EX-99.1

EX-99.1 2 d312613dex991.htm EX-99.1 EX-99.1

Exhibit 99.1

LOGO

HEXO Corp.

Condensed Interim

Consolidated Financial Statements

For the three and six months ended

January 31, 2023 and 2022

LOGO

Table of Contents


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		6

Notes to the Condensed Interim Consolidated Financial Statements:

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

Condensed Interim Consolidated Statements of Financial Position

(Unaudited, expressed in thousands of Canadian Dollars)


As at	Note		January 31, 2023			July 31, 2022
			$			$
Assets
Current assets
Cash and cash equivalents				34,233			83,238
Restricted funds		5		2,253			32,224
Short-term investments				504			–
Trade receivables				23,939			42,999
Commodity taxes recoverable				951			7,411
Prepaid expenses – current				16,333			18,339
Inventory		6		43,555			66,409
Biological assets		7		7,035			15,906
Assets held for sale		10		3,264			5,121

				132,067			271,647

Non-current assets
Property, plant and equipment		9		274,724			285,866
Intangible assets		11		92,014			94,343
Investment in associates		8		15,090			17,999
Long-term investments				—			504
Prepaid expenses				13,893			10,590

Total assets				527,788			680,949

Liabilities
Current liabilities
Accounts payable and accrued liabilities				32,129			72,581
Excise taxes payable				9,116			6,421
Warrant liabilities				442			717
Lease liability – current		14		733			914
Convertible debenture		12		—			38,301
Senior secured convertible note		13		189,659			210,379
Other current liabilities		24		10,916			5,763

				242,995			335,076

Non-current liabilities
Lease liability		14		1,230			1,926
Deferred income tax liability				27,570			28,846
Other long-term liabilities				881			1,409

Total liabilities				272,676			367,257

Shareholders’ equity
Share capital				1,891,307			1,889,768
Share-based payment reserve		17		70,911			73,657
Warrant reserve		16		81,195			82,395
Contributed surplus				97,927			90,981
Accumulated deficit				(1,897,119	)		(1,841,584	)
Accumulated other comprehensive income				10,891			18,475

Total shareholders’ equity				255,112			313,692

Total liabilities and shareholders’ equity				527,788			680,949

Going Concern (Note 2)
Commitments and contingencies (Note 24)

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

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 six months ended
	Note	January 31, 2023			January 31, 2022			January 31, 2023			January 31, 2022
Revenue from sale of goods	26		35,268			72,014			88,152			141,511
Excise taxes			(11,809	)		(19,251	)		(29,149	)		(38,786	)

Net revenue from sale of goods			23,459			52,763			59,003			102,725
Service revenue			702			—			929			225

Net revenue			24,161			52,763			59,932			102,950
Cost of goods sold	6		26,337			61,302			61,899			144,285

Gross profit/(loss) before fair value adjustments			(2,176	)		(8,539	)		(1,967	)		(41,335	)
Fair value component in inventory sold	6		5,194			9,966			25,160			22,726
Unrealized gain on changes in fair value of biological assets	7		(1,394	)		(15,945	)		(3,797	)		(29,526	)

Gross profit/(loss)			(5,976	)		(2,560	)		(23,330	)		(34,535	)
Operating expenses
General and administrative	20		10,484			22,550			20,953			45,036
Selling, marketing and promotion			2,678			6,369			6,784			12,592
Share-based compensation	17		301			4,017			1,260			7,841
Research and development			166			1,478			488			2,445
Depreciation of property, plant and equipment	9		839			1,140			1,623			3,196
Amortization of intangible assets	11		3,262			6,895			6,132			15,053
Restructuring costs			481			4,524			1,543			8,513
Impairment of property, plant and equipment and assets held for sale	9,10		408			100,130			(203	)		123,933
Impairment of intangible assets			—			140,839			—			140,839
Impairment of goodwill			—			375,039			—			375,039
Impairment of investment in associate	8		643			—			643			26,925
Derecognition of onerous contract			(269	)		—			(269	)		—
(Gain)/loss on disposal of property, plant and equipment			133			(254	)		(377	)		74
Acquisition, integration and transaction costs			4,645			4,569			8,360			28,945

			23,771			667,296			46,937			790,431

Loss from operations			(29,747	)		(669,856	)		(70,267	)		(824,966	)
Interest income (expense), net	21		(752	)		(5,058	)		(2,669	)		(9,588	)
Non-operating income (expense), net	21		34,169			(61,190	)		19,537			(18,977	)

Net income/(loss) before tax			3,670			(736,104	)		(53,399	)		(853,531	)
Current and deferred tax (expense)/recovery			(2,948	)		25,218			(2,136	)		25,373

Net income/(loss)			722			(710,886	)		(55,535	)		(828,158	)

Other comprehensive income
Foreign currency translation			181			(49	)		(233	)		39
Gain on fair value due to changes in credit spread, net of tax	13		(11,965	)		20,681			(7,351	)		20,957

Net loss and comprehensive loss			(11,062	)		(690,254	)		(63,119	)		(807,162	)

Comprehensive loss attributable to:
Shareholders of HEXO Corp.			(11,062	)		(689,224	)		(63,119	)		(801,466	)
Non-controlling interest			—			(1,030	)		—			(5,696	)

