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 June 2022

Commission File Number: 001-38781

HEXO Corp.

(Translation of registrant’s name into English)

120 chemin de la Rive

Gatineau, Québec, Canada J8M 1V2

(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 (i) the Registration Statement on Form F-10 of HEXO Corp. and HEXO Operations Inc. (File No. 333-256131), and (ii) the Registration Statement on Form F-10 of HEXO Corp. (File No. 333-255264).

Exhibit	Description
99.1	Condensed interim consolidated financial statements for the three and nine months ended April 30, 2022 and 2021
99.2	Management’s Discussion and Analysis for the nine months ended April 30, 2022
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: June 15, 2022	/s/ Joelle Maurais
	General Counsel and Corporate Secretary

EX-99.1

Exhibit 99.1

HEXO Corp.
Condensed Interim
Consolidated Financial Statements
For the three and nine months ended
April 30, 2022 and 2021

Condensed Interim Consolidated Statements of Financial Position	3
Condensed Interim Consolidated Statements of Net Loss and Comprehensive Loss	4
Condensed Interim Consolidated Statements of Changes in Shareholders’ Equity	5
Condensed Interim Consolidated Statements of Cash Flows	9
Notes to the Condensed Interim Consolidated Financial Statements:
1. Description of the Business	10
2. Going Concern	10
3. Basis of Preparation	11
4. New Accounting Policies and Pronouncements	11
5. Restricted Funds	12
6. Cash Held in Escrow	12
7. Commodity Taxes Recoverable and Other Receivables	12
8. Inventory	12
9. Biological Assets	13
10. Investments in Associates & Joint Venture	14
11. Property, Plant and Equipment	15
12. Assets Held for Sale	16
13. Intangible Assets	16
14. Business Acquisitions	17
15. Goodwill	20
16. Warrant Liabilities	21
17. Convertible Debentures	22
18. Senior Secured Convertible Note	23
19. Lease Liabilities	26
20. Senior Notes Payable	26
21. Share Capital	27
22. Common Share Purchase Warrants	27
23. Share-based Compensation	28
24. Net Loss per Share	30
25. Financial Instruments	30
26. Selling, General and Administrative Expenses by Nature	32
27. Other Income and Losses	33
28. Related Party Disclosure	33
29. Capital Management	34
30. Commitments and Contingencies	34
31. Fair Value of Financial Instruments	36
32. Non-Controlling Interest	36
33. Revenue from Sale of Goods	37
34. Segmented Information	37
35. Operating Cash Flow	38
36. Income Taxes	38
37. Subsequent Events	39

Condensed Interim Consolidated Statements of Financial Position

(Unaudited, expressed in thousands of Canadian Dollars)

As at	Note		April 30, 2022			July 31, 2021
Assets			$			$
Current assets
Cash and cash equivalents				14,221			67,462
Restricted funds		5		142,174			132,246
Cash held in escrow		6		—			285,779
Trade receivables				44,324			37,421
Commodity taxes recoverable and other receivables		7		7,693			13,549
Prepaid expenses				9,358			7,490
Inventory		8		135,402			135,327
Biological assets		9		16,983			14,284
Assets held for sale		12		22,540			—
				392,695			693,558
Non-current assets
Property, plant and equipment		11		296,634			393,902
Intangible assets		13		95,228			50,608
Investment in associates and joint venture		10		51,283			74,679
Lease receivable				4,389			4,453
Long-term investments				644			2,492
Prepaid expenses				8,111			3,922
Goodwill		15		—			88,189
Total assets				848,984			1,311,803
Liabilities
Current liabilities
Accounts payable and accrued liabilities				62,220			63,557
Excise taxes payable				5,211			6,591
Warrant liabilities		16		2,507			5,733
Lease liability		19		1,702			1,730
Senior notes payable		20		50,732			50,159
Convertible debentures – current		17		36,863			3,406
Senior secured convertible note		18		234,799			367,699
Onerous contract				4,763			4,763
				398,797			503,638
Non-current liabilities
Lease liability		19		41,964			42,155
Convertible debentures		17		—			33,089
Deferred income tax liability				34,809			136
Other long-term liabilities				2,590			520
Total liabilities				478,160			579,538
Shareholders’ equity
Share capital		21		1,847,866			1,267,967
Share-based payment reserve		23		72,785			69,750
Warrant reserve		22		82,395			124,112
Contributed surplus				90,504			41,290
Accumulated deficit				(1,741,396	)		(773,993	)
Accumulated other comprehensive income				20,491			1,152
Total equity attributable to shareholders of HEXO Corp.				372,645			730,278
Non-controlling interest		32		(1,821	)		1,987
Total shareholders’ equity				370,824			732,265
Total liabilities and shareholders’ equity				848,984			1,311,803
Going Concern (Note 2)
Commitments and contingencies (Note 30)
Subsequent events (Note 37)

Approved by the Board of Directors                

/s/ Helene Fortin, Director

/s/ Rose Marie Gage, Director

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

3

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						For the nine months ended
	Note		April 30, 2022			April 30, 2021			April 30, 2022			April 30, 2021
Revenue from sale of goods		33		63,590			33,082			205,101			120,059
Excise taxes				(18,021	)		(10,482	)		(56,808	)		(35,219	)
Net revenue from sale of goods				45,569			22,600			148,293			84,840
Ancillary revenue				—			60			225			168
Net revenue				45,569			22,660			148,518			85,008
Cost of goods sold		8		55,179			18,281			199,463			57,391
Gross profit/(loss) before fair value adjustments				(9,610	)		4,379			(50,945	)		27,617
Fair value component in inventory sold		8		8,903			6,426			31,629			17,619
Unrealized gain on changes in fair value of biological assets		9		(13,238	)		(10,863	)		(42,763	)		(35,616	)
Gross profit/(loss)				(5,275	)		8,816			(39,811	)		45,614
Operating expenses
General and administrative		26		27,278			14,822			72,318			39,039
Selling, marketing and promotion				5,366			2,452			17,958			6,682
Share-based compensation				5,769			2,715			13,610			10,904
Research and development				540			730			2,985			2,901
Depreciation of property, plant and equipment		11		1,579			1,612			4,776			4,369
Amortization of intangible assets		13		2,957			371			18,010			1,043
Restructuring costs				2,804			336			11,317			1,721
Impairment of property, plant and equipment		11		83,171			16			207,103			881
Impairment of intangible assets		13		—			—			140,839			—
Impairment of goodwill		15		—			—			375,039			—
Impairment of investment in associate		10		—			—			26,925			—
Disposal of long-lived assets				—			—			—			1,294
Gain on disposal of property, plant and equipment				(2,935	)		(19	)		(2,861	)		45
Acquisition, integration and transaction costs				1,175			1,871			30,120			2,307
				127,704			24,906			918,139			71,186
Loss from operations				(132,979	)		(16,090	)		(957,950	)		(25,572	)
Interest income (expense), net		27		(4,964	)		(2,947	)		(14,552	)		(7,311	)
Non-operating income (expense), net		27		(14,759	)		(1,674	)		(33,736	)		(12,864	)
Loss before tax				(152,702	)		(20,711	)		(1,006,238	)		(45,747	)
Current and deferred tax recovery				7,697			—			33,070			—
Net loss				(145,005	)		(20,711	)		(973,168	)		(45,747	)
Other comprehensive income
Foreign currency translation				236			3			277			3
Gain on fair value due to changes in credit spread, net of tax				(1,894	)		—			19,062			—
Net loss and comprehensive loss				(146,663	)		(20,708	)		(953,829	)		(45,744	)
Comprehensive loss attributable to:
Shareholders of HEXO Corp.				(146,594	)		(20,708	)		(948,064	)		(45,744	)
Non-controlling interest				(69	)		—			(5,765	)		—
				(146,663	)		(20,708	)		(953,829	)		(45,744	)
Net loss and comprehensive loss per share, basic and diluted				(0.34	)		(0.17	)		(2.76	)		(0.38	)
Weighted average number of outstanding shares
Basic and diluted		24		432,918,608			122,397,731			345,879,455			121,749,456

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

4

Condensed Interim Consolidated Statements of Changes in Shareholders’ Equity

(Unaudited, expressed in thousands of Canadian Dollars, except numbers of shares)

For the nine months ended	Note		Number of common shares		Share capital			Share-based payment reserve			Warrant reserves			Contributed surplus			Accumulated OCI		Accumulated deficit			Total to HEXO Corp			Non- controlling interest			Total equity
					$			$			$			$			$		$			$			$			$
Balance at July 31, 2020				120,616,441		1,023,788			65,746			95,617			27,377			—		(659,231	)		553,297			3,379			556,676
June 2020 at the market offering				244,875		—			—			—			—			—		—			—			—			—
Issuance fees				—		(192	)		—			—			—			—		—			(192	)		—			(192	)
Exercise of stock options				82,083		499			(195	)		—			—			—		—			304			—			304
Expiry of stock options				—		—			(9,507	)		—			9,507			—		—			—			—			—
Exercise of warrants				1,522,139		7,430			—			(2,188	)		131			—		—			5,373			—			5,373
Equity-settled share-based payments		23		—		—			10,337			—			—			—		—			10,337			—			10,337
Other comprehensive income				—		—			—			—			—			3					3			—			3
Non-controlling interest				—		—			—			—			—			—		—			—			371			371
Net loss				—		—			—			—			—			—		(45,747	)		(45,747	)		—			(45,747	)
Balance at April 30, 2021				122,465,538		1,031,525			66,381			93,429			37,015			3		(704,978	)		523,375			3,750			527,125
Balance at July 31, 2021				152,645,946		1,267,967			69,750			124,112			41,290			1,152		(773,993	)		730,278			1,987			732,265
At-the-Market program, net of costs		21		24,290,117		27,266			—			—			—			—		—			27,266			—			27,266
August 2021 public offering, net		21		49,080,024		135,645			—			—			—			—		—			135,645			—			135,645
Business acquisitions, net		14		75,073,121		230,232			18			769			—			—		—			231,019			—			231,019
Senior secured convertible note, net		18		156,558,862		184,525			—			—			—			—		—			184,525			—			184,525
Broker compensation		21		502,176		2,084			—			—			—			—		—			2,084			—			2,084
Exercise of stock options		23		17,024		147			(104	)		—			—			—		—			43			—			43
Expiry of stock options				—		—			(8,685	)		—			8,685			—		—			—			—			—
Expiry of warrants				—		—			—			(42,486	)		42,486			—		—			—			—			—
Equity-settled share-based payments		23		—		—			11,806			—			—			—		—			11,806			—			11,806
Other comprehensive income				—		—			—			—			—			19,339		—			19,339			—			19,339
Non-controlling interest		32		—		—			—			—			(1,957	)		–		—			(1,957	)		1,957			—
Net loss				—		—			—			—			—			—		(967,403	)		(967,403	)		(5,765	)		(973,168	)
Balance at April 30, 2022				458,167,270		1,847,866			72,785			82,395			90,504			20,491		(1,741,396	)		372,645			(1,821	)		370,824

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

5

Condensed Interim Consolidated Statements of Cash Flows

(Unaudited, expressed in thousands of Canadian Dollars)

For the nine months ended	Note		April 30, 2022			April 30, 2021
Operating activities			$			$
Loss before tax				(1,006,238	)		(45,744	)
Items not affecting cash or presented outside of operating activities		35		922,393			24,102
Changes in non-cash operating working capital items		35		(17,248	)		4,804
Cash used in operating activities				(101,093	)		(16,838	)
Financing activities
Proceeds from public offering, net				202,166			883
Issuance fees				(334	)		(192	)
Proceeds from the exercise of warrants				—			5,373
Proceeds from the exercise of stock options		23		43			304
Repayments of debt				(6,754	)		(30,625	)
Interest paid on senior notes payable				(5,095	)		—
Lease payments		19		(4,705	)		(3,476	)
Interest paid on convertible debentures		17		(2,409	)		(2,409	)
Cash-settlements of senior secured convertible note		18		(10,111	)		—
Cash provided/(used in) financing activities				172,801			(30,142	)
Investing activities
Proceeds from sale of interest in BCI		10		10,111			—
Cash outflows to restricted funds				(7,341	)		(24,290	)
Issuance of convertible debenture receivable				—			(19,500	)
Cash received from escrow		6		283,775			—
Cash payment on business acquisition, net of cash acquired		14		(381,157	)		—
Proceeds from sale of property, plant and equipment				11,423			102
Acquisition of property, plant and equipment				(25,941	)		(8,045	)
Purchase of intangible assets				(4,632	)		(1,447	)
Investment in associates and joint ventures		10		(11,187	)		(2,975	)
Cash used in investing activities				(124,949	)		(56,155	)
Decrease in cash and cash equivalents				(53,241	)		(103,135	)
Cash and cash equivalents, beginning of period				67,462			184,173
Cash and cash equivalents, end of period				14,221			81,038
Supplemental cashflow information in Note 35.

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

9

Notes to the Condensed Interim Consolidated Financial Statements

For the three and nine months ended April 30, 2022 and 2021

(Unaudited, expressed in thousands of Canadian Dollars, except share amounts or where otherwise stated)

1. Description of the Business

HEXO Corp. (“HEXO” or the “Company”), is a publicly traded corporation, incorporated in Ontario, Canada. HEXO is licensed to produce and sell cannabis and cannabis products under the Cannabis Act. The head office is located at 120 Chemin de la Rive, Gatineau, Canada. The Company’s common shares are listed on the Toronto Stock Exchange (“TSX”) and the National Association of Securities Dealers Automated Quotations (“Nasdaq”), both under the trading symbol “HEXO”. The Company was listed on the New York Stock Exchange up to August 24, 2021, at which time the Company transferred its US listing to the Nasdaq.

2. Going Concern

These condensed interim consolidated financial statements have been prepared using International Financial Reporting Standards (“IFRS”) as issued by the International Accounting Standards Board (“IASB”) applicable to a going concern, which assumes that the Company will be able to continue its operations and will be able to realize its assets and settle its liabilities in the normal course of business as they come due in the foreseeable future.

During the nine months ended April 30, 2022, the Company continued to incur losses and significant cash outflows, reporting a gross loss of $39,811, a loss from operations of $957,950, cash outflows from operating activities of $101,093 and an accumulated deficit of $1,741,396. The Company had cash and cash equivalents of $14,221 as at April 30, 2022 ($67,462 at July 31, 2021) and the Company remains highly leveraged with combined current debt balances of $322,394 as at April 30, 2022, consisting of the Senior secured convertible note (“the Note”) (Note 18), Senior notes payable (Note 20) and Convertible debentures (Note 17).

On January 31, 2022, the Company breached a financial covenant of the Note which required the Company to achieve positive adjusted earnings before taxes, interest, and depreciation for the three-month period ended January 31, 2022. This was deemed an event of default under the terms of the Note. Under the default terms, the Holder of the Note obtains the option to accelerate repayment of the Note at a value which is 115% of the principal amount outstanding (Note 18). As at the date of these financial statements, the Note continues to be in default. The Senior Note Payable also remains in default (Note 20) and the Convertible debentures are due for repayment in December 2022 (Note 17). These circumstances create material uncertainties that lend substantial doubt as to the ability of the Company to meet its obligations as they come due and, accordingly, the appropriateness of the use of accounting principles applicable to a going concern.

In recognition of these circumstances, the Company entered into an agreement with Tilray Brand Inc. (“Tilray”) to create a strategic partnership in which Tilray will acquire the outstanding principal balance of the Note that was originally issued by HEXO to HT Investments MA LLC (“HTI”) and restructure certain provisions of the Note (the “Transaction Agreement”). Among other provisions, the Optional Redemption Payments would be removed, the term extended to three years, and US$80 million in restricted cash released. On April 12, 2022, upon the execution of the Transaction Agreement, the Holder of the Note agreed to forbear their rights to act upon the event of default until the earlier of the closing of the Transaction Agreement or its termination.

Concurrent with the debt restructuring, the Company received a non-binding Letter of Intent for a $180 million equity backstop agreement, from an affiliate of KAOS, which would provide the Company access to capital over a 36-month period in order to help ensure debt and interest repayments under the revised terms of the Note can be met.

On June 14, 2022, the Company entered into an amending agreement with Tilray (the “Amending Agreement”) and an amending agreement with KAOS Capital Inc.(“KAOS”) and an affiliate of KAOS (the “Amended Standby Agreement”) (Note 37).

The closing of the Amending Agreement and the Amended Standby Agreement are subject to a number of conditions that have not yet been satisfied, including: (i) receipt of approvals from the Toronto Stock Exchange and the Nasdaq Stock Market LLC; (ii) receipt of approval from the HEXO shareholders; (iii) no material adverse effect having occurred in respect of HEXO; and (iv) receipt of all consents and approvals required by any regulatory authorities, including from the Competition Bureau. As at April 30, 2022, the Company was required to maintain a cash balance in an amount equal to or greater than US$100 million from the date of the Transaction Agreement to the date of closing or termination which was not met. Through the Amending Agreement, the minimum cash balance terms were reduced to $70 million (Note 37). A waiver was also received through the Amending Agreement in which Tilray irrevocably waives any rights or entitlements as the result of any non-compliance to the previously minimum liquidity requirement of US$100 million. There can be no assurance that the revised conditions will be satisfied and that the Amending Agreement will successfully close or close on the timeline necessary to provide sufficient liquidity to the Company.

There can be no assurances that alternatives will be available or available on terms that are acceptable to the Company.

These undertakings and planned transactions, while significant, may not be sufficient in and of themselves to enable the Company to fund all aspects of its operations. The Company’s ability to continue as a going concern is dependent on successfully closing the Amending Agreement or finding alternative sources of financing. Accordingly, management continues to pursue other alternatives to fund the Company’s operations and reduce costs so it can continue as a going concern, such as:

10

• Reduction of headcount and restructuring the organization to rightsize to future operating and administrative needs;

• Minimizing the Company’s reliance third party on service providers and professional fees;

• Liquidate the Company’s previously announced decommissioned and available for sale assets; and

• Securing a new directors and officers insurance program to facilitate the release of the restricted funds held in the captive insurance entity (April 30, 2022—$29,996), into operating cash.

The Company may be unable to realize its value from assets or discharge its liabilities in the normal course of business and may incur significant dilution to the holdings of existing shareholders in any restructuring or financing process and ultimately may be required to seek relief under a court-approved restructuring or liquidation process.

These condensed interim consolidated financial statements do not reflect the adjustments to the carrying values of assets and liabilities and the reported expenses and balance sheet classifications that would be necessary if the Company were unable to realize its assets and settle its liabilities as a going concern in the normal course of operations. Such adjustments could be material.

3. 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 IFRS as issued by the IASB 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 annual consolidated financial statements of the Company for the year ended July 31, 2021, prepared in accordance with IFRS as issued by the IASB.

The interim consolidated financial statements have been prepared using accounting policies consistent with those described in the annual consolidated financial statements for the year ended July 31, 2021.

These interim consolidated financial statements were approved and authorized for issue by the Board of Directors on June 14, 2022.

4. New Accounting Policies and Pronouncements

New Accounting Pronouncements Not Yet Effective

The following IFRS amendments have been recently issued by the IASB. Pronouncements that are irrelevant or not expected to have a significant impact have been excluded.

Amendments to IAS 1: Classification of Liabilities as Current or Non-current

The amendment clarifies the requirements relating to determining if a liability should be presented as current or non-current in the statement of financial position. Under the new requirement, the assessment of whether a liability is presented as current or non-current is based on the contractual arrangements in place as at the reporting date and does not impact the amount or timing of recognition. The amendment will apply retrospectively for the annual reporting period beginning August 1, 2022. The Company is currently evaluating the potential impact of this amendment on the Company’s consolidated financial statements.

Amendments to IAS 12: Deferred Tax related to Assets and Liabilities arising from a Single Transaction

The amendment narrowed the scope of certain recognition exemptions so that it no longer applies to transactions that, on initial recognition, give rise to equal taxable and deductible temporary differences. An entity applies the amendments to transactions that occur on or after the beginning of the earliest comparative period presented. It also, at the beginning of the earliest comparative period presented, recognizes deferred tax for all temporary differences related to leases and decommissioning obligations and recognizes the cumulative effect of initially applying the amendments as an adjustment to the opening balance of retained earnings (or other component of equity, as appropriate) at that date. The amendment will be effective for the annual period beginning August 1, 2023, and the Company has chosen not to early adopt the amendment. The Company is currently evaluating the potential impact of this amendment on the Company’s consolidated financial statements.

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 can either be incremental costs of fulfilling that contract or an allocation of other costs that relate directly to fulfilling contracts. The amendment applies retrospectively for annual reporting periods beginning August 1, 2022 and the Company has chosen not to early adopt. The Company is currently evaluating the potential impact of this amendment on the Company’s consolidated financial statements.

11

Amendments to IAS 16: Property Plant and Equipment: Proceeds before intended use

The amendment clarifies the accounting for the net proceeds from selling any items produced while bringing an item of property plant and equipment into use. The amendment prohibits a company from deducting from the cost of property plant and equipment proceeds from selling items produced while the company is preparing that assets for its intended use. The company will recognize such sales proceeds and related costs in profit and loss. The amendment applies retrospectively for the annual reporting period beginning August 1, 2022, and the Company has chosen not to early adopt. The Company is currently evaluating the potential impact of this amendment on the Company’s financial statements.

Amendments to IAS 8: Accounting Policies in Accounting Estimates and Errors

The amendment replaces the definition of accounting estimates, clarifying that they are monetary amounts in the financial statements that are subject to measurement uncertainty. The amendment also clarifies that a company is required to develop an accounting estimate if accounting policies require items in the financial statements to be measured in a way that involves measurement uncertainty. The amendment applies for the annual reporting period beginning August 1, 2023, and the Company has chosen not to early adopt. The Company is currently evaluating the potential impact of this amendment on the Company’s financial statements.

5. Restricted Funds

	April 30, 2022		July 31, 2021
	$		$
Letters of credit and collateral		2,502		2,552
Restricted cash under terms of the Senior Secured Convertible Note (Note 18)		109,677		99,696
Cash restricted in captive insurance subsidiary		29,995		29,998
Total		142,174		132,246

6. Cash Held in Escrow

On May 27, 2021, the Company issued US$360 million in a senior secured convertible note at a purchase price of US$327.6 million (Note 18). Under the senior secured convertible note agreement, US$229.32 million of the proceeds were immediately placed into an escrow account. On August 30, 2021, the Cash held in escrow was used, in full, towards funding the acquisition of all of the outstanding shares of the entities that carry on the business of Redecan (Note 14).

7. Commodity Taxes Recoverable and Other Receivables

	April 30, 2022		July 31, 2021
	$		$
Commodity taxes recoverable		7,578		56
Lease receivable – current1		115		107
Receivable on conversion of Inner Spirit Holdings Shares		—		2,698
Loan receivable2		—		5,000
Other receivables		—		5,688
Total		7,693		13,549

¹  A related party capital lease receivable related to Truss Limited Partnership (Note 28).

²  A short term bridge loan issued to 48North who was acquired by the Company on September 1, 2021 (Note 14).

8. Inventory

	As at April 30, 2022
	Capitalized		Biological asset fair
	cost		value adjustment		Total
Dried cannabis	$	59,904	$	35,115	$	95,019
Purchased dried cannabis		2,876		—		2,876
Extracts		19,805		2,186		21,991
Purchased extracts		743		—		743
Packaging and supplies		14,773		—		14,773
	$	98,101	$	37,301	$	135,402

12

	As at July 31, 2021
	Capitalized		Biological asset fair
	cost		value adjustment		Total
Dried cannabis	$	81,784	$	24,257	$	106,041
Purchased dried cannabis		1,754		—		1,754
Extracts		11,945		4,411		16,356
Purchased extracts		2,247		—		2,247
Packaging and supplies		8,929		—		8,929
	$	106,659	$	28,668	$	135,327

The Company recognizes the costs (capitalized cost and biological asset fair value adjustment) of harvested cannabis inventory expensed in two separate lines on the consolidated statement of net loss: (i) Capitalized costs relating to inventory expensed and included in Cost of goods sold amounted to $39,932 and $126,189 for the three and nine months ended April 30, 2022, respectively (April 30, 2021 – $17,654 and $57,934) (ii) The fair value component (biological asset fair value adjustments) of inventory sold on the consolidated statement of net loss was $13,238 and $42,763 for the three and nine months ended April 30, 2022 respectively (April 30, 2021 – $10,863 and $35,616) and included a write down of inventory to its net realizable value of $13,274 and $63,408, respectively (April 30, 2021 – $nil and $nil, respectively).

During the three and nine months ended April 30, 2022, the Company recorded write-offs on inventory of $1,973 and $7,529, respectively (April 30, 2021 – $374 and $374, respectively) and reversal of impairment of $nil and $nil, respectively (April 30, 2021 –$nil and $1,543) to its net realizable value. The write downs during the nine months ended April 30, 2022, relate to the impairment of the Keystone Isolation Technology extraction capital project which was to utilize inventory in the commissioning phase as well as the general aging of inventory and cultivation facility shutdowns.

Total depreciation capitalized in inventory in the nine months ended April 30, 2022 was $17,879 (April 30, 2021 – $10,850).

9. 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 nine months ended April 30, 2022			For the year ended July 31, 2021
	$			$
Balance, beginning of period		14,284			7,571
Acquired on business combination		8,352			8,892
Production costs capitalized		52,040			36,156
Net increase in fair value due to biological transformation and estimates		42,763			51,499
Harvested cannabis transferred to inventory		(97,370	)		(89,834	)
Disposal of biological assets		(3,086	)		—
Balance, end of period		16,983			14,284

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 (growing plants), the fair value at the point of harvest is adjusted based on the stage of growth at period-end. Harvested cannabis is transferred from biological assets at their fair value at harvest. During the nine months ended April 30, 2022, the Company disposed of $3,086 (April 30, 2021 – $nil) of biological assets due to the closure of a cultivation facility as well as damaged plants due to a heating issue. On April 30, 2022, the Company has modified its estimated fair value of trim due to changes in the Company’s operating strategy and trim usage during the period. This change in accounting estimate resulted in a decrease of $1,773 to biological assets.

The inputs and assumptions used in determining the fair value of cannabis plants are as follows:

• yield per plant;

• stage of growth percentage, estimated as age of plant from date of harvest as a percentage of total days in an average growing cycle, as applied to the estimated total fair value per gram (less fulfillment costs) to arrive at an in-process fair value for estimated biological assets to be harvested;

• selling price per gram;

• post-harvest cost (cost to complete and cost to sell) per gram; and

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

The table below summarizes the significant inputs and assumptions used in the fair value model, their weighted average range of value and sensitivity analysis:

13

Significant inputs and assumptions	Input values		An increase or decrease of 5% applied to the unobservable input would result in a  change to the fair value of approximately
	April 30, 2022	July 31, 2021	April 30, 2022		July 31, 2021
Weighted average selling price Derived from actual retail prices on a per product basis using the expected Flower and Trim yields per plant. Which is expected to approximate future selling prices and where applicable, considering strains.	$2.68 per dried gram	$3.05 per dried gram	$	1,231	$	746
Yield per plant Derived from historical harvest cycle results on a per strain basis, which is expected to be harvested from plants.	47-1,521 grams per plant	24-116 grams per plant	$	799	$	460
Post-harvest cost Derived from historical costs of production activities on a per product basis.	$0.70-$1.13 grams per plant	$0.67-$0.84 per dried gram	$	143	$	636

10. Investments in Associates & Joint Venture

	For the nine months ended April 30, 2022									For the year ended July 31, 2021
	Truss LP			Other			Total			Truss LP			Other			Total
	$			$			$			$			$			$
Balance, beginning of period		72,873			1,806			74,679			74,966			1,340			76,306
Capital contributions		8,500			2,687			11,187			4,250			783			5,033
Disposal		—			(984	)		(984	)		—			—			—
Share of net loss		(5,416	)		(1,258	)		(6,674	)		(6,343	)		(162	)		(6,505	)
Impairment loss		(26,925	)		—			(26,925	)		—			—			—
Foreign exchange loss through OCI		—			—			—			—			(155	)		(155	)
Balance, end of period		49,032			2,251			51,283			72,873			1,806			74,679

Truss LP

The Truss LP was formed 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 LP with the Company holding 42,500 common shares and representing the remaining 42.5%. Truss LP is a private limited partnership and its principal operating activities consist of pursuing opportunities to develop non-alcoholic, cannabis-infused beverages.

