Exhibit 99.1

HEXO Corp.

Condensed Interim

Consolidated Financial Statements

For the three months ended

October 31, 2022 and 2021

Table of Contents

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

1.	Description of Business	5
2.	Going Concern	5
3.	Basis of Preparation	6
4.	New Accounting Policies and Pronouncements	6
5.	Cash and Cash Equivalents	6
6.	Restricted Funds	6
7.	Inventory	7
8.	Biological Assets	7
9.	Investments in Associates	8
10.	Property, Plant and Equipment	9
11.	Assets Held for Sale	9
12.	Intangible Assets	10
13.	Convertible Debenture	10
14.	Senior Secured Convertible Note	11
15.	Lease Liabilities	12
16.	Share Capital	12
17.	Common Share Purchase Warrants	13
18.	Share-based Compensation	14
19.	Net Loss per Share	15
20.	Financial Instruments	16
21.	Operating Expenses by Nature	17
22.	Other Income and Losses	18
23.	Related Party Disclosure	18
24.	Capital Management	19
25.	Commitments and Contingencies	19
26.	Fair Value of Financial Instruments	20
27.	Revenue from Sale of Goods	20
28.	Segmented Information	21
29.	Operating Cash Flow Supplement	22

Exhibit 99.1

Condensed Interim Consolidated Statements of Financial Position

(Unaudited, expressed in thousands of Canadian Dollars)

As at	Note		October 31, 2022			July 31, 2022
Assets				$			$
Current assets
Cash and cash equivalents		5		78,484			83,238
Restricted funds		6		2,180			32,224
Trade receivables				45,029			42,999
Commodity taxes recoverable and other receivables				2,179			7,411
Prepaid expenses				21,759			18,339
Inventory		7		48,387			66,409
Biological assets		8		9,143			15,906
Assets held for sale		11		5,531			5,121
				212,692			271,647
Non-current assets
Property, plant and equipment		10		280,883			285,866
Intangible assets		12		93,224			94,343
Investment in associates		9		15,722			17,999
Long-term investments				504			504
Prepaid expenses				13,939			10,590
Total assets				616,964			680,949
Liabilities
Current liabilities
Accounts payable and accrued liabilities				39,296			72,581
Excise taxes payable				7,690			6,421
Warrant liabilities				715			717
Lease liability		15		927			914
Convertible debenture – current		13		39,827			38,301
Senior secured convertible note		14		222,499			210,379
Other liabilities		25		11,027			5,763
				321,981			335,076
Non-current liabilities
Lease liability		15		1,712			1,926
Deferred income tax liability				27,998			28,846
Other long-term liabilities				1,413			1,409
Total liabilities				353,104			367,257
Shareholders’ equity
Share capital				1,889,768			1,889,768
Share-based payment reserve		18		73,469			73,657
Warrant reserve		17		82,390			82,395
Contributed surplus				93,396			90,981
Accumulated deficit				(1,897,839	)		(1,841,584	)
Accumulated other comprehensive income				22,676			18,475
Total shareholders’ equity				263,860			313,692
Total liabilities and shareholders’ equity				616,964			680,949
Going Concern (Note 2)
Commitments and contingencies (Note 25)

Approved by the Board of Directors

/s/ Helene Fortin, Director

/s/ Mark Attanasio, Director

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

1

Condensed Interim Consolidated Statements of Net Loss and Comprehensive Loss

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

For the three months ended	Note		October 31, 2022			October 31, 2021
Revenue from sale of goods		27		51,815			69,497
Excise taxes				(17,340	)		(19,535	)
Net revenue from sale of goods				34,475			49,962
Service revenue				1,296			226
Net revenue				35,771			50,188
Cost of goods sold		7		35,563			82,985
Gross profit/(loss) before fair value adjustments				208			(32,797	)
Fair value component in inventory sold		7		19,966			12,760
Unrealized gain on changes in fair value of biological assets		8		(2,403	)		(13,581	)
Gross profit/(loss)				(17,355	)		(31,976	)
Operating expenses
General and administrative		21		10,466			22,484
Selling, marketing and promotion				4,106			6,223
Share-based compensation		18		959			3,824
Research and development				322			967
Depreciation of property, plant and equipment		10		784			2,057
Amortization of intangible assets		12		2,871			8,158
Restructuring costs				1,062			3,989
Impairment of property, plant and equipment and assets held for sale		10,11		(611	)		23,803
Impairment of investment in associate		9		—			26,925
(Gain)/loss on disposal of property, plant and equipment				(510	)		329
Acquisition, integration and transaction costs				3,715			24,374
				23,164			123,133
Loss from operations				(40,519	)		(155,109	)
Interest income (expense), net		22		(1,917	)		(4,531	)
Non-operating income (expense), net		22		(14,632	)		42,213
Net loss before tax				(57,068	)		(117,427	)
Current and deferred tax recovery				813			155
Net loss				(56,255	)		(117,272	)
Other comprehensive income
Foreign currency translation				(413	)		88
Gain on fair value due to changes in credit spread, net of tax		14		4,614			276
Net loss and comprehensive loss				(52,054	)		(116,908	)
Comprehensive loss attributable to:
Shareholders of HEXO Corp.				(52,054	)		(112,209	)
Non-controlling interest				—			(4,699	)
				(52,054	)		(116,908	)
Net loss and comprehensive loss per share, basic and diluted				(0.09	)		(0.46	)
Weighted average number of outstanding shares
Basic and diluted		19		600,988,447			251,805,870