			(11,062	)		(690,254	)		(63,119	)		(807,162	)

Net loss and comprehensive loss per share, basic and diluted			(0.26	)		(27.16	)		(1.47	)		(37.24	)

Weighted average number of outstanding shares
Basic and diluted	18		42,997,028			25,410,870			42,962,386			21,698,501

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

Condensed Interim Consolidated Statements of Changes in Shareholders’ Equity

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


For the six 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			10,903,282		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			1,475,601		23,877		—			—			—			—			—			23,877			—			23,877
August 2021 public offering, net			3,505,716		135,645		—			—			—			—			—			135,645			—			135,645
Business acquisitions, net			5,362,366		230,232		18			769			—			—			—			231,019			—			231,019
Senior secured convertible note, net			6,021,560		140,534		—			—			—			—			—			140,534			—			140,534
Broker compensation			35,870		2,084		—			—			—			—			—			2,084			—			2,084
Exercise of stock options			1,216		147		(105	)		—			—			—			—			42			—			42
Expiry of stock options			—		—		(7,415	)		—			7,415			—			—			—			—			—
Expiry of warrants			—		—		—			(42,420	)		42,420			—			—			—			—			—
Equity-settled share-based payments	17		—		—		7,570			—			—			—			—			7,570			—			7,570
Other comprehensive income			—		—		—			—			—			20,996			—			20,996			—			20,996
Non-controlling interest			—		—		—			—			(1,890	)		–			—			(1,890	)		1,890			—
Net loss			—		—		—			—			—			—			(822,462	)		(822,462	)		(5,696	)		(828,158	)

Balance at January 31, 2022			27,305,611		1,800,486		69,818			82,461			89,235			22,148			(1,596,455	)		467,693			(1,819	)		465,874

Balance at July 31, 2022			42,927,745		1,889,768		73,657			82,395			90,981			18,475			(1,841,584	)		313,692			—			313,692
Share issuance			455,290		1,539		—			—			—			—			—			1,539			—			1,539
Expiry of stock options			—		—		(5,746	)		—			5,746			—			—			—			—			—
Expiry of warrants			—		—		—			(1,200	)		1,200			—			—			—			—			—
Equity-settled share-based payments	17		—		—		3,000			—			—			—			—			3,000			—			3,000
Other comprehensive income			—		—		—			—			—			(7,584	)		—			(7,584	)		—			(7,584	)
Net loss			—		—		—			—			—			—			(55,535	)		(55,535	)		—			(55,535	)

Balance at January 31, 2023			43,383,035		1,891,307		70,911			81,195			97,927			10,891			(1,897,119	)		255,112			—			255,112

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

Condensed Interim Consolidated Statements of Cash Flows

(Unaudited, expressed in thousands of Canadian Dollars)


For the six months ended	Note		January 31, 2023			January 31, 2022
Operating activities
Net loss before tax				(53,399	)		(853,531	)
Items not affecting cash or presented outside of operating activities		28		37,141			796,376
Changes in non-cash operating working capital items		28		(7,172	)		(34,592	)

Cash used in operating activities				(23,430	)		(91,747	)

Financing activities
Proceeds from public offering, net				—			198,777
Issuance fees				—			(250	)
Proceeds from the exercise of stock options				—			42
Issued payments on cash settled RSU exercise		17		(304	)		—
Repayments of debt		12		(40,140	)		(6,754	)
Senior secured convertible note finance costs		13		(11,515	)		—
Interest paid on senior notes payable				—			(3,648	)
Lease payments		14		(513	)		(3,222	)
Interest paid on unsecured convertible debentures		12		(1,392	)		(1,606	)
Cash-settlements of senior secured convertible note				—			(10,111	)

Cash (used in)/provided by financing activities				(53,864	)		173,228

Investing activities
Proceeds from sale of interest in joint venture				—			10,111
Cash received from restricted funds and escrow				29,971			283,775
Cash payment on business acquisition, net of cash acquired				—			(381,157	)
Proceeds from sale of property, plant and equipment				2,241			1,955
Acquisition of property, plant and equipment				(120	)		(20,101	)
Purchase of intangible assets				(3,803	)		(3,939	)
Investment in associates and joint ventures				—			(1,861	)

Cash generated by/(used in) investing activities				28,289			(111,217	)

(Decrease)/increase in cash and cash equivalents				(49,005	)		(29,736	)
Cash and cash equivalents, beginning of period				83,238			67,462

Cash and cash equivalents, end of period				34,233			37,726

Supplemental cashflow information in Note 28.

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

Notes to the Condensed Interim Consolidated Financial Statements

For the three and six months ended January 31, 2023 and 2022

(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 contemplates 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 and six months ended January 31, 2023, the Company reported operating losses of $29,747 and $70,267, respectively; cash outflows from operating activities of $23,430 in the six months ended January 31, 2023 (positive operating cashflows of $5,360 generated in three months ended January 31, 2023) and an accumulated deficit of $1,897,119 and has yet to generate positive cashflows or earnings. The Company had a working capital deficiency of $110,928 and held cash and cash equivalents of $34,233 as at January 31, 2023 ($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 other covenants, 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 three months ended April 30, 2023.

