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    HEXO   CA4283043079

HEXO CORP.

(HEXO)
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HEXO : Identity of Company (Form 6-K)

09/24/2021 | 05:32pm EDT

Identity of Company

1.1

Name and Address of Company

HEXO Corp. ("HEXO")

3000 Solandt Road

Ottawa, Ontario

K2K 2X2

1.2

Executive Officer

Trent MacDonald, Chief Financial Officer

Telephone: 416-230-1126

Details of Acquisition

2.1

Nature of Business Acquired

On August 30, 2021, HEXO completed the previously announced acquisition of all of the outstanding shares of the entities that carry on the business of Redecan ("Redecan"), Canada's largest privately-owned licensed producer (the "Acquisition").

2.2

Acquisition Date

August 30, 2021.

2.3

Consideration

At closing, HEXO paid the selling shareholders of Redecan $400 million in cash (subject to certain customary closing adjustments) and delivered 69.7 million newly issued common shares of HEXO (the "Consideration Shares").

The cash portion of the purchase price was funded by HEXO through a combination of (i) cash released from a restricted escrow account that had held a portion of the net proceeds from HEXO's public offering of US$360 million senior secured convertible notes that was completed on May 27, 2021, (ii) a portion of the net proceeds raised by HEXO in its underwritten public offering of US$144.8 million of units (comprised of common shares and warrants) that was completed on August 24, 2021, and (iii) cash on hand.

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2.4

Effect on Financial Position

The estimated effect of the Acquisition on HEXO is outlined in the unaudited pro forma financial statements appended to this Business Acquisition Report. The unaudited pro forma financial statements were based on preliminary estimates, accounting judgments and currently available information and assumptions that management believes were reasonable at the time such statements were prepared. The unaudited pro forma financial statements provide a discussion of how such adjustments were derived and presented.

HEXO currently has no plans or proposals for material changes in the business affairs of the acquired business and entities which may have a significant effect on the financial performance or financial position of HEXO.

2.5

Prior Valuations

To the knowledge of HEXO, no valuation opinion was obtained within the last 12 months by either HEXO or Redecan required by securities legislation or a Canadian exchange or market to support the consideration paid by HEXO for the Acquisition.

2.6

Parties to Transaction

The Acquisition was not with an "informed person" (as such term is defined in Section 1.1 of National Instrument 51-102-Continuous Disclosure Obligations), associate or affiliate of HEXO.

2.7

Date of Report

September 24, 2021.

Financial Statements and Other Information

The following financial statements set out in the schedules hereto form an integral part of this Business Acquisition Report:

Schedule A: Audited Consolidated Financial Statements of 2579951 Ontario Inc. for the financial year ended December 31, 2020 (prepared in accordance with Canadian accounting standards for private enterprises ("ASPE")
Schedule B: Unaudited Interim Consolidated Financial Statements of 2579951 Ontario Inc. for the three months ended March 31, 2021 (prepared in accordance with ASPE)

-2-

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Schedule C: Unaudited pro forma condensed consolidated financial statements of HEXO that give effect to the acquisition of Redecan as at April 30, 2021 and for the nine months ended April 30, 2021 and for the year ended July 31, 2020

No change has been made to any of the aforementioned financial statements from those appended to HEXO's Amended and Restated Material Change Report dated July 14, 2021, and HEXO is relying on such statements pursuant to the exemption set forth in subsection 8.4(4) of National Instrument 51-102-Continuous Disclosure Obligations, which allows reliance on earlier financial statements when certain conditions have been met.

-3-

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SCHEDULE A

(See attached)

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2579951 Ontario Inc.

Consolidated Financial Statements

December 31, 2020

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Independent Auditor's Report

To the Shareholders of 2579951 Ontario Inc.:

Opinions

We have audited the consolidated financial statements of 2579951 Ontario Inc. and its subsidiaries (the "Company"), which comprise the consolidated balance sheet as at December 31, 2020, and the consolidated statements of earnings (loss), retained earnings (deficit) and cash flows for the year then ended, and notes to the consolidated financial statements, including a summary of significant accounting policies.

Unmodified Opinion on the Consolidated Financial Position

In our opinion, the accompanying consolidated balance sheet presents fairly, in all material respects, the consolidated financial position of the Company as at December 31, 2020, in accordance with Canadian accounting standards for private enterprises.

Qualified Opinion on the Consolidated Results of Operations and Cash Flows

In our opinion, except for the possible effects of the matter described in the Basis for Opinions, Including Basis for Qualified Opinion on the Results of Consolidated Operations and Cash Flows section or our report, the accompanying consolidated statement of earnings (loss), retained earnings (deficit) and cash flows present fairly, in all material respects, the consolidated results of operations and cash flows of the Company for the year ended December 31, 2020 in accordance with Canadian accounting standards for private enterprises.

Basis for Opinions, Including Basis for Qualified Opinion on the Results of Consolidated Operations and Cash Flows

We were appointed as auditors of the Company after December 31, 2020 and, therefore, did not observe the counting of physical inventories at January 1, 2020 and were unable to satisfy ourselves concerning those inventory quantities by alternative means. Since opening inventories enter into the determination of the results of operations and cash flows, we were unable to determine whether any adjustments might have been required in the consolidated statement of earnings (loss) and the cash flows from operating activities reported in the cash flow statement. Our audit opinion on the consolidated results of operations and cash flows for the year ended December 31, 2020 is modified because of the possible effects of this scope limitation.

We conducted our audit in accordance with Canadian generally accepted auditing standards. Our responsibilities under those standards are further described in the Auditor's Responsibilities for the Audit of the Consolidated Financial Statements section of our report. We are independent of the Company in accordance with the ethical requirements that are relevant to our audit of the consolidated financial statements in Canada, and we have fulfilled our other ethical responsibilities in accordance with these requirements. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our unmodified opinion on the consolidated financial position and our qualified opinion on the consolidated results of operations and cash flows.

Other Matter - Comparative Information

The comparative information for the year ended December 31, 2019 is unaudited and accordingly we do not express an audit opinion on the comparative figures.

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Responsibilities of Management and Those Charged with Governance for the Consolidated Financial Statements

Management is responsible for the preparation and fair presentation of the consolidated financial statements in accordance with Canadian accounting standards for private enterprises, and for such internal control as management determines is necessary to enable the preparation of consolidated financial statements that are free from material misstatement, whether due to fraud or error.