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

2

Condensed Interim Consolidated Statements of Changes in Shareholders’ Equity

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

For the three months ended	Note		Number of common shares		Share capital		Share-based payment reserve			Warrant reserves			Contributed surplus			Accumulated OCI		Accumulated deficit			Total to HEXO Corp.			Non- controlling interest			Total equity
					$		$			$			$			$		$			$			$			$
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
August 2021 public offering, net				49,325,424		135,779		—			—			—			—		—			135,779			—			135,779
Business acquisitions, net				75,073,121		230,232		18			769			—			—		—			231,019			—			231,019
Senior secured convertible note, net				34,070,379		75,885		—			—			—			—		—			75,885			—			75,885
Broker compensation				502,176		2,154		—			—			—			—		—			2,154			—			2,154
Exercise of stock options				17,024		146		(104	)		—			—			—		—			42			—			42
Expiry of stock options				—		—		(2,592	)		—			2,592			—		—			—			—			—
Expiry of warrants				—		—		—			(42,386	)		42,386			—		—			—			—			—
Equity-settled share-based payments				—		—		3,923			—			—			—		—			3,923			—			3,923
Other comprehensive income				—		—		—			—			—			364		—			364			25			389
Non-controlling interest				—		—		—			—			(1,275	)		—		—			(1,275	)		1,275			—
Net loss				—		—		—			—			—			—		(112,573	)		(112,573	)		(4,699	)		(117,272	)
Balance at October 31, 2021				311,634,070		1,712,163		70,995			82,495			84,993			1,516		(886,566	)		1,065,596			(1,412	)		1,064,184
Balance at July 31, 2022				600,988,447		1,889,768		73,657			82,395			90,981			18,475		(1,841,584	)		313,692			—			313,692
Expiry of stock options				—		—		(2,410	)		—			2,410			—		—			—			—			—
Expiry of warrants				—		—		—			(5	)		5			—		—			—			—			—
Equity-settled share-based payments		18		—		—		2,222			—			—			—		—			2,222			—			2,222
Other comprehensive income				—		—		—			—			—			4,201		—			4,201			—			4,201
Net loss				—		—		—			—			—			—		(56,255	)		(56,255	)		—			(56,255	)
Balance at October 31, 2022				600,988,447		1,889,768		73,469			82,390			93,396			22,676		(1,897,839	)		263,860			—			263,860

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

3

Condensed Interim Consolidated Statements of Cash Flows

(Unaudited, expressed in thousands of Canadian Dollars)

For the three months ended	Note	October 31, 2022			October 31, 2021
Operating activities			$			$
Net loss before tax			(57,068	)		(117,427	)
Items not affecting cash or presented outside of operating activities	29		56,712			75,655
Changes in non-cash operating working capital items	29		(28,434	)		(14,725	)
Cash used in operating activities			(28,790	)		(56,497	)
Financing activities
Proceeds from public offering, net			—			175,034
Issuance fees			—			(250	)
Proceeds from the exercise of stock options			—			42
Issued payments on cash settled RSU exercise	18		(249	)		—
Repayments of debt			—			(6,754	)
Senior secured convertible note finance costs	14		(2,970	)		—
Interest paid on debt			—			(1,816	)
Lease payments	15		(257	)		(1,626	)
Interest paid on unsecured convertible debentures	13		(803	)		(821	)
Cash provided financing activities			(4,279	)		163,809
Investing activities
Cash received from restricted funds and escrow			30,044			286,454
Cash payment on business acquisition, net of cash acquired			—			(381,157	)
Proceeds from sale of property, plant and equipment			26			1,748
Acquisition of property, plant and equipment			(3	)		(22,589	)
Purchase of intangible assets			(1,752	)		(1,606	)
Investment in associates and joint ventures			—			(1,861	)
Cash generated/(used) in investing activities			28,315			(119,011	)
(Decrease)/increase in cash and cash equivalents			(4,754	)		(11,699	)
Cash and cash equivalents, beginning of period			83,238			67,462
Cash and cash equivalents, end of period			78,484			55,763
Supplemental cashflow information in Note 29.

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

4

Notes to the Condensed Interim Consolidated Financial Statements

For the three months ended October 31, 2022 and 2021

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

1. Description of 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”.

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 three months ended October 31, 2022, the Company reported an operating loss of $40,519; cash outflows from operating activities of $28,790 and an accumulated deficit of $1,897,839 and has yet to generate positive cashflows or earnings. The Company had a working capital deficiency of $109,289 and held cash and cash equivalents of $78,484 as at October 31, 2022 ($83,238 at July 31, 2022). The Company’s 8% convertible debentures matured on December 5, 2022, which resulted in a cash repayment of $40,729. The Company remains subject to, amongst others, a minimum liquidity covenant of US$20 million under the Senior secured convertible note as well as a requirement to achieve Adjusted EBITDA of not less than US$1.00 for each quarter beginning in the Company’s third quarter of FY23.

These circumstances 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 has taken the following actions:

• The Company has received a non-binding Letter of Intent for a $180 million equity purchase agreement (the “equity line of credit” or “ELOC”), from an affiliate of KAOS Capital Ltd (“KAOS”), which could provide the Company access to $5 million capital per month over a 36-month period in order to help meet debt and interest repayments under the amended and reassigned secured note. The available funds are however restricted by a rolling twelve-month, share issuance limitation, restricting the Company’s ability to issue common shares in excess of 19.9% of the total outstanding common share balance, calculated at the beginning of that period. Under the terms of the equity purchase agreement a minimum share price of $0.30 per common share is required in order to utilize the ELOC. As of October 31, 2022, the Company received exemptive relief however has yet to file the prospectus supplement qualifying the distribution and resale by the subscriber of the Put Shares and thus has not been able to draw on the ELOC. The Company has filed the required articles in order to consolidate its common shares on a 14:1 basis. The common shares are expected to begin trading on a post-consolidation basis on the TSX and Nasdaq on December 19, 2022 and at which point the Company’s share price is also expected to exceed the minimum share price of $0.30, which remains at the prescribed pre-consolidation amount.

• The Company has executed a new directors and officers insurance program which has resulted in releasing previously restricted cash in the amount of $29,994 on September 1, 2022. The funds had previously been restricted under the Company’s captive insurance program (Note 6). The captive insurance program was replaced by a traditional insurance program that requires annual premiums.

The Company executed certain cost saving initiatives in the second half of the previous fiscal year in order to improve the operating expenses and cashflows of the business. The impact of these initiatives require time to be fully realized. During the current period, management has demonstrated improvements to the Company’s operating expenses and operating cashflows.

The Company’s ability to continue as a going concern is dependent upon its ability in the future to achieve profitable operations and, in the meantime, to obtain the necessary financing to meet its obligations, comply with its financial covenants, and to repay its liabilities when they become due. Alternative financing, predominantly by the issuance of equity to the public, or debt, will be sought to finance the operations of the Company.

There can be no assurances however that financing alternatives will be available or available on terms that are acceptable to the Company or that the Company’s savings initiatives alone will yield sufficient liquidity to meet the minimum liquidity or generate positive Adjusted EBITDA, in order for the Company to meet its covenant requirements and execute on its business plan. As such, 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.