On October 31, 2021, the Company noted indicators of impairment related to the Truss LP investment, notably, a reduced financial outlook and an additional requirement for capital to sustain operations. The Company tested the investment for impairment and recorded an impairment loss as outlined below. The recoverable amount was based on the estimated fair value less costs of disposal. The fair value less costs of disposal was estimated utilizing an income based discounted cash flows (“DCF”) analysis.

The significant assumptions in the DCF analysis were as follows:

i. Cash flows: Estimated cash flows were projected based on actual operating results from internal sources as well as industry and market trends. A five-year period was forecasted with an extended five-year period calculated using a discount model that assumes the growth rate of will decrease linearly to the terminal value growth rate of 3%;

ii. Terminal value growth rate: Management used a 3% terminal growth rate which is based on historical and projected consumer inflation, historical and projected economic indicators, and projected industry growth. If all other assumptions were held constant and the terminal growth rate was decreased by 1%, the impairment loss would increase by $3,098; and

iii. Discount rate: Management used a 15% post-tax discount rate which is reflective of an industry Weighted Average Cost of Capital (“WACC”). The WACC was estimated based on the risk-free rate, equity risk premium based on a direct comparison approach, a size premium and company specific risk, and after-tax cost of debt based on corporate bond yields. If all other assumptions were held constant and the discount rate increased by 1%, the impairment loss would increase by $8,394.

As a result of the test, the carrying value of the investment was higher than the recoverable amount, and an impairment loss of $26,925 (April 30, 2021 – $nil) was recorded for the nine months ended April 30, 2022.

14

Belleville Complex Inc.

On January 18, 2022, the Company disposed of its 25% interest in the joint venture Belleville Complex Inc (Note 28) which carried a value of $984. The interest was sold to the other shareholder, the related party Olegna Holdings Inc. (“Olegna”), a company owned and controlled by a director of the Company for gross proceeds of $10,111 and gain on disposal of $9,127. The proceeds were fully used towards the settlement of a monthly optional redemption on the Senior Secured Convertible Note (Note 18).

11. 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, 2020		1,656			164,949			24,439			33,461			18,871			98,135			24,405			365,916
Business acquisition		1,100			95,788			—			6,154			8,578			395			17,059			129,074
Additions		—			1,213			63			2,284			294			16,960			—			20,814
Disposals		—			1			—			(67	)		—			—			(1,055	)		(1,121	)
Transfers		—			3,951			17,649			884			1,388			(23,544	)		—			328
At July 31, 2021		2,756			265,902			42,151			42,716			29,131			91,946			40,409			515,011
Business acquisitions		8,941			59,856			545			58,063			2,053			4,076			1,993			135,527
Additions		61			732			2			14,101			146			10,548			—			25,590
Disposals/write offs		(307	)		(924	)		(41	)		(3,388	)		(6,683	)		(851	)		(2,102	)		(14,296	)
Transfers		—			—			—			—			380			(380	)		—			—
Held for Sale		(2,218	)		(12,366	)		—			(72	)		142			(9,433	)		—			(23,947	)
At April 30, 2022		9,233			313,200			42,657			111,420			25,169			95,906			40,300			637,885
Accumulated depreciation and impairments
At July 31, 2020		307			13,712			1,009			8,691			4,141			48,990			3,700			80,550
Depreciation		—			7,981			2,173			5,145			4,229			—			2,246			21,774
Transfers		—			(110	)		(16	)		(78	)		(277	)		—			—			(481	)
Disposals		—			—			—			—			—			—			(964	)		(964	)
Impairments		—			160			85			2,104			61			—			17,820			20,230
At July 31, 2021		307			21,743			3,251			15,862			8,154			48,990			22,802			121,109
Depreciation		—			7,037			1,980			9,312			3,132			(446	)		1,640			22,655
Transfers		—			682			(503	)		(825	)		266			—			—			(380	)
Disposals/write offs		(307	)		—			—			(1,884	)		—			(5,405	)		(1,942	)		(9,538	)
Impairments		462			89,583			37,108			10,896			5,158			48,372			15,524			207,103
Held for Sale		—			(585	)		—			636			251			—			—			302
At April 30, 2022		462			118,460			41,836			33,997			16,961			91,511			38,024			341,251
Net book value
At July 31, 2020		1,349			151,237			23,430			24,770			14,730			49,145			20,705			285,366
At July 31, 2021		2,449			244,159			38,900			26,854			20,977			42,956			17,607			393,902
At April 30, 2022		8,771			194,740			821			77,423			8,208			4,395			2,276			296,634

During the nine months ended April 30, 2022, the Company capitalized $17,879 (July 31, 2021 – $15,677) of depreciation to inventory. During the three and nine months ended April 30, 2022, depreciation expensed to the consolidated statement of net loss and comprehensive loss was $1,579 and $4,776 (April 30, 2021 – $1,612 and $4,369).

On October 31, 2021, the Company identified impairment to its Keystone Isolation Technology (KIT) capital project which was suspended. The KIT capital project related to the development and commissioning of new cannabis extraction and isolation equipment. During the three and nine months ended April 30, 2022, the Company recognized impairments on the associated equipment for an impairment loss of $nil and $13,377.

On January 31, 2022, indicators of impairment were identified as a result of significant revisions to management’s own forecasts of future net cash inflows and earnings from previous budgets and forecasts. As a result, certain cultivation facilities, as well as related equipment and capital projects were considered redundant and tested for impairment at the asset level resulting in an impairment loss of $98,022 being recorded.

During the three months ended April 30, 2022, management announced the planned cessation of operations at the leased, centralized manufacturing and processing facility, Belleville. The Company expects to phase out operations at the facility and migrate to other existing facilities. Certain identified cultivation equipment will also be transferred to alternative sites. The leasehold improvements, remaining construction in progress, associated and certain, redundant equipment have been impaired to their recoverable amounts.

15

Also on April 30, 2022, certain conditions existed requiring an adjustment to the recoverable value of a cultivation facility. As a result of the above, the Company recognized impairment losses of $83,171 during the three months ended April 30, 2022.

Recoverable amount was determined by reference to fair value less costs of disposal using a market approach. The market approach was based on comparable transactions for similar assets, which is categorized within Level 2 of the fair value hierarchy. Additional impairment losses were recorded for the related cultivation and processing licenses (Note 13).

Capitalized borrowing costs to buildings in the nine months ended April 30, 2022, was $nil (April 30, 2021 – $1,269 at an average interest rate of 6.4%). Transfers from construction in progress during the year reflect the activation of an asset’s useful life, transitioning from construction in progress to the appropriate property, plant and equipment classification.

12. Assets Held for Sale

Net book value	Land			Buildings			Cultivation and production equipment		Furniture, computers, vehicles and equipment		Construction in progress		Total
	$			$			$		$		$		$
At July 31, 2021		—			—			—		—		—		—
Business acquisition (Note 14)		1,873			366			274		—		—		2,513
Additions		2,218			11,781			708		109		9,433		24,249
Disposals		(425	)		(3,797	)		—		—		—		(4,222	)
At April 30, 2022		3,666			8,350			982		109		9,433		22,540

On September 1, 2021, the Company acquired 48North Cannabis Corp. and recognized the Good Farm cultivation facility as held for sale on the acquisition date. The facility was sold during the three months ended April 30, 2022.

Throughout the nine months ended April 30, 2022, management completed a strategic review of its total, post acquisition cultivation capacity and made the decision to exit the Good House (acquired from 48North), Brantford R&D, Fort Collins and Stellarton (acquired from Zenabis) facilities and dispose of certain associated equipment. As such, these assets have been classified as held for sale on the statement of financial position as of April 30, 2022. Management assessed the related assets for impairment upon classification as assets held for sale and determined that no impairment losses were required to be recorded as the carrying amounts are expected to be recovered through sale.

On April 30, 2022, the Company’s new management re-evaluated the future of the Kirkland Lake (acquired from 48North) cultivation facility and as a result the associated assets did not meet held for sale classification criteria as at April 30, 2022.

13. Intangible Assets

Cost	Cultivating and processing license		Brands		Software			Domain names		Patents/ Know-how		Total
	$		$		$			$		$		$
At July 31, 2020		116,433		8,440		3,710			585		1,933		131,101
Additions		—		—		1,546			—		790		2,336
Business acquisition		28,914		5,400		—			—		—		34,314
Disposals		—		—		(872	)		—		—		(872	)
At July 31, 2021		145,347		13,840		4,384			585		2,723		166,879
Additions		—		—		4,127			—		505		4,632
Business acquisitions		73,079		97,200		1,221			—		27,337		198,837
At April 30, 2022		218,426		111,040		9,732			585		30,565		370,348
Accumulated amortization and impairments
At July 31, 2020		110,957		2,000		1,966			125		45		115,093
Amortization		765		170		922			59		134		2,050
Disposals		—		—		(872	)		—		—		(872	)
At July 31, 2021		111,722		2,170		2,016			184		179		116,271
Amortization		6,033		6,636		2,630			44		2,667		18,010
Impairment		72,950		56,450		—			—		11,439		140,839
At April 30, 2022		190,705		65,256		4,646			228		14,285		275,120
Net book value
At July 31, 2020		5,476		6,440		1,744			460		1,888		16,008
At July 31, 2021		33,625		11,670		2,368			401		2,544		50,608
At April 30, 2022		27,721		45,784		5,086			357		16,280		95,228

Research and development expenses in the three and nine months ended April 30, 2022 were $540 and $2,985, respectively (April 30, 2021 - $730 and $2,901).

16

During the nine months ended April 30, 2022, the Company adjusted the estimated useful life of its previously indefinite life brand to a three-year period based on new available information such as market comparatives and market sales data.

IMPAIRMENT

On January 31, 2022, indicators of impairment were identified as a result of adverse changes in the Canadian Cannabis market experienced throughout the three months ended January 31, 2022, which resulted in significant revisions to management’s own forecasts of future net cash inflows and earnings from previous budgets and forecasts. As a result, the Company recorded aggregate impairment losses of $140,839 on intangible assets within the Canadian Cannabis CGU. The following details the impairment of the applicable assets to their individual recoverable amounts:

• The Company has valued the cultivation and processing licenses associated with the acquired facilities of Redecan (Note 14), using a fair value less costs of disposal model which estimates the value of the license as the difference between the present value of the future cash flows of the facility with-or-without a license in place, as at January 31, 2022 using management’s revised estimates of expected future cash flows and gross margins.

• Recoverable amount was $26,556, requiring an impairment loss of $45,000. If all other assumptions were held constant, and the forecasted gross margin rate was decreased by 10%, the recoverable amount of the cultivation and processing license would decrease by $6,771. In the with-or-without approach, reducing the estimated time to obtain a license and complete cultivation and production ramp up by six months would reduce the recoverable amount of the license by $8,066. In connection with the impairment loss recorded for a redundant cultivation facility (Note 11), the Company recorded an impairment loss of $27,950 relating to cultivation and processing licenses associated with the cultivation facility.

• The Company revalued the brand asset acquired in the Redecan transaction (Note 14) as at January 31, 2022, using management’s revised estimates of expected future revenues. Recoverable amount was determined to be $47,000, requiring an impairment loss of $43,754. Recoverable amount was determined with reference to fair value less cost of disposal, which utilized a relief from royalty approach model (Level 3). If all other assumptions were held constant, and the forecasted royalty rate was decreased by 10%, the recoverable amount of the brand would decrease by $5,061. The Company also impaired certain other acquired brands to their recoverable amounts, resulting in an impairment loss of $12,696.

• The Company has valued the production Know-How asset, acquired from the Redecan transaction (Note 14) as at January 31, 2022, using management’s revised estimates of expected future cash flows and related gross margins (Note 15). The recoverable amount was determined to be $14,000, requiring an impairment loss of $11,438. Recoverable amount was determined with reference to fair value less costs of disposal using a with-or-without approach based on an income based DCF valuation model (Level 3). The model estimates the value of the asset as the difference between the present value of the future cash flows of pre-roll revenues, with-or-without the unique Know-how as at the acquisition date. The significant estimate in the model is the initial incremental margin, which depletes over time, representing an advantageous increase to gross margin due to the process. In the with-or-without approach, increasing the estimated incremental margin by 5% would not impact the assets valuation materially.

14. Business Acquisitions

Goodwill arising from the acquisitions represented the expected synergies, future income and growth, and other intangibles that do not qualify for separate recognition at the date of acquisition. None of the goodwill arising from the acquisitions is expected to be deductible for tax purposes.

Acquisition of 48North Cannabis Corp.

On September 1, 2021, pre-market open, the Company acquired 100% of the issued and outstanding common shares of 48North Cannabis Corp. (“48North”). 48North was a Canadian-licensed cultivator and seller of medical and adult-use cannabis. 48North was acquired for select intellectual properties and its established market share. Under the arrangement, each former 48North common share was exchanged for 0.02366 (the “exchange ratio”) of a HEXO common share. In addition, all issued and outstanding stock options and compensation units of 48North were replaced with HEXO backed units, having the same terms but adjusted for the exchange ratio, and all issued and outstanding common share purchase warrants of 48North became exercisable for HEXO common shares adjusted for the exchange ratio.

The following table summarizes the purchase consideration and preliminary values of the net assets acquired from 48North on the acquisition date. The fair values of intangible assets remain preliminary and subject to change within the one-year measurement period.

			Units		Unit Price		Fair Value
					($)		($)
Consideration
Shares issued	(i)			5,352,005		3.10		16,591
Replacement warrants outstanding	(ii	)		1,554,320				769
Replacement stock options issued	(iii	)		17,766				18
Settlement of pre-existing debt	(iv	)		n/a				5,000
Total fair value of consideration								22,378

17

Net assets acquired
Current assets
Cash and cash equivalents		989
Accounts receivable		1,263
Other receivables		259
Prepaid expenses		2,962
Inventory		5,040
Biological assets		875
Assets held for sale		2,513
Non-current assets
Property, Plant and Equipment		9,683
Intangible assets—brands		2,500
Goodwill	Note 15	11,453
Total assets		37,537
Current liabilities
Accounts payable and accrued liabilities		(10,580	)
Excise taxes payable		(555	)
Lease Liability		(178	)
Non-current liabilities
Lease Liability		(553	)
Term loan		(3,293	)
Total liabilities		(15,159	)
Total net assets acquired		22,378

(i) As the acquisition closed pre-markets on September 1, 2021, the share price is based upon the closing HEXO Corp. TSX market price of common shares on August 31, 2021.

(ii) Warrants were valued using the Black-Scholes option pricing model as at the acquisition date September 1, 2021, using the following assumptions:

• Risk free rate of 0.39%-0.53%

• Expected life of 1 – 3 years

• Volatility rate of 101%; determined using historical volatility data

• Exercise prices of $6.34-$72.70

• Share price of $3.10

(iii) All vested and replaced stock options were valued using the Black-Scholes option pricing model as at the acquisition date of September 1, 2021, using the following assumptions and inputs;

• Risk free rate of 0.31% – 0.51%

• Expected life of 0.16 – 2.59 years

• Volatility rate of 101%; determined using historical volatility data

• Exercise prices of $6.33 – $46.03

• Share price of $3.10

(iv) Prior to the transaction’s closing date, the Company issued a $5,000 subordinated secured bridge loan with a 6-month term to 48North. For purposes of the acquisition accounting the loan, which had a fair value of $5,000, was effectively settled at the acquisition date and included in purchase consideration.

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

During the three and nine months ended April 30, 2022, 48North contributed net revenue of $262 and $2,209, respectively and a comprehensive net loss attributed to shareholders of $998 and $12,571, respectively, to the Company’s consolidated results since the date of acquisition. If the acquisition had occurred on August 1, 2021 management estimates that the Company’s consolidated net revenue and the comprehensive net loss would not have been materially impacted.

18

Acquisition of Redecan

On August 30, 2021, the Company acquired 100% of the outstanding shares of the entities that carry on the business of Redecan. Redecan was acquired for its brands, growing capability (including outdoor growing capability) intellectual properties and its established market share.

The following table summarizes the purchase consideration and preliminary values of the net assets acquired from Redecan on the acquisition date. The fair values of the purchase price working capital and intangible assets are preliminary and are subject to change within the one-year measurement period.

			Units		Unit Price		Fair Value
					($)		($)
Consideration
Cash	(i	)						402,173
Shares issued	(ii)			69,721,116		3.07		214,044
Total fair value of consideration								616,217
Net assets acquired
Current assets
Cash and cash equivalents								20,027
Accounts receivable								9,795
Prepaid expenses								4,366
Excise taxes receivable								2,566
Inventory								37,229
Biological assets								7,476
Income tax recoverable								4,947
Non-current assets
Property, plant and equipment								125,844
Cultivation and processing license								73,079
Brands								94,700
Intellectual property and know-how								27,337
Intangible assets—software								1,221
Goodwill	Note 15							275,397
Total assets								683,984
Current liabilities
Accounts payable and accrued liabilities								(4,340	)
Excise taxes payable								(1,125	)
Lease liability – current								(144	)
Income Tax Payable								(188	)
Non-current liabilities
Lease Liability								(1,117	)
Deferred tax								(60,853	)
Total liabilities								(67,767	)
Total net assets acquired								616,217

(i) Cash consideration of $402,173 was paid upon the closing of the acquisition on August 30, 2021. Under the share purchase agreement, the $400,000 cash consideration includes a variable component based upon a $4,500 working capital estimate. Upon closing of the transaction, the working capital of Redecan was estimated at a surplus of $2,173 above the $4,500 amount. As at April 30, 2022, $5,000 of the cash consideration remains held in escrow with a third party agent. Per the share purchase agreement, the Company had a period of 60 days after closing the transaction to settle the working capital balance as at August 30, 2021 however, as of the date of these condensed interim consolidated financial statements, finalization of the working capital component of the purchase has not yet occurred.

(ii) As the acquisition closed intraday on August 30, 2021, the share price is based upon the closing HEXO Corp. TSX market price of common shares on August 30, 2021.

19

The identified cultivation and processing license (“the license”) enables the Company to cultivate and produce cannabis products for sale and was valued at $73,079 using a with-or-without approach in an income based discounted cash flow (“DCF”) valuation model (Level 3). The model estimates the value of the license as the difference between the present value of the future cash flows of the facility with-or-without a license in place, as at the acquisition date. Significant estimates in the model include the forecast gross margin and the estimated time to obtain a license and complete cultivation and production ramp up. If all other assumptions were held constant, and the forecasted gross margin rate was decreased by 10%, the valuation of the cultivation and processing license would decrease by $18,300. In the with-or-without approach, reducing the estimated time to obtain a license and complete cultivation and production ramp up by six months would reduce the valuation of the license by $21,800.

The identified Brand asset which allows the Company immediate access to accretive market share and product offerings has been valued at $94,700 using a relief from royalty approach model (Level 3). If all other assumptions were held constant, and the forecasted royalty rate was decreased by 10%, the valuation of the brand would decrease by $9,500.

The identified Know-How intangible asset, related to the unique pre-roll process, provides the Company immediate access to scaled, efficient pre-roll technology and production capability and has been valued at $27,337. The asset was valued using a with-or-without approach in an income based DCF valuation model (Level 3). The model estimates the value of the asset as the difference between the present value of the future cash flows of pre-roll revenues, with-or-without the unique Know-how as at the acquisition date. The significant estimate in the model is the initial incremental margin, which depletes over time, representing an advantageous increase to gross margin due to the process. In the with-or-without approach, increasing the estimated incremental margin by 5% would increase the valuation of the asset by $12,426.

During the three and nine months ended April 30, 2022, Redecan contributed net revenue of $13,947 and $42,023, respectively and comprehensive net income/(loss) attributed to shareholders of ($91) and $8,092, respectively to the Company’s consolidated results since the date of acquisition. If the acquisition had occurred on August 1, 2021 management estimates that the Company’s consolidated net revenue would have increased by an estimated $6,787 and the comprehensive net loss would have increased by $5,425 for the nine months ended April 30, 2022.

The Company recognized transaction costs (primarily broker fees) of $22,636 related to the acquisition in Acquisitions and transaction costs in the statement of comprehensive income.

Upon shareholder approval of the Redecan acquisition transaction the Company issued 256,776 common shares as broker compensation.

15. Goodwill

	$
Balance as at July 31, 2021		88,189
Acquisition – Redecan (Note 14)		275,397
Acquisition – 48North (Note 14)		11,453
Impairment		(375,039	)
Balance as at April 30, 2022		—

Goodwill was recorded on the acquisition of Zenabis Brands Inc. on June 1, 2021, Redecan on August 30, 2021 (Note 14) and 48North on September 1, 2021 (Note 14) and is monitored at the company-wide level aggregated CGU level (“HEXO Corporate CGU”).

On January 31, 2022, the carrying amount of the Company’s total net assets significantly exceeded the Company’s market capitalization. In addition, the Canadian Cannabis market experienced adverse changes, which were reflected in significant revisions to management’s own forecasts of future net cash inflows and earnings from previous budgets and forecasts. As a result of these factors, management performed an indicator-based impairment test of goodwill as at January 31, 2022.

The significant assumptions in the DCF analysis were as follows:

i. Cash flows: Estimated cash flows were projected based on forecasted operating results from internal sources as well as industry and market trends. A discrete five-year period was forecasted with terminal value forecasted using the Gordon Growth Method. The growth rate will fall linearly to the terminal value, declining each year over the 5 years to a terminal exit enterprise value of x8.9. If all other assumption were held constant and the short-term growth rate in the first year was decreased by 5%, the recoverable amount would decrease by $26,931;

ii. Terminal value growth rate: Management used a 2% terminal growth rate which is based on historical and projected consumer inflation, historical and projected economic indicators, and projected industry growth. If all other assumptions were held constant and the terminal growth rate was decreased by 1%, the recoverable amount would decrease by $31,806;

20

iii. Post-tax discount rate: Management used a 14.3% post-tax discount rate which is reflective of an industry Weighted Average Cost of Capital (“WACC”). The WACC was estimated based on the risk-free rate, equity risk premium based on the Duff & Phelps method, and after-tax cost of debt based on select peer debt. If all other assumption were held constant and the discount rate was in increased by 1%, the recoverable amount would decrease by $28,383; and

iv. Tax rate: The tax rates used in determining the future cash flows were those substantively enacted at the respective valuation date.

The calculation of the adjusted current market capitalization was based on the share price of the Company on January 31, 2022, adjusted for a control premium of 20%, which was estimated by reference to premiums in recent acquisitions involving control, and from data on empirical control premium studies that considered industry, pricing, background, deal size, and timing of the observed premiums. If all other assumptions were held constant, and the share price declined by 5%, the impairment loss would increase by $18,000. If all other assumptions were held constant and the control premium was decreased by 5%, the recoverable amount would decrease by $15,000.

As a result, management concluded that the carrying value of the HEXO Corporate CGU was higher than the recoverable amount, and recorded a goodwill impairment loss of $375,039, during the three months ended January 31, 2022 resulting in Goodwill being recorded at $nil and the HEXO Corporate CGU’s carrying value falling within the recoverable amount acceptable range.

The Company’s goodwill impairment loss for the three- and nine-months period ended April 30, 2022 was $nil and $375,039, respectively (April 30, 2021 — $nil and $nil).

16. Warrant Liabilities

	US$25,000 Registered Direct Offering			US$20,000 Registered Direct Offering			August 2021 Underwritten Public Offering			Total
	$			$			$			$
Balance as at July 31, 2021		3,186			2,547			—			5,733
Issued		—			—			39,255			39,255
Gain on revaluation of financial instruments		(3,137	)		(2,509	)		(36,835	)		(42,481	)
Balance as at April 30, 2022		49			38			2,420			2,507

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. Losses (gains) on revaluation of the warrant liabilities are presented in Non-operating income (expenses) on the consolidated statements of loss and comprehensive loss.

August Underwritten Public Offering

On August 24, 2021, the Company closed an underwritten public offering for gross proceeds of US$144,800. Under this offering, the Company issued 24,540,012 warrants with an exercise price of US$3.45 per share. The warrant liability was measured at fair value using the Black-Scholes-Merton option pricing model (Level 2), using the following assumptions:

	As at April 30, 2022	Initial recognition August 24, 2021
Number of warrants	24,540,012	24,540,012
Share price	US$0.41	US$2.58
Expected life	3 years	2.5 years
Dividend	US $nil	US $nil
Volatility	95%	96%
Risk free rate	2.60%	0.84%
Exchange rate (USD/CAD)	$1.2792	$1.2608

US$20,000 Registered Direct Offering

On January 21, 2020, the Company closed a registered direct offering with institutional investors for gross proceeds of US$20,000. Under this offering, the Company issued 1,497,007 warrants with an exercise price of US$9.80 per share. The warrant liability was measured at fair value using the Black-Scholes-Merton option pricing model (Level 2), using the following assumptions:

21

	As at April 30, 2022	As at July 31, 2021	Initial recognition January 20, 2020
Number of warrants	1,497,007	1,497,007	1,497,007
Share price	US$0.41	US$3.97	US$5.80
Expected life	2.66 years	2.5 years	2.5 years
Dividend	US $nil	US $nil	US $nil
Volatility	95%	95%	80%
Risk free rate	2.60%	0.38%	1.57%
Exchange rate (USD/CAD)	$1.2792	$1.2462	$1.3116

US$25,000 Registered Direct Offering

On December 31, 2019, the Company closed a registered direct offering with institutional investors for gross proceeds of US$25,000. Under this offering, the Company issued 1,871,259 warrants with an exercise price of US$9.80 per share. The warrant liability was measured at fair value using the Black-Scholes-Merton option pricing model (Level 2), using the following assumptions:

	As at April 30, 2022	As at July 31, 2021	Initial recognition December 31, 2019
Number of warrants	1,871,259	1,871,259	1,871,259
Share price	US$0.41	US$3.97	US$6.36
Expected life	2.66 years	2.5 years	2.5 years
Dividend	US $nil	US $nil	US $nil
Volatility	95%	95%	79%
Risk free rate	2.60%	0.38%	1.71%
Exchange rate (USD/CAD)	$1.2792	$1.2462	$1.2988

17. Convertible Debentures

	Note			April 30, 2022		July 31, 2021
				$		$
Unsecured convertible debentures—March 2019		(a	)		—		3,406
Unsecured convertible debenture—December 2019		(b	)		36,863		33,089
Total convertible debentures					36,863		36,495
Current					36,863		3,406
Non-Current					—		33,089

(b) Unsecured Convertible Debentures March 2019

Balance as at July 31, 2021	$	3,406
Interest expense		55
Debt repayment		(3,461	)
Balance as at April 30, 2022	$	—

On June 1, 2021, the Company completed its business acquisition of Zenabis which included the assumption of Zenabis’ unsecured convertible debentures issued in March 2019. The debentures bore interest, payable in cash only, from the date of issue at 6.0% per annum, payable semi-annually on June 30 and December 31 of each year and were convertible at a price of $147.29. The convertible debentures were convertible, at the option of the holder, into common shares of the Company at any time prior to the close of business on the last business day immediately preceding the maturity date. On September 27, 2021, the Company repaid, in full, the outstanding principal and interest.