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:

•

Management will continue to evaluate potential private and public financing opportunities through the issuance of equity. Notably, the Company’s at-the-market program as initiated in May 2022, remains available to the Company (following certain legal and administrative filings) and authorizes the Company to issued equity up to US$40 million from treasury to the public, although the Company’s ability to access this entire amount may be affected by market conditions and the performance of the Company’s share price. Management may utilize this program to bridge cashflows during certain periods of volatility in order to manage its working capital obligations and remain compliant with the minimum liquidity covenant.

•

The Company has entered into an equity purchase agreement (the “equity line of credit” or “ELOC”) with an affiliate of KAOS Capital Ltd (“KAOS”), which could provide the Company access to $5 million capital per month over the ELOC’s remaining 29-month term. However, the Company has yet to file a prospectus supplement qualifying the distribution and resale by the subscriber of the Put Shares and thus has not drawn upon the ELOC, and considering the Company’s current financial situation, there are significant doubts as to the Company’s ability to file such a prospectus and access financing under the ELOC.

•

The Company executed certain cost saving initiatives in the second half of the previous fiscal year in order to decrease the operating expenses and improve the 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 and management continues to execute additional cost saving initiatives such as the restructuring of the Company’s packaging and manufacturing departments.

•

The Company has commenced discussions with its lender regarding potential amendments to and/or covenant relief under the Senior Secured Convertible Note. No agreement has been reached to date and there can be no assurance that such agreement will be reached.

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 favourable waivers and/or amendments from its lender under the Senior Secured Convertible Note and/or to obtain the necessary financing to meet its obligations, comply with its financial covenants, and to repay its liabilities when they become due.

There can be no assurances however that financing alternatives will be available or available on terms that are acceptable to the Company, that the Company will be able obtain favourable waivers and/or covenant relief from its lender under the Senior Secured Convertible Note 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. Should these

efforts prove unsuccessful, there is uncertainty as to the Company’s ability to remain in compliance with the covenants of the Senior Secured Convertible Note over the next 12-month period. 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.

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 March 16, 2023.

All figures are presented in thousands of Canadian dollars unless otherwise noted.

Basis of Consolidation

The interim consolidated financial statements include the financial results of the Company and its subsidiaries. Subsidiaries include entities which are wholly-owned as well as entities over which the Company has the authority or ability to exert power over the investee’s financial and/or operating decisions (i.e. control), which in turn may affect the Company’s exposure or rights to the variable returns from the investee. These interim consolidated financial statements include the operating results of acquired or disposed entities from the date control is obtained or the date control is lost, respectively. All intercompany balances and transactions are eliminated upon consolidation.

Share Consolidation

The Company finalized a share consolidation on the basis of fourteen (14) pre-consolidation common shares for one post-consolidation common share (14:1) effective December 19, 2022 (Note 15(c)). All balances of common shares, common share purchase warrants, stock options, restricted share units and deferred share units herein are reflective of the share consolidation (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. Restricted Funds


	January 31, 2023		July 31, 2022
	$		$
Letters of credit and collateral		2,253		2,230
Cash restricted in captive insurance subsidiary		—		29,994

Total		2,253		32,224

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

6.	Inventory


	As at January 31, 2023
	Capitalized cost		Biological asset fair value adjustment		Total
	$		$		$
Dried cannabis		24,423		13,250		37,673
Purchased dried cannabis		693		—		693
Extracts		1,883		—		1,883
Purchased extracts		147		—		147
Packaging and supplies		3,159		—		3,159

		30,305		13,250		43,555


	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 condensed interim consolidated statements of net loss and comprehensive loss :

(i)	Capitalized costs relating to inventory expensed and included in cost of goods sold amounted to $26,337 and $61,899 for the three months and six months ended January 31, 2023, respectively (January 31, 2022 – $61,302 and $144,285) which includes;

•

Write downs of inventory to their net realizable value of $7,308 and $17,574, respectively (January 31, 2022 – $13,937 and $50,134); and

•

Write-offs of inventory of $817 and $5,217 (January 31, 2022 – $4,941 and $5,556) which relate to destroyed and unsellable inventory; and

•

Reversal of impairments of $nil and $5,059, respectively (January 31, 2022 – $nil and $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 $5,194 and $25,160 for the three and six months ended January 31, 2023, (January 31, 2022 – $15,945 and $29,526).

Total depreciation capitalized in inventory during the six months ended January 31, 2023, was $9,463 (January 31, 2022 – $12,003).

7. Biological Assets

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


	For the six months ended January 31, 2023			For the year ended July 31, 2022
	$			$
Balance, beginning of period		15,906			14,284
Acquired on business combination		—			8,352
Production costs capitalized		16,277			62,489
Net increase in fair value due to biological transformation and estimates		3,797			59,665
Harvested cannabis transferred to inventory		(28,945	)		(119,432	)
Disposal of biological assets		—			(3,086	)
Derecognized on loss of control of subsidiary		—			(6,366	)

Balance, end of period		7,035			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 six months ended January 31, 2023, the Company did not dispose of any biological assets (January 31, 2022 – $3,086).

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;

•

Average 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 price 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

January 31, 2023

July 31, 2022

January 31, 2023

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.

