Internal Controls over Financial Reporting

Internal Controls over Financial Reporting

In accordance with National Instrument 52-109 Certification of Disclosure in Issuers’ Annual and Interim Filings (“NI 52-109”) and Rule 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934 within the U.S., 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

36    MD&A

reporting is reliable and that its financial statements have been prepared in accordance with International Financial Reporting Standards (“IFRS”).

Irrespective 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 weaknesses in our internal control over financial reporting as at October 31, 2020, are set forth below. Despite the existence of the material weaknesses described below, the CEO and CFO, together with management, have concluded that the Condensed Interim Consolidated Statements of Financial Position, Condensed Interim Consolidated Statements of Loss and Comprehensive Loss, Condensed Interim Consolidated Statements of Changes in Shareholders’ Equity and Condensed Interim Consolidated Statements of Cash Flows associated with this Management’s Discussion and Analysis, are presented in accordance with IFRS.

Material Changes to the Control Environment

The Company continued to experience issues with the existing Enterprise Resource Planning (“ERP”) system and is currently undertaking a major ERP optimization initiative. This initiative will provide an integrated system for inventory tracking and valuation from seed to sale. It will also advance the Company’s strategic goal of standardizing and automating business processes and controls across the organization and reducing reliance on complex spreadsheets. This business transformation will specifically address risks within the cannabis industry and is intended to facilitate improved ICFR.

During the period, the Company continued to expand into new markets with respects to the ready-to-drink cannabis infused beverages rollout. This resulted in the implementation of additional controls.

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 accounts, business processes and related controls, which was predicated on process flow mapping with control owners. Deficiencies in control processes were then assessed and aligned to the five components of the COSO 2013 internal control framework.

As of the three months ended October 31, 2020, the Company began remediation activities for the material weaknesses identified during fiscal 2020 that are described below, however initiatives are still in the deployment stage. Based on this evaluation, management concluded that the material weaknesses below continue to exist as of October 31, 2020.

Functionality of the Enterprise Resource Planning (ERP) System

The Company identified multiple deficiencies in the ERP’s design and functionality during the year. Specifically, there is a reasonable possibility that IT dependent control activities relating to inventory management, property, plant and equipment, procurement and journal entry postings would not prevent or detect a material misstatement of the Company’s annual or interim statements on a timely basis.

The Company intends for the ERP to be reimplemented in the next fiscal period and will only place reliance upon the ERP when it has been demonstrated that supporting Information Technology General Controls (ITGCs) have been designed and are operating effectively. To strengthen control functionality of the ERP, management has begun implementing the following initiatives;

• Assessment and remediation of the design, implementation and effectiveness of ITGCs that support the ERP, particularly those relating to change management;

• Engaging internal and third-party resources to incorporate improved inventory tracking and valuation within the ERP and to minimize reliance on complex spreadsheets;

• Integration of a fixed asset subledger into the ERP, supported by standardized fixed asset impairment and physical verification assessments to confirm the validity of data within the ERP;

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

• Implementation of an automated journal entry workflow within the ERP, and;

• Communication of policies, training and guidance regarding appropriate usage of the ERP.

37    MD&A

Control Environment

The Company did not adequately design or implement a comprehensive governance program for controls and industry-wide pressures precipitated elevated turnover, resulting in an ineffective control environment. As the Company was unable to emphasize adherence to control processes across the organization, this resulted in an increased likelihood of misstatements occurring.

To strengthen the controls surrounding the overall control environment, management has begun implementing the following initiatives;

• Consistent cross-functional communication of strategic company objectives;

• Implementing standardized, documented policies and controls, including assigning control owners who are accountable for maintaining control effectiveness;

• Implementing standardized training, performance management and succession planning;

• Bolstering the finance department by onboarding personnel who possess the appropriate degree of knowledge, expertise and training to perform complex financial transactions, and;

• Development of a comprehensive, independent internal audit function to enhance monitoring of controls.

Risk Assessment

The Company did not design or implement an Enterprise Risk Management Program to identify and analyze risks. As a result, financial reporting processes and internal controls were not, in some instances, appropriately designed to address risks specific to the business.

To strengthen the controls surrounding risk assessment, management has begun implementing the following initiatives;

• Design and implementation of an Enterprise Risk Management Program;

• Internal Control training for key personnel and subject specific training for individuals responsible for complex accounting transactions for both IFRS and ICFR, and;

• Regular review of control and governance documentation.

The above material weaknesses encompass multiple business processes and increase the possibility that a material misstatement on the consolidated financial statements would not be prevented or detected on a timely basis.

Information Technology General Controls

While the Company had ITGCs in place, some were assessed as ineffective. Consequently, this resulted in processes such as change management and user access management being deemed ineffective, contributing to issues with ERP functionality as described above.

To strengthen the ITGC environment, management has begun implementing the following initiatives;

• Identification, assessment and remediation over the design, implementation and effectiveness of IT related internal controls over financial reporting, and;

• Improving change management and user access management processes.

Complex Spreadsheet Controls

The Company did not implement and maintain effective controls surrounding complex spreadsheets. Controls related to complex spreadsheets did not address all identified material risks associated with manual data entry, review of assumptions and estimates, completeness of data comparative to the ERP, and the accuracy of formulas. Specifically, the complexity of spreadsheets resulted in adjusting entries required to correct significant account balances related to inventory, property, plant and equipment and tax.

To strengthen the controls over the use of complex spreadsheets, management has begun implementing the following initiatives;

• Engaging internal and third-party resources to aid in the identification, assessment and remediation over the design and implementation effectiveness of complex spreadsheet internal controls over financial reporting, and;

• Implementation of new financial applications to minimize, where possible, manual reliance and usage of complex spreadsheets in future periods.