22

(c) Unsecured Convertible Debenture December 2019

Balance as at July 31, 2021	$	33,089
Interest expense		6,183
Interest paid		(2,409	)
Balance as at April 30, 2022	$	36,863

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 $12.64 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 $30.00 for any 15 consecutive trading days.                

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.                

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 $3.20 (the “Early Conversion Price”) calculated based on the 5-day volume weighted average HEXO Corp. share price (the “VWAP”) preceding the announcement. The VWAP utilized data from both the TSX and NYSE. Each Conversion Unit provided the holder one common share and one half common share purchase warrant (with an exercise price of $4.00 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 and $6,265 principal amount of the Debentures were converted under the Early Conversion Price and into common shares and 3,686,721 and 978,907 common share purchase warrants of HEXO Corp., respectively.

On April 30, 2022 there remains $40,140 in principal debentures (July 31, 2021—$40,140) outstanding. The accrued and unpaid interest as at April 30, 2022 was $273 (July 31, 2021—$483).

18. Senior Secured Convertible Note

	April 30, 2022			April 30, 2022			July 31, 2021			July 31, 2021
Senior Secured Convertible Note	US$			$			US$			$
Opening balance, beginning of the period		364,847			454,673			—			—
Issued at fair value		—			—			407,284			491,714
Early conversions		—			—			(413	)		(497	)
Redemptions		(155,220	)		(194,970	)		(27,500	)		(33,525	)
Loss (gain) on fair value adjustment		12,916			17,073			(14,524	)		(18,100	)
Foreign exchange loss/(gain)		—			7,900			—			15,081
Ending balance, end of the period		222,543			284,676			364,847			454,673
Unrecognized Day 1 Loss
Opening balance, beginning of the period		(72,214	)		(86,974	)		—			—
Unrecognized loss at issuance		—			—			(79,684	)		(96,203	)
Recognized loss		30,900			37,097			7,470			9,229
Ending balance, end of the period		(41,314	)		(49,877	)		(72,214	)		(86,974	)
Total balance, end of period, net		181,229			234,799			292,633			367,699
Current portion		181,229			234,799			292,633			367,699
Non-current		—			—			—			—

On May 27, 2021 (the “Issuance date”), the Company issued a Senior Secured Convertible Note (the “Note”) directly to an institutional purchaser, HT Investments MA LLC (“HTI”), and certain of its affiliates or related funds (collectively, the “Holder”) at a principal amount of $434,628 (US$360,000). The Note was sold at a purchase price of $395,511 (US$327,600), or approximately 91% of the principal amount (“transaction price”). The Note bears no periodic cash interest payments and is repayable on May 1, 2023 (the “maturity date”) at 110% of the principal amount (the “Redemption Amount”), if not converted or redeemed earlier. The Redemption Amount on Issuance date was $478,091 (US$396,000). The Company used a portion of the net proceeds of the Note to fund the acquisition of Redecan (Note 14). The Note is secured against the assets of HEXO Operations Inc. and its subsidiaries, as well as the assets of HEXO USA Inc and its subsidiaries.

23

The closing of the Transaction Agreement is subject to several financial and non-financial interim covenants which are applicable from the date of entering into the Transaction Agreement to the earlier of the closing or termination date of the Transaction Agreement. As at April 30, 2022, the Company had not satisfied the minimum liquidity interim covenant of US$100 million (the “Liquidity Covenant”). Tilray did not express an intention of terminating the Transaction Agreement on the basis of the Company’s non-compliance with the Liquidity Covenant. Subsequent to April 30, 2022, management entered into an Amending Agreement which amended certain conditions of the Transaction Agreement including but not limited to the Liquidity Covenant, which was reduced to $70 million (the “Amended Liquidity Covenant”)(Note 37). A waiver was also received through the Amending Agreement in which Tilray irrevocably waives any rights or entitlements as the result of any non-compliance to the previously minimum liquidity requirement of US$100 million.

The Note can be converted in full or in part by the Holder into freely tradeable common shares of the Company at any time before the second last trading day before the maturity date at a conversion rate of 142.6533 common shares per US$1.00 (“conversion rate”). The Note includes different conversion and redemption options available to the Holder and the Company, subject to certain terms and limitations.

Event of Default

As at January 31, 2022, the Company failed to meet a financial covenant under the Note which required the Company to achieve positive adjusted earnings before taxes, interest, taxes and depreciation for the three month period ended January 31, 2022. This is an event of default under the terms of the Note. Subsequent to period end, on March 13, 2022, the Holder of the Note agreed to an irrevocable waiver of their rights in relation to the event of default (Note 18) until the earlier of May 17, 2022 or termination of the Proposed Transaction (the “waiver”). The waiver was then overridden by a forbearance to act upon the default event extended by the Holder as stated in the Transaction Agreement, executed April 12, 2022. The forbearance is applicable until the earlier of the closing or termination of the Transaction Agreement. As the Holder has not irrevocably waived the default event but rather has waived the right to act upon the default event, the Note remains in default as at April 30, 2022.

In an event of a default, the Holder obtains the option to declare the Note (or any portion thereof) to become due and payable immediately for cash in an amount equal to the Event of Default Acceleration Amount, as defined in the Note. The Event of Default Acceleration Amount is a cash amount equal to the greater of:

• (A) 115% of the outstanding principal amount of the Note, including any accrued and unpaid interest; and

• (B) 115% of the product of (i) the original conversion rate of 142.6533, (ii) the outstanding principal amount, including any accrued and unpaid interest, and (iii) the greater of:

• the highest Daily VWAP per Common Share occurring during the thirty (30) consecutive VWAP Trading Days ending on, and including, the VWAP Trading Day immediately before the date the acceleration notice is delivered; and

• the highest Daily VWAP per Common Share occurring during the thirty (30) consecutive VWAP Trading Days ending on, and including, the VWAP Trading Day immediately before the date the applicable Event of Default occurred.

As at April 30, 2022, the greater amount was calculated under (A) which represents a cash amount of $284,676 (US $222,543).

In addition, notwithstanding the event of a default, the Holder continues to hold the option to convert the Note, in full or in part, into freely tradeable common shares of the Company, at any time before the second last trading day before the maturity date. The Holder also continues to be entitled to exercise the Optional Redemption Options. However, during the period under which the Note is in default, the conversion rate applied to such conversions will be increased by a number of shares equal to the Event of Default Additional Shares, as defined in the Note. This conversion right continues to be subject to limitations on conversions, including the 9.99% beneficial ownership limitation, as set out in the Note.

As a result of the event of default, the Company is no longer able to exercise its option to force conversion of the Note and is unable to satisfy the terms of the Equity Condition, as set out in the Note, which means the Company does not retain the ability to settle monthly redemption payments in equity. Unless a waiver is granted by the Holder, any monthly redemption options exercised by the Holder will be required to be settled in cash.

Fair Value Measurement

The Note represents a hybrid instrument with multiple embedded derivatives requiring separation. The Note, as a whole, has been designated as FVTPL, as at least one of the derivatives does significantly modify the cash flows of the Note and it is clear with limited analysis that separation is not prohibited. The changes in fair value of the instrument are recorded in the Statement of loss with changes in credit spread being recognized through Other comprehensive income.

As at April 30, 2022, as a result of the event of default, the fair value of the Note with a demand feature cannot be less than the amount payable on demand, discounted from the first date that the amount could be required to be repaid. The demand amount was calculated by reference to the Event of Default Acceleration amount, as defined in the agreement. Fair value was determined through the use of a model using a valuation technique that includes unobservable inputs.

As the demand amount represented the higher amount, the Note was measured at its demand amount of $284,676 (US $222,542), representing 115% of the outstanding principal at April 30, 2022. There was no accrued or unpaid interest as at April 30, 2022.

The fair value of the Note is classified as Level 2 in the fair value hierarchy and was determined using the partial differential equation method with the following inputs;

24

	As at April 30, 2022			As at July 31, 2021			Initial recognition May 21, 2021
Share price	US$	0.41		US$	3.98		US$	6.53
Dividend	$	nil		$	nil		$	nil
Volatility		120	%		85	%		85	%
Risk free rate		3.45	%		0.327	%		0.227	%
Credit spread		37.65	%		15.44	%		16.06	%

During the three months and nine months ended April 30, 2022 the gain on fair value adjustments related to changes in credit spread amounted to $4,978 and $25,935, respectively.

The fair value of the Note at initial recognition was determined using a valuation technique that includes unobservable inputs. The Company identified a difference between the transaction price and the fair value of $96.2 million (US$79.7 million) (the “Day 1 loss”). The Company believes that time is the factor that market participants would take into account when pricing the note. Therefore, the unrecognized Day 1 loss is recognized on a straight-line basis in the statement of net loss over the contractual life of the Note.

The following table represents the movement of redemption amounts in the nine months ended April 30, 2022 and the year ended July 31, 2021. Under the default terms redemptions are to be made at 115% of the principal amount owed from the date of default. All redemptions during the nine months ended April 30, 2022 were made at 110% of principal amount owed under non-default terms of the agreement.

	April 30, 2022					July 31, 2021
	Shares Issued		Amount			Shares Issued		Amount
			$					$
Principal at redemption, beginning of period				458,710					—
Issuances:
Initial issuance				—					478,091
Settlements:
Early conversion option		—		—			53,495		(497	)
Optional redemption options		156,558,862		(194,970	)		4,548,746		(33,525	)
Increase in redemption value due to default				13,036					—
Foreign exchange loss				7,900					14,641
Principal at redemption, end of period				284,676					458,710

On January 18, 2022, the Company utilized cash proceeds from the sale of its interest in Belleville Complex Inc. to settle $10,111 of optional redemptions at a rate of 110% of principal (Note 10). No shortfall cash payments were issued in the nine months ended April 30, 2022.

An increase/decrease in the US$/CA$ foreign exchange rate of 1% would result in a foreign exchange loss/gain adjustment of $2,847. Further, a decrease of credit spread by 2% would decrease the fair value of the instrument by $1,240 and an increase in share price of the Company by 10% would not result in a material change.

The following table depicts amounts that can be demanded by the Holder in accordance with the event of default reflective of 115% of the principal amount of the Note.

Fiscal Year	Redemption amount		Redemption amount
	US$		$
2022 – three months remaining		222,543		278,089
2023		—		—
Total		222,543		278,089

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19. Lease Liabilities

The following is a continuity schedule of lease liabilities for the nine months ended April 30, 2022 and the year ended July 31, 2021:

	$
Balance at July 31, 2020		29,116
Assumed on business combination (Note 14)		17,059
Lease disposals		(789	)
Lease payments		(4,835	)
Interest expense on lease liabilities		3,334
Balance at July 31, 2021		43,885
Assumed on business combination (Note 14)		1,992
Lease additions		29
Lease terminations		(871	)
Lease payments		(4,705	)
Interest expense on lease liabilities		3,336
Balance at April 30, 2022		43,666
Current		1,702
Non-current		41,964

The Company’s leases consist of administrative real estate leases and a production real estate property. Effective December 1, 2021, the Company exited two real estate leases and the corresponding liability was written off for a realized gain of $453 recognized in other income and loss on the consolidated statements of loss and comprehensive loss. The Company expensed variable lease payments of $802 and $2,411 in the three and nine months ended April 30, 2022 (April 30, 2021 – $815 and $2,412, respectively).

The following table is the Company’s undiscounted lease obligations over the next five fiscal years (including three months remaining in fiscal year 2022) and thereafter as at April 30, 2022:

Fiscal year	2022		2023 – 2024		2025 – 2026		Thereafter		Total
	$		$		$		$		$
Lease obligations		1,833		12,078		11,183		50,903		75,997

20. Senior Notes Payable

The following table illustrates the continuity schedule of the senior notes payable for the nine months ended April 30, 2022 and the year ended July 31, 2021:

	April 30,2022			July 31, 2021
	$			$
Opening Balance		50,159			—
Assumed on business combination		—			50,138
Interest paid		(5,095	)		(1,210	)
Interest expense		5,668			1,231
Closing Balance		50,732			50,159
Current portion		50,732			50,159
Long-term portion		—			—

On June 1, 2021 as part of the Zenabis acquisition, the Company assumed senior notes which have a principal amount owing of $51,875 and a maturity date of March 31, 2025. The senior notes bear interest at 14% per annum calculated and compounded monthly in arrears and payable to the lender on the first day of each month. The debt is secured against the assets of Zenabis Global Inc and it’s subsidiaries. The carrying value of the assets subject to the security is $55,038.

Prior to the business acquisition of Zenabis, certain covenants were claimed by the lender to be in breach, and a demand for repayment was received by the borrower. Zenabis filed a petition on February 19, 2021 for a determination of the amount required to repay and terminate the senior notes and to obtain discharges of the debenture and related security (Note 30). Further, the senior notes contain a covenant that requires lender permission for a change in control event. This was not obtained prior to the close of the acquisition of Zenabis and as such, the debt remains in default. Accordingly, the senior notes have been classified as current debt and recorded initially at fair value at the business acquisition date and amortized cost thereafter.

The following table represents the undiscounted loans and borrowings repayment schedule as at April 30, 2022:

July 31, 2022	$	51,875
Thereafter		—
	$	51,875

The accrued and unpaid interest as at April 30, 2022 was $597 (July 31, 2021 - $nil).

26

21. Share Capital

(a) Authorized

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

(b) Issued and Outstanding

As at April 30, 2022, a total of 458,167,270 (July 31, 2021 – 152,645,946) common shares were issued and outstanding. No special shares have been issued or are outstanding.

	Number of shares		Share Capital
Balance as at July 31, 2021		152,645,946	$	1,267,967
Acquisition shares – Redecan (Note 14), net		69,721,116		213,746
Acquisition shares – 48North (Note 14), net		5,352,005		16,486
At-the-Market programs, net of costs		24,290,117		27,266
August 2021 Underwritten Public Offering		49,080,024		135,645
Redemptions of senior secured convertible note1, net (Note 18)		156,558,862		184,525
Broker compensation		502,176		2,084
Exercise of stock options		17,024		147
Balance as at April 30, 2022		458,167,270	$	1,847,866

¹ Issuance of equity as settlement of optional redemption payments.

August 2021 Underwritten Public Offering

On August 24, 2021, the Company closed an underwritten public offering for total gross proceeds of $183,103 (US$144,786)

were generated through the issuance of 49,325,424 units comprising 49,325,424 common shares and 24,540,012 common share purchase warrants. The warrants were fair valued at $39,255 and recorded as a Warrant liability (Note 16). Associated issuance costs in the nine months ended April 30, 2022 were $8,069.

At-the-Market (“ATM”) Program

On November 17, 2021, the Company resumed the ATM program initially launched in May 2021 allowing the Company to issue up to $150,000 (or its US equivalent) of common shares to the public. The first round of the program ceased activity on May 25, 2021 and a total of approximately $46,987, (after foreign exchange gains) was generated through the issuance of 6,373,926 common shares in the year ended July 31, 2021. Upon resumption, the Company raised additional gross proceeds of $24,449 on the issuance of 20,658,412 common shares. Associated issuance costs in the nine months ended April 30, 2022 were $705.

22. Common Share Purchase Warrants

The following table summarizes warrant activity during the nine months ended April 30, 2022 and the year ended July 31, 2021.

	April 30, 2022					July 31, 2021
	Number of warrants			Weighted average exercise price1		Number of warrants			Weighted average exercise price1
Outstanding, beginning of period		36,666,958		$	8.85		33,379,408		$	7.60
Expired and cancelled2		(3,179,074	)		33.86		(535,889	)		4.09
Issued on acquisition		1,554,320			1.42		5,970,370			14.59
Issued		24,540,012			4.35		—			—
Exercised		—			—		(2,146,931	)		4.10
Outstanding, end of period		59,582,216		$	6.06		36,666,958		$	8.85

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

²  Of the Company’s expired and canceled warrants in the year ended July 31, 2021, 509,089 cancellations were due to cashless exercises of the Company’s April 2020 and May 2020 warrants. In lieu of cash equal to the number of warrants exercised multiplied by the exercise price, the warrant holder forgoes the corresponding number of warrants which are effectively canceled.

The following is a consolidated summary of warrants outstanding as at April 30, 2022 and July 31, 2021.

27

	April 30, 2022				July 31, 2021
	Number outstanding		Book value		Number outstanding		Book value
Classified as Equity			$				$
June 2019 financing warrants
Exercise price of $63.16 expiring June 19, 2023		546,135		10,023		546,135		10,022
April 2020 underwritten public offering warrants
Exercise price of $3.84 expiring April 13, 2025		11,830,075		15,971		11,830,075		15,971
May 2020 underwritten public offering warrants
Exercise price of $4.20 expiring May 21, 2025		7,591,876		10,446		7,591,876		10,446
Conversion Unit warrants
Exercise price of $4.00 expiring June 10, 2023		3,686,721		11,427		3,686,721		11,427
Exercise price of $4.00 expiring June 30, 2023		978,907		1,928		978,907		1,928
Broker / Consultant warrants
Exercise price of $3.00 expiring November 3, 2021		—		—		18,905		34
Exercise price of $3.00 expiring March 14, 2022		—		—		23,571		66
Exercise price of $63.16 expiring June 19, 2023		15		—		15		—
Molson warrants
Exercise price of $24.00 expiring October 4, 2021		—		—		2,875,000		42,386
Issued in connection with business acquisition
Exercise price of $151.24 expiring September 27, 2021		—		—		14,617		—
Exercise price of $155.19 expiring April 17, 2022		—		—		226,422		1
Exercise price of $78.16 expiring August 21, 2022		15,992		3		15,992		3
Exercise price of $102.71 expiring August 21, 2022		24,338		2		24,338		2
Exercise price of $11.29 expiring January 27, 2023		356,689		1,195		356,689		1,195
Exercise price of $10.99 expiring April 16, 2023		680,877		398		—		—
Exercise price of $12.68 expiring May 4, 2023		602,804		322		—		—
Exercise price of $72.70 expiring April 2 2024		250,080		49		—		—
Exercise price of $3.96 expiring April 23, 2025		631,322		4,232		631,322		4,232
Exercise price of $9.03 expiring June 25, 2025		3,205,378		18,236		3,205,378		18,236
Exercise price of $5.64 expiring September 23, 2025		1,228,873		7,902		1,228,873		7,902
Exercise price of $8.47 expiring October 30, 2025		43,856		261		43,856		261
		31,673,938		82,395		33,298,692		124,112
Classified as Liability
US$25m Registered Direct Offering Warrants
Exercise price of US$9.80 expiring December 31, 2024		1,871,259		49		1,871,259		3,185
US$20m Registered Direct Offering Warrants
Exercise price of US$9.80 expiring January 22, 2025		1,497,007		38		1,497,007		2,548
August 2021 Underwritten Public Offerings Warrants
Exercise price of US$3.45 expiring August 24, 2026		24,540,012		2,420		—		—
		27,908,278		2,507		3,368,266		5,733
		59,582,216		84,902		36,666,958		129,845

23. Share-based Compensation

Stock Options

The following table summarizes stock option activity during the nine months ended April 30, 2022 and the year ended July 31, 2021.

	April 30, 2022					July 31, 2021
	Number of options			Weighted average exercise price		Number of options			Weighted average exercise price
Opening balance		12,018,143		$	10.63		7,503,691		$	16.30
Granted		11,038,113			1.01		5,273,906			5.21
Replacement options issued on acquisition		162,009			7.19		905,902			3.81
Forfeited		(3,323,802	)		4.94		(630,473	)		12.80
Expired		(565,587	)		22.06		(624,832	)		25.95
Exercised		(17,024	)		2.54		(410,051	)		3.00
Closing balance		19,311,852		$	5.63		12,018,143		$	10.63

The following table summarizes the stock option grants during the nine months ended April 30, 2022.

28

			Options granted
Grant date	Exercise price ($)		Executives and directors		Non-executive employees		Total		Vesting terms		Expiry period
November 1, 2021		1.86		2,327,613		947,580		3,275,193		Terms A		10 years
March 21, 2022		0.75		2,491,034		2,254,069		4,745,103		Terms A		10 years
April 28, 2022		0.51		2,839,660		178,157		3,017,817		Terms A		10 years
Total				7,787,232		3,250,881		11,038,113

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 April 30, 2022.

Exercise price	Number outstanding		Weighted average remaining life (years)		Number exercisable		Weighted average remaining life (years)
$1.86–$10.76		16,131,929		9.13		6,359,326		8.38
$15.56–$26.16		1,215,197		7.04		1,116,539		7.01
$28.52–$34.00		1,963,253		6.64		1,963,251		6.64
$47.36–$234.76		1,473		0.00		1,477		0.00
		19,311,852				9,440,593

Restricted Share Units (“RSUs”)

Under the Omnibus Plan, the Board of Directors is authorized to issue RSUs (in conjunction with all share based compensation) 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 nine months ended April 30, 2022 and the year ended July 31, 2021.

	April 30, 2022					July 31, 2021
				Value of units on					Value of units on
	Units			grant date		Units			grant date
Opening balance		550,832		$	7.91		587,108		$	8.41
Granted		1,517,236			1.74		24,008			3.17-7.17
Replacement units issued on acquisition		—			—		223,506			8.61
Exercised – equity settled		—			—		(223,506	)		8.61
Exercised – cash settled		—			—		(25,483	)		5.62-8.60
Forfeited		(34,801	)		3.30		(34,801	)		11.76
Closing balance		2,033,267		$	3.34		550,832		$	7.91

Deferred Share Units (“DSUs”)

Under the Omnibus Plan, the Board of Directors is authorized to issue DSUs (in conjunction with all share based compensation) up to 10% of the issued and outstanding common shares, net of the outstanding share based awards. 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 deferral 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. DSUs may be exercised for cash, equity or a combination of both at the discretion of the holder once vested as per the terms of the award grant.

The following table summarizes DSU activity during the nine months ended April 30, 2022 and the year ended July 31, 2021.

	April 30, 2022				July 31, 2021
			Value of units on				Value of units on
	Units		grant date		Units		grant date
Opening balance		—	$	—		—	$	—
Granted		4,088,386		0.72		—		—
Closing balance		4,088,386	$	0.52		—	$	—

All DSUs have been issued to directors of the Company and fully vest upon the termination of their tenure as directors.

Share-based Compensation

Share-based compensation is measured at fair value at the date of grant and are expensed over the vesting period. 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 the grant date by applying the following assumptions:

29

	April 30, 2022			April 30, 2021
Exercise price (weighted average)	$	7.40		$	17.97
Share price (weighted average)	$	7.24		$	18.16
Risk-free interest rate (weighted average)		0.84	%		1.30	%
Expected life (years) of options (weighted average)		5			5
Expected annualized volatility (weighted average)		92	%		83	%

Volatility was estimated using the average historical volatility of the Company.

For the three and nine months ended April 30, 2022, the Company allocated no share based compensation to inventory (April 30, 2021 – $444 and $1,284).

24. 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	April 30, 2022		July 31, 2021
Stock options		19,311,852		12,018,143
RSUs		2,033,267		550,832
DSUs		4,088,386		—
Acquired and reissued warrants		7,040,209		5,747,487
2019 June financing warrants		546,135		546,135
US$25m registered direct offering warrants		1,871,259		1,871,259
US$20m registered direct offering warrants		1,497,007		1,497,007
2020 April underwritten public offering warrants		11,830,075		11,830,075
2020 May underwritten public offering warrants		7,591,876		7,591,876
2021 August underwritten public offering warrants		24,540,012		—
Warrants issued under conversion of debentures		4,665,628		4,665,628
Joint venture issued warrants		—		2,875,000
Convertible debenture broker/finder warrants		15		42,491
		85,015,721		49,235,933

25. Financial Instruments

Market Risk

Interest Risk

The Company has minimal exposure to interest rate risk related to the investment of cash, cash equivalents and restricted cash. The Company may, from time to time, invest cash in highly liquid investments with short terms to maturity that would accumulate interest at prevailing rates for such investments. As at April 30, 2022, the Company has $50,732 in notes payable (July 31, 2021 – $50,159) (Note 20) that bear interest at a fixed rate and therefore are not subject to interest risk.

The Company holds senior secured convertible debt that under the non-default terms bears no cash interest and is repayable at a fixed rate of 110% of the face value under the standard terms. The Company triggered an event of default on January 31, 2022 (Note 18) however, the lender has issued a forbearance of their ability to act on the event of default until the earlier of the close or termination of the Amending Agreement. Any amounts due on the note or if placed into default by the lender, at such time, would be subject to a prospective interest rate of 18% (Note 18).

Price Risk

Price risk is the risk of variability in fair value due to movements in equity or market prices.

Financial liabilities

During the nine months ended April 30, 2022 the Company obtained an amendment to the Senior secured convertible notes equity condition effectively reducing the Equity Condition threshold by 70% allowing the Company increased discretion over redemption payments to be repaid in cash or equity (Note 18). The sensitivity of the Senior secured convertible note due to price risk is disclosed in Note 18.

If the fair value of these financial assets and liabilities were to increase or decrease by 10% the Company would incur a related net increase or decrease to Comprehensive loss of an estimated $23,666 (April 30, 2021 – no material impact). The following table presents the Company’s price risk exposure as at April 30, 2022 and July 31, 2021.

30

	April 30, 2022			July 31, 2021
	$			$
Financial assets		644			2,492
Financial liabilities		(237,306	)		(373,432	)
Total exposure		(236,662	)		(370,940	)

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 cash held in escrow, restricted cash and trade receivables. As at April 30, 2022, 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, restricted funds and cash held in escrow are held with three Canadian commercial banks that hold Dun & Bradstreet credit ratings of AA (July 31, 2021 – AA) and an American commercial bank with a credit rating of A-. Certain restricted funds in the amount of $29,995 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 at April 30, 2022 is $273 (July 31, 2021 – $66).

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.

The carrying amount of cash and cash equivalents, restricted cash and trade receivables represents the maximum exposure to credit risk and as at April 30, 2022 and amounted to $200,719 (July 31, 2021 – $522,908). During the nine months ended April 30, 2022 the Company fully utilized the July 31, 2021 cash held in escrow balance to partially fund the acquisition of Redecan (Note 14).

The following table summarizes the Company’s aging of trade receivables as at April 30, 2022 and July 31, 2021:

	April 30,		July 31,
	2022		2021
	$		$
0–30 days		28,142		22,971
31–60 days		5,914		12,390
61–90 days		4,428		1,435
Over 90 days		5,840		625
Total		44,324		37,421

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 nine months ended April 30, 2022, 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 (“AGLC”) representing 18%, 28% and 13%, respectively (April 30, 2021 – SQDC, OCS and AGLC representing 50%, 20% and 17%, respectively) of total applicable periods gross cannabis sales.

The Company holds trade receivables from the crown corporations SQDC, OCS and the AGLC representing 12%, 35% and 17%, respectively, of total trade receivables, respectively as at April 30, 2022 (July 31, 2021 – the three crown corporations SQDC, OCS and AGLC representing 13%, 29% and 13% 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 (See Note 2 – Going Concern). The Company manages liquidity risk by reviewing on an ongoing basis, its working capital requirements. As at April 30, 2022, the Company has $14,221 (July 31, 2021 – $67,462) of cash and cash equivalents and $44,324 (July 31, 2021 – $37,421) in trade receivables. The Company has current liabilities of $398,797 (July 31, 2021 – $503,638) on the statement of financial position. As well, the Company has remaining contractual commitments of $2,020 due before July 31, 2022.