In preparing the consolidated financial statements, management is responsible for assessing the Company's ability to continue as a going concern, disclosing, as applicable, matters related to going concern and using the going concern basis of accounting unless management either intends to liquidate the Company or to cease operations, or has no realistic alternative but to do so.

Those charged with governance are responsible for overseeing the Company's financial reporting process.

Auditor's Responsibilities for the Audit of the Consolidated Financial Statements

Our objectives are to obtain reasonable assurance about whether the consolidated financial statements as a whole are free from material misstatement, whether due to fraud or error, and to issue an auditor's report that includes our opinion. Reasonable assurance is a high level of assurance, but is not a guarantee that an audit conducted in accordance with Canadian generally accepted auditing standards will always detect a material misstatement when it exists. Misstatements can arise from fraud or error and are considered material if, individually or in the aggregate, they could reasonably be expected to influence the economic decisions of users taken on the basis of these consolidated financial statements.

As part of an audit in accordance with Canadian generally accepted auditing standards, we exercise professional judgment and maintain professional skepticism throughout the audit. We also:

Identify and assess the risks of material misstatement of the consolidated financial statements, whether due to fraud or error, design and perform audit procedures responsive to those risks, and obtain audit evidence that is sufficient and appropriate to provide a basis for our opinion. The risk of not detecting a material misstatement resulting from fraud is higher than for one resulting from error, as fraud may involve collusion, forgery, intentional omissions, misrepresentations, or the override of internal control.

Obtain an understanding of internal control relevant to the audit in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company's internal control.

Evaluate the appropriateness of accounting policies used and the reasonableness of accounting estimates and related disclosures made by management.

Conclude on the appropriateness of management's use of the going concern basis of accounting and, based on the audit evidence obtained, whether a material uncertainty exists related to events or conditions that may cast significant doubt on the Company's ability to continue as a going concern. If we conclude that a material uncertainty exists, we are required to draw attention in our auditor's report to the related disclosures in the consolidated financial statements or, if such disclosures are inadequate, to modify our opinion. Our conclusions are based on the audit evidence obtained up to the date of our auditor's report. However, future events or conditions may cause the Company to cease to continue as a going concern.

Evaluate the overall presentation, structure and content of the consolidated financial statements, including the disclosures, and whether the consolidated financial statements represent the underlying transactions and events in a manner that achieves fair presentation.

We communicate with those charged with governance regarding, among other matters, the planned scope and timing of the audit and significant audit findings, including any significant deficiencies in internal control that we identify during our audit.

Burlington, Ontario

July 13, 2021

Chartered Professional Accountants

Licensed Public Accountants

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2579951 Ontario Inc.

Consolidated Balance Sheet

As at December 31, 2020

2020 2019
(Unaudited)

Assets

Current

Cash

7,806,974 3,110,116

Trade receivables

14,666,289 5,335,688

Government remittances receivable

2,200,906 7,948,282

Inventory (Note 3)

26,792,382 16,454,944

Prepaid expenses and deposits

3,213,503 1,296,368

Receivable from shareholders (Note 4)

117,906 -
54,797,960 34,145,398

Property, plant and equipment (Note 5)

84,136,530 65,322,854

Deposits (Note 5)

4,923,006 -
143,857,496 99,468,252

Liabilities

Current

Trade and other payables

9,407,837 9,815,603

Government remittances payable

3,030,819 876,569

Income taxes payable

4,374,595 104,199

Advances from related parties (Note 6)

116,215,958 89,467,755
133,029,209 100,264,126

Shareholders' Equity (Deficit)

Share capital (Note 7)

48 48

Retained earnings (deficit)

10,828,239 (795,922 )
10,828,287 (795,874 )
143,857,496 99,468,252

Approved on behalf of the Board

Director

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

1

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2579951 Ontario Inc.

Consolidated Statement of Earnings (Loss)

For the year ended December 31, 2020

2020 2019
(Unaudited)

Revenue

Revenue before returns and allowances

107,295,969 17,337,454

Returns and allowances

(5,209,031 ) (152,289 )

Revenue before excise duties (Note 8)

102,086,938 17,185,165

Excise duties

(28,437,696 ) (3,964,572 )

Revenue, net of excise duties

73,649,242 13,220,593

Cost of sales (Note 3)

35,811,886 6,028,301

Gross margin

37,837,356 7,192,292

Selling, general and administrative expenses

Advertising and promotion

997,041 318,939

Amortization

1,303,945 1,021,593

Business taxes and licences

2,148,637 486,074

Consulting fees

1,316,135 -

Donations

- 2,339

Freight and logistics

1,850,686 284,236

Insurance

811,492 514,115

Interest and bank charges

147,755 88,711

Meals and entertainment

119,068 99,819

Office and general

1,903,554 488,603

Professional fees

260,936 173,557

Property taxes

101,340 64,185

Rental

151,873 191,450

Repairs and maintenance

1,122,879 270,627

Salaries, wages and benefits

6,188,585 2,420,380

Supplies

2,737,949 726,733
21,161,875 7,151,361

Income from operations

16,675,481 40,931

Other income (loss)

Foreign exchange gain

36,868 44,127

Impairment loss on property, plant and equipment (Note 5)

(588,593 ) -
(551,725 ) 44,127

Earnings before income tax

16,123,756 85,058

Provision for income taxes (Note 9)

4,499,595 123,299

Net earnings (loss)

11,624,161 (38,241 )

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

2

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2579951 Ontario Inc.

Consolidated Statement of Retained Earnings (Deficit)

For the year ended December 31, 2020

2020 2019
(Unaudited)

Deficit, beginning of year

(795,922 ) (757,681 )

Net earnings (loss)

11,624,161 (38,241 )

Retained earnings (deficit), end of year

10,828,239 (795,922 )

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

3

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2579951 Ontario Inc.