5

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 International Accounting Standards Board and IFRS Interpretations Committee (“IFRIC”). These interim consolidated financial statements do not contain all the disclosures required in annual consolidated financial statements and should be read in conjunction with the annual consolidated financial statements of the Company for the year ended July 31, 2022, prepared in accordance with IFRS.

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, 2022.

These interim consolidated financial statements were approved and authorized for issue by the Board of Directors on December 15, 2022. All figures are presented in thousands of Canadian dollars unless otherwise noted.

4. New Accounting Policies and Pronouncements

New and Amended Standards 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 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 is effective for annual periods beginning on or after January 1, 2023 with early application permitted. The Company is currently evaluating the potential impact of these amendments on the Company’s consolidated financial statements.

5. Cash and Cash Equivalents

	October 31, 2022		July 31, 2022
	$		$
Operating cash		55,880		75,819
Interest savings accounts		22,604		7,419
Cash and cash equivalents		78,484		83,238

6. Restricted Funds

	October 31, 2022		July 31, 2022
	$		$
Letters of credit, collateral and guarantees for purchases		2,180		2,230
Cash restricted in captive insurance subsidiary		—		29,994
Total		2,180		32,224

On September 1, 2022, the Company unrestricted the cash previously held in the captive insurance subsidiary and which has been transferred into operational accounts.

6

7. Inventory

	As at October 31, 2022
	Capitalized cost		Biological asset fair value adjustment		Total
	$		$		$
Dried cannabis		22,807		13,842		36,649
Purchased dried cannabis		1,009		—		1,009
Extracts		2,212		—		2,212
Purchased extracts		450		—		450
Packaging and supplies		8,067		—		8,067
		34,545		13,842		48,387

	As at July 31, 2022
	Capitalized cost		Biological asset fair value adjustment		Total
	$		$		$
Dried cannabis		30,636		23,600		54,236
Purchased dried cannabis		662		—		662
Extracts		3,928		—		3,928
Purchased extracts		478		—		478
Packaging and supplies		7,105		—		7,105
		42,809		23,600		66,409

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 $35,563 for the three months ended October 31, 2022 (October 31, 2021 – $82,985) which includes;

• Write downs of inventory to their net realizable value of $10,266 (October 31, 2021 – $36,197); and

• Write-offs of inventory of $4,400 (October 31, 2021 – $615) which relate to destroyed and unsellable inventory; and

• Reversal of impairments of $5,351 (October 31, 2021 – $nil) to net realizable value.

(ii) The fair value component (biological asset fair value adjustments) of inventory sold on the consolidated statement of net loss was $19,966 for the three months ended October 31, 2022, (October 31, 2021 – $12,760).

Total depreciation capitalized in inventory in the three months ended October 31, 2022, was $4,784 (October 31, 2021 – $6,275).

8. 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 for the period are as follows:

	For the three months ended October 31, 2022			For the year ended July 31, 2022
	$			$
Balance, beginning of period		15,906			14,284
Acquired on business combination		—			8,352
Production costs capitalized		5,414			62,489
Net increase in fair value due to biological transformation and estimates		2,403			59,665
Harvested cannabis transferred to inventory		(14,580	)		(119,432	)
Disposal of biological assets		—			(3,086	)
Derecognized on loss of control of subsidiary		—			(6,366	)
Balance, end of period		9,143			15,906

Biological assets are valued in accordance with IAS 41 - Agriculture, based on an income approach (Level 3) in which the fair value at the point of harvest is estimated based on selling price less costs to sell at harvest. 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 to inventory at their fair value at harvest. During the three months ended October 31, 2022, the Company did not dispose of any biological assets (July 31, 2022 – $3,086).

7

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 fulfilment 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:

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
	October 31, 2022	July 31, 2022	October 31, 2022	July 31, 2022
Weighted average selling price Derived from actual retail prices on a per product basis using the expected flower per plant. This is expected to approximate future selling prices and where applicable, considering strains.	$1.58 per dried gram	$2.73 per dried gram	$702	$1,190
Yield per plant Derived from historical harvest cycle results on a per strain basis, which is expected to be harvested from plants.	82-1,053 grams per plant1	82-1,307 grams per plant	$430	$803
Post-harvest cost Derived from historical costs of production activities on a per product basis.	$0.61-$0.63 per dried gram	$0.19-$0.63 per dried gram	not material	$303

9. Investments in Associates

	October 31, 2022									July 31, 2022
	Truss LP			Other			Total			Truss LP			Other			Total
	$			$			$			$			$			$
Opening Balance		16,000			1,999			17,999			72,873			1,806			74,679
Cash contributed to investment		—			—			—			8,500			2,721			11,221
Disposal		—			—			—			—			(984	)		(984	)
Share of net (loss)		(2,078	)		(320	)		(2,398	)		(7,613	)		(1,544	)		(9,157	)
Foreign exchange gain through OCI		—			121			121			—			—			—
Impairment		—			—			—			(57,760	)		—			(57,760	)
Ending Balance		13,922			1,800			15,722			16,000			1,999			17,999

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 a 57.5% controlling interest in Truss LP with the Company holding 42,500 common shares and representing the remaining 42.5% interest. Truss LP is a private limited partnership and its principal operating activities consist of the development, production and sale of non-alcoholic, cannabis-infused beverages.