The Company has restricted funds to satisfy debt of $50,732, presented in current liabilities (Note 5). The maturity analysis of undiscounted cash flows for lease obligation and convertible debentures is disclosed in Note 19 and Note 17, respectively.

Current financial liabilities include the Company’s obligation on the Senior secured convertible note. As stated in Note 2, the Company has entered into a Transaction Agreement with Tilray Brands Inc. in which a minimum of the US$160 million of outstanding principle will

31

be assumed from the current lender and the maturity will be extended by 36-months and release the US$80 million of restricted cash. The Company continues to be in breach of a financial covenant at April 30, 2022 however, the Holder has issued an forbearance to act on the default matter until the earlier of the closing or termination of the Transaction Agreement. Management expects to settle the remaining US$33,515 of outstanding principle in equity and has since April 30, 2022 has settled US$9,367 through the issuance of 34,388,669 common shares.

If the Company is unable to meet the requirements Equity Condition Waiver (Note 18) the Holder may demand settlement in cash. The analysis of potential cash outflow to redeem the Note up to the earliest maturity date is given below. During the nine months ended April 30, 2022 the Company settled all the optional redemption payments in equity, with the exception of a cash payment made using the net proceeds on the sale of the Company’s interest in BCI (Note 10). The Company has also received a cash settlement waiver for the May 2023 optional redemption.

The following table provides an analysis of undiscounted contractual maturities for financial liabilities.

Fiscal year	2022 (three months remaining)		2023		2024		2025		Thereafter		Total
	$		$		$		$		$		$
Accounts payable and accrued liabilities		62,220		—		—		—		—		62,220
Excise taxes payable		5,211		—		—		—		—		5,211
Senior notes payable		51,875		—		—		—		—		51,875
Convertible debentures		807		41,273		—		—		—		42,080
Undiscounted future lease payments		1,833		6,039		6,039		5,592		56,494		75,997
		121,946		47,312		6,039		5,592		56,494		237,383
Senior secured convertible note1		278,089		—		—		—		—		278,089
Total		400,035		47,312		6,039		5,592		56,494		515,472

¹ The senior secured convertible note has been valued using the April 30, 2022, US/CAD foreign exchange rate. The Company’s ability to settle the note in equity or cash is dependent upon meeting certain conditions as stated in Note 18.

Foreign Currency Risk

On April 30, 2022, the Company holds certain financial assets and liabilities denominated in United States Dollars which consist of cash and cash equivalents, restricted funds, the senior secured convertible note 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 April 30, 2022, approximately $111,228 (US$86,951) (July 31, 2021 – $434,838 (US$348,931)) of the Company’s cash and cash equivalents was in US$. A 1% change in the foreign exchange rate would result in a change of $1,112 to the unrealized gain or loss on foreign exchange or on the gain or loss on financial instrument revaluation of US$ denominated warrants.

The Company’s Senior secured convertible note is denominated in US$. The Company plans to settle the majority of this debt in equity. However, if the Company is unable to meet the equity settlement condition or secure cash settlement waivers, the settlement may entail cash outflow. The sensitivity of the Senior secured convertible note due to foreign currency risk is disclosed in Note 18.

26. Selling, General and Administrative 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				For the nine months ended
	April 30, 2022		April 30, 2021		April 30, 2022		April 30, 2021
	$		$		$		$
Salaries and benefits		7,846		3,448		27,507		13,711
Professional fees		6,922		3,023		16,917		8,523
General and administrative		9,172		7,332		22,081		14,014
Consulting		3,338		1,019		5,813		2,791
Total		27,278		14,822		72,318		39,039

32

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

	For the three months ended				For the nine months ended
	April 30, 2022		April 30, 2021		April 30, 2022		April 30, 2021
	$		$		$		$
General and administrative related wages and benefits		7,846		3,448		27,507		13,711
Marketing and promotion related wages and benefits		1,722		1,560		5,756		4,064
Research and development related wages and benefits		395		433		1,991		2,247
Total operating expense related wages and benefits		9,963		5,441		35,254		20,022
Wages and benefits capitalized to inventory		9,014		3,465		24,938		11,795
Total wages and benefits		18,977		8,906		60,192		31,817

27. Other Income and Losses

	For the three months ended						For the nine months ended
	April 30, 2022			April 30, 2021			April 30, 2022			April 30, 2021
	$			$			$			$
Interest and financing expenses		(5,147	)		(3,296	)		(15,701	)		(8,368	)
Interest income		183			349			1,149			1,057
Interest income (expense), net		(4,964	)		(2,947	)		(14,552	)		(7,311	)
Revaluation gain of warrant liabilities		3,147			(383	)		42,481			(9,587	)
Share of loss from investment in associates and joint ventures		(1,856	)		(2,244	)		(6,674	)		(5,902	)
Fair value loss on senior secured convertible note		(15,110	)		—			(80,105	)		—
Gain on sale of interest in BCI (Note 10)		—			—			9,127			—
Loss on convertible debenture receivable		—			746			—			746
Gain/(Loss) on investments		—			544			(576	)		1,204
Foreign exchange gain/(loss)		(527	)		(1,514	)		393			(3,836	)
Other income/(loss)		(413	)		1,177			1,618			4,511
Non-operating income (expense), net		(14,759	)		(1,674	)		(33,736	)		(12,864	)

28. Related Party Disclosure

Compensation of Key Management

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 period was as follows:

	For the three months ended				For the nine months ended
	April 30, 2022		April 30, 2021		April 30, 2022		April 30, 2021
	$		$		$		$
Salary and/or consulting fees		748		764		2,237		1,846
Termination benefits		2,516		—		7,830		1,008
Bonus compensation		307		210		2,666		620
Share-based compensation		3,877		1,454		6,977		5,709
Total		7,448		2,428		19,710		9,183

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.

Termination benefits for the three months ended April 30, 2022 are comprised of certain share-based awards to outgoing executives.

Related Parties and Transactions

Belleville Complex Inc.

The Company held a 25% interest in Belleville Complex Inc. (“BCI”) with the related party Olegna Holdings Inc. (“Olegna”), a company owned and controlled by a director of the Company, holding the remaining 75% in BCI. On January 18, 2022, the Company sold its 25% interest in BCI to the related party partner Olegna for net proceeds of $10,111 which were immediately used to partially repay the February 2022 optional redemption. The Company remains the anchor tenant of the BCI owned property until 2033. The Company has also subleased a portion of the space to Truss LP (Note 7).

Initial consideration for the 25% interest on the joint venture was deemed $nil, the carrying value of BCI at disposal was $984 and therefore as a result of the above transaction the Company recognized a gain on sale of $9,127, recognized in other income and losses during the nine months ended April 30, 2022.

33

Under this lease arrangement, the Company incurred $1,414 and $4,002 in lease and operating expenses during the three and nine months ended April 30, 2022 (April 30, 2021—$1,261 and $3,427). This lease liability is recognized on the Company’s balance sheet under IFRS 16 (Note 19).

Truss LP

The Company owns a 42.5% interest in Truss LP and accounts for the interest as an investment in an associate (Note 10).

The Company subleases a section of its Belleville lease to Truss LP. This sublease is recognized as a finance lease receivable on the Company’s balance sheet (Note 7).

Under a Temporary Supply and Services Agreement (“TSSA”) with Truss LP, the Company produced, and packaged cannabis infused beverages in the Cannabis Infused Beverage (“CIB”) Facility (located at the Belleville facility) and in the Gatineau Facility. The Company continues to market and sell beverages for the adult-use markets in Canada, in each case subject to the terms of its regulatory approvals and applicable laws. On October 1, 2021, Truss LP received a cannabis manufacturing and processing license under the Cannabis Act (Canada) and commenced manufacturing by producing CIBs within the Belleville facility. Under a new arrangement and until Truss LP receives its cannabis selling license, the Company purchases the manufactured goods from Truss LP and sells the beverages through to third parties, as a principal in the arrangement. Truss LP was not licensed for the selling of cannabis as at April 30, 2022 however, the license was received on May 2, 2022.

During the three and nine months ended April 30, 2022, the Company purchased $nil and $912 (April 30, 2021 – $782 and $5,955) of raw materials from Truss LP under the previous TSSA arrangement and $4,059 and $9,196 (April 30, 2021 – $nil and $nil) of manufactured products under the new arrangement in the three and nine months ended.

29. Capital Management

The Company’s objectives when managing capital is to safeguard their ability to continue as a going concern, so that they can provide returns for shareholders and reach cashflow positivity.

Management defines capital as the Company’s shareholders’ equity. The Board of Directors does not establish quantitative return on capital criteria for management. The Company has not paid any dividends to its shareholders. The Company is not subject to any externally imposed capital requirements other than the covenants related to the Company’s debt instruments as set out in Notes 17 and 18.

As at April 30, 2022, total managed capital was $370,824 (July 31, 2021 – $732,265).

30. 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 – three months remaining		2,020
July 31, 2023		39,361
July 31, 2024		3,675
July 31, 2025		2,615
July 31, 2026		5,968
Thereafter		13,471
		67,110

See Note 19 for recognized contractual commitments regarding the Company’s lease obligations under IFRS 16.

LETTERS OF CREDIT

The Company holds 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. As at April 30, 2022, the remaining balance of the letter of credit is $200, was not drawn upon and is secured by cash held in collateral (Note 5).

On August 1, 2020, the Company reissued a pre-existing letter of credit with a Canadian financial institution under an agreement with a public utility provider entitling the utility provider to a maximum of $2,581, subject to certain operational requirements. The letter of credit has a one-year expiry from the date of issuance with an auto renewal feature. On January 1, 2021, the letter of credit was reduced to $2,352 by way of amendment. The letter of credit has not been drawn upon as at April 30, 2022. The letter of credit is secured by cash held in collateral (Note 5).                

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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. While the following matters are ongoing, the Company disputes the allegations and intends to continue to vigorously defend against the claims.

As of April 30, 2022, the Company and its former Chief Executive Officer are defendants in a putative class-action lawsuit pending in the Québec Superior Court brought on behalf of certain purchasers of shares of the Company and filed on November 19, 2019. The lawsuit asserts causes of action for misrepresentations under the Québec Securities Act and the Civil Code of Québec in connection with certain statements contained in HEXO’s prospectus, public documents and public oral statements between April 11, 2018 and November 15, 2019. The allegations relate to: (1) statements made by the Company regarding its agreement with the Province of Québec to supply cannabis; (2) statements made by the Company regarding its acquisition of Newstrike, particularly the licensing of the Newstrike facilities and the forecasted synergies and/savings from the Newstrike acquisition; (3) statements made by the Company about the net revenues in Q4 2019 and fiscal year 2020; and (4) the certifications by Sebastien St-Louis and the underwriters of the Company. The plaintiffs seek to represent a class comprised of Québec residents who acquired the Company’s securities either in an Offering (primary market) or on the secondary market during such period and seek compensatory damages for all monetary losses and costs. The amount claimed for damages has not been quantified and no accrual has been made as at April 30, 2022 (July 31, 2021—$nil).

As of April 30, 2022, the Company is named as a defendant in a proposed consumer protection class action filed on June 16, 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.

On June 1, 2021, by way of the business acquisition of Zenabis, the Company assumed senior notes payable and the following litigation with the associated lender of the notes (Note 20). Upon closing the acquisition of Zenabis, the Company was in default under the debenture due to the failure to obtain the lender’s consent for a change of control. On February 19, 2021, Zenabis filed a petition in the Supreme Court of British Columbia for a determination of the amount required to repay and terminate the debenture and to obtain discharges of the debenture and related security. The lender took the position that the amount to discharge the debenture and related securities was approximately $72,000. The Company believes the amount is approximately $53,000, which has been provided for in the consolidated financial statements and management is evaluating various options for settlement. The difference largely relates to whether a prepayment fee and default fees are payable under the debenture and to the amount to buyout and discharge of a revenue-based royalty liability. The petition was heard on March 29, March 30, March 31, April 1, April 15 and May 14, 2021. On December 17, 2021, the Supreme Court of British Columbia rendered judgment in the petition proceedings commenced by Zenabis on February 19, 2021, against Sundial Growers Inc. and 2657408 Ontario Inc. The Court concluded that the proceedings have not been determinative of the issues raised by the parties since those issues are not suitable for disposition by petition, and that while the petition hearing may have clarified some of those issues, those issued have yet to be tried and the merits of these issues have yet to be determined. As a result, the debt remains outstanding and in default at April 30, 2022.

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. The costs and purchase obligations under the contract exceed the economic benefits expected to be received. The related loss was realized in operating expenses in the year ended July 31, 2020. The onerous contract liability remains as at April 30, 2022 and July 31, 2021.

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31. Fair Value of Financial Instruments

The fair values of the financial instruments as at April 30, 2022 are summarized in the following table:

	Amortized cost		FVTPL		Total
Assets	$		$		$
Cash and cash equivalents		14,221		—		14,221
Restricted funds		142,174		—		142,174
Long – term investments		—		644		644
Liabilities	$		$		$
Warrant liability		—		2,507		2,507
Convertible debt		36,863		—		36,863
Senior secured convertible note – current1		—		234,799		234,799
Loans and borrowings – current		50,732		—		50,732
Other long-term liabilities2		—		2,590		2,590

¹  Valued at the default demand amount 115% of the outstanding principal (Note 18).

² Financial liability designated as FVTPL.

The fair values of the financial instruments as at July 31, 2021 are summarized in the following table:

	Amortized cost		FVTPL		Total
Assets	$		$		$
Cash and cash equivalents		67,462		—		67,462
Restricted funds		132,246		—		132,246
Long – term investments		—		2,492		2,492
Liabilities	$		$		$
Warrant liability		—		5,733		5,733
Convertible debt- current		3,406		—		3,406
Convertible debt		33,089		—		33,089
Senior secured convertible note – current		—		367,699		367,699
Loans and borrowings – current		50,159		—		50,159
Other long-term liabilities1		—		520		520

¹  Financial liability designated as FVTPL.

The carrying values of cash and cash equivalents, accounts payable, trade receivable and restricted funds approximate their fair values due to their relatively short periods to maturity. No transfers between levels of the fair value hierarchy used in measuring the fair value of financial instruments during the three months ended April 30, 2022 or the year ended July 31, 2021.

32. Non-Controlling Interest

The change in non-controlling interests is as follows.

	For the nine months April 30, 2022			For the year end July 31, 2021
Balance, beginning of period	$	1,987		$	3,379
Non-controlling interest acquired on business combination		—			(1,340	)
Partnership contributions		1,957			81
Share of comprehensive loss for the period		(5,765	)		(133	)
Balance, end of period	$	(1,821	)	$	1,987

Keystone Isolation Technology Inc

The Company holds a 60% interest in Keystone Isolation Technology Inc. (“KIT”) which was intended to principally operate out of Belleville Facility, and the remaining 40% represents the non-controlling interest held by Chroma Global Technologies Ltd. Management terminated the KIT project during the three months ended January 31, 2022, and the associated assets were impaired (Note 11). KIT had no revenues or other expenses during the three or the nine months ended April 30, 2022 or the year ended July 31, 2021.

ZenPharm Limited

The Company holds a 60% interest in ZenPharm Limited (“ZenPharm”) obtained through the acquisition of Zenabis on June 1, 2021. ZenPharm was formed to service the European medical cannabis market.

36

33. Revenue from Sale of Goods

The Company disaggregated its 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 CIB division, which was established in order to manufacture, produce and sell cannabis beverage products. The CIB division operated under the Company’s cannabis manufacturing licensing, in compliance with Health Canada and the Cannabis Act’s regulations until Truss LP received its cannabis manufacturing license on October 1, 2021 (Note 28). The Company acts as a principal in the sale of CIBs to customers and therefore, continues to present revenue from CIB on a gross basis. The Company expects to continue to recognize CIB revenue on a gross basis at least until Truss LP receives its cannabis selling license.

For the three months ended	April 30, 2022						April 30, 2021
Revenue stream	Cannabis sales excluding beverages		Cannabis beverage sales		Total		Cannabis sales excluding beverages		Cannabis beverage sales		Total
	$		$		$		$		$		$
Retail		48,987		4,059		53,046		29,273		3,330		32,603
Medical		831		—		831		430		—		430
Wholesale		3,267		—		3,267		49		—		49
International		6,446		—		6,446		—		—		—
Total revenue from sale of goods		59,531		4,059		63,590		29,752		3,330		33,082

For the nine months ended	April 30, 2022						April 30, 2021
Revenue stream	Cannabis sales excluding beverages		Cannabis beverage sales		Total		Cannabis sales excluding beverages		Cannabis beverage sales		Total
	$		$		$		$		$		$
Retail		159,387		11,257		170,644		104,587		10,280		114,867
Medical		2,621		—		2,621		1,508		—		1,508
Wholesale		11,118		—		11,118		559		—		559
International		20,718		—		20,718		3,125		—		3,125
Total revenue from sale of goods		193,844		11,257		205,101		109,779		10,280		120,059

During the three and nine months ended April 30, 2022 the Company incurred $618 and $4,236, respectively (April 30, 2021—$936 and $2,474) of net sales provisions and price concessions.

34. Segmented Information

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

37

35. Operating Cash Flow

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

For the nine months ended	April 30, 2022			April 30, 2021
	$			$
Items not affecting cash
Depreciation of property, plant and equipment		4,776			4,369
Depreciation of property, plant and equipment in cost of sales		15,756			1,502
Amortization of intangible assets		18,010			1,043
Loss on senior secured convertible note		80,105			—
Loss/(gain) on convertible debenture		—			(746	)
Unrealized gain on changes in fair value of biological assets		(42,763	)		(35,616	)
Unrealized fair value adjustment on investments		1,848			(1,204	)
Amortization of deferred financing costs		–			793
Interest expense		11,532			4,890
Accretion of convertible debenture		3,747			2,956
Noncash transaction fees		1,681			—
License depreciation and prepaid royalty expenses		—			118
Write-off of inventory and biological assets		7,529			1,001
Write down of inventory to net realizable value		63,408
Realized fair value amounts on inventory sold		31,629			17,619
Share of loss from investment in associate and joint ventures		6,674			5,902
Share-based compensation		13,820			12,000
Revaluation of financial instruments (gain)/loss		(42,481	)		9,587
Impairment losses		752,246			(662	)
Gain on sale of BCI		(9,127	)		—
Loss on long lived assets and disposal of property, plant and equipment		(2,861	)		1,339
(Gain) loss on exit of lease		(453	)		(789	)
Foreign exchange gain		7,317			—
Total items not affecting cash		922,393			24,102
Changes in non-cash operating working capital items
Trade receivables		4,155			347
Commodity taxes recoverable and other receivables		3,681			5,648
Prepaid expenses		6,218			(1,851	)
Lease Receivable		27			—
Inventory		(58,460	)		(36,768	)
Biological assets		46,075			33,965
Accounts payable and accrued liabilities		(15,505	)		6,269
Excise taxes payable		(3,060	)		(2,806	)
Income tax recoverable		(379	)		—
Total non-cash operating working capital		(17,248	)		4,804

Additional supplementary cash flow information is as follows:

For the nine months ended	April 30, 2022		April 30, 2021
	$		$
Property, plant and equipment expenditure in accounts payable		2,015		4,150
Right-of-use asset additions		1,993		—
Capitalized borrowing costs		—		1,269
Interest paid		7,504		2,409

36. Income Taxes

The Company’s effective income tax rate was 3.29% for the nine months ended April 30, 2022 (April 30, 2021 – nil%). The effective tax rate is different than the statutory rate primarily due to the non-recognition of deferred tax assets.

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37. Subsequent Events

On June 14, 2022 the Company entered into a Amending Agreement with Tilray and an Amended Standby Agreement with KAOS and an affiliate of KAOS (the “Investor”).

The amendments to the Transaction Agreement pursuant to which HEXO, Tilray Brands and HTI agreed to are as follows:

• Reduce the Liquidity Covenant and closing condition from US$100 million to $70 million;

• Extend the Outside Date (as defined in the Transaction Agreement) from July 1, 2022 to August 1, 2022 and to extend the date past which the Outside Date cannot be extended to November 30, 2022;

• Extend the date by which the Company must use best efforts to obtain shareholder approval from June 15, 2022 to July 15, 2022;

• Reduce the Amendment Share Price (as defined in the Transaction Agreement) from USD$0.54 to CAD$0.40;

• Amend the condition regarding Tilray’s right to appoint nominees and an observer to the Company’s board of directors such that Tilray will be entitled to appoint two directors and one observer to the Company’s board of directors;

• Amend and restate the Purchased Note (as defined in the Transaction Agreement) to reflect a reduction in Tilray Brands’ Conversion Price (as defined in the Purchased Note) from CAD$0.85 to CAD$0.40; and

• Amend and restate the Assignment and Assumption Agreement (as defined in the Transaction Agreement) to reflect certain changes to the purchase price and consideration (as between Tilray Brands and HTI).

The Company also formally agreed, for a period of three months, to reduce the minimum price condition included in the Standby Agreement from the CAD$0.30 to CAD$0.10 per share. In addition, the Investor has agreed to allow the Company to commence the process of drawing upon the Amended Standby Commitment immediately following receipt of necessary regulatory approvals without having to wait until the first five trading days of the next calendar month as previously contemplated by the Standby Agreement. Subsequent draws will continue to be available only during the first five trading days of any month during the term of the Standby Commitment. The Company is not required to pay the Investor any additional consideration in connection with these amendments to the Standby Agreement.

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EX-99.2

Exhibit 99.2

HEXO Corp. Management’s Discussion & Analysis For the three and nine months ended April 30, 2022

Table of Contents

INTRODUCTION	2
COMPANY OVERVIEW	3
STRATEGY AND OUTLOOK	3
HEXO CORP. HOUSE OF BRANDS	6
HEXO GROUP OF FACILITIES	7
HEXO USA	9
FINANCIAL RESULTS	10
OPERATIONAL AND FINANCIAL HIGHLIGHTS	11
SUMMARY OF RESULTS	12
ADJUSTED EBITDA	19
FINANCIAL POSITION HIGHLIGHTS	20
LIQUIDITY AND CAPITAL RESOURCES	21
GOING CONCERN	23
CAPITAL RESOURCES	24
CAPITALIZATION TABLE	25
OFF-BALANCE SHEET ARRANGEMENTS AND CONTRACTUAL OBLIGATIONS	27
FINANCIAL RISK MANAGEMENT	28
CRITICAL ACCOUNTING ESTIMATES AND ASSUMPTIONS	30
RELATED PARTY TRANSACTIONS	30
RISK FACTORS	34
CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS	40

Management’s Discussion and Analysis of Financial Condition and Results of Operations for the three and nine months ended April 30, 2022

All dollar amounts in this MD&A are expressed in thousands of Canadian dollars, except for share and per share amounts, and where otherwise indicated. Amounts expressed in United States dollars (“USD”) are expressed as US$.

Introduction

This 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 and nine months ended April 30, 2022. 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 National Association of Securities Dealers Automated Quotations (“Nasdaq”). This MD&A is supplemental to, and should be read in conjunction with, our condensed interim consolidated financial statements for the three and nine months ended April 30, 2022 (the “financial statements”) and the audited consolidated financial statements for the year ended July 31, 2021. 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.

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 or 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.

Management estimates that the working capital at April 30, 2022, and forecasted cash flows require additional capitalization in order to meet the Company’s obligations for the foreseeable future. Please see Note 2 of the financial statements, and Liquidity and Capital Resources – Going concern section of this MD&A, for a more detailed discussion.

This MD&A is dated June 14, 2022.

2    MD&A

Company Overview

HEXO is a consumer-packaged goods (“CPG”) cannabis company with the leading recreational market share in Canada. We pride ourselves in developing innovative award-winning products, which has been evident in our product offering from the beginning. From our early innovation with the Elixir oil spray to the introduction of the 28g format and straight edge pre-rolls, we strive to develop the right products for the market at the right time. We are committed to putting consumers at the center of everything we do by ensuring we understand them, and the needs that cannabis can address or enhance in their lives. This data driven approach is at the core of our innovation pipeline and is coupled with our keen focus on delivering safe, reputable, high-quality cannabis products to our customers and consumers.

Headquartered in Gatineau, Quebec, with facilities across North America, we are constantly assessing our product development, cultivation, processing, marketing and sales practices to offer adult-use and medical cannabis products, extracts and derivatives in accordance with the Cannabis Act in Canada and globally pursuant to all applicable international regulations.

We manufacture and sell CBD Powered by HEXO^® products in 17 states in the U.S. in partnership with Molson Coors and have taken HEXO international with our medical cannabis product offerings.

Strategy and Outlook

The “Path Forward” is a strategic plan that utilizes HEXO’s current assets and our capabilities, to drive accelerated organic growth, build market share and become operationally cash flow positive within the next four quarters¹.

The Path Forward is made up of five priorities:

1. Continue to reduce manufacturing and production costs;

2. Streamline and simplify the organizational structure;

3. Realize cost synergies from acquisitions and recent plant closures;

4. Focus on revenue management, including more disciplined pricing; and

5. Accelerate growth through organic market share gains and capture missed revenue opportunities, including improving our ability to align cultivation planning with market demand, reintroduce a focus on medical and strengthen our commercial capabilities and innovation pipeline.

This plan is underpinned by specific actions to fortify our balance sheet, strengthen the leadership team and enhance corporate governance.

Reduce Manufacturing and Production costs

The Company expects to reduce manufacturing and production costs by leveraging existing capabilities across facilities. The Company is actively applying best practices and learnings from its highest-margin categories and top facilities, across its entire operations to improve and optimize productivity.

The Company has identified synergistic cost savings opportunities from optimizing HEXO’s production network and leveraging the capacities of its recent acquisitions. Specifically, this includes: transitioning from co-packaging agreement towards in-house production capabilities; leveraging HEXO’s scale to deliver on procurement savings; and reconfiguring the Company’s production network to achieve greater efficiencies, for example, moving vape production and distillate production to the Redecan facility.

Management actioned this initiative further during the period upon decommissioning and ending operations at the Stellarton facility. Management also announced the planned shutdown of the centralized manufacturing and processing facility in Belleville, ON. The Company will transition these operations to its existing cultivations sites at Masson, QC and Fenwick, ON.

Streamline and Simplify the Organizational Structure

The Company expects to streamline and simplify its organizational structure and more closely align operating costs with its size. These cost reductions will be achieved through a combination of reduced reliance on outside consultants, streamlining the organization as a new IT platform is implemented, right-sizing the organization, and realizing the synergistic benefits of the recent acquisitions. These initiatives are expected to represent a 30% reduction in the Company’s SG&A by fiscal year end 2023. As part of these initiatives, the Company is reducing the total consolidated headcount by 450 positions, resulting in savings of approximately $30.6 million on an annualized basis.

Cost Synergies

The Company expects to continue to deliver on synergies as a result of its recent acquisitions.

¹  Period begins post Q2’22 and includes the five quarters thereafter, up to and including Q3’23

3    MD&A

Revenue Management

HEXO will focus on revenue management, including more disciplined pricing across our entire range by leveraging our brand continuum we are able to differentiate ourselves across features and price balancing our approach to both volume and profit.

Accelerate Organic Growth

To increase revenue, the Company plans on accelerating growth through organic market share gains and capturing revenue opportunities through better demand planning. For example, currently, the Company is only delivering 65% to 70% of demand to its customers. Going forward, the Company will connect its demand forecast to what it intends to harvest. The Company will take learnings from its acquisition of Redecan and apply them across the organization. The Company will also put a focus back on medical and consolidate this product under Redecan’s leadership given their strength in this category.