Consolidated Statement of Cash Flows

For the year ended December 31, 2020

2020 2019
(Unaudited)

Cash provided by (used for) the following activities

Operating activities

Net earnings (loss)

11,624,161 (38,241 )

Amortization

12,174,795 4,932,847

Impairment loss on property, plant and equipment

588,593 -
24,387,549 4,894,606

Changes in working capital accounts

Trade receivables

(9,330,601 ) (1,772,667 )

Government remittances receivable

5,747,376 (3,900,635 )

Inventory

(10,337,438 ) (11,624,220 )

Prepaid expenses and deposits

(1,917,135 ) (478,835 )

Income taxes payable

4,270,396 (582,372 )

Trade and other payables

(407,765 ) 5,392,385

Government remittances payable

2,154,250 221,408
14,566,632 (7,850,330 )

Financing activity

Advances from related parties

26,748,203 40,452,298

Investing activities

Purchases of property, plant and equipment

(31,577,065 ) (33,668,113 )

Advances to shareholders

(117,906 ) -

Deposits

(4,923,006 ) -

Increase (decrease) in cash

4,696,858 (1,066,145 )

Cash, beginning of year

3,110,116 4,176,261

Cash, end of year

7,806,974 3,110,116

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

4

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2579951 Ontario Inc.

Notes to the Consolidated Financial Statements

For the year ended December 31, 2020

(Figures as at December 31, 2019 and for the year then ended are unaudited)

1.

Incorporation and operations

2579951 Ontario Inc. was incorporated under the Ontario Business Corporations Act on May 30, 2017. 2579951 Ontario Inc., through its wholly owned subsidiaries 9037136 Canada Inc. (o/a Redecan Pharm) and 2526356 Ontario Inc. (collectively referred to as the "Company"), operate as a licensed cultivator, processor and seller of medical and recreational cannabis in Canada under the Cannabis Act.

2.

Significant accounting policies

The consolidated financial statements have been prepared in accordance with Canadian accounting standards for private enterprises "ASPE" set out in Part II of the CPA Canada Handbook - Accounting, as issued by the Accounting Standards Board in Canada and include the following significant accounting policies:

Basis of consolidation

The Company consolidates all subsidiaries. As such, assets, liabilities, revenues and expenses of all subsidiaries have been consolidated and all inter company transactions and balances have been eliminated.

Inventory

Inventory includes biological assets (growing cannabis plants), agriculture inventories (harvested cannabis) and related supplies and packaging materials. All inventory is valued at the lower of cost and net realizable value. Cost is determined by the weighted average method, and includes purchase price of direct materials, direct labour and an allocation of certain overheads. Net realizable value is the estimated selling price in the ordinary course of business, less estimated costs of completion and selling costs.

Property, plant and equipment

Property, plant and equipment are initially recorded at cost. Amortization is provided using the declining balance method at rates intended to amortize the cost of assets over their estimated useful lives.

Method Rate

Land and land improvements

Not amortized

Buildings

declining balance 10 %

Automotive

declining balance 30 %

Computer equipment

declining balance 67 %

Computer software

declining balance 100 %

Equipment

declining balance 30 %

Fences

declining balance 10 %

Furniture and fixtures

declining balance 20 %

Office equipment

declining balance 20 %

Machinery and equipment

declining balance 30 %

Property, plant and equipment acquired during the year but not placed into use during this time are not amortized in the year of acquisition.

Revenue recognition

Revenue from the sale of cannabis to customers is recognized when the Company transfers the control of the goods to the customer, which occurs upon delivery and acceptance by the customer. The Company recognizes revenue for the amount of consideration the Company expects to receive, taking into account the impact from any rights of return on sales, price concessions or similar obligations.

Income taxes

The Company accounts for income taxes using the taxes payable method. Under this method, a provision is only made for taxes payable or recoverable in the current year. Income taxes payable/recoverable are measured using the income tax rates and laws established by taxation authorities and in effect at the balance sheet date.

5

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2579951 Ontario Inc.

Notes to the Consolidated Financial Statements

For the year ended December 31, 2020

(Figures as at December 31, 2019 and for the year then ended are unaudited)

2.

Significant accounting policies (Continued from previous page)

Leases

A lease that transfers substantially all of the benefits and risks of ownership is classified as a capital lease. At the inception of a capital lease, an asset and a payment obligation is recorded at an amount equal to the lesser of the present value of the minimum lease payments and the property's fair market value. Assets under capital leases are amortized using the declining balance method, over their estimated useful lives. All other leases are accounted for as operating leases and rental payments are expensed as incurred.

An arrangement contains a lease where the arrangement conveys a right to use the underlying tangible asset, and whereby its fulfillment is dependent on the use of the specific tangible asset. After the inception of the arrangement, a reassessment of whether the arrangement contains a lease is made only in the event that:

there is a change in contractual terms;

a renewal option is exercised or an extension is agreed upon by the parties to the arrangement;

there is a change in the determination of whether the fulfillment of the arrangement is dependent on the use of the specific tangible asset; or

there is a substantial physical change to the specified tangible asset.

Foreign currency translation

These consolidated financial statements have been presented in Canadian dollars, the principal currency of the Company's operations.

Transaction amounts denominated in foreign currencies are translated into their Canadian dollar equivalents at exchange rates prevailing at the transaction dates. Carrying values of monetary assets and liabilities reflect the exchange rates at the balance sheet date. Gains and losses on translation or settlement are included in the determination of net earnings (loss) for the current year.

Long-lived assets and discontinued operations

Long-lived assets consist of property, plant and equipment. Long-lived assets held for use are measured and amortized as described in the applicable accounting policies.

The Company performs impairment testing on long-lived assets held for use whenever events or changes in circumstances indicate that the carrying amount of an asset, or group of assets, may not be recoverable. The carrying amount of a long-lived asset is not recoverable if the carrying amount exceeds the sum of the undiscounted future cash flows from its use and disposal. If the carrying amount is not recoverable, impairment is then measured as the amount by which the asset's carrying amount exceeds its fair value. Fair value is measured using discounted future cash flows. Any impairment is included in net earnings (loss) for the year.

Use of estimates

The preparation of consolidated financial statements in conformity with Canadian accounting standards for private enterprises requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated financial statements, and the reported amounts of revenues and expenses during the year.

Accounts receivable are stated after evaluation as to their collectability and an appropriate allowance for doubtful accounts is provided where considered necessary. Provisions are made for slow moving and obsolete inventory, and for potential returns, allowance and price concessions on product sold. Amortization is based on the estimated useful lives of property, plant and equipment.