8

10. Property, Plant and Equipment

Cost	Land			Buildings			Leasehold improvements			Cultivation and production equipment			Furniture, computers, vehicles and equipment			Construction in progress			Right-of- Use assets			Total
		$			$			$			$			$			$			$			$
At July 31, 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			602			(36	)		15,511			141			11,333			—			27,612
Disposals		—			(971	)		(587	)		(3,946	)		(3,577	)		(223	)		(20,460	)		(29,764	)
Transfers		(307	)		(523	)		546			(2,106	)		(3,070	)		(1,033	)		(350	)		(6,843	)
Held for sale		(1,766	)		(11,967	)		—			(7,944	)		(3,151	)		(393	)		—			(25,221	)
Loss of control		(592	)		(84,865	)		—			(8,428	)		(3,013	)		411			(17,059	)		(113,546	)
At July 31, 2022		9,093			228,034			42,619			93,866			18,514			106,117			4,533			502,776
Additions		—			—			—			3			—			(171	)		—			(168	)
Transfers		—			—			—			93			(93	)		—			—			—
Foreign currency translation		—			—			—			—			—			578			—			578
At October 31, 2022		9,093			228,034			42,619			93,962			18,421			106,524			4,533			503,186
Accumulated depreciation and impairments
At July 31, 2021		307			21,743			3,251			15,862			8,154			48,990			22,802			121,109
Depreciation		—			11,143			2,028			11,931			4,245			—			1,796			31,143
Transfers		(307	)		(329	)		(5	)		(4,328	)		138			(5,405	)		(350	)		(10,586	)
Disposals		—			—			(498	)		(260	)		(612	)		—			(20,300	)		(21,670	)
Impairments		462			89,581			37,084			11,470			5,698			48,746			15,524			208,565
Held for sale		—			(1,868	)		—			(2,188	)		(884	)		—			—			(4,940	)
Loss of control		(462	)		(79,602	)		—			(13,933	)		153			4,192			(17,059	)		(106,711	)
At July 31, 2022		—			40,668			41,860			18,554			16,892			96,523			2,413			216,910
Depreciation		—			2,405			43			2,349			616			—			155			5,568
Transfers		—			—			—			42			(42	)		—			—			—
Disposals		—			—			—			—			—			26			—			26
Impairments (reversal)		—			—			—			—			—			(201	)		—			(201	)
At October 31, 2022		—			43,073			41,903			20,945			17,466			96,348			2,568			222,303
Net book value
At July 31, 2021		2,449			244,159			38,900			26,854			20,977			42,956			17,607			393,902
At July 31, 2022		9,093			187,366			759			75,312			1,622			9,594			2,120			285,866
At October31, 2022		9,093			184,961			716			73,017			955			10,176			1,965			280,883

During the three months ended October 31, 2022, the Company capitalized $4,784 (October 31, 2021 – $6,275) of depreciation to inventory. During the three months ended October 31, 2022, depreciation expensed to the consolidated statement of loss and comprehensive loss was $784 (October 31, 2021 – $2,057).

11. 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		1,873			366			274			—			—			2,513
Additions		1,765			10,100			5,756			2,267			393			20,281
Disposals		(974	)		(3,246	)		—			(14	)		—			(4,234	)
Impairment loss		(794	)		—			(5,185	)		(379	)		(80	)		(6,438	)
Loss of control of subsidiary		(508	)		(5,939	)		—			(241	)		(313	)		(7,001	)
At July 31, 2022		1,362			1,281			845			1,633			—			5,121
Impairment loss reversal		—			410			—			—			—			410
At October 31, 2022		1,362			1,691			845			1,633			—			5,531

9

12. Intangible Assets

Cost	Cultivating and processing license			Brands			Software		Domain names		Patents/ Know-how		Total
		$			$			$		$		$		$
At July 31, 2021		145,347			13,840			4,384		585		2,723		166,879
Additions		—			—			6,494		—		590		7,084
Business acquisitions		73,079			97,200			1,221		—		27,337		198,837
Loss of control		(28,914	)		(5,400	)		—		—		—		(34,314	)
At July 31, 2022		189,512			105,640			12,099		585		30,650		338,486
Additions		—			—			1,560		—		192		1,752
At October 31, 2022		189,512			105,640			13,659		585		30,842		340,238
Accumulated amortization and impairments
At July 31, 2021		111,722			2,170			2,016		184		179		116,271
Amortization		6,561			7,862			3,527		59		3,338		21,347
Impairment		72,950			56,450			—		—		11,439		140,839
Loss of control		(28,914	)		(5,400	)		—		—		—		(34,314	)
At July 31, 2022		162,319			61,082			5,543		243		14,956		244,143
Amortization		370			1,237			565		15		684		2,871
At October 31, 2022		162,689			62,319			6,108		258		15,640		247,014
Net book value
At July 31, 2021		33,625			11,670			2,368		401		2,544		50,608
At July 31, 2022		27,193			44,558			6,556		342		15,694		94,343
At October 31, 2022		26,823			43,321			7,551		327		15,202		93,224

Research and development expenses in the three months ended October 31, 2022 were $322 (October 31, 2021 - $967).

13. Convertible Debenture

	$
Balance as at July 31, 2021	33,089
Interest expense	8,423
Interest paid	(3,211	)
Balance as at July 31, 2022	38,301
Interest expense	2,329
Interest paid	(803	)
Balance as at October 31, 2022	39,827

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 on 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.

The accrued and unpaid interest as at October 31, 2022 was $309 (July 31, 2022 - $291) and there remained $40,140 in principal debentures (July 31, 2022 - $40,140) outstanding.

10

On December 5, 2022, the 8% debentures matured, and the Company made the full outstanding principal repayment of $40,140 plus accrued interest of $589.

14. Senior Secured Convertible Note

	US$			$
Balance as at July 31, 2022		164,051			210,379
Gain on fair value during the period		(1,036	)		(1,314	)
Foreign exchange loss		—			13,434
Balance as October 31, 2022		163,015			222,499

On July 12, 2022, the Company amended and restated the senior secured convertible note, which was immediately thereafter assigned to Tilray Brands, Inc., pursuant to the terms of an amended and restated assignment and assumption agreement dated June 14, 2022 (the “Note”, or the “Senior Secured Convertible Note”).

Pursuant to the terms of the Transaction Agreement, Tilray Brands acquired 100% of the remaining outstanding principal balance of US$173.7 million of the Note and, concurrently, HEXO assumed an obligation to pay a US$1.5 million monthly fee, that represents a finance cost, until the earlier of i) the date all obligations of the Company pursuant to the terms of the Note have been satisfied, extinguished or terminated, ii) the conversion in full of the Note, iii) cancellation by Tilray or iv) January 15, 2027.

The Note which unless early converted, matures on May 1, 2026, includes coupon interest at the fixed rate of five percent (5%) per annum, calculated daily, and is payable by the Company to the Holder semi-annually on the last business day of each June and December (commencing June, 2022). For the first year of the Note, the Company is required to pay interest in cash. Unpaid interest at October 31, 2022 was $3,605 (July 31, 2022—$464). Thereafter, until the maturity date, in the event that the Company is not in compliance with the Minimum Liquidity covenant, the Company shall be entitled to elect to add the amount of the interest to the Principal Amount of the Note as capitalized interest. Subject to the terms of the Note, unless the principal amount and the capitalized interest have previously been converted, on the maturity date, the Company shall pay the capitalized interest by way of conversion consideration.