$2.83 per dried
gram

$2.73 per dried
gram

not material

1,190

Yield per plant

Derived from historical harvest cycle results on a per strain basis, which is expected to be harvested from plants.

68-1,521 grams
per plant¹

82-1,307
grams per
plant

not material

803

Post-harvest cost

Derived from historical costs of production activities on a per product basis.

$0.50-$0.70 per
dried gram

$0.19-$0.63
per dried
gram

not material

303

8. Investments in Associates


	For the six months ended January 31, 2023									For the year ended 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)		(1,362	)		(993	)		(2,355	)		(7,613	)		(1,544	)		(9,157	)
Foreign exchange gain through OCI		—			89			89			—			—			—
Impairment/write down		—			(643	)		(643	)		(57,760	)		—			(57,760	)

Ending balance		14,638			452			15,090			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.

9. 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		—			—			—			62			—			(168	)		—			(106	)
Disposals		—			—			—			—			—			—			(731	)		(731	)
Transfers		—			48			—			(1,681	)		83			1,461			—			(89	)
Foreign currency translation		—			—			—			—			—			372			—			372

At January 31, 2023		9,093			228,082			42,619			92,247			18,597			107,782			3,802			502,222


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		—			4,829			87			4,636			1,224			—			310			11,086
Transfers		—			—			—			(577	)		(52	)		629			—			—
Disposals		—			—			—			—			—			26			(731	)		(705	)
Impairments (reversal)		—			—			—			408			—			(201	)		—			207

At January 31, 2023		—			45,497			41,947			23,021			18,064			96,977			1,992			227,498


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 January 31, 2023		9,093			182,585			672			69,226			533			10,805			1,810			274,724

During the six months ended January 31, 2023, the Company capitalized $9,463 (January 31, 2022 – $12,003) of depreciation to inventory. During the three and six months ended January 31, 2023, depreciation expensed to the consolidated statement of loss and comprehensive loss was $839 and $1,632 (January 31, 2022 – $1,140 and $3,196).

10. 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

Disposal		(469	)		(266	)		(419	)		(1,113	)		—			(2,267	)
Impairment loss reversal		—			410			—			—			—			410

At January 31, 2023		893			1,425			426			520			—			3,264

11. Intangible Assets


Cost	Cultivating and processing license			Brands			Software		Domain names		Patents/ Know-how/ License		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		—			—			1,670		—		2,133		3,803

At January 31, 2023		189,512			105,640			13,769		585		32,783		342,289


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		737			2,475			1,199		30		1,691		6,132

At January 31, 2023		163,056			63,557			6,742		273		16,647		250,275


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 January 31, 2023		26,456			42,083			7,027		312		16,136		92,014

Research and development expenses in the three and six months ended January 31, 2023 were $166 and $488 (January 31, 2022 – $1,478 and $2,445).

12. Convertible Debenture


	$
At July 31, 2021		33,089
Interest expense		8,423
Interest paid		(3,211	)

At July 31, 2022		38,301
Interest expense		3,231
Interest paid		(1,392	)
Principal paid		(40,140	)

At January 31, 2023		—

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 were convertible at the option of the holder at any time after December 7, 2020 and prior to maturity at a conversion price of $176.96 per share (the “Conversion Price”), subject to adjustment in certain events. The Company had the right to force the conversion of all of the 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 $420.00 for any 15 consecutive trading days.

Upon maturity, the holders of the Debentures had 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 $44.80 (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 $56.00 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.

On December 5, 2022, the 8% debentures matured, and the Company settled the outstanding balance in cash, through a payment of $40,140 plus the remaining accrued interest of $589.

13. Senior Secured Convertible Note


	US$			$
At July 31, 2022		164,051			210,379
Gain on fair value during the period		(21,984	)		(29,430	)
Foreign exchange loss		—			8,710

At January 31, 2023		142,067			189,659

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. On December 29, 2022, the Company made its first scheduled interest payment of $5,596 (US$4,125). Accrued and unpaid interest at January 31, 2023 was $941 (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$5.60 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 CAD$42.00 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.

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 January 31, 2023			As at July 31, 2022			Initial recognition July 12, 2022
Share price	US$	1.60		US$	2.66		US$	2.80
Dividend	$	nil		$	nil		$	nil
Volatility		93	%		87.8	%		80.7	%
Credit spread		32.36	%		34.2	%		38.6	%
Conversion price	US$	4.13		US$	4.34		US$	4.20- US$4.34

Risk free rates were selected based upon a Secured Overnight Financing Rate (“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 $1,896 (July 31, 2022 – $2,104). A decrease of credit spread by 1% would increase the fair value of the instrument by $3,309 (July 31, 2022 – $2,487).

14. Lease Liabilities


	(for the six months ended) January 31, 2023			(for the year ended) July 31, 2022
	$			$
Balance, beginning of period		2,840			43,885
Assumed on business combination		—			1,992
Lease additions		—			29
Lease terminations		(470	)		(24,300	)
Lease payments		(513	)		(6,054	)
Interest expense on lease liabilities		106			4,197
Derecognition due to loss of control		—			(16,909	)

Balance, end of period		1,963			2,840

Current		733			914
Non-current		1,230			1,926

On January 31, 2023, the Company’s leases consist of a propagation facility and an administrative real estate lease. During the three and six months ended January 31, 2023, the Company expensed variable lease payments of $198 and $396 (January 31, 2022 – $796 and $1,609).