By their nature, these estimates are subject to measurement uncertainty, and the effect on the consolidated financial statements from changes in such estimates in future years could be material. These estimates and assumptions are reviewed periodically and, as adjustments become necessary they are reported in earnings in the years in which they become known.

6

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2579951 Ontario Inc.

Notes to the Consolidated Financial Statements

For the year ended December 31, 2020

(Figures as at December 31, 2019 and for the year then ended are unaudited)

2.

Significant accounting policies (Continued from previous page)

Financial instruments

The Company recognizes its financial instruments when the Company becomes party to the contractual provisions of the financial instrument. All financial instruments are initially recorded at their fair value, including financial assets and liabilities originated and issued in a related party transaction with management. Financial assets and liabilities originated and issued in all other related party transactions are initially measured at their carrying or exchange amount in accordance with Section 3840 Related Party Transactions.

At initial recognition, the Company may irrevocably elect to subsequently measure any financial instrument at fair value. The Company has not made such an election during the year.

Transaction costs and financing fees directly attributable to the origination, acquisition, issuance or assumption of financial instruments subsequently measured at fair value are immediately recognized in net earnings (loss). Conversely, transaction costs and financing fees are added to the carrying amount for those financial instruments subsequently measured at cost or amortized cost.

3.

Inventory

2020 2019

Packaging materials

4,571,980 4,586,233

Cannabis plants

1,833,898 1,830,474

Bulk cannabis flower

12,489,460 5,385,895

Bulk cannabis extracts

3,218,154 3,383,898

Finished goods

4,678,890 1,268,444
26,792,382 16,454,944

The cost of inventories recognized as an expense and included in cost of sales amounted to $35,811,886 (2019 - $6,028,301), including $661,624 (2019 - $nil) relating to packaging materials which were written off as obsolete during the year.

Included in cost of sales is amortization of production equipment of $10,042,552 (2019 - $3,911,254).

4.

Receivable from shareholder

The balance due from the shareholder is unsecured, non-interest bearing and due on demand.

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2579951 Ontario Inc.

Notes to the Consolidated Financial Statements

For the year ended December 31, 2020

(Figures as at December 31, 2019 and for the year then ended are unaudited)

5.

Property, plant and equipment

2020 2019
Accumulated Net book Net book
Cost amortization value value

Land and land improvements

5,337,750 - 5,337,750 2,984,120

Buildings

59,647,615 7,541,462 52,106,153 46,173,589

Automotive

215,204 87,368 127,836 109,017

Computer equipment

1,766,038 1,340,614 425,424 560,231

Computer software

4,069,098 3,590,025 479,073 1,424,915

Equipment

33,040,257 7,850,969 25,189,288 13,599,584

Fences

21,187 10,875 10,312 11,410

Furniture and fixtures

316,282 68,881 247,401 261,242

Office equipment

151,511 37,095 114,416 70,300

Machinery and equipment

253,235 154,358 98,877 128,446
104,818,177 20,681,647 84,136,530 65,322,854

Deposits included in the consolidated balance sheet represent deposits placed for certain property, plant and equipment to be used in the Company's production operations, which has not been delivered as of December 31, 2020. Additional commitments relating to these items is disclosed in Note 10.

During the year the Company recorded an impairment loss on property, plant and equipment relating to certain construction costs which had been capitalized, but for which management determined the construction was not expected to be completed.

6.

Advances from related parties

2020 2019

2516576 Ontario Inc. (controlling shareholder)

115,847,648 89,132,156

Minority shareholders

1,060 75,779

Member of immediate family of minority shareholders

367,250 259,820
116,215,958 89,467,755

Amounts owing to the above related parties are unsecured, non-interest bearing and due on demand.

7.

Share capital

Authorized

Unlimited number of common shares

2020 2019

Issued

100 Common shares

48 48

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2579951 Ontario Inc.

Notes to the Consolidated Financial Statements

For the year ended December 31, 2020

(Figures as at December 31, 2019 and for the year then ended are unaudited)

8.

Revenue

The Company earns revenues from sales to medical patients ("medical") and through provincial distributors for the recreational market ("recreational"). The gross revenue recognized by major category is as follows:

2020 2019

Revenue

Medical

5,499,766 2,204,971

Recreational

101,796,203 15,132,483

Returns and allowances

(5,209,031 ) (152,289 )

Revenue before excise taxes

102,086,938 17,185,165
9.

Income taxes

The reconciliation of the Company's effective income tax expense is as follows:

2020 2019

Expected tax expense

4,272,795 (10,134 )

Increase (decrease) in income tax expense resulting from:

Impact of difference between amortization for accounting purposes and CCA taken in the period

(1,077,586 ) (1,050,024 )

Intercompany charges capitalized for tax purposes

4,163,664 (1,734,670 )

Ontario minimum tax

214,109 -

Non-deductible expenses

19,485 13,089

Impact of tax loss carried forward against period taxable income

(3,092,872 ) 2,905,038

Actual tax expense

4,499,595 123,299
10.

Commitments

The Company has entered into various operating lease agreements with estimated minimum annual payments as follows:

2021

214,243

2022

210,000

2023

210,000

2024

210,000

2025

210,000

Thereafter, to 2029

390,000
1,444,243

During the year, the Company signed various agreement to purchase items of manufacturing equipment. As at December 31, 2020, outstanding commitments for manufacturing equipment were $16,349,578.

11.

Financial instruments

The Company, as part of its operations, carries a number of financial instruments. It is management's opinion that the Company is not exposed to significant interest, currency, credit, liquidity or other price risks arising from these financial instruments except as otherwise disclosed.

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2579951 Ontario Inc.

Notes to the Consolidated Financial Statements

For the year ended December 31, 2020

(Figures as at December 31, 2019 and for the year then ended are unaudited)

Credit concentration

As at December 31, 2020, 3 customers (2019 - 3) accounted for 95% (2019 - 89%) of consolidated revenues before excise duties and 3 customers (2019 - 3) accounted for 97% (2019 - 99%) of the consolidated accounts receivable. The Company believes that there is no unusual exposure associated with the collection of these receivables as the customers are government agencies that distribute cannabis in their respective provinces.