Subject to certain limitations and adjustments, the Note is convertible in part, into HEXO Common Shares at the Holder’s option at any time prior to the second scheduled trading day prior to the maturity date, at a US$ equivalent conversion price of CAD$0.40 per HEXO Common share as determined the day before exercise, including all capitalized interest. HEXO has the ability to force the conversion if the daily VWAP per common share is equal to or exceeds $3.00 per share for twenty consecutive trading days, subject to HEXO meeting the terms of the equity condition, as set out in the terms of the Note.

The Company is not able to redeem or repay the Note prior to May 1, 2026, without the prior written consent of the Holder.

The Company is subject to certain financial and non-financial covenants as set out in the terms of the Note. Among other covenants, the Company is subject to a minimum liquidity covenant and is required to maintain an unrestricted cash amount equal to or greater than US$20.0 million. In addition, as of the last day of each three-month period starting with the three-month period ending April 30, 2023, the Company is required to have Adjusted EBITDA of not less than US$1.00 for the three-month period ending on such day. Adjusted EBITDA means for any fiscal quarter, the Adjusted EBITDA of the Company, calculated as: (i) total net income (loss); (ii) plus (minus) income taxes (recovery); (iii) plus (minus) finance expense (income); (iv) plus depreciation; (v) plus amortization; (vi) plus (minus) investment (gains) losses, including revaluation of financial instruments, share of loss from investment in joint ventures, adjustments on warrants and other financial derivatives, unrealized loss on investments, and foreign exchange gains and losses; (vii) plus (minus) fair value adjustments on inventory and biological assets; (viii) plus inventory write-downs and provisions; (ix) plus (minus) non-recurring transaction and restructuring costs; (x) plus impairments to any and all long-lived assets; (xi) plus all stock-based compensation; and (xii) plus any management or advisory fee paid by the Company to the Holder or any Affiliate thereof during the applicable quarter.

On the occurrence of an Event of Default, the Note becomes due and payable immediately at the Event of Default Acceleration Amount, as defined under the Senior secured convertible note agreement. The Note constitutes the senior secured obligation of the Company.

Fair Value Measurement

The Senior secured convertible note represents a hybrid instrument containing a conversion feature and multiple embedded derivatives. The Note has been designated in its entirety 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 consolidated statement of net loss with changes in fair value attributable to changes in credit risk being recognized through other comprehensive income.

11

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;    

	As at October 31, 2022			As at July 31, 2022			Initial recognition July 12, 2022
Share price	US$	0.19		US$	0.19		US$	0.20
Dividend	$	nil		$	nil		$	nil
Volatility		87	%		87.8	%		80.7	%
Credit spread		37	%		34.2	%		38.6	%
Conversion price	US$	0.30		US$	0.31		US$	0.30-US$0.31

Risk free rates were selected based upon a SOFR curve at the valuation date. The curve’s period range was 3 months to 4 years.

An increase/decrease in the US$/CA$ foreign exchange rate of 1% would result in a foreign exchange loss/gain adjustment of $2,225 (July 31, 2022 – $2,104). A decrease of credit spread by 1% would increase the fair value of the instrument by $2,814 (July 31, 2022 – $2,487).

15. Lease Liabilities

	October 31, 2022			July 31, 2022
		$			$
Balance, beginning of period		2,840			43,885
Assumed on business combination		—			1,992
Lease additions		—			29
Lease terminations		—			(24,300	)
Lease payments		(257	)		(6,054	)
Interest expense on lease liabilities		56			4,197
Derecognition due to loss of control		—			(16,909	)
Balance, end of period		2,639			2,840
Current		927			914
Non-current		1,712			1,926

The Company’s leases consist of administrative real estate leases. During the three months ended October 31, 2022, the Company expensed variable lease payments of $197 (October 31, 2021 – $813).     

The following table is the Company’s lease obligations over the next five fiscal years and thereafter as at October 31, 2022:    

Fiscal year	2023 (nine-months remaining)		2024 –2025		2026 –2027		Thereafter		Total
		$		$		$		$		$
Lease obligations		770		1,174		300		1,200		3,444

16. 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 October 31, 2022, a total of 600,988,447 (July 31, 2022 – 600,988,447) common shares were issued and outstanding. No special shares have been issued or are outstanding.

(c) Pending Share Consolidation

During the period, the Company continued to be non-compliant with the Nasdaq’s requirement to maintain a US$1.00 minimum share price. The Company received an 180 day extension to regain compliance status on July 26, 2022. Subsequent to October 31, 2022, and following shareholder approval of a consolidation of the Common Shares on the basis of a range between two (2) and fourteen (14) existing pre-consolidation common shares for every one (1) post-consolidation Common Share (the “Consolidation”) at the annual and special meeting of the shareholders of the Company held on March 8, 2022, the Company filed articles of amendment to implement the Consolidation on the basis of fourteen (14) existing pre-consolidation Common Shares for every one (1) post-Consolidation Common Share. The common shares will continue to be listed on the TSX and the Nasdaq under the symbol “HEXO”, and the common shares are expected to begin trading on a post-Consolidation basis on the TSX and Nasdaq on December 19, 2022. As a result of the Consolidation, the 600,988,447 shares issued and outstanding prior to the Consolidation will be reduced to approximately 42,927,746 common shares. Fractional interests of 0.5 or greater were rounded up to the nearest whole number of Common Shares and fractional interests of less than 0.5 were rounded down to the nearest whole number of Common Shares. On Consolidation, the exercise or conversion price and the number of Common Shares issuable under any of the Company’s outstanding warrants, senior secured

12

convertible note, stock options and other share-based securities exercisable for or convertible into common shares will be proportionately adjusted to reflect the Consolidation in accordance with the respective terms thereof.

17. Common Share Purchase Warrants

The following table summarizes warrant activity during the three months ended October 31, 2022, and year ended July 31, 2022.