The following table is the Company’s lease obligations over the next five fiscal years and thereafter as at January 31, 2023:


Fiscal year	2023 (six-months remaining)		2024 – 2025		2026 – 2027		Thereafter		Total
	$		$		$		$		$
Lease obligations		395		780		300		1,200		2,675

15. 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 January 31, 2023, a total of 43,383,035 (July 31, 2022 – 42,927,745) common shares were issued and outstanding. No special shares have been issued or are outstanding.

(c) Share Consolidation

On January 25, 2022, the Company was notified of being non-compliant with the minimum bid price requirement under the Nasdaq Listing Rule 5500(a)(2) for continued listing on the Nasdaq Capital Market, since the closing bid price for the Company’s common shares listed on Nasdaq was below US$1.00 for 30 consecutive trading days. The Company received a 180 day extension to regain compliance status on July 26, 2022. 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 was obtained 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 “Consolidation”). The common shares began trading on a post-Consolidation basis on the TSX and Nasdaq on December 19, 2022, remaining listed under the symbol “HEXO”. As a result of the Consolidation, the 600,988,447 shares issued and outstanding prior to the Consolidation became 42,927,745 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 convertible note, stock options and other share-based securities exercisable for or convertible into common shares were proportionately adjusted to reflect the Consolidation in accordance with the respective terms thereof.

16. Common Share Purchase Warrants

The following table summarizes warrant activity during the six months ended January 31, 2023, and year ended July 31, 2022.


	For the six months ended January 31, 2023					For the year ended July 31, 2022
	Number of warrants			Weighted average exercise price¹		Number of warrants			Weighted average exercise price¹
				$					$
Outstanding, beginning of period		4,255,875			84.98		2,619,071			123.90
Expired and cancelled		(28,358	)		274.20		(227,077	)		474.04
Issued on acquisition		—			—		111,023			314.02
Issued		—			—		1,752,858			60.90

Outstanding, end of period		4,227,517			85.15		4,255,875			84.98

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 January 31, 2023 and July 31, 2022.


	January 31, 2023				July 31, 2022
	Number outstanding		Book value		Number outstanding		Book value

Classified as Equity			$				$
June 2019 financing warrants
Exercise price of $884.24 expiring June 19, 2023		39,010		10,023		39,010		10,023
April 2020 underwritten public offering warrants
Exercise price of $53.76 expiring April 13, 2025		845,005		15,971		845,005		15,971
May 2020 underwritten public offering warrants
Exercise price of $58.80 expiring May 21, 2025		542,277		10,446		542,277		10,446
Conversion Unit warrants
Exercise price of $56.00 expiring June 10, 2023		263,337		11,427		263,337		11,427
Exercise price of $56.00 expiring June 30, 2023		69,923		1,928		69,923		1,928
Broker / Consultant warrants
Exercise price of $884.24 expiring June 19, 2023		1		—		1		—
Issued in connection with business acquisition
Exercise price of $1,094.24 expiring August 21, 2022		—		—		1,142		3
Exercise price of $1,437.94 expiring August 21, 2022		—		—		1,738		2
Exercise price of $158.06 expiring January 27, 2023		—		—		25,478		1,195
Exercise price of $158.86 expiring April 16, 2023		48,634		398		48,634		398
Exercise price of $177.52 expiring May 4, 2023		43,058		322		43,058		322
Exercise price of $1,017.80 expiring April 2 2024		17,863		49		17,863		49
Exercise price of $55.44 expiring April 23, 2025		45,094		4,232		45,094		4,232
Exercise price of $126.42 expiring June 25, 2025		228,956		18,236		228,956		18,236
Exercise price of $78.96 expiring September 23, 2025		87,777		7,902		87,777		7,902
Exercise price of $118.58 expiring October 30, 2025		3,133		261		3,133		261

		2,234,068		81,195		2,262,426		82,395
Classified as Liability
US$25m Registered Direct Offering Warrants
Exercise price of US$137.20 expiring December 31, 2024		133,662		1		133,662		8
US$20m Registered Direct Offering Warrants
Exercise price of US$137.20 expiring January 22, 2025		106,929		1		106,929		6
August 2021 Underwritten Public Offerings Warrants
Exercise price of US$48.30 expiring August 24, 2026		1,752,858		440		1,752,858		703

		1,993,449		442		1,993,449		717

		4,227,517		81,637		4,255,875		83,112

17. 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 4,338,304 common shares as at January 31, 2023 (July 31, 2022 – 4,292,775). 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 January 31, 2023, the Company had 1,629,514 issued and outstanding under the Omnibus Plan, 50,077 issued and outstanding under the Former Plan and 36,565 issued and outstanding under the assumed plans from business combinations.

Stock Options

The following table summarizes stock option activity during the six months ended January 31, 2023, and the year ended July 31, 2022.


