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

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	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.

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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.

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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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