	October 31, 2022					July 31, 2022
	Number of warrants			Weighted average exercise price1		Number of warrants			Weighted average exercise price1
				$					$
Outstanding, beginning of period		59,582,216			6.07		36,666,958			8.85
Expired and cancelled		(40,330	)		92.98		(3,179,074	)		33.86
Issued on acquisition		—			—		1,554,320			22.43
Issued		—			—		24,540,012			4.35
Outstanding, end of period		59,541,886			6.17		59,582,216			6.07

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

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

	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		10,023
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 $63.16 expiring June 19, 2023		15		—		15		—
Issued in connection with business acquisition
Exercise price of $78.16 expiring August 21, 2022		—		—		15,992		3
Exercise price of $102.71 expiring August 21, 2022		—		—		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		680,877		398
Exercise price of $12.68 expiring May 4, 2023		602,804		322		602,804		322
Exercise price of $72.70 expiring April 2 2024		250,080		49		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
	31,633,608		82,390		31,673,938		82,395
Classified as Liability
US$25m Registered Direct Offering Warrants
Exercise price of US$9.80 expiring December 31, 2024		1,871,259		5		1,871,259		8
US$20m Registered Direct Offering Warrants
Exercise price of US$9.80 expiring January 22, 2025		1,497,007		5		1,497,007		6
August 2021 Underwritten Public Offerings Warrants
Exercise price of US$3.45 expiring August 24, 2026		24,540,012		705		24,540,012		703
		27,908,278		715		27,908,278		717
		59,541,886		83,105		59,582,216		83,112

13

18. Share-based Compensation

Omnibus Plan

The Company has a share option plan (the “Former Plan”), adopted in July 2017, that was administered by the Board of Directors who established exercise prices and expiry dates. Expiry dates are up to 10 years from issuance, as determined by the Board of Directors at the time of issuance. On June 28, 2018, the Board of Directors put forth a new share option plan (the “Omnibus Plan”) which was approved by shareholders on August 28, 2019. Unless otherwise determined by the Board of Directors, options issued under both the Former Plan and Omnibus Plan vest over a three-year period. The maximum number of common shares reserved for issuance for options that may be granted under the Omnibus Plan is 10% of the issued and outstanding common shares or 60,098,845 common shares as at October 31, 2022 (July 31, 2022 – 60,098,845). The Omnibus plan is subject to cash and equity settlement, the Former Plan and plans acquired on business combinations are eligible for equity settlements. Options issued prior to July 2018 under the outgoing plan and the options assumed through business acquisitions do not contribute to the available option pool reserved for issuance. As of October 31, 2022, the Company had 22,049,595 issued and outstanding under the Omnibus Plan, 726,744 issued and outstanding under the Former Plan and 514,742 issued and outstanding under the assumed plans from business combinations.

Stock Options

The following table summarizes stock option activity during the three months ended October 31, 2022, and the year ended July 31, 2022.

	Number of options			Weighted average exercise price		Number of options			Weighted average exercise price
				$					$
Opening balance		24,687,068			0.73		12,018,143			10.63
Granted		—			—		17,851,906			0.73
Replacement options issued on acquisition		—			—		162,009			7.19
Forfeited		(925,127	)		2.30		(4,714,233	)		4.47
Expired		(470,860	)		5.72		(613,733	)		22.20
Exercised		—			—		(17,024	)		2.54
Closing balance		23,291,081			0.74		24,687,068			0.73

The following table summarizes information concerning stock options outstanding as at October 31, 2022.

Exercise price	Number outstanding		Weighted average remaining life (years)		Number exercisable		Weighted average remaining life (years)
$0.28—$0.75		13,506,446		9.54		1,925,669		9.39
$1.86—$9.92		6,600,510		7.81		5,056,337		7.54
$10.76—$34.00		3,184,125		6.22		3,184,125		6.22
		23,291,081				10,166,131

Restricted Share Units (“RSUs”)

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

The following table summarizes RSU activity for the three months ended October 31, 2022 and the year ended July 31, 2022.

	October 31, 2022					July 31, 2022
	Units			Value of units on grant date		Units			Value of units on grant date
				$					$
Opening balance		2,033,267			3.24		550,832			7.91
Granted		—			—		1,517,236			1.74
Exercised – cash settled		(1,041,252	)		0.24		—			—
Forfeited		—			—		(34,801	)		3.30
Closing balance		992,015			2.09		2,033,267			3.24

As of October 31, 2022, 951,139 of the RSUs were vested.

14

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.

The following table summarizes DSU activity for three months ended October 31, 2022 and the year ended July 31, 2022.

	October 31, 2022				July 31, 2022
	Units		Value of units		Units		Value of units
			$				$
Opening balance		4,088,386		0.24		—		—
Granted		359,154		0.26		4,088,386		0.72
Closing balance		4,447,540		0.25		4,088,386		0.24

All DSUs have been issued to directors of the Company and fully vest upon the termination of their tenure as directors. As at October 31, 2022, there were no vested DSUs.

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:

	October 31, 2022			October 31, 2021
Exercise price (weighted average)	$	2.89		$	8.99
Share price (weighted average)	$	2.76		$	8.85
Risk-free interest rate (weighted average)		1.96	%		0.87	%
Expected life (years) of options (weighted average)		5			5
Expected annualized volatility (weighted average)		95	%		92	%

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

19. Net Loss per Share

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

Instrument	October 31, 2022		July 31, 2022
Stock options		23,291,081		24,687,068
RSUs		992,015		2,033,267
DSUs		4,447,540		4,088,386
Acquired and reissued warrants		6,999,879		7,040,209
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		24,540,012
Warrants issued under conversion of debentures		4,665,628		4,665,628
Convertible debenture broker/finder warrants		15		15
Senior secured convertible note		601,720,232		556,882,200
	689,992,754		647,273,137

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20. Financial Instruments

Market Risk

Interest Risk

The Company has minimal exposure to interest rate risk related to the investment of cash and cash equivalents and restricted funds. 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 October 31, 2022, the Company has $237,083 (US$173,700) of outstanding principal on the senior secured convertible note (Note 14) bearing interest of 5% per annum, paid semi-annually. The senior secured convertible note bears a fixed interest rate and therefore is not subject to interest risk.

Price Risk

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

Financial liabilities

The sensitivity of the Senior secured convertible note due to price risk is disclosed in Note 14.