	January 31, 2023					July 31, 2022
	Number of options			Weighted average exercise price		Number of options			Weighted average exercise price
				$					$
Opening balance		1,763,337			10.22		858,414			148.82
Granted		108,932			3.64		1,275,136			10.27
Replacement options issued on acquisition		—			—		11,572			100.66
Forfeited		(100,359	)		72.29		(336,731	)		62.53
Expired		(55,754	)		117.87		(43,838	)		310.79
Exercised		—			—		(1,216	)		35.56

Closing balance		1,716,156			55.98		1,763,337			10.22

The following table summarizes information concerning stock options outstanding as at January 31, 2023.


Exercise price	Number outstanding		Weighted average remaining life (years)		Number exercisable		Weighted average remaining life (years)
$3.64 - $10.50		1,066,489		9.33		137,548		9.14
$26.04 - $138.88		431,736		7.54		367,121		7.38
$150.64 - $46.00		217,931		5.95		217,931		5.95

		1,716,156				722,600

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 six months ended January 31, 2023 and the year ended July 31, 2022.


	January 31, 2023					July 31, 2022
	Units			Value of units on grant date		Units			Value of units on grant date
				$					$
Opening balance		145,236			41.58		39,345			110.74
Granted		—			—		108,374			24.36
Exercised – cash settled		(78,249	)		3.89		—			—
Forfeited		—			—		(2,483	)		46.20

Closing balance		66,987			25.68		145,236			41.58

As of January 31, 2023, 64,921 of the RSUs were vested.

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 six months ended January 31, 2023 and the year ended July 31, 2022.


	January 31, 2023				July 31, 2022
	Units		Value of units		Units		Value of units
			$				$
Opening balance		292,030		3.36		—		—
Granted		58,796		3.54		292,030		10.08

Closing balance		350,826		2.11		292,030		3.36

All DSUs have been issued to directors of the Company and fully vest upon the termination of their tenure as directors. As at January 31, 2023, 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:


For the six months ended	January 31, 2023			January 31, 2022
Exercise price (weighted average)	$	34.62		$	107.80
Share price (weighted average)	$	33.23		$	105.84
Risk-free interest rate (weighted average)		2.00	%		0.87	%
Expected life (years) of options (weighted average)		5			5
Expected annualized volatility (weighted average)		95	%		93	%

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

18. 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	January 31, 2023		July 31, 2022
Stock options		1,716,156		1,763,337
RSUs		66,984		145,233
DSUs		350,826		292,030
Acquired and reissued warrants		474,515		502,873
2019 June financing warrants		39,010		39,010
US$25m registered direct offering warrants		133,662		133,662
US$20m registered direct offering warrants		106,929		106,929
2020 April underwritten public offering warrants		845,005		845,005
2020 May underwritten public offering warrants		542,277		542,277
2021 August underwritten public offering warrants		1,752,858		1,752,858
Warrants issued under conversion of debentures		333,260		333,260
Convertible debenture broker/finder warrants		1		1
Senior secured convertible note		41,576,885		39,777,300

		47,938,368		46,233,775

19. Financial Instruments

Market Risk

Interest Risk

The Company has minimal exposure to interest rate risk related to the investment of cash and cash equivalents, restricted funds and short-term investments. 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 January 31, 2023, the Company has $231,889 (US$173,700) of outstanding principal on the senior secured convertible note (Note 13) 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 13.

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 $18,960 (July 31, 2022 – $22,335). The following table presents the Company’s price risk exposure as at January 31, 2023 and July 31, 2022.


	January 31, 2023			July 31, 2022
	$			$
Financial assets		504			504
Financial liabilities		(190,101	)		(211,096	)

Total exposure		(189,597	)		(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 January 31, 2023, 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 six months ended January 31, 2023, 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 January 31, 2023 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. 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 January 31, 2023 and amounted to $60,425 (July 31, 2022 – $158,461).

The following table summarizes the Company’s aging of trade receivables on January 31, 2023 and July 31, 2022:


	January 31, 2023		July 31, 2022
	$		$
0–30 days		12,230		24,661
31–60 days		911		11,808
61–90 days		2,661		2,177
Over 90 days		8,137		4,353

Total		23,939		42,999

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 six months ended January 31, 2023, the Company’s recorded sales to the crown corporations; the Ontario Cannabis Store (“OCS”), Alberta Gaming, Liquor and Cannabis agency (“AGLC”), British Columbian Liquor Distribution Branch, and le Société québécoise du cannabis (“SQDC”), representing 45%, 22%, 14% and 19%, respectively (January 31, 2022 – SQDC, OCS and AGLC representing 29%, 19% and 14%, respectively) of total applicable periods net cannabis sales.

The Company holds trade receivables from the crown corporations OCS and SQDC representing 25% and 13% of total trade receivables, respectively as at January 31, 2023 (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 January 31, 2022, the Company has $34,233 (July 31, 2022 – $83,238) of cash and cash equivalents and $23,939 (July 31, 2022 – $42,999) in trade receivables.

The Company has current liabilities of $242,995 (July 31, 2022 – $335,076) on the statement of financial position. As well, the Company has remaining contractual commitments of $17,198 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 January 31, 2023.