Withdrawal of Financial Guidance

In connection with its strategic plan titled “The Path Forward”, the Company has previously provided guidance regarding its operational synergies and incremental increases to cash flows for the financial years ending July 31, 2022 and 2023. In light of a number of developments, circumstances and considerations, including, among others, deteriorating market and macro-economic conditions, recent changes to senior management and the pending transaction with Tilray Brands, Inc. (with expected impacts on the Company’s capital structure and liquidity). Julius Ivancsits (HEXO CFO) is embarking on a comprehensive review of its existing organizational and business strategy with the continuing objectives of becoming EBITDA and cash flow positive. The Company now believes that it will not achieve the synergies and incremental cash flow increases to the level estimated in its previous guidance and it expects such figures and measures to be lower than previously guided.

Definitive Agreement with Tilray Brands to Create a Strategic Alliance and $180 million Equity Backstop Financing

On April 12, 2022, the HEXO Corp. entered into a Definitive Agreement with Tilray Brands Inc. (“Tilray Brands”), in which Tilray Brands will acquire the outstanding principle (a minimum US$160 million) of the senior secured convertible notes (the “Senior Notes”) that were originally issued by HEXO (the “Transaction”) to HT Investments MA LLC (“HTI”).

We believe the strategic alliance between HEXO and Tilray Brands will provide several financial and strategic benefits including the following:

• Deleveraging: At closing, Tilray Brands will be purchasing the Amended Note at a lower price than the approximately 120 cents at which HTI has been redeeming the Note over the past six months. The Transaction is combined with the Standby Commitment, which provides HEXO with the option to draw up to $5 million per month to support business needs and deliver its capital structure over time.

• Operational Flexibility: The Amended Note will provide HEXO with immediate operational flexibility by modifying the terms to be more favourable to HEXO. This includes eliminating the monthly redemption feature, amending the financial covenants and extending the maturity by three additional years. These amendments limit shareholder dilution moving forward and remove the going concern risk that acted as an overhang on the business for the past several quarters. The terms of the transaction unlock US$80 million of previously restricted cash which, when combined with the Standby Commitment, provides HEXO with significant liquidity to invest in organic growth initiatives.

• Substantial Synergies: The Commercial Agreements are estimated to deliver significant cost synergies and will target combined cost savings of up to US$80 million within two years of the completion of the Transaction. The two companies have been working together to evaluate cost saving synergies as well as other production efficiencies, including with respect to cultivation and processing services, and certain cannabis 2.0 products, including pre-rolls, beverages and edibles, and shared services and procurement.

• Increases Product Breadth and Commitment to Innovation: Leveraging both companies’ commitment to innovation, brand building and operational efficiencies, HEXO and Tilray will share expertise in order to strengthen market positioning and capitalize on opportunities for growth through a broadened product offering and new innovation.

As consideration for Tilray Brands’ purchase of the Senior Notes, Tilray Brands will pay HTI 95% of the then current outstanding principal for the Senior Notes (“Purchase Price”). Until closing, HTI may continue to redeem the Senior Notes pursuant to their terms, however in no event shall the principal of the purchased Notes be less than US$160 million prior to the closing of the Transaction. The Purchase Price will be satisfied in cash, common shares of Tilray Brands, or a combination thereof. As a part of the proposed transaction, Hexo has also agreed to issue to HTI an amount of HEXO common shares equal to 12% of the then currently outstanding principal of the Senior Notes divided by 95% of the most recent closing stock price of HEXO common shares on the day prior to the announcement of the Transaction.

In connection with the purchase of the Senior Notes, Tilray Brands and HEXO intend to extend the maturity date by three years, to May 1, 2026. Included in the agreement is the waiving the right to act upon the default event (as described in Note 18 of the condensed interim consolidated financial statements) by HTI.

4    MD&A

The new arrangement allows for the reduction of selling pressure on the Company’s share price as there is no maximum ownership capacity in place under the new agreement. Whereas under the current debt agreement the lender is restricted to 9.99% ownership in HEXO.

The Transaction is subject to a number of conditions, including (i) completion of all required amendments to the terms of the Notes; (ii) execution of definitive documentation relating to the Notes; (iii) receipt of approvals from the Toronto Stock Exchange and the Nasdaq Stock Market LLC, satisfactory to both HEXO and Tilray Brands, as applicable; (iv) Tilray Brands’ satisfactory completion of confirmatory financial due diligence; (v) receipt of all consents and approvals required by any regulatory authorities; (vi) final approval of the boards of directors of each of HEXO and Tilray Brands; (vii) receipt of shareholder approval from the HEXO shareholders; (viii) no material adverse effect having occurred in respect of HEXO; (ix) receipt of all necessary approvals relating to the $180 million committed equity line provided by KAOS Capital (“KAOS”); and (x) complying with specified financial and non-financial covenants.

The Transaction Agreement provides that HEXO and Tilray Brands will work together to finalize and enter into Commercial Agreements at closing of the Transaction on mutually agreeable terms covering the following key areas:

• Tilray Brands will complete certain production and processing as a third-party manufacturer of products currently manufactured by HEXO;

• HEXO will source cannabis products for international markets, excluding Canada and U.S., exclusively from Tilray Brands; and

• HEXO and Tilray Brands will share costs on a 50:50 basis on facilities optimization activities, procurement, general and administrative costs, including insurance and certain shared services, and certain production and processing activities for straight-edge pre-rolls, edibles and beverages.

The Commercial Agreements will also provide that HEXO pay Tilray Brands a monthly fee of US$1.5 million for advisory services with respect to cultivation, operation and production matters.

In addition to the restructured debt, HEXO has entered into an agreement with an affiliate of KAOS pursuant to which HEXO, KAOS and such other parties that may be added to the standby commitment (collectively, the “Standby Parties”) are expected to negotiate a standby equity purchase agreement (the “Standby Agreement”). It is expected that the Standby Agreement will permit HEXO to demand the Standby Parties to subscribe for a maximum aggregate of $5 million of Common Shares per month over a period of 36 months. The Common Shares are expected to be issued at a 7% discount to the 20-day volume weighted average price of HEXO’s shares on the Toronto Stock Exchange at the time the demand is made. The maximum standby commitment is expected to be $180 million over the term of the Standby Agreement (the “Standby Commitment”). A 3% Standby Commitment fee payable in Common Shares was due upon the execution of the Standby Agreement. As a result, the Company issued 10,843,373 common shares to KAOS.

On June 14, 2022, the Company entered into a Amending Agreement with Tilray and an Amended Standby Agreement with KOAS and an affiliate of KOAS (the “Investor”).

The amendments to the Transaction Agreement pursuant to which HEXO, Tilray Brands and HTI agreed to are as follows:

• Reduce the Liquidity Covenant and closing condition from US$100 million to $70 million;

• Extend the Outside Date (as defined in the Transaction Agreement) from July 1, 2022 to August 1, 2022 and to extend the date past which the Outside Date cannot be extended to November 30, 2022;

• Extend the date by which the Company must use best efforts to obtain shareholder approval from June 15, 2022 to July 15, 2022;

• Reduce the Amendment Share Price (as defined in the Transaction Agreement) from USD$0.54 to CAD$0.40;

• Amend the condition regarding Tilray’s right to appoint nominees and an observer to the Company’s board of directors such that Tilray will be entitled to appoint two directors and one observer to the Company’s board of directors;

• Amend and restate the Purchased Note (as defined in the Transaction Agreement) to reflect a reduction in Tilray Brands’ Conversion Price (as defined in the Purchased Note) from CAD$0.85 to CAD$0.40; and

• Amend and restate the Assignment and Assumption Agreement (as defined in the Transaction Agreement) to reflect certain changes to the purchase price and consideration (as between Tilray Brands and HTI).

The Company also formally agreed, for a period of three months, to reduce the minimum price condition included in the Standby Agreement from the CAD$0.30 to CAD$0.10 per share. In addition, the Investor has agreed to allow the Company to commence the process of drawing upon the Amended Standby Commitment immediately following receipt of necessary regulatory approvals without having to wait until the first five trading days of the next calendar month as previously contemplated by the Standby Agreement. Subsequent draws will continue to be available only during the first five trading days of any month during the term of the Standby Commitment. The Company is not required to pay the Investor any additional consideration in connection with these amendments to the Standby Agreement.

5    MD&A

HEXO Corp. House of Brands

6    MD&A

Truss Beverage Co.

Through Truss Beverage Co. (“Truss”), our business venture with Molson Coors Canada (“Molson Canada”) we have positioned ourselves to meet the cannabis beverage market in Canada head on. Truss is committed to developing and producing a range of cannabis beverages that focus on great taste, consistency and choice for consumers. We currently offer one of the largest portfolios of cannabis infused beverages and extract products in the Canadian market.

Truss beverage products continue to be one of the top cannabis beverage market share position in Canada with 25% of total sales².

Truss beverages are produced and distributed from HEXO’s Belleville facility. The beverage related operations were conducted by HEXO (through the operations of HEXO Cannabis Infused Beverages or “HEXO CIB”) under HEXO’s licensing before October 1, 2021 when Truss obtained its own manufacturing and processing license. Under the new arrangement, the Company purchases the manufactured goods from Truss LP and sells the beverages through to third parties, as a principal in the arrangement. On May 2, 2022, Truss received its independent selling license from Health Canada and is expected operationalize the license in Fiscal 2023.

HEXO Group of Facilities

The following provides information about HEXO’s consolidated group of facilities as of the date of this MD&A:

Location	Purpose	Description
Masson, Quebec (Corporate Headquarters)	Cultivation & Manufacturing	The Company’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 B9. Except as noted below, the facility is licensed by Health Canada for Standard Cultivation, Standard Processing, Sale for Medical Purposes and the current license expires April 7, 2023. The facility is also licensed for cannabis research and the current research license expires October 25, 2024.
Fenwick, Ontario	Cultivation & Manufacturing	The approximately 400,000 sq.ft. owned Fenwick Facility is where all central administrative functions of Redecan are located including accounting, purchasing and quality assurance. The facility is licensed for Standard Cultivation, Standard Processing and Sale for Medical and Adult-use Purposes (effective September 25, 2020 to September 25, 2023). This facility accounts for the majority of Redecan’s processing (extraction, bud drying, trimming and bulk bagging), manufacturing (capsule, pre-roll), and packaging (vape filling and packaging, oil bottling and packaging, capsule bottling and packaging, bud bottling and packaging, pre-roll packaging) activities.
Cayuga, Ontario	Cultivation & Manufacturing	The owned Cayuga Facility operates a seasonal annual crop cycle, operating outside and under hoophouses. The crops are planted in the spring and harvested in the fall. The Cayuga Facility is licensed by Health Canada for Standard Cultivation effective until May 1, 2023. The primary functions of the site are cultivation of annual seasonal crops for pre-roll bud and shake for extraction, drying, trimming, bulk bagging, and storage of bulk harvested cannabis materials.
Ottawa, Ontario	Other	HEXO leases approximately 40,036 sq. ft. of office space in Ottawa, Ontario for its administrative and finance functions.
Effingham, Ontario	Propagation, Mother plant maintenance, Medical sales distribution	The Effingham Facility’s cultivation activities are utilized for vegetative plant propagation and mother plant maintenance. The facility produces plants to transfer to the Cayuga Facility and Fenwick Facility for cultivation and harvesting. The Effingham Facility also acts as the center for direct to patient medical sales order fulfillment and patient enrollment, management, and record keeping. The facility is licensed for Standard Cultivation, Processing and Selling purposes, with the current license expiring June 26, 2023.

²  Per internal review of Headset sales data based on $ sold Sales from February 1, 2022 to April 30, 2022.

7    MD&A

FACILITIES DECOMMISSIONED AND/OR DISPOSED OF (OR IN THE PROCESS THEREOF)
Location	Status	Description
Belleville, Ontario	Manufacturing	HEXO’s Belleville, Ontario facility, a 932,190 sq. ft. leased commercial space, served as its centralized processing, manufacturing and distribution centre. The Belleville facility is licensed by Health Canada for Standard Processing and Sale for Medical and Non-Medical Purposes (current license effective October 21, 2020 and expiring October 21, 2023). The facility also has a Cannabis Research license (effective August 27, 2020 and expires October 25, 2024). On April 21, 2022, management announced the closing of the Belleville facility and the intention to shift the manufacturing and processing operations to the Masson and Fenwick facilities in order to streamline operations and reduce overhead. Decommissioning is in progress as of the date of this MD&A, and the Company plans to fully exit the facility by late July 2022. Truss Beverage Co, (licensed for cannabis manufacturing effective October 1, 2021) will continue to operate their 183,600 sq. ft. of subleased space under their own license at the facility.
Brantford, Ontario	Non-operational (formerly R&D)	HEXO’s Brantford Facility was previously 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 previously fully licensed by Health Canada (Standard Cultivation, Standard Processing and Selling) but the license was terminated by the Company on November 17, 2021 as the operations were moved to Masson to reduce costs. The building remains held for sale as at April 30, 2022 on the Company’s condensed interim consolidated financial statements.
Kirkland Lake, Ontario	Currently non-operational (formerly cultivation & manufacturing)	The Kirkland Lake Facility is located on 800 acres of land owned by DelShen Therapeutics Corp. (a subsidiary of 48North) and comprises approximately 40,000 sq. feet of indoor cannabis cultivation and processing facility. The facility’s license issued by Health Canada for Standard Cultivation expired on February 11, 2022. On November 9, 2021, management announced the decommissioning and closure of the facility, and this was completed January 31, 2022. The closure took place to centralize cannabis cultivation, manufacturing, and distribution to core facilities and for synergistic value purposes. However, new management is currently assessing the future of Kirkland Lake and the opportunity to utilize the facility for craft cannabis cultivation, as a part of the go-forward business plan. Thus, the facility no longer meets the classification criteria for as held for sale as at April 30, 2022 on the Company’s condensed interim consolidated financial statements.
Brant County, Ontario (Good House)	Non-operational (formerly cultivation & manufacturing)	The Good Farm Facility is a 100-acre farm located in Brant County, Ontario, which was acquired as part of the 48North acquisition. The facility’s license was issued by Health Canada for Standard Cultivation, expired on February 4, 2022. On November 9, 2021, management announced the decommissioning and closure effective January 31, 2022. The closure took place to centralize product cultivation, manufacturing, and distribution to core facilities and for synergistic value purposes. The continues to be classified as held for sale as at April 30, 2022 on the Company’s condensed interim consolidated financial statements.
Brantford, Ontario (Good Farm)	Sold	The Good Farm Facility was sold during the three months ended April 30, 2022.
Vaughan, Ontario	Non-operational (formerly R&D)	HEXO’s Vaughan, Ontario facility is a leased facility that houses a 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. On February 9, 2022, the Company concluded its R&D activities at the site and currently is seeking to exit or sublease the facility.
Fort Collins, CO, USA	Non-operational (formerly manufacturing)	The Company owns an approximate 50,000 sq.ft. facility in the state of Colorado marking its first international property. Management has decided to pursue an unsolicited offer to sell the building with the expectation to secure a leased property in the near future. The facility has been classified as held for sale as at April 30, 2022 on the Company’s condensed interim consolidated financial statements.

8    MD&A

Atholville, New Brunswick	Cultivation	The Company owns and operates the Atholville Facility, (obtained through the acquisition of Zenabis on June 1, 2021) which is a 380,000 sq. ft. indoor growing facility in Atholville, New Brunswick. The Atholville facility is fully licensed by Health Canada for Standard Cultivation, Standard Processing and Sale for Medical Purposes which expires July 19, 2025.
Stellarton, Nova Scotia	Non-operational (formerly manufacturing)	The Company obtained the Stellarton Facility by way of the acquisition of Zenabis on June 1, 2021. The 255,000 sq. ft. indoor facility in Stellarton, Nova Scotia, was used as a packaging, processing and value-added cannabis product manufacturing facility. The facility was licensed by Health Canada for Standard Cultivation and Standard Processing and expired March 1, 2022. In Q1’22 management announced the closure of Stellarton, to centralize product cultivation, manufacturing, and distribution to core facilities and for cost saving purposes. Decommissioning of the facility ended February 28, 2022, upon its closure, and the facility has been classified as held for sale as at April 30, 2022 on the Company’s condensed interim consolidated financial statements.
Langley, British Columbia	Non-operational (formerly cultivation)	The Langley Facility was acquired by the Company through the acquisition of Zenabis on June 1, 2021. The facility is a leased 450,000 sq. ft. greenhouse located in Langley, British Columbia which was previously retrofitted for cannabis cultivation and processing. The facility was licensed by Health Canada for Standard Cultivation and Standard Processing and the current license expires August 2, 2022. The facility was licensed for cannabis research and development which was terminated January 5, 2022. The Company has terminated operations at the Langley Facility in order to realize synergistic cost savings, as intended upon acquisition. As of the date of this MD&A, the facility remains leased by the Company and has been impaired to $nil.

HEXO USA

We believe that the U.S. cannabis market represents a significant opportunity to create a global company. We’ve established HEXO USA Inc. (“HEXO USA”) – a wholly owned US based entity created to facilitate our expansion into the US hemp market. We have also created a second joint business venture, Truss CBD USA LLC (“Truss CBD USA³”) with Molson Coors. 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 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 is now present across select grocery markets within Colorado and has launched products in an additional 17 states during Q1’22.

The Company’s new management is undergoing an assessment and revision of the HEXO USA business plan and sales strategy which includes the research, development and formulation of creating unique cannabinoid cocktails (blends) tailored to specific applications to maximize cannabinoid functionality at high level margins. This strategy can be applied to CBD and minor cannabinoid-based products across both regulated markets and non-regulated markets as we await federal legalization. This includes the formulation and development of cannabinoid beverages, topicals/vanity personal care products to edibles, gummies and infused pre-rolls.

As of the date of this MD&A, the Company remains in the process of selling the Fort Collins location with the expectation to secure a leased space in the near future.

³  The operations of Truss CBD USA are currently not significant to the financial results of HEXO. Truss CBD USA and HEXO’s activities in relation to it will be conducted in accordance with all applicable laws.

9    MD&A

Financial Results For the three and nine months ended April 30, 2022

Special Note on Acquisitions and Consolidations

The Company had completed three business acquisitions in the previous three fiscal quarters and as such, the acquisition dates and applicable periods of consolidated results are stated in the table below:

Entity	Business Acquisition Date		Effective Period of Financial Results
			Q3’22		Q2’22		Q3’21
Zenabis		June 1, 2021		Full period		Full period		Not applicable
Redecan		August 30, 2021		Full period		Full period		Not applicable
48North		September 1, 2021		Full period		Full period		Not applicable

Operational and Financial Highlights

KEY FINANCIAL PERFORMANCE INDICATORS

Condensed summary of results for the three and nine months ended April 30, 2022, and April 30, 2021, and the three months ended January 31, 2022.

	For the three months ended									For the nine months ended
	April 30, 2022			January 31, 2022			April 30, 2021			April 30, 2022			April 30, 2021
	$			$			$			$			$
Revenue from sale of goods		63,590			72,014			33,082			205,101			120,059
Excise taxes		(18,021	)		(19,251	)		(10,482	)		(56,808	)		(35,219	)
Net revenue from sale of goods		45,569			52,763			22,600			148,293			84,840
Ancillary revenue		—			—			60			225			168
Total revenue		45,569			52,763			22,660			148,518			85,008
Cost of goods sold		(55,179	)		(61,302	)		(18,281	)		(199,463	)		(57,391	)
Gross loss before fair value adjustments		(9,610	)		(8,539	)		4,379			(50,945	)		27,617
Fair value adjustments1		4,335			5,979			4,437			11,134			17,997
Gross profit/(loss)		(5,275	)		(2,560	)		8,816			(39,811	)		45,614
Operating expenses		(127,704	)		(667,296	)		(24,906	)		(918,139	)		(71,186	)
Loss from operations		(132,979	)		(669,856	)		(16,090	)		(957,950	)		(25,572	)
Other expenses and losses		(19,723	)		(66,248	)		(4,621	)		(48,288	)		(20,175	)
Loss before tax		(152,702	)		(736,104	)		(20,711	)		(1,006,238	)		(45,747	)
Current and deferred tax		7,697			25,218			—			33,070			—
Other comprehensive income		(1,658	)		20,632			3			19,339			3
Total Net loss and comprehensive loss		(146,663	)		(690,254	)		(20,708	)		(953,829	)		(45,744	)

¹  Realized fair value amounts on inventory sold and unrealized gain on changes in fair value of biological assets.

11    MD&A

Summary of Results

Revenue

The following table represents the Company disaggregated net revenues by sale stream variances from the previous quarter and the comparative quarter of the prior fiscal year.

For the three months ended	Units	Q3’22		Q2’22		Variance ($)			Variance (%)			Q3’21		Variance ($)		Variance (%)
ADULT-USE (EXCLUDING BEVERAGES)
Adult-use cannabis net revenue	$		31,125		36,114		(4,989	)		(14	%)		19,151		11,974		63	%
Dried grams and gram equivalents sold (kg)	kg		18,481		18,320		161			1	%		8,645		9,836		114	%
ADULT-USE (BEVERAGES)
Adult-use cannabis net revenue	$		4,059		3,867		192			5	%		3,049		1,010		33	%
Dried grams and gram equivalents sold (kg)	kg		4,391		3,754		637			17	%		3,461		930		27	%
DOMESTIC MEDICAL
Domestic medical net revenue	$		672		811		(139	)		(17	%)		351		321		91	%
Dried grams and gram equivalents sold (kg)	kg		138		196		(58	)		(30	%)		79		59		75	%
WHOLESALE
Wholesale cannabis net revenue	$		3,267		3,740		(473	)		(13	%)		49		3,218		6,567	%
Dried grams and gram equivalents sold (kg)	kg		3,157		3,989		(832	)		(21	%)		4		3,153		78,825	%
INTERNATIONAL
International cannabis net revenue	$		6,446		8,231		(1,785	)		(22	%)		—		6,446		nil	%
Dried grams and gram equivalents sold (kg)	kg		2,407		3,319		(912	)		(27	%)		—		2,407		nil	%
Net revenue from sale of goods	$		45,569		52,763		(7,194	)		(14	%)		22,600		22,969		102	%

ADULT-USE SALES

Non-Beverage Adult-Use Sales

In the three months ended April 30, 2022, the Company’s consolidated adult-use net revenue (exclusive of cannabis infused beverages) grew 63%, as compared to Q3’21 due to $22,656 of accretive sales contributed by acquisitions.

The Company’s legacy adult-use net sales declined by 16% from Q3’21 due to previously noted increase in competition and loss of market share in Quebec. However, the Company’s 10% net sales organic growth in the Ontario market helped offset the decline.

Quarter over quarter net adult use sales have declined by 14%. A key driver was the decline in Zenabis sales as management has shifted focus to international and wholesale opportunities. Legacy HEXO net sales also declined quarter over quarter as the result of the aforementioned lost market share in Quebec and the reduction of bulk format sales. The Company significantly boosted its net sales in British Columbia due to the restocking of highly demanded products. This was ultimately offset by a significant shipment to Alberta, which was not landed in time to recognize the sale in the current period.

Beverage Based Adult-Use Sales

Sales from the Cannabis Infused Beverages (“CIB’s”) revenue stream effectively represents the sales activity of the Company’s joint business venture with Molson Canada, Truss. 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 license from Health Canada. On October 1, 2021, Truss obtained their Health Canada manufacturing license. Under the new arrangement, the Company purchases the manufactured goods from Truss LP and sells the beverages through to third parties, as a principal in the arrangement. On May 2, 2022, Truss LP obtained its own Cannabis selling license. However, the purchase arrangement has remained unchanged till Fiscal 2023 when it becomes fully operational.

During the quarter, net beverage sales increased by 5% from the previous quarter and 33% from the third quarter of fiscal 2021. Following the receipt of their cannabis manufacturing license, Truss LP sells CIB’s to the Company which are then sold at a $nil margin and are free of excise tax.

INTERNATIONAL SALES

During the period, international net revenues decreased 22% from the previous quarter primarily due to certain constrained stock availability affecting the Company’s ability to meet demand. International sales are subject to fluctuation quarter over quarter however, management continues to review and expand international opportunities.

12    MD&A

No international sales were recognized in Q3’21 due to revised prerequisite testing and a needed additional certification by the Israeli government which caused a delay in the Company’s ability to export. The matter was resolved in Q4’21.

DOMESTIC MEDICAL SALES

Domestic net medical revenue remained relatively consistent quarter over quarter. Domestic net medical revenue increased 91% from Q3’21. The acquisition of Redecan was the key contributor to this growth as legacy operations net sales decreased 52% as the result of decreasing average medical prices.

WHOLESALE REVENUE

Wholesale activity consists of transactions held between the Company and other licensed entities. These sales are generally large quantities at competitive, bulk sale prices which vary from sale to sale. Wholesales are also free of excise taxes, as this burden belongs to the purchaser.

During the quarter, the Company’s wholesale revenue experienced non-organic growth of $3,218 from the Q3’21 as the result of the acquiring Zenabis. Wholesale revenues moderately declined by $473 quarter over quarter. Wholesale revenue continue to be subject to fluctuation period over period, however, additional wholesale opportunities continue to be assessed and evaluated as they arise.

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. Excise 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 medical based sales are free of the excise taxes burden.

As a percentage of adult-use gross sales in the period, excise taxes have increased slightly to 36% of gross revenue, from 35% in the previous quarter and Q3’21 as the result over a price per gram sold.

Cost of Sales 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, net realizable adjustments, write offs, 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 crystallized fair value, as the result of the purchase price accounting in the Redecan and Zenabis acquisitions, and subsequent sales have been removed from gross profit before adjustments below. These figures represent fair value adjustments which otherwise would have been realized upon the sale of inventory on the statement of comprehensive income in ‘Realized fair value amounts on inventory sold.’ However, per IFRS 3 requirements, the carried fair value adjustments were then capitalized to the inventories cost basis upon acquisition and are recorded in Cost of goods sold.

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.

	For the three months ended									For the nine months ended
	April 30, 2022			January 31, 2022			April 30, 2021			April 30, 2022			April 30, 2021
	$			$			$			$			$
Net revenue from sale of goods		45,569			52,763			22,600			148,293			84,840
Adjusted cost of sales		(35,536	)		(33,937	)		(17,654	)		(106,740	)		(57,933	)
Gross profit before adjustments		10,033			18,826			4,946			41,553			26,907
Gross margin before adjustments		22	%		36	%		22	%		28	%		32	%
Write off of biological assets and destruction costs		—			(1,360	)		—			(2,340	)		—
Write off of inventory		(1,973	)		(4,941	)		(627	)		(7,529	)		(1,001	)
Write (down)/up of inventory to net realizable value		(13,274	)		(13,937	)		—			(63,408	)		1,543
Crystallization of fair value on business combination accounting		(4,396	)		(7,127	)		—			(19,446	)		—
Gross (loss)/profit before fair value adjustments		(9,610	)		(8,539	)		4,319			(51,170	)		27,449
Realized fair value amounts on inventory sold		(8,903	)		(9,966	)		(6,426	)		(31,629	)		(17,619	)
Unrealized gain on changes in fair value of biological assets		13,238			15,945			10,863			42,763			35,616
Gross (loss)/profit		(5,275	)		(2,560	)		8,756			(40,036	)		45,446

13    MD&A

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 current the previous fiscal quarters.