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 $22,271 (July 31, 2022 – $22,335). The following table presents the Company’s price risk exposure as at October 31, 2022 and July 31, 2022.

	October 31, 2022			July 31, 2022
	$			$
Financial assets		504			504
Financial liabilities		(223,214	)		(211,096	)
Total exposure		(222,710	)		(210,592	)

Credit Risk

Credit risk is the risk of financial loss to the Company if a customer or counterparty to a financial instrument fails to meet its contractual obligations and arises principally from the Company’s trade receivables. As at October 31, 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 and restricted funds are held with three Canadian commercial banks that hold Dun & Bradstreet credit ratings of AA (July 31, 2022 – AA).

Certain restricted funds in the amount of $29,994 were managed by an insurer and were held as a cell captive within a Bermuda based private institution which does not have a publicly available credit rating; however they utilized custodian is Citibank which holds a credit rating of A+. During the three months ended October 31, 2022, management entered into a new directors and officers insurance program which released the cell captive restricted funds of $29,994.

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 on October 31, 2022 is $444 (July 31, 2022 – $1,927).

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 October 31, 2022 and amounted to $125,693 (July 31, 2022 – $158,461).

The following table summarizes the Company’s aging of trade receivables on October 31, 2022 and July 31, 2022:

	October 31, 2022		July 31, 2022
	$		$
0–30 days		31,855		24,661
31–60 days		3,202		11,808
61–90 days		5,349		2,177
Over 90 days		4,623		4,353
Total		45,029		42,999

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Economic Dependence Risk

Economic dependence risk is the risk of reliance upon a select number of customers, which significantly impacts the financial performance of the Company. For the three months ended October 31, 2022, the Company’s recorded sales to the crown corporations; the Ontario Cannabis Store (“OCS”), Société québécoise du cannabis (“SQDC”), British Columbian Liquor Distribution Branch and the Alberta Gaming, Liquor and Cannabis agency (“AGLC”) representing 42%, 15%, 14% and 11%, respectively (October 31, 2021 – SQDC, OCS and AGLC representing 31%, 20% and 15%, respectively) of total applicable periods net cannabis sales.

The Company holds trade receivables from the crown corporations AGLC, OCS and the SQDC representing 16%, 15%, and 10% of total trade receivables, respectively as at October 31, 2022 (July 31, 2022 – the two crown corporations OCS and AGLC representing 42% and 23% 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. On October 31, 2022, the Company has $78,484 (July 31, 2022 – $83,238) of cash and cash equivalents and $45,029 (July 31, 2022 – $42,999) in trade receivables.

The Company has current liabilities of $321,981 (July 31, 2022 – $335,076) on the statement of financial position. As well, the Company has remaining contractual commitments of $25,029 due before July 31, 2023. Current financial liabilities include the Company’s obligation on the senior secured convertible note. The senior secured convertible note is classified as current due to the noteholders ability to convert the note into equity at any time during the life of the note, and therefore does not reflect a cash based current liability as at October 31, 2022.

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

Fiscal year	2023 (nine-months remaining)		2024		2025		2026		2027		Thereafter		Total
	$		$		$		$		$		$		$
Accounts payable and accrued liabilities		39,296		—		—		—		—		—		39,296
Excise taxes payable		7,690		—		—		—		—		—		7,690
Convertible debentures (Note 13)		40,158		—		—		—		—		—		40,158
Undiscounted lease payments (Note 15)		770		587		587		150		150		1,200		3,444
Senior secured convertible note (Note 14)1		30,280		36,678		39,237		271,530		12,284		—		390,009
Total		118,194		37,265		39,824		271,680		12,434		1,200		480,597

¹ Undiscounted and inclusive of scheduled interest and advisory fee payments.

Foreign Currency Risk

On October 31, 2022, the Company holds certain financial assets and liabilities denominated in United States Dollars which consist of certain amounts of cash and cash equivalents, 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. On October 31, 2022, approximately $45,966 (US$33,679) (July 31, 2022 – 104,215 (US$81,266)) of the Company’s cash and cash equivalents was in US$. A 1% change in the foreign exchange rate would result in a change of $459 to the unrealized gain or loss on foreign exchange.

The Company’s senior secured convertible note is denominated in US$. The sensitivity of the senior secured convertible note due to foreign currency risk is disclosed in Note 14.

21. Operating Expenses by Nature

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

For the three months ended	October 31, 2022		October 31, 2021
	$		$
Salaries and benefits		2,895		10,191
General and administrative		3,743		5,901
Professional fees		3,375		5,848
Consulting		453		544
Total		10,466		22,484

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

For the three months ended	October 31, 22		October 31, 2021
	$		$
General and administrative related wages and benefits		2,895		10,191
Marketing and promotion related wages and benefits		800		1,969
Research and development related wages and benefits		105		511
Total operating expense related wages and benefits		3,800		12,671
Wages and benefits capitalized to inventory		6,236		8,482
Total wages and benefits		10,036		21,153

22. Other Income and Losses

For the three months ended	October 31, 2022			October 31, 2021
	$			$
Interest and financing expenses		(2,467	)		(5,305	)
Interest income		550			774
Finance income (expense), net		(1,917	)		(4,531	)
Revaluation of warrant liabilities		2			27,467
Share of loss from investment in associates and joint ventures		(2,398	)		(2,149	)
Fair value (loss)/gain on senior secured convertible note		(6,270	)		11,670
Gain/(loss) on investments		140			(279	)
Foreign exchange gain/(loss)		(9,023	)		5,504
Other gains		2,917			—
Non-operating income (expense), net		(14,632	)		42,213

23. 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 year was as follows:

For the three months ended	October 31, 2022		October 31, 2021
	$		$
Salary and/or consulting fees		591		854
Termination benefits		—		1,638
Bonus compensation		—		2,013
Stock-based compensation		566		1,505
Total		1,157		6,010

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.

Related Parties and Transactions

Truss LP

The Company owns a 42.5% interest in Truss LP and accounts for the interest as an investment in an associate (Note 9).

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 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 second arrangement and until Truss LP operationalizes 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 received its license for the selling of cannabis on May 2, 2022, however, Truss LP has not enabled the license to be utilized and have no ability to sell to their customers. The Company continued to act as the principal in the arrangement during the three months ended October 31, 2022. Subsequent to October 31, 2022, Truss LP has operationalized its license.