Liquidity risk

Liquidity risk is the risk that the Company will encounter difficulty in meeting obligations associated with financial liabilities. The Company's objective is to have sufficient liquidity to meet its liabilities from due. The Company monitors cash balances and cash flows generated from operations to meet its requirements. The Company is exposed to liquidity risk relating to its trade and other payables and advances from related parties which are due on demand.

12.

Subsequent events

On May 28, 2021, HEXO Corp. announced that it has entered into a definitive share purchase agreement to acquire all the outstanding shares of the Company for a purchase price of $925 million payable in cash and through the issuance of common shares of HEXO Corp. (the "Transaction"). The Transaction is subject to certain customary adjustments, closing conditions, applicable regulatory approvals, and HEXO Corp. shareholder approval. The close date of the Transaction is not determinable as of the date of these financial statements. As part of the Transaction and related customary adjustments, the parties have agreed that the balance owing to the controlling shareholder 2516576 Ontario Inc., as disclosed in Note 6, will be settled in full on close of the Transaction. Accordingly, the balance owing to 2516576 Ontario Inc. has been classified as a current liability in advances from related parties in the consolidated balance sheet.

On May 14, 2021, 2579951 Ontario Inc. was amalgamated with its parent company, 2516576 Ontario Inc., to form 5048963 Ontario Inc. (the "Company").

13.

ASPE to International Financial Reporting Standards Reconciliation

As discussed in Note 12, the Company entered into a definitive share purchase agreement on May 28, 2021 to sell all of the outstanding shares of the Company to HEXO Corp. The Company has presented an ASPE to International Financial Reporting Standards ("IFRS") reconciliation for the statement of earnings (loss), balance sheet and a description of the impact of each adjustment for each period presented. The tables below quantify the significant differences on the Company's net earnings and financial position between ASPE and IFRS as at and for the years ended December 31, 2020 and 2019 with descriptions thereto of such differences.

Notes 2020 2019

Net income (loss) after tax under ASPE

11,624,161 (38,241 )

IFRS Adjustments

Variable consideration adjustment to gross revenue

(i ) (249,883 ) (112,725 )

Realized fair value amounts on inventory sold

(ii ) (81,213,167 ) (6,013,788 )

Unrealized gain on biological asset transformation

(ii ) 122,236,824 18,933,426

Reversal of cost of sales

(iii ) 100,000 75,000

Depreciation on right-of-use assets

(iii ) (249,293 ) (198,245 )

Interest expense on lease liability

(iii ) (147,696 ) (146,046 )

Reversal of rent expense

(iii ) 149,388 189,554

Deferred income tax expense

(iv ) (10,619,186 ) (3,956,264 )

Net and comprehensive income under IFRS

41,631,148 8,732,671

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Table of Contents
13.

ASPE to International Financial Reporting Standards Reconciliation (Continued from previous page)

Notes As reported
under ASPE
Adjustments As reported
under IFRS

As at December 31, 2020

Inventory

(ii) 26,792,382 49,309,456 76,101,838

Biological assets

(ii) - 9,098,703 9,098,703

Right-of-use asset, net

(iii) - 1,737,168 1,737,168

Trade and other payables

(iii) 9,407,837 (120,000 ) 9,287,837

Current lease liability

(iii) - 238,650 238,650

Non-current lease liability

(iii) - 2,001,156 2,001,156

Provisions

(i), (iii) - 405,071 405,071

Deferred tax liability

(iv) - 14,575,450 14,575,450

Retained earnings

(i), (ii), (iii), (iv) 10,828,239 43,045,000 53,873,239

As at December 31, 2019

Inventory

(ii) 16,454,944 11,714,981 28,169,925

Biological assets

(ii) - 5,669,521 5,669,521

Right-of-use asset, net

(iii) - 1,986,461 1,986,461

Trade and other payables

(iii) 9,815,603 (60,000 ) 9,755,603

Current lease liability

(iii) - 249,387 249,387

Non-current lease liability

(iii) - 2,032,112 2,032,112

Provision

(i), (iii) - 155,188 155,188

Deferred tax liability

(iv) - 3,956,264 3,956,264

Retained earnings

(i), (ii), (iii), (iv) (795,922 ) 13,038,012 12,242,090

(i) Under IFRS, an adjustment is required to record the constraint on variable consideration resulting from the markdown / price reductions arrangements with customers.

(ii) Under IFRS, an adjustment is required to record biological assets at fair value less cost to sell. Further, biological assets are transferred to inventory at fair value less cost to sell. An adjustment is made to recognize inventory at cost which is the fair value less cost of sell at the point where it transferred from biological assets. The following represent the key assumptions used in the determination of the fair value of the biological assets:

Weighted average selling price (per gram) - $3.18 (2019 - $3.31)

Yield per plant (dried bud and trim) - 1,144 grams (2019 - 968 grams)

Stage of growth - 43% (2019 - 53%)

Attrition rate - 1% (2019 - 1%)

(iii) Under IFRS, an adjustment is required to record right-of-use assets and lease liabilities for items leased. After initial recognition, IFRS requires the discounted lease liability to be accreted to the full liability amount and associated interest expense is recognized. In preparing the estimate for the value of the lease liability, management has determined a range of incremental borrowing rates attributable to underlying leases to be 2.28% - 6.84%. Depreciation expense is recognized on the right-of use assets over the lease term or the non-cancellable lease term ranging from 2 - 21 years. Additionally, an adjustment for lease restitution costs is also required to be recognized under IFRS as a provision.

(iv) Under ASPE, the Company uses the taxes payable method of accounting for income taxes. Under IFRS, the Company is required to recognize both current and deferred taxes. Deferred tax has been recognized on any temporary differences between the carrying amounts of assets and liabilities and the corresponding tax bases used in the computation of taxable earnings. Deferred tax assets and liabilities have been measured at the tax rates that are expected to apply in the period when the asset is realized, and the liability is settled. Deferred tax assets are recognized to the extent future recovery is probable. Deferred tax assets have been reduced to the extent that it is no longer probable that sufficient taxable earnings will be available to allow all or part of the asset to be recovered.