For the three months ended	Adult-Use (excluding beverages)			Medical			International			Wholesale			Total non-beverage			Adult-use beverages			Company total
April 30, 2022	$			$			$			$			$			$			$
Net revenue from the sale of goods		31,125			672			6,446			3,267			41,510			4,059			45,569
Adjusted cost of sales		(25,433	)		(344	)		(3,082	)		(2,618	)		(31,477	)		(4,059	)		(35,536	)
Gross profit before adjustments ($)		5,692			328			3,364			649			10,033			—			10,033
Gross margin before adjustments (%)		18	%		49	%		52	%		20	%		24	%		—			22	%
January 31, 2022	$			$			$			$			$			$			$
Net revenue from the sale of goods		36,114			811			8,231			3,740			48,896			3,867			52,763
Adjusted cost of sales		(22,682	)		(136	)		(3,808	)		(3,444	)		(30,070	)		(3,867	)		(33,937	)
Gross profit before adjustments ($)		13,432			675			4,423			296			18,826			—			18,826
Gross margin before adjustments (%)		37	%		83	%		54	%		8	%		39	%		—			36	%
April 30, 2021	$			$			$			$			$			$			$
Net revenue from the sale of goods		19,151			351			—			49			19,551			3,049			22,600
Adjusted cost of sales		(13,860	)		(128	)		—			(48	)		(14,036	)		(3,618	)		(17,654	)
Gross profit before adjustments ($)		5,291			223			—			1			5,515			(569	)		4,946
Gross margin before adjustments (%)		28	%		64	%		nil	%		2	%		28	%		(19	%)		22	%

Adult-Use (excluding beverages)

The Company’s total non-beverage gross margin before adjustments has decreased from the previous quarter due to lower processing volumes resulting in unfavorable, under absorption rates at the Company’s Belleville, centralized production facility. The Company also utilized certain higher costed stock to satisfy demand across the consolidated business, resulting in lower margins. This previous quarters higher margin was due to a more favorable sales mix of higher margin products. The non-beverage, adult-use adjusted gross margin decreased when compared the comparative period of fiscal 2021 due to the above.

International

The Company’s adjusted international gross margin remained relatively consistent quarter over quarter. There is no excise tax burden applicable to international sales. The Company’s international sales and the associated gross margins may vary from period to period as they are dependent upon the specific purchase order arrangements. There were no international sales during the comparative period.

Wholesale

The wholesale gross margin before adjustments has increased from the previous quarter as the result of the Company’s strategic offloading of finished goods in Q2’22 to de-risk inventory from future impairment and increase cash flows. As previously disclosed, the Company’s 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.

Cannabis Infused Beverages

The adult-use beverage gross margin amounts to $nil after the derecognition of CIB operations under the old services agreement, and the recognition of certain production variances. As discussed in the Company’s CIB division section (see section ‘HEXO CIB’) Truss received its cannabis manufacturing license on October 1, 2021.

14    MD&A

IMPAIRMENTS AND WRITE OFFS

During the period the Company recognized impairment and write offs pertaining to certain aged and unsellable inventory and certain stock associated with the decommissioning of facilities. In the comparative period of fiscal 2021, the Company destroyed $627 of inventory, primarily packaging materials no longer required.

In the three months ended January 31, 2022, the Company wrote off $4,941 of previously unimpaired aged inventory. The Company also wrote off $1,360 of compromised biological assets due to an overheating issue which has since been remediated. Also, during the prior period, the Company impaired $12,887 of aged inventory and excess supply.

In the three months ended October 31, 2021, the Company destroyed $980 of biological assets and wrote off $615 of inventory upon the winddown and ending of operations at the Langley facility. Also, during the period, the Company impaired $36,197 of inventory primarily due to the cessation of the KIT project which would have used significant biomass to commission the equipment.

FAIR VALUE ADJUSTMENTS

The unrealized gain on changes in fair value of biological assets increased 22% from Q3’21. The growth is the result of additional plants on hand due to business combinations. Quarter over quarter the decrease unrecognized changes to fair value of biological assets is due to a change in estimated trim fair values as the result of a change in operational strategy.

The realized fair value adjustment on inventory sold during the period decreased 11% compared to the previous quarter due to the decreased sales volumes and continued decrease in average selling prices. When compared to the comparative period of fiscal 2021 the realized fair value adjustment on inventory sold increased 39% due to the Company’s increased sales total sales.

Operating Expenses

	For the three months ended									For the nine months ended
	April 30, 2022			January 31, 2022			April 30, 2021			April 30, 2022			April 30, 2021
	$			$			$			$			$
General and administration		23,605			22,550			11,178			68,645			35,147
Selling, marketing and promotion		5,366			6,369			2,452			17,958			6,682
Share-based compensation		5,769			4,017			2,715			13,610			10,904
Research and development		540			1,478			730			2,985			2,901
Depreciation of property, plant and equipment		1,579			1,140			1,612			4,776			4,369
Amortization of intangible assets		2,957			6,895			371			18,010			1,043
Restructuring costs		2,804			4,524			336			11,317			1,721
Impairment of property, plant and equipment		83,171			100,130			16			207,103			881
Impairment of intangible assets		—			140,839			—			140,839			—
Impairment of goodwill		—			375,039			—			375,039			—
Impairment of investment in joint venture and associates		—			—			—			26,925			—
Disposal of long-lived assets		—			—			—			—			1,294
Loss/(gain) on disposal of property, plant and equipment		(2,935	)		(254	)		(19	)		(2,861	)		45
Acquisition, integration and transaction costs		1,175			4,569			1,871			30,120			2,308
Health Canada recovery fee		3,673			—			3,644			3,673			3,891
Total		127,704			667,296			24,906			918,139			71,186

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. general and administrative expenses include salaries for administrative staff and executive salaries as well as general corporate expenditures including legal, insurance and professional fees.

GENERAL AND ADMINISTRATIVE

The Company’s general and administrative expenses increased 5% quarter over quarter, most notably due to the additional legal and consulting costs incurred during the Company’s dispute for board control with activist investors and the resultant board refresh. Certain expenses were lowered due to cost savings initiatives such as payroll and general expenses, however these reductions were offset additional legal and consulting costs.

Compared to the third quarter of fiscal 2021, expenses have increased due to the following:

• The required Health Canada annual recovery fees remained relatively consistent from Q3’21. Legacy HEXO fees decreased 49% due to an increase in purchases from other LPs which is an offset to fees owed. The increase in fees due to the additional sales from the acquisitions of Redecan, Zenabis and 48North have offset this reduction. These fees will continue to be accrued each April based on the previous fiscal year’s sales and purchases by class of cannabis and quantity purchased and sold.

15    MD&A

• Payroll related and other general expenses increased as a result of increase headcount attributed to the Zenabis and Redecan acquisitions in fiscal 2022, not applicable in the prior year.

• Audit, legal, consulting and professional fees have increased as the Company has increased in both complexity and size (due to M&A activity) year over year.

The increased general and administrative expenses during the nine months ended April 30, 2022 as compared to the comparative period of fiscal 2021 is due to the increased scale and size of the Company. This is due to acquisitions, the increased involvement and reliance of consultants and general expansion of legal, audit and other professional fees.

MARKETING AND PROMOTION

Marketing and promotion expenses declined quarter over quarter as a result of explicit cost cutting initiatives over consulting and certain marketing/communications programs.

Compared to the same three- and nine-month period of fiscal 2021, the increase is driven by the additional headcount and marketing programs following the acquisitions of Redecan, 48North and Zenabis.

SHARE-BASED COMPENSATION

In the three months ended April 30, 2022, share-based compensation increased as a result of the granting of 4,088,386 deferred share units during the quarter.

When compared to the three and nine months ended fiscal 2021, share based compensation increased due to a combination of the issuance of deferred share units and acceleration of certain share-based awards to terminated executives and directors.

DEPRECIATION OF PROPERTY, PLANT AND EQUIPMENT

Depreciation of property, plant and equipment in operating expenses remained consistent when compared to the third quarter of fiscal 2021. However total depreciation increased in the nine-month period due to the additional depreciable assets, not contributing to capitalized production overhead, from the Zenabis, and Redecan business combinations.

For the three months April 30, 2022, depreciation expenses recognized through operating expenses increased quarter over quarter as the result of the significant decommissioning of certain facilities and operations.

AMORTIZATION OF INTANGIBLE ASSETS

During the three months ended April 30, 2022, amortization of intangible assets has decreased from the previous quarter, as the intangible assets base was significantly reduced following the impairment of acquired brands, licenses and production Know-how totaling $140,839.

Compared to the three and nine months ended of fiscal 2021, amortization increased due to the additional intangible assets, namely, cultivation licenses, brands and production Know-how, which were acquired through the business combinations of Zenabis (June 1, 2021), Redecan (August 30, 2021) and 48North (September 1, 2021).

RESTRUCTURING COSTS

During the three months ended, April 30, 2022, expenses were incurred upon two organizational restructuring events to rightsize certain departments and the operations. Share-based restructuring charges were also incurred upon the acceleration of stock options for an outgoing executive’s severance payment. The previous quarters expenses were the result of changes made to the Company’s executives. These charges comprise executive severance and associated replacement costs.

During the comparative three and nine months ended April 30, 2021, the Company also recognized expenses to rightsize certain departments and management structure.

IMPAIRMENT OF PROPERTY, PLANT AND EQUIPMENT

During the three months April 30, 2022, management announced the closing of the Belleville facility in order to realize the efficiencies available under the existing footprint at its cultivation facilities. The Company expects to have phased out its operations at Belleville by the end of Q4’22. As a result, the Company has impaired the applicable leasehold improvements, right of use assets, non-transferable cultivation and production equipment and remaining construction in progress at the site. Additional impairments were identified as a result of management’s assessment of future production capacity needs. This assessment resulted in the impairment of certain buildings and equipment acquired as part of the Zenabis business combination and the reflection of their expected fair market values.

16    MD&A

Recoverable amounts were determined by reference to fair value less costs of disposal using a market approach. The market approach was based on comparable transactions for similar assets, which is categorized within Level 2 of the fair value hierarchy.

Also, during Q2’22, management cancelled the KIT extraction project and all capitalized costs were impaired.

During the comparative period nine month ended in fiscal 2021, impairment losses related to the abandoned Montreal facility lease right-of-use asset which was no longer required under the Company’s operational needs.

IMPAIRMENT OF INTANGIBLE ASSETS

In the three months ended April 30, 2022, the Company recorded no impairments on intangible assets.

In the previous quarter, impairments of the Company’s acquired and capitalized brands, capitalized licenses from acquired cultivation facilities realized on business combinations and the production Know-how asset were recognized. The impairments were the result of a recasting of the Company’s anticipated future cashflows and economic benefits to be derived from said assets upon new managements adjustment of forecast estimates and updated internal and external conditions.

There were no impairments of intangible assets in the comparative three- and nine-months period ended April 30, 2021.

IMPAIRMENT OF GOODWILL

In the previous quarter, the Company identified indicators of impairment as the Company’s carrying value of the Company’s only material cash generating unit (the “Canadian Operations CGU”) exceeded market capitalization. The Company performed an impairment test and valuation of the Canadian Operations CGU resulting in a full impairment of the goodwill arising from the acquisitions of Zenabis, Redecan and 48North (see note 15 of the financial statements).

As a result of the above, the Company no longer carries Goodwill, and as such no further impairments were recognized in the current period.

There were no impairments of goodwill in the comparative three and nine months ended April 30, 2021.

IMPAIRMENT OF INVESTMENT IN ASSOCIATE

The Company recorded no impairments of investment in associates in the three months ended April 30, 2022 and the comparable period of fiscal 2021.

During the nine months ended April 30, 2022, the company recorded impairment on the investment in Truss LP as there existed indicators of impairment and as such management performed discounted cash flow valuation which resulted in impairment down to its recoverable amount. The historical carrying amount of the Truss LP investment included $42,300 related to the fair value of warrants issued to Molson Canada as part of the initial investment in 2018. These warrants expired unexercised in October 2021.

ACQUISITION, INTEGRATION AND TRANSACTION COSTS

During the three months ended April 30, 2022, the Company realized expenses related to the activity associated with executing the Definitive Agreement (see section ‘Sale of Amended Senior Secured Convertible Notes to Tilray Brands and $180 million Equity Backstop Financing’).

In the first and second quarter of fiscal 2022, these expenses related to the acquisition and integration of Redecan, 48North and Zenabis. include closing costs, legal expenses, broker compensation, costs associated with the special shareholders meeting to approve the Redecan transaction, due diligence, consulting, integration, and other applicable costs.

During the comparative period of fiscal 2021, the Company began incurring expenses relating to the acquisition of Zenabis.

17    MD&A

Other Income and Losses

	For the three months ended									For the nine months ended
	April 30, 2022			January 31, 2022			April 30, 2021			April 30, 2022			April 30, 2021
	$			$			$			$			$
Interest and financing expenses		(5,147	)		(5,251	)		(3,296	)		(15,701	)		(8,368	)
Interest income		183			193			349			1,149			1,057
Interest income (expense), net		(4,964	)		(5,058	)		(2,947	)		(14,552	)		(7,311	)
Revaluation of financial instruments gain		3,147			11,866			(383	)		42,481			(9,587	)
Share of loss from investment in associate and joint ventures		(1,856	)		(2,669	)		(2,244	)		(6,674	)		(5,902	)
Loss on convertible debenture receivable		—			—			746			—			746
Fair value loss on senior secured note		(15,110	)		(76,666	)		—			(80,105	)		—
Gain on sale of interest in BCI		—			9,127			—			9,127			—
Gain (loss) on sale of investments		—			(297	)		544			(576	)		1,204
Foreign exchange gain/(loss)		(527	)		(4,582	)		(1,514	)		393			(3,836	)
Other income and losses		(413	)		2,031			1,177			1,618			4,511
Non-operating income (expense), net		(14,759	)		(61,190	)		(1,674	)		(33,736	)		(12,864	)

INTEREST AND FINANCING EXPENSES

During the three months ended April 30, 2022, interest and financing expenses remained consistent with the previous quarter.

Compared to the same three and nine-month period in fiscal 2021, interest and financing fees have increased due to the additional interest-bearing debt instruments assumed upon the acquisition of Zenabis on June 1, 2021.

REVALUATION OF FINANCIAL INSTRUMENTS

The applicable financial instruments are the USD denominated warrants which are classified as a liability and remeasured at each period end date.

The April 30, 2022, revaluation of the warrants resulted in a gain in the current period, due to the decrease to the underlying share price. The decreased gain compared Q2’22, is due to lower favorable share price volatility. The number of outstanding USD warrants remains consistent quarter over quarter.

The losses in the previous three and nine months ended of fiscal 2021 were resultant of a lower volatility in the Company’s share price and a lower number of outstanding USD backed warrants.

SHARE OF LOSS FROM INVESTMENT IN ASSOCIATES AND JOINT VENTURES

The Company accounts for its interests in associates and joint venture under the equity method and as such recognizes the applicable portion of their financial results onto the consolidated statement of comprehensive loss.

Quarter over quarter and compared to the three months ended of fiscal 2021, these losses decreased due to reduced losses from Truss and Truss USA as sales continue to improve. The Company disposed of its joint venture Belleville Complex Inc. in the previous quarter realizing a gain on disposal of $9,127. As a result, no equity loss pick up was realized in the current period.

The losses have increased compared to the same nine-month period of fiscal 2021 in conjunction with the increased size and scale of operations at the associate.

FAIR VALUE LOSS ON SENIOR SECURED CONVERTIBLE NOTE

During the three months ended April 30, 2022 the Company’s Senior Secured Convertible Note (issued in Q4’21) continued to be valued at the cash demand amount being 115% of the outstanding principle due to defaults and the Holder’s rights (see section ‘Senior Secured Convertible Note’). Therefore, the required revaluation of the Senior Secured Convertible Note was less volatile quarter over quarter resulting in a significantly lower loss. The loss on revaluation is offset by the Company’s $4,978 gain on credit spread, recognized through Other Comprehensive Income.

In the current and previous quarter, the Company did not meet the adjusted EBITDA financial covenant of the senior secured convertible note. Accordingly, the Company valued the note under the cash demand default condition which resulted in the grossing up of outstanding principal debt to 115% and a loss on revaluation of $76,666 in Q2 22. The loss on revaluation was offset by the Company’s $20,681 gain on credit spread, recognized through Other Comprehensive Income.

The Q3 22 gain on credit spread is a function of the increased credit spread risk input to valuation of the note as compared to the previous period.

18    MD&A

The Company also recognized $12,163 and $37,097, in amortization related to the day one deferred loss during the three and nine months ended April 30, 2022, respectively.

FOREIGN EXCHANGE GAIN/(LOSS)

Gains and losses are the outcome of favorable and unfavorable volatility in the CAD/USD FX rate period over period on the USD denominated senior secured note and cash balances. The losses recognized during the period are due to the unfavorable quarter over quarter change in the CAD/USD rate on the senior secured convertible note and the Company’s USD cash balance..

The losses recognized in the third quarter of fiscal 2021, were the result of unfavorable movement in CAD/USD FX rate on the Company’s USD cash balance.

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 and acquisition 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:

	Q3’22			Q2’22			Q1’22			Q4’21			Q3’21
	$			$			$			$			$
Total net loss attributable to shareholders before tax		(152,702	)		(736,104	)		(117,427	)		(69,512	)		(20,708	)
Finance expense (income), net		4,964			5,058			4,531			23,211			2,947
Depreciation, included in cost of sales		4,814			5,973			4,969			2,308			1,502
Depreciation, included in operating expenses		1,579			1,140			2,057			1,728			1,612
Amortization, included in operating expenses		2,957			6,895			8,158			1,002			371
Investment (gains) losses
Revaluation of financial instruments loss/(gain)		(3,147	)		(11,866	)		(27,467	)		(7,304	)		383
Share of loss from investment in joint venture		1,856			2,669			2,149			602			2,244
Loss/(gain) on convertible debt fair market valuation		15,110			76,666			(11,670	)		6,964			(746	)
Unrealized loss/(gain) on investments		—			297			279			(788	)		(544	)
Realized gain on disposal of investment in BCI		—			(9,127	)		—			—			—
Foreign exchange loss/(gain)		527			4,582			(5,504	)		(12,945	)		1,514
Non-cash fair value adjustments
Realized fair value amounts on inventory sold		8,903			9,966			12,760			14,148			6,426
Unrealized gain on changes in fair value of biological assets		(13,238	)		(15,945	)		(13,581	)		(15,883	)		(10,863	)
Crystalized fair value adjustment on PPA		4,396			7,127			7,923			2,272			—
Restructuring costs & acquisition costs
Restructuring costs		2,804			4,524			3,989			1,562			336
Acquisition, integration and transaction costs		1,175			4,569			24,374			14,869			1,871
Other non-cash items
Share-based compensation, included in operating expenses		5,769			4,017			3,824			827			2,715
Share-based compensation, included in cost of sales		—			—			211			333			251
Write-off of biological assets and inventory		1,973			6,301			1,595			1,181			—
Write (up)/down of inventory to net realizable value		13,274			13,937			36,197			5,308			—
Impairment loss on goodwill		—			375,039			—			—			—
Gain on exit of lease		—			—			—			—			(88	)
Impairment losses on property, plant and equipment		83,171			100,130			23,803			19,350			16
Impairment losses on intangible assets		—			140,839			—			—			—
Impairment of investment in associate		—			—			26,925			—			—
(Gain)/loss of long-lived assets		(2,935	)		(254	)		329			19			(19	)
Other income/(losses)		413			(2,031	)		—			—			—
Adjusted EBITDA		(18,337	)		(5,598	)		(11,576	)		(10,748	)		(10,780	)

19    MD&A

The quarter over quarter decrease in Adjusted EBITDA is the result of the reduction in the consolidated adjusted gross margin (see section ‘Cost of Sales’) and the impact of the $3,673 Health Canada cannabis fee (a 2.3% levy based upon the Company’s total cannabis sales from the period of April 1, 2021 to March 31, 2022, net of shipping and purchased cannabis costs) which is recognized in the third quarter each fiscal year. The previous quarters improvement was driven by the period’s betterment of adjusted gross margins (see sections ‘Cost of Sales & Gross Margin Before Adjustments’ and ‘Operating Expenses’).

Quarterly Results Summary

The following table presents certain unaudited financial information for each quarter of the past two fiscal years. Past performance is not a guarantee of future performance, and this information is not necessarily indicative of results for any future period.

	Q3 ’22 April 30, 2022			Q2 ’22 January 31, 2022			Q1 ’22 October 31, 2021			Q4 ’21 July 31, 2021
	$			$			$			$
Net revenue		45,569			52,763			50,188			38,760
Total comprehensive loss		(146,663	)		(690,254	)		(116,908	)		(67,959	)
Weighted average shares outstanding		432,918,608			355,752,174			251,805,870			142,018,176
Loss per share – basic		(0.34	)		(1.94	)		(0.46	)		(0.48	)
Loss per share – fully diluted		(0.34	)		(1.94	)		(0.46	)		(0.48	)
	Q3 ’21 April 30, 2021			Q2 ’21 January 31, 2021			Q1 ’21 October 31, 2020			Q4 ’20 July 31, 2020
	$			$			$			$
Net revenue		22,660			32,880			29,468			27,145
Total comprehensive loss		(20,708	)		(20,839	)		(4,197	)		(169,532	)
Weighted average shares outstanding		122,397,731			122,022,069			120,849,754			77,376,174
Loss per share – basic		(0.17	)		(0.17	)		(0.04	)		(1.60	)
Loss per share – fully diluted		(0.17	)		(0.17	)		(0.04	)		(1.60	)

Financial Position Highlights

The following table provides a summary of our financial position as at April 30, 2022 and July 31, 2021.

	April 30, 2022		July 31, 2021
	$		$
Current assets		392,695		693,558
Non-current assets		456,289		618,245
Current liabilities		398,797		503,638
Non-current liabilities		79,363		75,900
Total shareholders’ equity		370,824		730,278

Current Assets

The following significant activities and events resulted in the net decrease of assets during the nine months ended April 30, 2022:

• The Company’s cash and cash equivalents has been reduced by $53,241 (See section ‘Liquidity and Capital Resources’).

• Cash held in escrow of $285,779 was utilized to acquire Redecan in Q1’22.

• Assets Held for Sale increased by $22,540 in line with the Company’s Path forward announcement which noted the exiting of certain cultivation and manufacturing facilities. This largely related to assets acquired from the 48North business combination and the HEXO USA site,

• The Company capitalized $11,187 to its investments in associates during the period. These were offset by the Company’s share of losses in its joint venture and associates and the $26,925 impairment of the Company’s investment in Truss LP, resulting in a net asset decrease of $23,396

Non-Current Assets

The following significant activities and events resulted in the net decrease of assets during the nine months ended April 30, 2022:

• Non-current assets have decreased as a result of the $88,189 full impairment of the Zenabis acquisition goodwill as the result of impairment of the HEXO CGU.

• The business combinations of Redecan and 48North added $198,837 of intangible assets. However, in the previous quarter the Company impaired certain of these and other intangible assets in the amount of $140,839 (See section ‘Operating Expenses).

20    MD&A

• Similar to the above, the business combinations of Redecan and 48North added $135,527 of property, plant and equipment assets. However, throughout the fiscal year the Company has impaired certain of these and other assets in the amount of $207,103 (See section ‘Operating Expenses).

Current Liabilities

The following significant activities and events resulted in the net decrease of current liabilities during the nine months ended April 30, 2022:

• Accounts payable and accrued liabilities remained consistent. The additional operations of two acquired entities resulted in an increase of liabilities of $7,835. Offsetting this increase was the derecognition of liabilities attributable to the Company’s CIB division after a change in the Company’s arrangement with Truss LP following the receipt of their cannabis processing license (see ‘HEXO CIB (Cannabis Infused Beverages).

• The Senior secured convertible note decreased by $132,900 on a net basis, due to redemption repayments made during the period (see section ‘Senior Secured Convertible Note’) and the amortization of the day 1 loss.

• The Company’s December 2019 convertible debentures were reclassified as current liabilities from long term as they mature Dec 2022.

Long-Term Liabilities

During the nine months ended April 30, 2022 long-term liabilities increased from July 31, 2022 due the recognition of a deferred tax liability (recognized on the business combination of Redecan). This was offset by the reclassification of the December 2019 convertible debenture to current liabilities as the debt approaches maturity in December 2022.

Shareholders’ Equity

During the nine months ended April 30, 2022, the net decrease to shareholders’ equity was due to the following:

• Share capital increased due to; $27,266 of share issuances on the Company’s ATM program (which ran until February 2022); $230,232 of capital was issued on the Redecan and 48North transactions; $184,525 of capital was issued on senior secured convertible note redemptions; and $135,645 of capital raised through the August 2021 underwritten public offering.

• Shares-based payment reserve increased on a net basis. The net increase is the result of total share-based compensation issued of $11,806 and replacement stock options of $18 on the 48North acquisition. This was offset by expired vested stock options of $8,685 and exercised options of $104.

• Warrant reserve decreased by $42,486 mainly due to the expiry of warrants which had been issued as compensation in the formation of Truss LP in October 2018. The warrant reserve was increased by $769 on the issuance of replacement warrants associated with the acquisition of 48North.

• The Company’s contributed surplus increased mainly due to the expired warrants and stock options as stated above.

Liquidity and Capital Resources

Cash Flow Highlights

For the nine months ended	April 30, 2022			April 30, 2021
Cash (used)/generated through:	$			$
Operating activities		(101,093	)		(16,838	)
Financing activities		172,801			(30,142	)
Investing activities		(124,949	)		(56,155	)
Ending cash balance		14,221			81,038

Operating Activities

Net cash used in operating activities for the nine months ended April 30, 2022 increased from $16,838 in the comparative period as the Company has generally increase in size and expanded its scale (from headcount to production capability) due to acquisition activity between Q4’21 and Q1’22. Specific contributors to this variance are as follows:

• Acquisition and transaction costs related to the recent M&A amounted to $30,120 (April 30, 2021—$2,307) as well as restructuring costs of $11,317 (April 30, 2021—$1,721);

• The Company’s Selling general, administrative and marketing expenses increased by 97% year over year.

• Changes to non-cash working capital of ($17,248) as compared to $4,804 in April 30, 2021 were composed of;

• Net increase of inventories and biological assets carried of $12,385 due to increased scale of operations acquired through business combinations;

• Prepaid expenses were reduced to align to the Company’s cash management needs, resulting in a change of net inflows of $6,218 compared to cash used of $1,851 in the comparative period; and

• Increased cash used to pay down accounts payables and accruals by $15,504.

21    MD&A

Financing Activities

Net cash generated from financing activities for the nine months ended April 30, 2022 increased from the comparative period due to the following events and transactions:

• Net cash generated from issuance of common shares through the underwritten public offering in August 2021 was $175,034; and $27,266 from the Company’s ATM program;

• During the period, the Company repaid convertible and other debt acquired through the Zenabis and 48North acquisitions in the amount of $11,849; and

• The Company’s also utilized the $10,111 of cash proceeds from the sale of its investment in BCI towards repayment of the Senior secured convertible note.

Investing Activities

Cash used for investing activities increased significantly in the nine months ended April 30, 2022 from the comparative period of fiscal 2021 due to the following events and transactions:

• The Company’s $283,775 of Cash held in escrow, which had been raised through the Senior secured convertible note in May 2021, was fully utilized, as intended, to partially fund the $402,173 cash component of the Redecan transaction. The balance of the cash component was derived from the cash raised in August 2021 underwritten public offering. The total net cash used in the fiscal for the acquisition of Redecan and 48North was $97,382;

• The Company received net proceeds from the sale of its investment in BCI of $10,111; and

• Cash contributions of $11,187 were made to Truss LP and Truss USA.