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During the three months ended October 31, 2022, the Company purchased $1,551 (October 31, 2021 – $912, under the previous arrangement and $1,270 under the second arrangement) of manufactured products under the second updated arrangement.

24. Capital Management

The Company’s objectives when managing capital is to safeguard the ability to continue as a going concern, so that the Company 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 senior secured convertible note as set out in Note 14.

On October 31, 2022, total managed capital was $263,860 (July 31, 2022 – $313,692).

25. 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, 2023 (nine-months remaining)		25,029
July 31, 2024		26,447
July 31, 2025		27,893
July 31, 2026		24,811
July 31, 2027		12,513
Thereafter		1,200
	117,893

See Note 15 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. On October 31, 2022, the remaining balance of the letter of credit is $150, was not drawn upon and is secured by cash held in collateral (Note 6).

The Company holds a 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 was initially issued on August 1, 2020 and had a one-year expiry from the date of issuance, with an auto renewal feature thereafter. On October 31, 2022, the letter of credit remained at $2,080 (July 31, 2022 – $2,080). The letter of credit has not been drawn upon and is secured by cash held in collateral (Note 6).

CONTINGENCIES

The Company may be, from time to time, subject to various administrative and other legal proceedings. 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 October 31, 2022, the Company and one of its former Chief Executive Officers 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 March 27, 2020. 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) HEXO’s management of its inventories. 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 October 31, 2022 (July 31, 2022—$nil).

As of October 31, 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

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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.

ONEROUS CONTRACT

During the period, the Company’s onerous contract provision related to a fixed price supply agreement for the supply of certain cannabis products was adjusted to the court settlement amount of $1,846, inclusive of $575 of accrued interest. Management has initiated an appeal against the court’s decision and is simultaneously pursuing a settlement with the counterparty.

26. Fair Value of Financial Instruments

The fair values of the financial instruments as at October 31, 2022 are summarized in the following table:

	Amortized
	cost		FVTPL		Total
Assets	$		$		$
Cash and cash equivalents		78,484		—		78,484
Restricted funds		2,180		—		2,180
Long – term investments		—		504		504
Liabilities	$		$		$
Warrant liability		—		715		715
Convertible debt		39,827		—		39,827
Senior secured convertible note		—		222,499		222,499
Other long-term liabilities1		—		1,413		1,413

¹  Financial liability designated as FVTPL.

The fair values of the financial instruments as at July 31, 2022 are summarized in the following table:

	Amortized
	cost		FVTPL		Total
Assets	$		$		$
Cash and cash equivalents		83,238		—		83,238
Restricted funds		32,224		—		32,224
Long – term investments		—		504		504
Liabilities	$		$		$
Warrant liability		—		717		717
Convertible debt		38,301		—		38,301
Senior secured convertible note		—		223,132		223,132
Other long-term liabilities1		—		1,409		1,409

¹ Financial liability designated as FVTPL.

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

27. Revenue from Sale of Goods

The Company disaggregates 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, and its selling license on May 2, 2022. During the three months ended October 31, 2022, the Company continued to act as a principal in the sale of CIBs to customers and therefore, continues to present revenue from CIB on a gross basis. Subsequently, beginning in November 2022, Truss LP has operationalized its cannabis selling license and the Company has ceased the recognition of CIB sales.

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For the three months ended	October 31, 2022						October 31, 2021
Revenue stream	Cannabis sales excluding beverages		Cannabis beverage sales		Total		Cannabis sales excluding beverages		Cannabis beverage sales		Total
	$		$		$		$		$		$
Retail		47,179		1,551		48,730		55,205		3,331		58,536
Medical		739		—		739		809		—		809
Wholesale		1,139		—		1,139		4,111		—		4,111
International		1,207		—		1,207		6,041		—		6,041
Total revenue from sale of goods		50,264		1,551		51,815		66,166		3,331		69,497

During the three months ended October 31, 2022 no adjustments were made to the Company’s net sales provision and price concessions (October 31, 2021 – $2,467).     

28. Segmented Information

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

29. Operating Cash Flow Supplement

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

For the three months ended	October 31,2022			October 31,2021
	$			$
Items not affecting cash
Depreciation of property, plant and equipment		784			2,057
Depreciation of property, plant and equipment in cost of sales		4,773			4,969
Amortization of intangible assets		2,871			8,158
Fair value loss/(gain) on convertible debentures		6,270			(11,670	)
Unrealized gain on changes in fair value of biological assets		(2,403	)		(13,581	)
Unrealized fair value adjustment on investments		—			279
Onerous contract settlement adjustment		(2,917	)		—
Interest and other income		877			3,812
Accretion of convertible debenture		1,508			1,189
Non-cash finance and transaction fees		—			1,751
Write-off of inventory and biological assets		4,400			615
Write down of inventory to net realizable value		4,915			36,197
Realized fair value amounts on inventory sold		19,966			12,760
Loss from investment in associate and joint ventures		2,398			2,149
Share-based compensation		959			4,034
Revaluation of financial instruments (gain)/loss		(2	)		(27,467	)
Impairment losses		(611	)		51,708
(Gain)/loss on long lived assets and disposal of property, plant and equipment		(510	)		329
Foreign exchange gain		13,434			(1,634	)
Total items not affecting cash		56,712			75,655
Changes in non-cash operating working capital items
Trade receivables		(2,030	)		1,502
Commodity taxes recoverable and other receivables		5,232			4,748
Prepaid expenses		(6,769	)		3,470
Lease receivable		—			27
Inventory		(11,248	)		(6,434	)
Biological assets		9,166			14,974
Accounts payable and accrued liabilities		(24,054	)		(24,662	)
Excise taxes payable		1,269			(3,636	)
Income tax recoverable		—			(4,714	)
Total non-cash operating working capital		(28,434	)		(14,725	)

Additional supplementary cash flow information is as follows:

For the three months ended	October 31,2022		October 31,2021
	$		$
Property, plant and equipment in accounts payable		73		2,106
Right-of-use asset additions		—		1,993
Interest paid		803		2,637

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30. Income Taxes

The Company’s effective income tax rate was 1.43% for the three months ended October 31, 2022 (October 31, 2021 – 0.1%). The effective tax rate is different than the statutory rate primarily due to the non-recognition of deferred tax assets.

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