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


Fiscal year	2023 (six-months remaining)		2024		2025		2026		2027		Thereafter		Total
	$		$		$		$		$		$		$
Accounts payable and accrued liabilities		32,129		—		—		—		—		—		32,129
Excise taxes payable		9,116		—		—		—		—		—		9,116
Undiscounted lease payments (Note 14)		395		390		390		150		150		1,200		2,675
Senior secured convertible note (Note 13)¹		17,812		35,875		38,378		265,582		12,015		—		369,662

Total		59,452		36,265		38,768		265,732		12,165		1,200		413,582

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

Foreign Currency Risk

On January 31, 2023, 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 January 31, 2023, $9,572 (US$7,170) (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 not result in a material change 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 13.

20. 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				For the six months ended
	January 31, 2023		January 31, 2022		January 31, 2023		January 31, 2022
	$		$		$		$
Salaries and benefits		2,595		9,487		5,491		19,633
General and administrative		5,089		6,379		8,835		12,540
Professional fees		2,565		4,754		5,939		10,389
Consulting		235		1,930		688		2,474

Total		10,484		22,550		20,953		45,036

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


	For the three months ended				For the six months ended
	January 31, 2023		January 31, 2022		January 31, 2023		January 31, 2022
	$		$		$		$
General and administrative related wages and benefits		2,595		9,487		5,491		19,633
Marketing and promotion related wages and benefits		558		2,064		1,358		4,034
Research and development related wages and benefits		94		1,086		199		1,597

Total operating expense related wages and benefits		3,247		12,637		7,048		25,264
Wages and benefits capitalized to inventory		4,455		7,442		10,691		15,923

Total wages and benefits		7,702		20,079		17,739		41,187

21. Other Income and Losses


	For the three months ended						For the six months ended
	January 31, 2023			January 31, 2022			January 31, 2023			January 31, 2022
	$			$			$			$
Interest and financing expenses		(1,263	)		(5,251	)		(3,730	)		(10,555	)
Interest income		511			193			1,061			967

Finance income (expense), net		(752	)		(5,058	)		(2,669	)		(9,588	)

Revaluation of warrant liabilities		273			11,866			275			39,334
Share of loss from investment in associates and joint ventures		43			(2,669	)		(2,355	)		(4,818	)
Fair value (loss)/gain on senior secured convertible note		31,777			(76,666	)		25,506			(64,995	)
Gain on sale of interest in BCI		—			9,127			—			9,127
Gain/(loss) on investments		–			(297	)		140			(576	)
Foreign exchange gain/(loss)		3,709			(4,582	)		(5,313	)		920
Other gains		(1,633	)		2,031			1,284			2,031

Non-operating income (expense), net		34,169			(61,190	)		19,537			(18,977	)

22. 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				For the six months ended
	January 31, 2023		January 31, 2022		January 31, 2023		January 31, 2022
	$		$		$		$
Salary and/or consulting fees		562		635		1,153		1,490
Termination benefits		—		3,642		—		5,280
Bonus compensation		—		380		—		2,393
Stock-based compensation		841		1,595		1,407		3,100

Total		1,403		6,252		2,560		12,263

These transactions are in the normal course of operations and are measured at the exchange amount, which is the amount of consideration established and agreed by the related parties. On January 31, 2023, key management held 1,148 of vested RSUs outstanding.

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 8).

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. 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 operationalized its cannabis selling license on November 1, 2022, the Company purchased the manufactured goods from Truss LP and sold the beverages through to third parties, as a principal under the arrangement. Truss LP received its license for the selling of cannabis on May 2, 2022, however, Truss LP was unable to operationalize the license to be utilized until November 1, 2022. The Company acted as the principal in the arrangement during the three months ended October 31, 2022 and ceased doing so on November 1, 2022 at which point the Company no longer recognizes the sale of CIBs in the condensed interim consolidated statements of net loss.

During the six months ended January 31, 2023, the Company purchased $1,551, respectively (January 31, 2022 – $912, under the previous arrangement and $5,137 under the second arrangement) of manufactured products under the second updated arrangement.

23. 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 13.

On January 31, 2023, total managed capital was $255,112 (July 31, 2022 – $313,692).

24. Commitments and Contingencies

COMMITMENTS

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

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


	$
July 31, 2023 (six-months remaining)		17,198
July 31, 2024		26,413
July 31, 2025		27,145
July 31, 2026		24,270
July 31, 2027		12,239
Thereafter		1,302

		108,567

See Note 14 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 January 31, 2023, the remaining balance of the letter of credit is $150, was not drawn upon and is secured by cash held in collateral (Note 5).

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 January 31, 2023, 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 5).

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.

On of January 23, 2023, the Superior Court of Quebec dismissed the class action lawsuit against the Company and its former Chief Executive Officer, filed November 19, 2019. The lawsuit had asserted 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 sought 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 sought 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 January 31, 2023 (July 31, 2022—$nil). The Plaintiff has until March 20, 2023 to file an appeal.

As of January 31, 2023, 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.

During the year ended July 31, 2020, the Company recognized an onerous contract provision of $4,762 related to a fixed price supply agreement for the supply of cannabis. During the six months ended January 31, 2023, the onerous provision was adjusted to the court judgement amount of $1,846. On January 31, 2023, the total outstanding judgement liability was $10,454 (presented in other liabilities). Management has initiated an appeal against the court’s decision and is simultaneously pursuing a settlement with the counterparty.