Table of Contents

SCHEDULE B

(See attached)

Table of Contents

2579951 Ontario Inc.

Interim Consolidated Financial Statements

March 31, 2021

(Unaudited)

Table of Contents Table of Contents

2579951 Ontario Inc.

Interim Consolidated Balance Sheets

As at

(Unaudited)

March 31
2021

December 31
2020

(audited)

Assets

Current

Cash

2,811,611 7,806,974

Trade receivables

14,708,430 14,666,289

Government remittances receivable

1,533,359 2,200,906

Inventory (Note 3)

31,306,782 26,792,382

Prepaid expenses and deposits

5,655,733 3,213,503

Receivable from shareholders (Note 4)

117,937 117,906
56,133,852 54,797,960

Property, plant and equipment (Note 5)

85,481,713 84,136,530

Deposits (Note 5)

4,795,656 4,923,006
146,411,221 143,857,496

Liabilities

Current

Trade and other payables

6,172,256 9,407,837

Government remittances payable

2,657,052 3,030,819

Income taxes payable

3,604,994 4,374,595

Advances from related parties (Note 6)

116,235,008 116,215,958
128,669,310 133,029,209

Share capital (Note 7)

48 48

Retained earnings

17,741,863 10,828,239
17,741,911 10,828,287
146,411,221 143,857,496

Approved on behalf of the Board

Director

The accompanying notes are an integral part of these financial statements

1

Table of Contents

2579951 Ontario Inc.

Interim Consolidated Statements of Earnings (Loss)

For the periods ended March 31, 2021 and March 31, 2020

(Unaudited)

3 Months
Ended
March 31
2021
3 Months
Ended
March 31
2020

Revenue

Revenue before returns and allowances

35,038,368 13,051,200

Returns and allowances

(1,121,304 ) (56,925 )

Revenue before excise duties (Note 8)

33,917,064 12,994,275

Excise duties

(9,265,410 ) (2,980,950 )

Revenue, net of excise duties

24,651,654 10,013,325

Cost of sales (Note 3)

10,279,719 8,228,063

Gross margin

14,371,935 1,785,262

Selling, general and administrative expenses

Advertising and promotion

727,064 12,320

Amortization

378,648 325,322

Business taxes and licences

673,270 278,256

Consulting fees

142,408 487,309

Freight and logistics

680,598 201,113

Insurance

275,996 151,755

Interest and bank charges

42,951 32,276

Meals and entertainment

25,422 31,096

Office and general

513,326 272,213

Professional fees

15,903 32,555

Property taxes

53,567 24,477

Repairs and maintenance

258,847 143,786

Rental

37,397 38,289

Salaries, wages and benefits

1,403,717 883,467

Supplies

831,534 579,187
6,060,648 3,493,421

Income (loss) from operations

8,311,287 (1,708,159 )

Other income (loss)

Foreign exchange gain (loss)

(130,428 ) 302,253

Impairment loss on property, plant and equipment

(37,235 ) -
(167,663 ) 302,253

Earnings (loss) before income tax

8,143,624 (1,405,906 )

Provision for income taxes (Note 9)

1,230,000 609,666

Net earnings (loss)

6,913,624 (2,015,572 )

The accompanying notes are an integral part of these financial statements

2

Table of Contents

2579951 Ontario Inc.

Interim Consolidated Statements of Retained Earnings (Deficit)

For the periods ended March 31, 2021 and March 31, 2020

(Unaudited)

3 Months
Ended
March 31
2021
3 Months
Ended
March 31
2020

Retained earnings (deficit), beginning of period

10,828,239 (795,921 )

Net earnings (loss)

6,913,624 (2,015,572 )

Retained earnings (deficit), end of period

17,741,863 (2,811,493 )

The accompanying notes are an integral part of these financial statements

3

Table of Contents

2579951 Ontario Inc.

Interim Consolidated Statements of Cash Flows

For the periods ended March 31, 2021 and March 31, 2020

(Unaudited)

3 Months
Ended
March 31
2021
3 Months
Ended
March 31
2020

Cash provided by (used for) the following activities

Operating activities

Net earnings (loss)

6,913,624 (2,015,572 )

Amortization

4,261,528 2,034,043

Impairment loss on property, plant and equipment

37,235 -
11,212,387 18,471

Changes in working capital accounts

Trade receivables

(42,141 ) (5,519,189 )

Government remittances receivable

667,547 (189,266 )

Inventory

(4,514,399 ) (740,794 )

Prepaid expenses and deposits

(2,442,230 ) (258,646 )

Trade and other payables

(3,235,580 ) (2,175,960 )

Government remittances payable

(373,767 ) 41,413

Income taxes payable

(769,601 ) 109,666
502,216 (8,714,305 )

Financing activity

Advances from related parties

19,050 11,481,461

Investing activities

Purchases of property, plant and equipment

(5,643,948 ) (5,545,093 )

Advances to shareholders

(31 ) -

Deposits

127,350 -
(5,516,629 ) (5,545,093 )

Decrease in cash

(4,995,363 ) (2,777,937 )

Cash, beginning of period

7,806,974 3,110,116

Cash, end of period

2,811,611 332,179

The accompanying notes are an integral part of these financial statements

4

Table of Contents

2579951 Ontario Inc.

Notes to the Interim Consolidated Financial Statements

For the periods ended March 31, 2021 and 2020

(Unaudited)

1.

Incorporation and operations

2579951 Ontario Inc. was incorporated under the Ontario Business Corporations Act on May 30, 2017. 2579951 Ontario Inc., through its wholly owned subsidiaries 9037136 Canada Inc. (o/a Redecan Pharm) and 2526356 Ontario Inc. (collectively referred to as the "Company"), operate as a licensed cultivator, processor and seller of medical and recreational cannabis in Canada under the Cannabis Act.

2.

Significant accounting policies

The interim consolidated financial statements have been prepared in accordance with Canadian accounting standards for private enterprises set out in Part II of the CPA Canada Handbook - Accounting, as issued by the Accounting Standards Board in Canada and include the following significant accounting policies:

Basis of consolidation

The Company consolidates all subsidiaries. As such, assets, liabilities, revenues and expenses of all subsidiaries have been consolidated and all inter company transactions and balances have been eliminated.

Inventory

Inventory includes biological assets (growing cannabis plants), agriculture inventories (harvested cannabis) and related supplies and packaging materials. All inventory is valued at the lower of cost and net realizable value. Cost is determined by the weighted average method, and includes purchase price of direct materials, direct labour and an allocation of certain overheads. Net realizable value is the estimated selling price in the ordinary course of business, less estimated costs of completion and selling costs.