Senior Secured Convertible Note

The closing of the Transaction Agreement is subject to several financial and non-financial interim covenants which are applicable from the date of entering into the Transaction Agreement to the earlier of the closing or termination date of the Transaction Agreement. As at April 30, 2022, the Company had not satisfied the minimum liquidity interim covenant of US$100 million (the “Liquidity Covenant”). Tilray did not express an intention of terminating the Transaction Agreement on the basis of the Company’s non-compliance with the Liquidity Covenant. Subsequent to April 30, 2022, management entered into an Amending Agreement which amended certain conditions of the Transaction Agreement including but not limited to the Liquidity Covenant, which was reduced to $70 million (the “Amended Liquidity Covenant”)(Note 37). A waiver was also received on through the Amending Agreement in which Tilray irrevocably waives any rights or entitlements as the result of any non-compliance to the previously minimum liquidity requirement of US$100 million. However, there can be no guarantee that the Amended Liquidity Covenant will be met on the closing date of the Amending Agreement and therefore may prevent the Company’s ability to close on the Amending Agreement.

Event of Default

As at January 31, 2022, the Company failed to meet a financial covenant under the Note which required the Company to achieve positive adjusted earnings before taxes, interest, taxes and depreciation for the three month period ended January 31, 2022. This is an event of default under the terms of the Note. Subsequent to period end, on March 13, 2022, the Holder of the Note agreed to an irrevocable waiver of their rights in relation to the event of default (Note 18) until the earlier of May 17, 2022 or termination of the Proposed Transaction (the “waiver”). The waiver was then overridden by a forbearance to act upon the default event extended by the Holder as stated in the Transaction Agreement, executed April 12, 2022. The forbearance is applicable until the earlier of the closing or termination of the Transaction Agreement. As the Holder has not irrevocably waived the default event but rather has waived the right to act upon the default event, the Note remains in default as at April 30, 2022.

In an event of a default, the Holder obtains the option to declare the Note (or any portion thereof) to become due and payable immediately for cash in an amount equal to the Event of Default Acceleration Amount, as defined in the Note. The Event of Default Acceleration Amount is a cash amount equal to the greater of:

• (A) 115% of the outstanding principal amount of the Note, including any accrued and unpaid interest; and

• (B) 115% of the product of (i) the original conversion rate of 142.6533, (ii) the outstanding principal amount, including any accrued and unpaid interest, and (iii) the greater of:

• the highest Daily VWAP per Common Share occurring during the thirty (30) consecutive VWAP Trading Days ending on, and including, the VWAP Trading Day immediately before the date the acceleration notice is delivered; and

• the highest Daily VWAP per Common Share occurring during the thirty (30) consecutive VWAP Trading Days ending on, and including, the VWAP Trading Day immediately before the date the applicable Event of Default occurred.

As at April 30, 2022, the greater amount was calculated under (A) which represents a cash amount of $284,676 (US $222,543).

In addition, notwithstanding the event of a default, the Holder continues to hold the option to convert the Note, in full or in part, into freely tradeable common shares of the Company, at any time before the second last trading day before the maturity date.

22    MD&A

The Holder also continues to be entitled to exercise the Optional Redemption Options. However, during the period under which the Note is in default, the conversion rate applied to such conversions will be increased by a number of shares equal to the Event of Default Additional Shares, as defined in the Note. This conversion right continues to be subject to limitations on conversions, including the 9.99% beneficial ownership limitation, as set out in the Note.

As a result of the event of default, the Company is no longer able to exercise its option to force conversion of the Note and is unable to satisfy the terms of the Equity Condition, as set out in the Note, which means the Company does not retain the ability to settle monthly redemption payments in equity. Unless a waiver is granted by the Holder, any monthly redemption options exercised by the Holder will be required to be settled in cash.

Fair Value Measurement

The Note represents a hybrid instrument with multiple embedded derivatives requiring separation. The Note, as a whole, has been designated as FVTPL, as at least one of the derivatives does significantly modify the cash flows of the Note and it is clear with limited analysis that separation is not prohibited. The changes in fair value of the instrument are recorded in the Statement of loss with changes in credit spread being recognized through Other comprehensive income.

As at April 30, 2022, as a result of the event of default, the fair value of the Note with a demand feature cannot be less than the amount payable on demand, discounted from the first date that the amount could be required to be repaid. The demand amount was calculated by reference to the Event of Default Acceleration amount, as defined in the agreement. Fair value was determined through the use of a model using a valuation technique that includes unobservable inputs.

As the demand amount represented the higher amount, the Note was measured at its demand amount of $284,676 (US $222,542), representing 115% of the outstanding principal at April 30, 2022. There was no accrued or unpaid interest as at April 30, 2022.

Going Concern

During the nine months ended April 30, 2022, the Company continued to incur losses and significant cash outflows, reporting a gross loss of $39,811, a loss from operations of $957,950, cash outflows from operating activities of $101,093 and an accumulated deficit of $1,741,396. The Company had cash and cash equivalents of $14,221 as at April 30, 2022 ($67,462 at July 31, 2021) and the Company remains highly leveraged with combined current debt balances of $322,394 as at April 30, 2022, consisting of the Senior secured convertible note (“the Note”) (Note 18), Senior notes payable and Convertible debentures.

On January 31, 2022, the Company breached a financial covenant of the Note which required the Company to achieve positive adjusted earnings before taxes, interest, and depreciation for the three-month period ended January 31, 2022. This was deemed an event of default under the terms of the Note. Under the default terms, the Holder of the Note obtains the option to accelerate repayment of the Note at a value which is 115% of the principal amount outstanding. As at the date of these financial statements, the Note continues to be in default. The Senior Note Payable also remains in default and the Convertible debentures are due for repayment in December 2022. These circumstances create material uncertainties that lend substantial doubt as to the ability of the Company to meet its obligations as they come due and, accordingly, the appropriateness of the use of accounting principles applicable to a going concern.

In recognition of these circumstances, the Company entered into an agreement with Tilray Brand Inc. (“Tilray”) to create a strategic partnership in which Tilray will acquire the outstanding principal balance of the Note that was originally issued by HEXO to HT Investments MA LLC (“HTI”) and restructure certain provisions of the Note (the “Transaction Agreement”). Among other provisions, the Optional Redemption Payments would be removed, the term extended to three years, and US$80 million in restricted cash released. On April 12, 2022, upon the execution of the Transaction Agreement, the Holder of the Note agreed to forbear their rights to act upon the event of default until the earlier of the closing of the Transaction Agreement or its termination.

Concurrent with the debt restructuring, the Company received a non-binding Letter of Intent for a $180 million equity backstop agreement, from an affiliate of KAOS, which would provide the Company access to capital over a 36-month period in order to help ensure debt and interest repayments under the revised terms of the Note can be met.

On June 14, 2022, the Company entered into an amending agreement with Tilray (the “Amending Agreement”) and an amending agreement with KAOS Capital Inc.(“KAOS”) and an affiliate of KAOS (the “Amended Standby Agreement”) (Note 37).

The closing of the Amending Agreement and the Amended Standby Agreement are subject to a number of conditions that have not yet been satisfied, including: (i) receipt of approvals from the Toronto Stock Exchange and the Nasdaq Stock Market LLC; (ii) receipt of approval from the HEXO shareholders; (iii) no material adverse effect having occurred in respect of HEXO; and (iv) receipt of all consents and approvals required by any regulatory authorities, including from the Competition Bureau. As at April 30, 2022, the Company was required to maintain a cash balance in an amount equal to or greater than US$100 million from the date of the Transaction Agreement to the date of closing or termination which was not met. Through the Amending Agreement, the minimum cash balance terms were reduced to $70 million (Note 37). A waiver was also received on through the Amending Agreement in which Tilray irrevocably waives any rights or entitlements as the result of any non-compliance to the previously minimum liquidity requirement of US$100 million. There can be no assurance that the revised conditions will be satisfied and that the Amending Agreement will successfully close or close on the timeline necessary to provide sufficient liquidity to the Company.

23    MD&A

There can be no assurances that alternatives will be available or available on terms that are acceptable to the Company.

These undertakings and planned transactions, while significant, may not be sufficient in and of themselves to enable the Company to fund all aspects of its operations. The Company’s ability to continue as a going concern is dependent on successfully closing the Amending Agreement or finding alternative sources of financing. Accordingly, management continues to pursue other alternatives to fund the Company’s operations and reduce costs so it can continue as a going concern, such as:

• Reduction of headcount and restructuring the organization to rightsize to future operating and administrative needs;

• Minimizing the Company’s reliance third party service providers and professional fees;

• Liquidate the Company’s previously announced decommissioned and available for sale assets; and

• Securing a new directors and officers insurance program to facilitate the release of the restricted funds held in the captive insurance entity (April 30, 2022—$29,996), into operating cash.

The Company may be unable to realize its value from assets or discharge its liabilities in the normal course of business and may incur significant dilution to the holdings of existing shareholders in any restructuring or financing process and ultimately may be required to seek relief under a court-approved restructuring or liquidation process.

These condensed interim consolidated financial statements do not reflect the adjustments to the carrying values of assets and liabilities and the reported expenses and balance sheet classifications that would be necessary if the Company were unable to realize its assets and settle its liabilities as a going concern in the normal course of operations. Such adjustments could be material.

Capital Resources

On April 30, 2022, working capital totaled ($6,102). The Company had no “in-the-money” warrants or vested stock options issued and outstanding as of April 30, 2022, using the closing market price of the common shares on the TSX of $0.52.

As evidenced throughout the fiscal year, the Company is continuously assessing its capital and operational expenditures to streamline the business and cut down operational losses each period on the path to generating earnings per share.

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 Use of Proceeds
Initiated in May 2021, then resumed in November 2021, ending February 2022	At-the-market public offering	$50,260	The net proceeds generated from the financing were approximately $46,564. The Company expects to use the net proceeds from the ATM Program for: (i)  costs associated with the Company’s U.S. expansion plans including the contemplated acquisition of a facility in the State of Colorado and its subsequent retrofitting and improvement; (ii)   capital expenditures, including potential capital expenditures to make additional improvements to the production lines at the Company’s Belleville, Ontario facility;	The Company acquired US facility in Colorado in May 2021 utilizing proceeds of approximately $8.06 million. The remaining raised proceeds from the first round of financing (May 2021) were used towards the funding of working capital and debt repayments. On a first in, first out basis, the funds were fully utilized at October 31, 2021. During the nine months ended April 30, 2022, the Company raised an additional $27,773 proceeds. Management has not altered the intended use of these funds since inception in May 2021.
			(iii)  potential future acquisitions; (iv)  working capital, including replenishing existing cash resources and working capital which will be used to fund certain transaction and integration costs and minimum debt repayments related to the Company’s proposed acquisition of Zenabis Global Inc. (“Zenabis”); and (v)   repayment of additional debts owed by Zenabis following the completion of the Zenabis acquisition.	On a first in, first out basis, the funds were utilized towards funding working capital and $5,904 remains outstanding at April 30, 2022. The Company remains compliant with its stated intended use as at April 30, 2022

24    MD&A

May 27, 2021	Senior Secured Convertible Note	US$327,600	The approximate net proceeds before closing fees from the financing were US$327,600. The Company expected to use virtually all the funds to finalize the acquisition of Redecan.	Upon receipt, as agreed upon, US$229,320 of the funds were placed into escrow intended for the acquisition of Redecan. The Company was subject to a covenant to restrict US$80 million of the funds for the future potential settlement of the senior note assumed on the acquisition of Zenabis May 24, 2021. On August 30, 2021, the Company utilized the unrestricted funds raised to acquire Redecan. As at April 30, 2022, $102,336 (US$80,000) remains restricted for the settlement of certain debt and associated liabilities. The Company was in compliance with the stated use of funds and the required covenant at April 30, 2022.
August 24, 2021	Underwritten Public Offering	US$144,800	The approximate net proceeds before closing fees from the financing were $138,871. The Company intended to use the net proceeds from this offering to satisfy a portion of the cash component of the purchase price payable to the Redecan shareholders on closing of the Redecan acquisition and for expenditures in relation to the Company’s U.S. expansion plans.	Management utilized approximately $106,185 in closing the acquisition of Redecan on August 30, 2021. On April 30, 2022, there is no remaining cash on hand related to this financing. The Company was compliant with its stated intended use on January 31, 2022.

Capitalization Table

The capitalization information in the table below presents the balances of issued and outstanding common shares and other convertible securities as at the date of this MD&A, April 30, 2022 and July 31, 2021.

	June 14, 2022		April 30, 2022		July 31, 2021
Common shares		500,856,312		458,167,270		152,645,946
Warrants		59,829,197		59,582,216		36,986,570
Options		17,951,025		19,311,852		12,018,143
Restricted share units		2,033,267		2,033,267		550,832
Deferred share units		4,088,386		4,088,386		—
Convertible debentures		3,175,633		3,175,633		3,175,633
Senior convertible note1		1,144,111,570		532,454,285		84,501,262
Total		1,732,045,390		1,078,812,909		289,878,386

¹ Estimated based on the assumption all remaining principal at 115% is converted at 88% of the applicable dates available share price.

25    MD&A

The following table summarizes the Company’s stock options outstanding as at April 30, 2022 and July 31, 2021.

	April 30, 2022					July 31, 2021
	Number of options			Weighted average exercise price		Number of options			Weighted average exercise price
Opening balance		12,018,143		$	10.63		7,503,691		$	16.30
Granted		11,038,113			1.01		5,273,906			5.21
Replacement options issued on acquisition		162,009			7.19		905,902			3.81
Forfeited		(3,323,802	)		4.94		(630,473	)		12.80
Expired		(565,587	)		22.06		(624,832	)		25.95
Exercised		(17,024	)		2.54		(410,051	)		3.00
Closing balance		19,311,852		$	5.63		12,018,143		$	10.63

Summary of outstanding and vested outstanding stock options as at April 30, 2022.

	Number outstanding		Weighted average remaining life (years)		Number exercisable		Weighted average remaining life (years)
$1.86–$10.76		16,131,929		9.13		6,359,326		8.38
$15.56–$26.16		1,215,197		7.04		1,116,539		7.01
$28.52–$34.00		1,963,253		6.64		1,963,251		6.64
$47.36–$234.76		1,473		0.00		1,477		0.00
		19,311,852				9,440,593

The following table summarizes RSU activity during the nine months ended April 30, 2022 and the year ended July 31, 2021. As of April 30, 2022, 466,540 RSU’s are vested and outstanding.

	April 30, 2022					July 31, 2021
	Units			Value of units on grant date		Units			Value of units on grant date
Opening balance		550,832		$	7.91		587,108		$	8.41
Granted		1,517,236			1.74		24,008			3.17-7.17
Replacement units issued on acquisition		—			—		223,506			8.61
Exercised – equity settled		—			—		(223,506	)		8.61
Exercised – cash settled		—			—		(25,483	)		5.62-8.60
Forfeited		(34,801	)		3.30		(34,801	)		11.76
Closing balance		2,033,267		$	3.34		550,832		$	7.91

The following table summarizes DSU activity during the nine months ended April 30, 2022 and the year ended July 31, 2021.

	April 30, 2022				July 31, 2021
	Units		Value of units on grant date		Units		Value of units on grant date
Opening balance		—	$	—		—	$	—
Granted		4,088,386		0.72		—		—
Closing balance		4,088,386	$	0.52		—	$	—

All DSUs have been issued to directors of the Company and fully vest upon the termination of their tenure as directors.

The following table summarizes warrant activity during the nine months ended April 30, 2022 and the year ended July 31, 2021.

	April 30, 2022					July 31, 2021
	Number of warrants			Weighted average exercise price1		Number of warrants			Weighted average exercise price1
Outstanding, beginning of year		36,666,958		$	8.85		33,379,408		$	7.60
Expired and cancelled		(3,179,074	)		33.86		(535,889	)		4.09
Issued on acquisition		1,554,320			1.42		5,970,370			14.59
Issued		24,540,012			4.35		—			—
Exercised		—			—		(2,146,931	)		4.10
Outstanding, end of year		59,582,216		$	6.06		36,666,958		$	8.85

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

26    MD&A

Off-Balance Sheet Arrangements and Contractual Obligations

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

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:

	2022 (three months remaining)		2023 – 2024		2025 – 2026		Thereafter		Total
	$		$		$		$		$
Accounts payable and accrued liabilities(4)		62,220		—		—		—		62,220
Excise taxes payable		5,211		—		—		—		5,211
Onerous contract		4,763		—		—		—		4,763
Convertible debenture and interest		35,627		—		—		—		35,627
Loans and Borrowings		50,732								50,732
Senior secured convertible note(3)		278,089		—		—		—		278,089
Undiscounted lease obligations		1,832		12,079		11,182		50,904		75,997
Capital projects (1)		108		34,377		—		—		34,485
Service contracts		1,164		2,674		888		166		4,892
Lease based operating expenses (2)		748		5,985		8,211		13,472		28,416
		440,494		55,115		20,281		64,542		580,432

(1) The Company’s stated capital projects commitments are disclosed on the basis of managements current capital budget and is subject to change.

(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.

(3) Based upon the 115% default value of the outstanding principal as at April 30, 2022.

LITIGATION

Class Actions

As of April 30, 2022, the Company and its former Chief Executive Officer are defendants in a putative class-action lawsuit pending in the Québec Superior Court brought on behalf of certain purchasers of shares of the Company and filed on November 19, 2019. The lawsuit asserts causes of action for misrepresentations under the Québec Securities Act and the Civil Code of Québec in connection with certain statements contained in HEXO’s prospectus, public documents and public oral statements between April 11, 2018 and November 15, 2019. The allegations relate to: (1) statements made by the Company regarding its agreement with the Province of Québec to supply cannabis; (2) statements made by the Company regarding its acquisition of Newstrike, particularly the licensing of the Newstrike facilities and the forecasted synergies and/savings from the Newstrike acquisition; (3) statements made by the Company about the net revenues in Q4 2019 and fiscal year 2020; and (4) the certifications by Sebastien St-Louis and the underwriters of the Company. The plaintiffs seek to represent a class comprised of Québec residents who acquired the Company’s securities either in an Offering (primary market) or on the secondary market during such period and seek compensatory damages for all monetary losses and costs. The amount claimed for damages has not been quantified and no accrual has been made as at April 30, 2022 (July 31, 2021 — $nil).

As of April 30, 2022, the Company is named as a defendant in a proposed consumer protection class action filed on June 16, 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.

27    MD&A

MediPharm

As of July 31, 2020, the Company is subject to a lawsuit filed against HEXO Operations by Medipharm Labs Inc. (“Medipharm”) seeking $9,800 for alleged non-payment of cannabis resin it supplied to HEXO Operations pursuant to a supply agreement dated February 11, 2019 between Medipharm and HEXO Operations’ former subsidiary, Up Cannabis, which was a subsidiary of Newstrike and was amalgamated with HEXO Operations, together with Newstrike and certain other affiliates, in August 2019. HEXO intends to vigorously defend itself against the claim and has filed a defence and counterclaim which alleges, among other things, that the supply agreement is void as it was entered into in bad faith. The full amount of Medipharm’s claim is contested by the Company, and the Company is seeking repayment of the full value of the supply agreement in the amount of $35,000 from Medipharm in its counterclaim.

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 the investment of cash, cash equivalents and restricted cash. The Company may, from time to time, invest cash in highly liquid investments with short terms to maturity that would accumulate interest at prevailing rates for such investments. As at April 30, 2022, the Company has $50,732 in notes payable (July 31, 2021 – $50,159) (Note 20) that bear interest at a fixed rate and therefore are not subject to interest risk.

The Company holds senior secured convertible debt that under the non-default terms bears no cash interest and is repayable at a fixed rate of 110% of the face value under the standard terms. The Company triggered an event of default on January 31, 2022 (Note 18) however, the lender has issued a forbearance of their ability to act on the event of default until the earlier of the close or termination of the Amending Agreement. Any amounts due on the note or if placed into default by the lender, at such time, would be subject to a prospective interest rate of 18%.

Price Risk

Price risk is the risk of variability in fair value due to movements in equity or market prices.

Financial liabilities

During the nine months ended April 30, 2022 the Company obtained an amendment to the Senior secured convertible notes equity condition effectively reducing the Equity Condition threshold by 70% allowing the Company increased discretion over redemption payments to be repaid in cash or equity (Note 18). The sensitivity of the Senior secured convertible note due to price risk is disclosed in Note 18.

If the fair value of these financial assets and liabilities were to increase or decrease by 10% the Company would incur a related net increase or decrease to Comprehensive loss of an estimated $23,666 (April 30, 2021 – no material impact). The following table presents the Company’s price risk exposure as at April 30, 2022 and July 31, 2021.

	April 30, 2022			July 31, 2021
	$			$
Financial assets		644			2,492
Financial liabilities		(237,306	)		(373,432	)
Total exposure		(236,662	)		(370,940	)

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 cash held in escrow, restricted cash and trade receivables. As at April 30, 2022, 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, restricted funds and cash held in escrow are held with three Canadian commercial banks that hold Dun & Bradstreet credit ratings of AA (July 31, 2021 – AA) and an American commercial bank with a credit rating of A-. Certain restricted funds in the amount of $29,995 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+.

28    MD&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 at April 30, 2022 is $273 (July 31, 2021 – $66).

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.

The carrying amount of cash and cash equivalents, restricted cash and trade receivables represents the maximum exposure to credit risk and as at April 30, 2022 and amounted to $200,719 (July 31, 2021 – $522,908). During the nine months ended April 30, 2022 the Company fully utilized the July 31, 2021 cash held in escrow balance to partially fund the acquisition of Redecan (Note 14).

The following table summarizes the Company’s aging of trade receivables as at April 30, 2022 and July 31, 2021:

	April 30, 2022		July 31, 2021
	$		$
0–30 days		28,142		22,971
31–60 days		5,914		12,390
61–90 days		4,428		1,435
Over 90 days		5,840		625
Total		44,324		37,421

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 nine months ended April 30, 2022, 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 (“AGLC”) representing 18%, 28% and 13%, respectively (April 30, 2021 – SQDC, OCS and AGLC representing 50%, 20% and 17%, respectively) of total applicable periods gross cannabis sales.

The Company holds trade receivables from the crown corporations SQDC, OCS and the AGLC representing 12%, 35% and 17%, respectively, of total trade receivables, respectively as at April 30, 2022 (July 31, 2021 – the three crown corporations SQDC, OCS and AGLC representing 13%, 29% and 13% 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 (See Note 2 – Going Concern). The Company manages liquidity risk by reviewing on an ongoing basis, its capital requirements. As at April 30, 2022, the Company has $14,221 (July 31, 2021 – $67,462) of cash and cash equivalents and $44,324 (July 31, 2021 – $37,421) in trade receivables. The Company has current liabilities of $398,797 (July 31, 2021 – $503,638) on the statement of financial position. As well, the Company has remaining contractual commitments of $2,020 due before July 31, 2022.

The Company has restricted funds to satisfy debt of $50,732, presented in current liabilities (Note 5). The maturity analysis of undiscounted cash flows for lease obligation and convertible debentures is disclosed in Note 19 and Note 17, respectively.

Current financial liabilities include the Company’s obligation on the Senior secured convertible note. As stated in Note 2, the Company has entered into a Definitive Agreement with Tilray Brands Inc. in which a minimum of the US$160 million of outstanding principle will be assumed from the current lender and the maturity will be extended by 36-months and release the US$80 million of restricted cash. The Company continues to be in breach of a financial covenant at April 30, 2022 however, the Holder has issued an forbearance to act on the default matter until the earlier of the closing or termination of the Transaction Agreement. Management expects to settle the remaining US$33,515 of outstanding principle in equity and has since April 30, 2022 has settled US$9,367 through the issuance of 34,388,669 common shares.

If the Company is unable to meet the requirements Equity Condition Waiver (Note 18) the Holder may demand settlement in cash. The analysis of potential cash outflow to redeem the Note up to the earliest maturity date is given below. During the nine months ended April 30, 2022 the Company settled all the optional redemption payments in equity, with the exception of a cash payment made using the net proceeds on the sale of the Company’s interest in BCI (Note 10). The Company has also received a cash settlement waiver for the May 2023 optional redemption.

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The following table provides an analysis of undiscounted contractual maturities for financial liabilities.

Fiscal year	2022 (three months remaining)		2023		2024		2025		Thereafter		Total
	$		$		$		$		$		$
Accounts payable and accrued liabilities		62,220		—		—		—		—		62,220
Excise taxes payable		5,211		—		—		—		—		5,211
Senior notes payable		51,875		—		—		—		—		51,875
Convertible debentures		807		41,273		—		—		—		42,080
Undiscounted future lease payments		1,833		6,039		6,039		5,592		56,494		75,997
		121,946		47,312		6,039		5,592		56,494		237,383
Senior secured convertible note		278,089		—		—		—		—		278,089
Total		400,035		47,312		6,039		5,592		56,494		515,472

Foreign Currency Risk

On April 30, 2022, the Company holds certain financial assets and liabilities denominated in United States Dollars which consist of cash and cash equivalents, restricted funds, the senior secured convertible note 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 April 30, 2022, approximately $111,228 (US$86,951) (July 31, 2021 – $434,838 (US$348,931)) of the Company’s cash and cash equivalents was in US$. A 1% change in the foreign exchange rate would result in a change of $1,112 to the unrealized gain or loss on foreign exchange or on the gain or loss on financial instrument revaluation of US$ denominated warrants.

The Company’s Senior secured convertible note is denominated in US$. The Company plans to settle the majority of this debt in equity. However, if the Company is unable to meet the equity settlement condition or secure cash settlement waivers, the settlement may entail cash outflow. The sensitivity of the Senior secured convertible note due to foreign currency risk is disclosed in Note 18.    

Critical Accounting Estimates and Assumptions

Our critical accounting assumptions are presented in Note 4 of the Company’s annual audited consolidated financial statements for the year ended July 31, 2021, and in certain cases the financial statement note itself. The annual audited consolidated financial statements are available under HEXO’s profile on SEDAR and EDGAR.

Other than those estimates outlined in the business acquisitions of Redecan and 48North (Note 14 of the Condensed Interim Consolidated Financial Statements) there have been no changes to the Company’s critical accounting estimates and assumptions.

Related Party Transactions

Compensation of Key Management

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 period was as follows:

	For the three months ended				For the nine months ended
	April 30, 2022		April 30, 2021		April 30, 2022		April 30, 2021
	$		$		$		$
Salary and/or consulting fees		748		764		2,237		1,846
Termination benefits		2,516		—		7,830		1,008
Bonus compensation		307		210		2,666		620
Stock-based compensation		3,877		1,454		6,977		5,709
Total		7,448		2,428		19,710		9,183

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.

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Related Parties and Transactions

Belleville Complex Inc.

The Company held a 25% interest in Belleville Complex Inc. (“BCI”) with the related party Olegna Holdings Inc. (“Olegna”), 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. On January 18, 2022, the Company sold its 25% interest in BCI to the related party partner Olegna for net proceeds of $10,111 which were immediately used to partially repay the February 2022 optional redemption. The Company remains the anchor tenant of the BCI owned property until 2033. The Company has also subleased a portion of the space to Truss LP.

Initial consideration for the 25% interest on the joint venture was deemed $nil, the carrying value of BCI at disposal was $984 and therefore as a result of the above transaction the Company recognized a gain on sale of $9,127, recognized in other income and losses during the nine months ended April 30, 2022.