Subsequent to the period, on February 24, 2023 the Company received a notice of arbitration from a capital markets consulting group claiming the Company failed to pay a completion fee in connection to an advisory arrangement. The claimant is seeking $11,904 for breach of contract. The Company believes the action to be without merit and intends to vigorously defend the claim. No provision has been recognized as of January 31, 2023.

25. Fair Value of Financial Instruments

The fair values of the financial instruments as at January 31, 2023 are summarized in the following table:


	Amortized cost		FVTPL		Total
	$		$		$
Assets
Cash and cash equivalents		34,233		—		34,233
Restricted funds		2,253		—		2,253
Short-term investments		—		504		504

	$		$		$
Liabilities
Warrant liability		—		442		442
Senior secured convertible note		—		189,659		189,659
Other long-term liabilities¹		—		881		881

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.

26. 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 and other cannabis derivative products (“Cannabis sales excluding beverages”). The Company’s cannabis beverage sales were 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. Up until November 1, 2022 the Company acted as a principal in the sale of CIBs to customers and presented the revenue from the sale of CIB’s on a gross basis. On November 1, 2022, Truss LP has operationalized its cannabis selling license and the Company has ceased the recognition of CIB sales (see Note 22).


For the three months ended				January 31, 2023							January 31, 2022
Revenue stream	Cannabis sales excluding beverages			Cannabis beverage sales		Total			Cannabis sales excluding beverages		Cannabis beverage sales		Total
	$			$		$			$		$		$
Retail		33,058			—		33,058			55,195		3,867		59,062
Medical		634			—		634			981		—		981
Wholesale		1,841			—		1,841			3,740		—		3,740
International		(265	)		—		(265	)		8,231		—		8,231

Total revenue from sale of goods		35,268			—		35,268			68,147		3,867		72,014


For the six months ended				January 31, 2023							January 31, 2022
Revenue stream	Cannabis sales excluding beverages			Cannabis beverage sales		Total			Cannabis sales excluding beverages		Cannabis beverage sales		Total
	$			$		$			$		$		$
Retail		80,237			1,551		81,788			110,400		7,198		117,598
Medical		1,373			—		1,373			1,790		—		1,790
Wholesale		4,049			—		4,049			7,851		—		7,851
International		942			—		942			14,272		—		14,272

Total revenue from sale of goods		86,601			1,551		88,152			134,313		7,198		141,511

During the three months and six months ended January 31, 2023, the Company recognized $4,735 and $5,580, respectively (January 31, 2022 – $1,151 and $3,618) of net sales provisions and price concessions.

27. Segmented Information

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

28. Operating Cash Flow Supplement

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


For the six months ended	January 31, 2023			January 31, 2022
	$			$
Items not affecting cash
Depreciation of property, plant and equipment		1,623			3,196
Depreciation of property, plant and equipment in cost of sales		4,675			10,942
Amortization of intangible assets		6,132			15,053
Fair value loss/(gain) on convertible debentures		(28,627	)		64,996
Unrealized gain on changes in fair value of biological assets		(3,797	)		(29,526	)
Unrealized fair value adjustment on investments		—			1,847
Onerous contract settlement adjustment		(2,648	)		—
Interest and other income		1,829			7,605
Accretion of convertible debenture		1,508			2,451
Non-cash finance and transaction fees		1,539			1,681
Write-off of inventory and biological assets		5,217			5,556
Write down of inventory to net realizable value		12,515			50,134
Realized fair value amounts on inventory sold		25,160			22,726
Loss from investment in associate and joint ventures		2,355			4,818
Share-based compensation		1,260			8,052
Revaluation of financial instruments (gain)/loss		(275	)		(39,334	)
Impairment losses		440			669,076
Gain on sale of BCI		—			(9,053	)
(Gain)/loss on long lived assets and disposal of property, plant and equipment		(377	)		—
Gain on exit of lease		(470	)		(453	)
Foreign exchange gain		9,082			6,609

Total items not affecting cash		37,141			796,376


For the six months ended	January 31, 2023			January 31, 2022
Changes in non-cash operating working capital items
Trade receivables		19,060			(816	)
Commodity taxes recoverable and other receivables		6,460			4,297
Prepaid expenses		(1,297	)		2,853
Lease receivable		—			27
Inventory		(15,250	)		(35,778	)
Biological assets		12,668			29,836
Accounts payable and accrued liabilities		(30,778	)		(26,755	)
Excise taxes payable		2,695			(3,774	)
Onerous contract cash settlement		(730	)		—
Income tax recoverable		—			(4,482	)

Total non-cash operating working capital		(7,172	)		(34,592	)

Additional supplementary cash flow information is as follows:


For the six months ended	January 31, 2023		January 31, 2022
	$		$
Capital amounts in accounts payable		440		961
Capital contributions in accounts payable		—		8,035
Right-of-use asset additions		—		1,993
Interest paid		12,907		5,254

29. Income Taxes

The Company’s effective income tax rate was 1.43% for the six months ended January 31, 2023 (January 31, 2022 – 3.17%). The effective tax rate is different than the statutory rate primarily due to the non-recognition of deferred tax assets.