Property, plant and equipment

Property, plant and equipment are initially recorded at cost. Amortization is provided using the declining balance method at rates intended to amortize the cost of assets over their estimated useful lives.

Method Rate

Land and land improvement

Not amortized

Buildings

declining balance 10 %

Automotive

declining balance 30 %

Computer equipment

declining balance 67 %

Computer software

declining balance 100 %

Equipment

declining balance 30 %

Fences

declining balance 10 %

Furniture and fixtures

declining balance 20 %

Office equipment

declining balance 20 %

Machinery and equipment

declining balance 30 %

Property, plant and equipment acquired during the period but not placed into use during this time are not amortized in the period of acquisition.

Revenue recognition

Revenue from the sale of cannabis to customers is recognized when the Company transfers the control of the goods to the customer, which occurs upon delivery and acceptance by the customer. The Company recognizes revenue for the amount of consideration the Company expects to receive, taking into account the impact from any rights of return on sales, price concessions or similar obligations.

Income taxes

The Company accounts for income taxes using the taxes payable method. Under this method, a provision is only made for taxes payable or recoverable in the current year. Income taxes payable/recoverable are measured using the income tax rates and laws established by taxation authorities and in effect at the balance sheet date.

5

Table of Contents

2579951 Ontario Inc.

Notes to the Interim Consolidated Financial Statements

For the period ended March 31, 2021 and 2020

(Unaudited)

2.

Significant accounting policies (Continued from previous page)

Leases

A lease that transfers substantially all of the benefits and risks of ownership is classified as a capital lease. At the inception of a capital lease, an asset and a payment obligation is recorded at an amount equal to the lesser of the present value of the minimum lease payments and the property's fair market value. Assets under capital leases are amortized using the declining balance method, over their estimated useful lives. All other leases are accounted for as operating leases and rental payments are expensed as incurred.

An arrangement contains a lease where the arrangement conveys a right to use the underlying tangible asset, and whereby its fulfillment is dependent on the use of the specific tangible asset. After the inception of the arrangement, a reassessment of whether the arrangement contains a lease is made only in the event that:

there is a change in contractual terms;

a renewal option is exercised or an extension is agreed upon by the parties to the arrangement;

there is a change in the determination of whether the fulfillment of the arrangement is dependent on the use of the specific tangible asset; or

there is a substantial physical change to the specified tangible asset.

Foreign currency translation

These financial statements have been presented in Canadian dollars, the principal currency of the Company's operations.

Transaction amounts denominated in foreign currencies are translated into their Canadian dollar equivalents at exchange rates prevailing at the transaction dates. Carrying values of monetary assets and liabilities reflect the exchange rates at the balance sheet date. Gains and losses on translation or settlement are included in the determination of net earnings (loss) for the current period.

Long-lived assets

Long-lived assets consist of property, plant and equipment. Long-lived assets held for use are measured and amortized as described in the applicable accounting policies.

The Company performs impairment testing on long-lived assets held for use whenever events or changes in circumstances indicate that the carrying amount of an asset, or group of assets, may not be recoverable. The carrying amount of a long-lived asset is not recoverable if the carrying amount exceeds the sum of the undiscounted future cash flows from its use and disposal. If the carrying amount is not recoverable, impairment is then measured as the amount by which the asset's carrying amount exceeds its fair value. Fair value is measured using discounted future cash flows. Any impairment is included in net earnings (loss) for the period.

Use of estimates

The preparation of financial statements in conformity with Canadian accounting standards for private enterprises requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenues and expenses during the period.

Accounts receivable are stated after evaluation as to their collectability and an appropriate allowance for doubtful accounts is provided where considered necessary. Provisions are made for slow moving and obsolete inventory, and for potential returns, allowance and price concessions on product sold. Amortization is based on the estimated useful lives of property, plant and equipment.

By their nature, these estimates are subject to measurement uncertainty, and the effect on the financial statements from changes in such estimates in future periods could be material. These estimates and assumptions are reviewed periodically and, as adjustments become necessary they are reported in earnings in the periods in which they become known.

Financial instruments

The Company recognizes its financial instruments when the Company becomes party to the contractual provisions of the financial instrument. All financial instruments are initially recorded at their fair value, including financial assets and liabilities originated and issued in a related party transaction with management. Financial assets and liabilities originated and issued in all other related party transactions are initially measured at their carrying or exchange amount in accordance with Section 3840 Related Party Transactions.

6

Table of Contents

2579951 Ontario Inc.

Notes to the Interim Consolidated Financial Statements

For the period ended March 31, 2021 and 2020

(Unaudited)

2.

Significant accounting policies (Continued from previous page)

Financial instruments(Continued from previous page)

At initial recognition, the Company may irrevocably elect to subsequently measure any financial instrument at fair value. The Company has not made such an election during the period.

Transaction costs and financing fees directly attributable to the origination, acquisition, issuance or assumption of financial instruments subsequently measured at fair value are immediately recognized in net earnings (loss). Conversely, transaction costs and financing fees are added to the carrying amount for those financial instruments subsequently measured at cost or amortized cost.

3.

Inventory

March 31 December 31
2021 2020

Packaging materials

9,552,491 4,571,980

Cannabis plants

1,812,457 1,833,898

Bulk cannabis flower

10,214,097 12,489,460

Bulk cannabis extracts

4,964,932 3,218,154

Finished goods

4,762,805 4,678,890
31,306,782 26,792,382

The cost of inventories recognized as an expense and included in cost of sales amounted to $10,279,719 (March 31, 2020 - $8,228,063).

Included in cost of sales is amortization of production equipment of $3,069,742 (March 31, 2020 - $1,708,721).

4.

Receivable from shareholder

The balance due from the shareholder is unsecured, non-interest bearing and due on demand.

7

Table of Contents

2579951 Ontario Inc.

Notes to the Interim Consolidated Financial Statements

For the period ended March 31, 2021 and 2020

(Unaudited)

5.