Under this lease arrangement, the Company incurred $1,414 and $4,002 in lease and operating expenses during the three and nine months ended April 30, 2022 (April 30, 2021 - $1,261 and $3,427). 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 10).

The Company subleases a section of its Belleville lease to Truss LP. This sublease is recognized as a finance lease receivable on the Company’s balance sheet (Note 7).

Under a Temporary Supply and Services Agreement (“TSSA”) with Truss LP, the Company produced, and packaged cannabis infused beverages in the Cannabis Infused Beverage (“CIB”) Facility (located at the Belleville facility) and in the Gatineau Facility. The Company continues to market and sell beverages for the adult-use markets in Canada, in each case subject to the terms of its regulatory approvals and applicable laws. On October 1, 2021, Truss LP received a cannabis manufacturing and processing license under the Cannabis Act (Canada) and commenced manufacturing by producing CIBs within the Belleville facility. Under a new arrangement and until Truss LP receives its cannabis selling license, the Company purchases the manufactured goods from Truss LP and sells the beverages through to third parties, as a principal in the arrangement. Truss LP was not licensed for the selling of cannabis as at April 30, 2022 however, the license was received on May 2, 2022.

During the three and nine months ended April 30, 2022, the Company purchased $nil and $912 (April 30, 2021 – $782 and $5,955) of raw materials from Truss LP under the previous TSSA arrangement and $4,059 and $9,196 (April 30, 2021 – $nil and $nil) of manufactured products under the new arrangement in the three and nine months ended.

Management’s Report on Internal Controls over Financial Reporting

Management’s Report on 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(f) and 15d-15(f) 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. DCP and ICFR has been designed by management to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with International Financial Reporting Standards (“IFRS”).

The Company’s internal control over financial reporting includes those policies and procedures that (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the Company; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with IFRS, and that receipts and expenditures of the Company are being made only in accordance with authorizations of management and directors of the Company; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the Company’s assets that could have a material effect on the financial statements. Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluations of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate. 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.

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Management has assessed the effectiveness of our internal control over financial reporting based on the criteria set forth in the Internal Control – Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”). The scope of management’s assessment of internal control over financial reporting excludes 4% of our consolidated total assets and 21% of our consolidated net revenues related to Zenabis Global Inc., which was acquired on June 1, 2021, and similarly excludes 24% of consolidated total assets and 28% of consolidated net revenues related to Redecan, which was acquired on August 30, 2021. The scope of management’s assessment of internal control over financial reporting also excludes all consolidated total assets and consolidated net revenues from 48North, which was assessed as immaterial by Management and acquired September 1, 2021.

Management concluded that internal control over financial reporting was not effective as of April 30, 2022 as a result of previously reported material weaknesses in internal control over financial reporting. The assessment of the control environment of Zenabis Global Inc. will be part of the Company’s internal control over financial reporting evaluations for the current fiscal year.

A material weakness 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 the Company’s annual or interim financial statements will not be prevented or detected on a timely basis. In connection with the assessment of the effectiveness of our internal control over financial reporting, our management identified material weaknesses that existed as of July 31, 2021. For the year ended July 31, 2020, the Company identified material weaknesses in the control environment, risk assessment processes, information technology general controls, the functionality of the enterprise resource planning (ERP), reliance on complex spreadsheets, procurement, fixed assets and period end financial reporting. While these material weaknesses remain unremediated, as a result of improvements in our monitoring processes, we identified additional areas of material weakness as at July 31, 2021 and continue to provide expanded disclosure under three main areas: (i) Control environment, (ii) Control activities and (iii) Information Technology General Controls.

i. Control Environment

The Company did not design or implement adequate oversight processes and structures, or an organizational design to support the achievement of the Company’s objectives in relation to internal controls. The Company identified multiple deficiencies in internal controls, primarily due to the control environment not being mature enough to support the increasing complexity of the business and rapid expansion through acquisitions. As a result, pervasive issues exist within the control environment that impact the ability of the Company to maintain effective internal control over financial reporting. In addition, accountability for adherence to policies and processes across the organization was not consistently enforced; and as such, there is increased likelihood of misstatements occurring. This material weakness contributed to the following further material weaknesses:

• Risk assessment procedures did not fully identify risks of misstatement that could, individually or in combination with others, increase the vulnerability of the Company to material misstatements to the financial statements, whether intentional or unintentional.

• Monitoring activities did not operate effectively to identify control gaps and control deficiencies in significant processes in a timely manner. In addition, monitoring activities did not operate to identify new risks related to changes in the business, and as such, these risks were not assessed or responded to in the internal control environment.

• While the Company is not aware of any material fraud or suspected fraud, anti-fraud control activities were not designed to effectively mitigate the risk of fraud events occurring or not being detected in a timely manner to an acceptable level. In the prior year, control deficiencies were identified in both the fraud risk assessment and the design and monitoring of Company’s whistleblower hotline. However, the Company has transitioned the whistleblower hotline to a third-party vendor specializing in robust, anonymous whistleblower reporting systems and ethics programs in the beginning of November 2021.

• Information and communication processes did not effectively operate to ensure that appropriate and accurate information was available to financial reporting personnel on a timely basis to fulfill their roles and responsibilities. Significant changes to the composition of the board and senior management have also impacted information and communication, as well as the overall control environment.

These entity level control deficiencies did not result in a misstatement to the financial statements; however, when aggregated, could impact the ability of the Company to maintain a system of effective internal control, including an effective anti-fraud program. These deficiencies could potentially reduce the likelihood of preventing or detecting misstatements, which could impact multiple financial statement accounts and disclosures. Accordingly, management has determined the above deficiencies constitute a material weakness, both individually and in aggregate.

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ii. Control Activities

We previously identified material weaknesses in our internal control over financial reporting that continue to exist. Through the period, the Company did not design and maintain an effective control environment commensurate with its financial reporting requirements. Specifically, the Company did not reassess resource requirements to support the increasing complexity of the business and rapid expansion through acquisitions. As a result, there was not a complement of personnel with an appropriate level of internal controls and accounting knowledge, training and experience commensurate with our financial reporting requirements throughout the fiscal period. This resulted in an inability to consistently establish appropriate authorities and responsibilities in pursuit of financial reporting objectives and insufficient segregation of duties in our finance and accounting functions. This material weakness contributed to the following further material weaknesses:

• The Company did not design and maintain effective controls over the period-end financial reporting process to achieve complete, accurate and timely financial accounting, reporting and disclosures. Specifically, the Company did not consistently maintain formal accounting policies, procedures and appropriate controls over the preparation and review of account reconciliations and journal entries.

• The Company did not design and consistently maintain effective controls to achieve reasonable assurance that transactions are properly initiated, authorized, recorded and reported. Specifically, the Company did not design and consistently maintain controls over a number of significant processes, including loans and borrowings, convertible debentures, purchases-to-pay, inventory, biological assets, property, plant and equipment, intangible assets, leases, investments, tax and equity.

• The Company did not design and maintain processes and controls to analyze, account for and disclose non-routine, unusual or complex transactions. Specifically, the Company did not design and maintain controls to timely analyze and account for the senior secured convertible note, impairment of non-financial assets, and non-routine complex transactions including the accounting and reporting related to material acquisitions.

These material weaknesses resulted in audit adjustments to loans and borrowings, senior secured convertible note, leases, and related right of use assets, accruals, various expense line items and related financial statement disclosures, which were recorded prior to the issuance of the consolidated financial statements as of and for the year ended July 31, 2021. Additionally, these material weaknesses, individually and in the aggregate, could result in a material misstatement of the Company’s accounts or disclosures that would not be prevented or detected.

iii. Information Technology General Controls

The Company did not design and maintain effective controls over information technology (“IT”) general controls for information systems that are relevant to the preparation of its financial statements, specifically, with respect to: (i) program change management controls for financial systems to ensure that IT program and data changes affecting financial IT applications and underlying accounting records are identified, tested, authorized and implemented appropriately; (ii) user access controls to ensure appropriate segregation of duties and that adequately restrict user and privileged access to financial applications, programs, and data to appropriate company personnel; (iii) computer operations controls to ensure that critical batch jobs are monitored and the design and operating effectiveness of controls at service organizations are evaluated on a timely basis, and (iv) testing and data validation controls for program development to ensure that new software and application development is aligned with business and IT requirements.

These IT deficiencies did not result in a misstatement to the financial statements; however, the deficiencies, when aggregated, could impact maintaining effective segregation of duties, as well as the effectiveness of IT-dependent controls (such as automated controls that address the risk of material misstatement to one or more assertions, along with the IT general controls and underlying data that support the effectiveness of system-generated data and reports) that could result in misstatements potentially impacting all financial statement accounts and disclosures that would not be prevented or detected. Accordingly, management has determined these deficiencies in the aggregate constitute a material weakness.

Status of Remediation Plan

As disclosed in the prior year, management, with the assistance of external consultants, began reviewing and revising our internal control over financial reporting. Management is committed to implementing changes to our internal control over financial reporting to ensure that the control deficiencies that contributed to the material weaknesses are remediated. The following remedial activities are in progress:

• We are in the process of implementing additional ongoing oversight, training and communication programs for management and personnel to reinforce the Company’s standard of conduct, enhance understanding of assessed risks, and clarify individual responsibility for control activities at various levels within the Company.

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• We have increased the number of finance and accounting personnel with contractors. While they may have the requisite knowledge and skillset, we plan to transition away from contractors to full-time personnel to establish clear responsibility and accountability for key financial reporting processes and controls. We will continue to evaluate financial reporting personnel for the appropriate level of internal controls and accounting knowledge, training, and experience commensurate with our financial reporting requirements and will enhance personnel where necessary.

• We have established an internal audit function and engaged external consultants to assist management with the testing of internal controls and provide advisory for the remediation efforts. As a result, we continue to assess risks related to financial reporting, understand and document significant financial reporting processes, and to reassess the design and operation of key controls.

• We are designing a more robust anti-fraud program, inclusive of transitioning service providers for the monitoring of the Whistleblower hotline to ensure prompt, competent, and confidential review, investigation, and resolution of instances of non-compliance and allegations involving fraud and misconduct. We have engaged a third-party vendor specializing in reliable, anonymous whistleblower reporting systems and ethics program in the beginning of November 2021. Management implemented an annual review and acknowledgment of the Code of Ethics for all personnel.

• We are in the design and development stage of an ERP and IT ecosystem project, including a new cultivation management software application, which will be implemented in the next fiscal year and replace our existing ERP system. This will improve functionality, with an additional focus on ensuring that system design addresses the existing IT general control deficiencies relating to system development, data migration and change and user access management. We have designed specific System Development Lifecycle Controls to address the data migration and conversion risk for these upcoming implementations. This will also support remediation of material weaknesses relating to control activities.

• We commenced a full ERP user access review to identify any instances of inappropriate access, as well as assess any instances where users have been assigned incompatible duties and responsibilities. We have designed a process to monitor the appropriate use of privileged user access. This will be performed on a quarterly basis. User access deficiencies are not fully remediated as access controls have not been subject to operating effectiveness testing.

• We implemented automated purchase-to-pay approval workflows and authorization of journal entries within the existing ERP in the prior fiscal period to assist in addressing segregation of duties. While management determined that the design of both purchase-to-pay and journal entry authorization controls were effective, the IT general control deficiencies in aggregate adversely impacted the operating effectiveness of these controls, as both are IT-dependent. As at February 1, 2022, the tracking of system changes within the existing ERP were configured to achieve the effective design of controls that will be implemented to mitigate the risk of unauthorized changes or access to the existing ERP. Tracking of system changes are not fully remediated as they have not been subject to operating effectiveness testing.

• While we believe these actions will contribute to the remediation of material weaknesses, we have not completed all the corrective processes, procedures and related evaluation or remediation that we believe are necessary. As we continue to evaluate and work to remediate the material weaknesses, we may need to take additional measures to address the control deficiencies. Until the remediation steps set forth above, including the efforts to implement any additional control activities identified through our remediation processes, are fully implemented and concluded to be operating effectively, the material weaknesses described above will not be considered fully remediated.

Changes in Internal Control Over Financial Reporting

Other than disclosed above, there have been no changes in the Company’s internal control over financial reporting during the Company’s quarter ended April 30, 2022 that have materially affected or are reasonably likely to materially affect its internal control over financial reporting.

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. The Company’s fulsome discussion over its risk factors are disclosed in the annual Managements Discussion & Analysis and Annual Information Form dated October 29, 2021 available under our profile on www.sedar.com and www.edgar.com.

• Existing funds on hand, when combined with operational cash flow, are not sufficient to fund existing debt repayments, capex budgets, and potential cash requirements under the Senior Secured Convertible Note. Management is exploring several options to secure the necessary financing, which could include the issuance of new public or private equity or debt instruments, supplemented with operating cash inflows from operations. Nevertheless, there is no assurance that certain sources of additional future funding will be available to the Company or will be available on terms which are acceptable to management. These circumstances create material uncertainties that lend substantial doubt as to the ability of the Company to meet its obligations as they come due and, accordingly, the appropriateness of the use of accounting principles applicable to a going concern.

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• The Company’s ability to continue as a going concern is dependent upon its ability to fund the repayment of existing borrowings, secure additional financing and to generate positive cash flows from operations. These financial statements do not reflect the adjustments to the carrying values of assets and liabilities and the reported expenses and balance sheet classifications that would be necessary If the company were unable to realize its assets and settle its liabilities as a going concern in the normal course of operations. Such adjustments could be material.

• The Company’s ability to make scheduled payments of principal or to pay redemption payments or other amounts payable under the Senior Secured Convertible Notes or to refinance the Senior Secured Convertible Notes depends on our future performance, which is subject to economic, financial, competitive and other factors, some of which are beyond our control. The terms of the Senior Secured Convertible Notes require us to pay approximately US$211.3 million (as of the date of this M&A) to repay or redeem the full principal amount of the Notes at maturity, and the Purchaser has the right to require the Company to pay the Optional Redemption Payments and certain other amounts under the Senior Secured Convertible Notes. The Company’s business may not generate cash flow from operations in the future sufficient to satisfy our obligations under the Notes. If we are unable to generate such cash flow, we may be required to adopt one or more alternatives, such as reducing or delaying investments or capital expenditures, selling assets, refinancing or obtaining additional equity capital on terms that may be onerous or highly dilutive. Our ability to refinance the Senior Secured Convertible Notes will depend on the capital markets and our financial condition at such time. We may not be able to engage in any of these activities or engage in these activities on desirable terms, which could result in a default on the Senior Secured Convertible Notes.

• The conversion of the Senior Secured Convertible Notes or the satisfaction of redemption payments and other amounts payable under the Senior Secured Convertible Notes in Common Shares will dilute the ownership interests of existing shareholders to the extent we deliver shares upon conversion or redemption of the Senior Secured Convertible Notes. Any sales in the public market of the Common Shares issuable upon such conversion or redemption could adversely affect prevailing market prices of our Common Shares. In addition, the existence of the Notes may encourage short selling by market participants because the conversion of the Senior Secured Convertible Notes or the satisfaction of redemption payments and other amounts payable under the Senior Secured Convertible Notes in Common Shares could be used to satisfy short positions, or anticipated conversion or satisfaction of redemption payments and other amounts payable under the Senior Secured Convertible Notes in Common Shares could depress the price of our Common Shares.

• The Fundamental Change repurchase and redemption features of the Notes may delay or prevent an otherwise beneficial attempt to take over the Company. The terms of the Senior Secured Convertible Notes require us to repurchase the Notes in the event of a Fundamental Change. A takeover of the Company would trigger an option of the Purchaser to require us to repurchase the Senior Secured Convertible Notes. This may have the effect of delaying or preventing a takeover of the Company that would otherwise be beneficial.

• The Company is subject to certain covenants set forth in the Senior Notes. The Senior Notes contain customary events of default, including for non-payment, misrepresentation, breach of covenants, defaults under other material indebtedness, material adverse change, bankruptcy, change of control and material judgments. Among other things, we are required to maintain a minimum liquidity of at least US$35.0 million at all times, and in some cases, of at least US$80.0 million. We are required to maintain or exceed a minimum threshold of adjusted EBITDA beginning Q2’22, which the Company did not meet. However, on March 13, 2022, the Lender has waived its rights to act upon the default until the earlier of May 17, 2022 or the date the proposed transaction with Tilray Brands is completed. Upon an event of default under the Senior Notes, the outstanding principal amount of the Senior Notes plus any other amounts owed under the Senior Notes will become immediately due and payable. In such a circumstance, the Company may not be able to make accelerated payments required under the Senior Notes, and the Secured Noteholder could foreclose on the Company’s assets. An event of default would also likely significantly diminish the market price of our Common Shares.

• If the principal amount of the Senior Secured Convertible Notes is not converted into Common Shares or the Company does not pay or is not able to pay for any redemptions of the Senior Secured Convertible Notes in Common Shares, servicing the debt under the Senior Secured Convertible Notes requires a significant amount of cash, and the Company may not have sufficient cash flow from its business to pay its obligations under the Senior Secured Convertible Notes.

• The Company generated negative operating cash flow for the past three and six months and for the past four fiscal years. While the Company has announced and launched the “Path Forward” as a transformational strategic plan designed to utilize HEXO’s current assets and capabilities, to drive accelerated organic growth, build market share and become operationally cash flow positive within the next four quarters, there are no guarantee that it will be successful in becoming cash flow positive from operations within that timeline. The Company can also not guarantee that it will attain or maintain positive operating cash flow in the future. To the extent that the Company has negative cash flows in future periods, HEXO may require additional financing to fund its operations to the point where it is generating positive cash flows, and continued negative cash flow may restrict HEXO’s ability to pursue its business objectives. 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.

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• The Company recently announced the key terms of a strategic partnership agreement with Tilray Brands, and HTI, in which Tilray is expected to acquire the Senior Secured Convertible Notes from that were originally issued by HEXO to HTI. The strategic partnership then announced remains subject to the negotiations of the definitive agreements and the satisfaction of specific conditions, including (i) completion of all required amendments to the terms of the Notes; (ii) execution of definitive documentation relating to the Notes; (iii) receipt of approvals from the Toronto Stock Exchange and the Nasdaq Stock Market LLC, satisfactory to both HEXO and Tilray Brands, as applicable; (iv) Tilray Brands’ satisfactory completion of confirmatory financial due diligence; (v) receipt of all consents and approvals required by any regulatory authorities; (vi) final approval of the boards of directors of each of HEXO and Tilray Brands; (vii) receipt of shareholder approval from the HEXO shareholders; (viii) no material adverse effect having occurred in respect of HEXO; and (ix) receipt of all necessary approvals relating to the $180 million committed equity line provided by KAOS Capital Inc. The Company cannot predict the outcome of the negotiations between HTI, Tilray Brands and the Company, There are also no guarantees that the definitive agreements will be signed and that the conditions will be satisfied.

• The Company recently announced the key terms of a $180 million committed equity line provided by KAOS, pursuant to which pursuant to which HEXO, KAOS and the Standby Parties are expected to negotiate the Standby Agreement. The Standby Agreement remains subject to negotiation and, among other things, receipt of necessary regulatory and TSX approvals. The Company cannot predict the outcome of the negotiations between KAOS, the Standby Parties and the Company and there are no guarantees that the Standby Agreement will be signed, or that it will be entered on the terms announced by the Company. The Company can also not guarantee nor predict the issue price of any Common Shares issued under the Standby Commitment, the nature and amount of the Standby Commitment fee the terms, the use of the proceeds from the Standby Commitment, or the terms of any nomination rights agreement that may be entered into with the Standby Parties.

• 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.

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

• The Company may not be successful in the integration of acquisitions into our business (see ‘Cautionary Statement Regarding Forward-Looking Statements’).

• We have identified multiple material weaknesses in our internal controls as of July 31,2021 and January 31, 2022, and if we fail to maintain an effective system of internal controls, our ability to accurately and timely report our financial results or prevent fraud may be adversely affected, and investor confidence and the market price of HEXO’s shares may be adversely affected. In the course of preparing and auditing our consolidated financial statements for the year ended July 31, 2021, we and our independent registered public accounting firm identified multiple material weaknesses in our internal control over financial reporting as of July 31, 2021. In accordance with reporting requirements set forth by the SEC, a material weakness 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 our Company’s annual or interim consolidated financial statements will not be prevented or detected on a timely basis. The material weaknesses are identified in “Management’s Report on Internal Control over Financial Reporting” section of this MD&A. We have begun and will continue to implement measures to address the material weaknesses. However, the implementation of those measures may not fully remediate the material weaknesses in a timely manner. In the future, we may determine that we have additional material weaknesses or other deficiencies, or our independent registered public accounting firm may disagree with our management’s assessment of the effectiveness of our internal controls. Our failure to correct these material weaknesses or our failure to discover and address any other material weaknesses could result in inaccuracies in our financial statements and impair our ability to comply with the applicable financial reporting requirements and related regulatory filings on a timely basis. Moreover, ineffective internal control over financial reporting could significantly hinder our ability to prevent fraud.

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

36    MD&A

• The market price of the Common Shares may be volatile and subject to wide fluctuations in response to numerous factors, many of which are beyond HEXO’s control. Companies in the cannabis sector, including HEXO, have also been experiencing extreme volatility in their trading prices. This volatility may affect the ability of holders of Common Shares to sell their securities at an advantageous price. Market price fluctuations in the Common Shares may be due to the Company’s operating results failing to meet expectations of securities analysts or investors in any period, downward revision in securities analysts’ estimates, adverse changes in general market or industry conditions or economic trends, acquisitions, dispositions or other material public announcements by the Company or its competitors, the COVID-19 pandemic, or a variety of other factors. These broad market fluctuations may adversely affect the trading price of the Common Shares.

• Financial markets historically at times experienced significant price and volume fluctuations that have particularly affected the market prices of equity securities of companies and that have often been unrelated to the operating performance, underlying asset values or prospects of such companies. Accordingly, the market price of the Common Shares may decline even if the Company’s operating results, underlying asset values or prospects have not changed. Additionally, these factors, as well as other related factors, may cause decreases in asset values that are deemed to be other than temporary, which may result in impairment losses. Continuing fluctuations in price and volume may occur. If such increased levels of volatility and market turmoil continue, the Company’s operations could be adversely impacted and the trading price of the Common Shares may be materially and adversely affected.

• We may issue additional securities to finance future activities outside of the Offering. The Company’s articles permit the issuance of an unlimited number of Common Shares, and shareholders will have no pre-emptive rights in connection with such further issuances. The directors of the Company have discretion to determine the price and the terms of further issuances. Moreover, additional Common Shares will be issued by the Company on any exercise of options or other security-based compensation awards outstanding or issued by the Company, upon any exercise of outstanding common share purchase warrants, and upon any conversion or repayment in Common Shares of the principal amount of the Company’s outstanding convertible debentures. We cannot predict the size of future issuances of securities or the effect, if any, that future issuances and sales of securities will have on the market price of the Common Shares. Sales or issuances of substantial numbers of Common Shares, or the perception that such sales could occur, may adversely affect prevailing market prices of the Common Shares. In connection with any issuance of Common Shares, investors will suffer dilution to their voting power and we may experience dilution in our earnings per share.

• HEXO has in the past made and may in the future make acquisitions and investments that could divert management’s attention, result in operating difficulties and dilution to our shareholders and otherwise disrupt our operations and HEXO may have difficulty integrating any such acquisitions successfully or realizing the anticipated benefits therefrom, any of which could have a material adverse effect on our business, financial condition, results of operations, cash flows and prospects. Although HEXO has conducted and will conduct due diligence in connection with potential strategic acquisitions or investment opportunities and potential vendors have, may or will provide a number of representations and warranties in favour of the Company in connection with these acquisitions, an unavoidable level of risk remains regarding any undisclosed or unknown liabilities of or issues concerning the acquired entities.

• 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.

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

• 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.

• 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.

• 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.

• 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.

• 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.

37    MD&A

• 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 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..

• 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.

• 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.

• 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 Nasdaq; 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 Nasdaq.

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

Non-IFRS Measures

The Company has 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.

38    MD&A

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) infrequent expenses, plus (minus) other non-cash items. See Adjusted EBITDA table for those items comprising investment (gains)/losses, non-cash fair value adjustments, infrequent 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.” The adjustment begins with the IFRS additional measure Gross profit before fair value adjustments. The cost of goods sold is then modified to remove the impact of write-offs of inventory and biological assets, write downs to net realizable value, destruction costs and the crystalized fair value adjustments from purchase price accounting. 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.

PRODUCTION CAPACITY

The production capacity disclosed within 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.

ORGANIC GROWTH/VARIANCES

Organic growth is representative of the Company’s results and earnings that are a direct result of the Company’s existing operations.

CRYSTALIZED FAIR VALUE

The crystallized fair value is the result of the purchase price accounting of Redecan and Zenabis. This represents the fair value adjustments which otherwise would have been realized upon the sale of inventory on the statement of comprehensive income in ‘Realized fair value amounts on inventory sold’ but per IFRS 3 requirements, the fair value adjustments are capitalized to the inventory’s day one cost on the acquisition date.

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 and six months ended January 31, 2022.

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.

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.

39    MD&A

Cautionary Statement Regarding Forward-Looking Statements

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 Company’s ability to implement the Path Forward and realize it’s intended cost savings and benefits;

• 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 Company’s ability to manage and integrate acquisitions;

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

• the Company’s competitive advantages;

• 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;

• 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 event of a default event and whether the Company has the ability to fund arising obligations;

• the impact of competition;

• the Company’s Truss and Truss CBD USA business ventures with Molson Coors and the future impact thereof;

• 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 protect intellectual property;

• the Company’s ability to retain key personnel;

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

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

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” in the Company’s 2021 Annual MD&A and Annual Information Form filed October 29, 2021. 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.

40    MD&A

EX-99.3

Exhibit 99.3

Form 52-109F2

Certification of Interim Filings

Full Certificate

I, Mark Attanasio, Acting in the capacity of 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 April 30, 2022.

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: The issuer has disclosed in its interim MD&A

(a) the fact that the issuer’s other certifying officer and I have limited the scope of our design of DC&P and ICFR to exclude controls, policies and procedures of

(i) N/A

(ii) N/A

(iii) a business that the issuer acquired not more than 365 days before the issuer’s financial year end; and

(b) summary financial information about the proportionately consolidated entity, special purpose entity or business that the issuer acquired that has been proportionately consolidated or consolidated in the issuer’s financial statements.

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 February 1, 2022 and ended on April 30, 2022 that has materially affected, or is reasonably likely to materially affect, the issuer’s ICFR.

Date: June 14, 2022

/s/ Mark Attanasio

Mark Attanasio

Acting in the capacity of Chief Executive Officer

2

EX-99.4

Exhibit 99.4

Form 52-109F2

Certification of Interim Filings

Full Certificate

I, Helene Fortin, Acting in the capacity of 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 April 30, 2022.

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: The issuer has disclosed in its interim MD&A

(a) the fact that the issuer’s other certifying officer and I have limited the scope of our design of DC&P and ICFR to exclude controls, policies and procedures of

(i) N/A

(ii) N/A

(iii) a business that the issuer acquired not more than 365 days before the issuer’s financial year end; and

(b) summary financial information about the proportionately consolidated entity, special purpose entity or business that the issuer acquired that has been proportionately consolidated or consolidated in the issuer’s financial statements.

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 February 1, 2022 and ended on April 30, 2022 that has materially affected, or is reasonably likely to materially affect, the issuer’s ICFR.

Date: June 14, 2022

/s/ Helene Fortin

Helene Fortin

Acting in the capacity of Chief Financial Officer

2