Fixed Assets

The Company did not have a fixed assets subledger within its ERP, instead maintaining this information within complex spreadsheets. This led to increased risk of error regarding the identification, tracking, classification, disposal, and depreciation of fixed assets.

To ensure that fixed asset registers are complete, accurate and appropriately valued, management has begun implementing the following initiatives;

• Documenting and communicating policies regarding the purchase, transfer and disposal of capital assets;

• Integration of the fixed asset subledger into the ERP, and;

38    MD&A

• Introducing standardized fixed asset physical verification procedures.

Financial Reporting

The Company did not maintain effective process level and management review controls over financial reporting processes, reconciliations, the application of IFRS and accounting measurements related to complex transactions. Some journal entries were not subject to consistent review and approval prior to posting. To strengthen the controls surrounding the financial reporting process, management has begun planning the following initiatives;

• Assessing roles and responsibilities within the finance and accounting function, as well as providing tools, processes and training to functional staff, and;

• Implementation of a cloud-based financial reporting application to automate and control the financial statement close process, in addition to the automation of workflows within the ERP

Procurement

The Company did not have effective controls around the authorization of purchases. This material weakness was initially identified July 31, 2019.

During fiscal 2020, the Company introduced a comprehensive Procurement policy, updated the Governance Authority Matrix, provided additional training and guidance regarding adherence to the above and began implementation of an automated purchasing functionality within the ERP.

Management has determined that this material weakness will be fully remediated once the automated purchasing functionality has been implemented and assessed as operating effectively over a full financial reporting period.

Risk Factors

Our overall performance and results of operations are subject to various risks and uncertainties that may materially and adversely affect our business, products, financial condition and operations and may 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 29, 2020 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. These licenses expire on various dates and must be renewed by Health Canada. Failure to comply with the requirements of our licenses 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.

• The volatile Canadian cannabis industry has resulted in several of the Company’s peers to undergo similar rightsizing efforts which could saturate the market with similar assets the Company intends to sell. This could result in further future losses and/or the inability for the Company to liquidate certain of its unneeded assets.

• The continued spread of COVID-19 nationally and globally could also disrupt our cultivation and processing activities, supply chains and sales channels, and result in a reduction in supply of, or demand for, the company’s products as a result of travel restrictions, work refusals by and mandatory accommodations for employees, changing demand by consumers, mass quarantines, confinements, lock-downs or government-imposed closures in Canada or abroad, which could adversely impact materially the company’s business, operations or financial results.

• Since the latter part of February 2020, financial markets have experienced significant volatility in response to the developing COVID-19 pandemic and equity markets in particular have experienced significant declines. The continued spread of COVID-19 nationally and globally may impact the Company’s ability raise sufficient capital.

• We operate within a still young and evolving industry and are exposed to certain risks surrounding the fair value inputs related to the valuation of our biological assets and inventories, which may lead to certain impairments and write-offs. These inputs include but are not limited too market pricings, external and internal demand for cannabis and cannabis products and by-products.

• 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.

39    MD&A

• 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.

• Conversely, we may be subject to growth decline related risks including reduced capacity needs and inactivity of our internal systems and related assets. Our ability to manage growth volatility effectively will require us to continue to monitor our external industry environment and modify our internal operations accordingly.

• The Company’s credit facility, could expose the Company to risks that its cash flows may become insufficient to satisfy required payments of principal and interest, 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 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. Restrictions and covenants from those facilities may limit the Company’s ability to execute its plans.

• 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 are currently a party to certain class action and other lawsuits as discussed elsewhere in this MD&A and we may become party to additional 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.

• The potential expansion into international operations will result in increased operational, regulatory and other risks.

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

• The Company’s operations in emerging markets to which it expands could pose an increased inflation risk on the business.

• The Company’s ability to successfully identify and make beneficial acquisitions and/or establish joint ventures or investments in associates, as well as successfully integrate these future acquisitions into the Company’s operations.

• 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 and Belleville campuses, and we will continue to be focused on these campuses for the foreseeable future. Adverse changes or developments affecting these campuses 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 edible cannabis 2.0 market in Canada, including through our agreements various provincial governing bodies which 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.

• The adult-use cannabis industry has encountered and may continue to encounter price compressions, which may adversely impact the Company’s profitability. In addition, such price compressions, as well as, or together with, oversupply of certain types of inventory in the industry, may result in the Company incurring additional impairment losses on inventory in the event the cost of our inventory exceeds its net realizable value. The continuing evolution of these market conditions represent ongoing uncertainties that may affect the Company’s future financial results.

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

• 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.

40    MD&A

• 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.

• 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.

• The Company may be at risk as a result of breaches of security at its facilities or in respect of electronic documents, data storage and risks related to breaches of applicable privacy laws, cyber security risks, loss of information and computer systems.

• 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/or 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. The Company must rely largely on its own market research to forecast sales as detailed forecasts are not generally obtainable from other sources at this early stage of the recreational marijuana industry in Canada.

• 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 acquisitions 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.

• The Company operates in a highly regulated industry which could discourage any takeover offers.

• We maintain or self-insure 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 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.

• 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.

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• The Company’s ERP may impact 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.

• The Company may not be able to develop and maintain strong internal controls and be SOX compliant by the mandated deadline.

• 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.

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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, 2020.

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, 2020 and ended on October 31, 2020 that has materially affected, or is reasonably likely to materially affect, the issuer’s ICFR.

Date: December 14, 2020

/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, Trent MacDonald, 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, 2020.

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, 2020 and ended on October 31, 2020 that has materially affected, or is reasonably likely to materially affect, the issuer’s ICFR.

Date: December 14, 2020

/s/ Trent MacDonald

Trent MacDonald

Chief Financial Officer

2