Property, plant and equipment

March 31 December 31
2021 2020
Accumulated Net book Net book
Cost amortization value value

Land and land improvements

5,342,316 - 5,342,316 5,337,750

Buildings

61,226,893 9,036,892 52,190,001 52,106,153

Automotive

330,327 102,712 227,615 127,836

Computer equipment

1,795,158 1,402,256 392,902 425,424

Computer software

4,013,623 3,659,593 354,030 479,073

Equipment

36,389,087 9,874,708 26,514,379 25,189,288

Fences

21,187 11,133 10,054 10,312

Furniture and fixtures

316,282 84,807 231,475 247,401

Office equipment

151,511 38,351 113,160 114,416

Machinery and equipment

386,226 280,445 105,781 98,877
109,972,610 24,490,897 85,481,713 84,136,530

Deposits included in the consolidated balance sheet represent deposits placed for certain property, plant and equipment to be used in the Company's production operations, which has not been delivered as of March 31, 2021. Additional commitments relating to these items is disclosed in Note 10.

6.

Advances from related parties

March 31 December 31
2021 2020

2516576 Ontario Inc. (controlling shareholder)

115,843,448 115,847,648

Minority shareholders

1,060 1,060

Member of immediate family of minority shareholders

390,500 367,250
116,235,008 116,215,958

Amounts owing to the above related parties are unsecured, non-interest bearing and due on demand.

7.

Share capital

Authorized

Unlimited number of common shares

March 31 December 31
2021 2020

Issued

Common shares
100 Common shares

48 48

8

Table of Contents

2579951 Ontario Inc.

Notes to the Interim Consolidated Financial Statements

For the period ended March 31, 2021 and 2020

(Unaudited)

8.

Revenue

The Company earns revenues from sales to medical patients ("medical") and through provincial distributors for the recreational market ("recreational"). The revenue before excise taxes recognized by major category is as follows:

3 Months
Ended
3 Months
Ended
March 31 March 31
2021 2020

Revenue

Medical

1,610,210 1,078,589

Recreational

33,428,158 11,972,611

Returns and allowances

(1,121,304 ) (56,925 )

Revenue before excise taxes

33,917,064 12,994,275
9.

Income taxes

The reconciliation of the Company's effective income tax expense is as follows:

3 Months
Ended
3 Months
Ended
March 31 March 31
2021 2020

Expected tax expense (recovery)

1,677,760 (372,565 )

Increase (decrease) in income tax expense resulting from:

Impact of difference between amortization for accounting purposes and CCA taken in the period

265,433 (542,168 )

Intercompany charges capitalized for tax purposes

(1,095,847 ) 2,151,701

Non-deductible expenses

4,787 2,972

Impact of tax loss carried forward against period taxable income

377,867 (630,274 )

Actual tax expense

1,230,000 609,666
10.

Commitments

The Company has entered into various lease agreements with estimated minimum annual payments as follows:

2021

154,451

2022

210,000

2023

210,000

2024

210,000

2025

210,000

Thereafter, to 2029

390,000
1,384,451

During the period, the Company signed various agreement to purchase items of manufacturing equipment. As at March 31, 2021, outstanding commitments for manufacturing equipment were $16,112,812.

9

Table of Contents

2579951 Ontario Inc.

Notes to the Interim Consolidated Financial Statements

For the period ended March 31, 2021 and 2020

(Unaudited)

11.

Financial instruments

The Company, as part of its operations, carries a number of financial instruments. It is management's opinion that the Company is not exposed to significant interest, currency, credit, liquidity or other price risks arising from these financial instruments except as otherwise disclosed.

Credit concentration

For the three months ended March 31, 2021, 3 customers (March 31, 2020 - 3) accounted for 89% ( March 31, 2020 - 92%) of revenues before excise duties and as at March 31, 2020, 3 customers (December 31, 2020 - 3) accounted for 94% (December 31, 2020 - 97%) of the accounts receivable. The Company believes that there is no unusual exposure associated with the collection of these receivables as the customers are government agencies that distribute cannabis in their respective provinces.

Liquidity risk

Liquidity risk is the risk that the Company will encounter difficulty in meeting obligations associated with financial liabilities. The Company's objective is to have sufficient liquidity to meet its liabilities from due. The Company monitors cash balances and cash flows generated from operations to meet its requirements. The Company is exposed to liquidity risk relating to its trade and other payables and advances from related parties which are due on demand.

12.

Subsequent events

On May 28, 2021, HEXO Corp. announced that it has entered into a definitive share purchase agreement to acquire all the outstanding shares of the Company for a purchase price of $925 million payable in cash and through the issuance of common shares of HEXO Corp. (the "Transaction"). The Transaction is subject to certain customary adjustments, closing conditions, applicable regulatory approvals, and HEXO Corp. shareholder approval. The close date of the Transaction is not determinable as of the date of these financial statements. As part of the Transaction and related customary adjustments, the parties have agreed that the balance owing to the controlling shareholder 2516576 Ontario Inc., as disclosed in Note 6, will be settled in full on close of the Transaction. Accordingly, the balance owing to 2516576 Ontario Inc. has been classified as a current liability in advances from related parties in the consolidated balance sheet.

On May 14, 2021, 2579951 Ontario Inc. was amalgamated with its parent company, 2516576 Ontario Inc., to form 5048963 Ontario Inc. (the "Company").

10

Table of Contents

2579951 Ontario Inc.

Notes to the Interim Consolidated Financial Statements

For the period ended March 31, 2021 and 2020

(Unaudited)

13.

ASPE to International Financial Reporting Standards Reconciliation

As discussed in Note 12, the Company entered into a definitive share purchase agreement on May 28, 2021 to sell all of the outstanding shares of the Company to HEXO Corp. The Company has presented an ASPE to International Financial Reporting Standards ("IFRS") reconciliation for the statement of earnings (loss), balance sheet and a description of the impact of each adjustment for each period presented. The tables below quantify the significant differences on the Company's net earnings between ASPE and IFRS as at and for the 3 month periods ended March 31, 2021 and 2020 with descriptions thereto of such differences.

Notes Three
Months
ended
March 31,
2021
Three
Months
ended
March 31,
2020

Net income (loss) after tax under ASPE

6,913,624 (2,015,572 )

IFRS Adjustments

Variable consideration adjustment to gross revenue

(i ) (278,998 ) (218,260 )

Realized fair value amounts on inventory sold

(ii ) (15,472,095 ) (3,561,756 )

Unrealized gain on biological asset transformation

(ii ) 20,832,187 13,953,043

Reversal of cost of sales

(iii ) 25,000 25,000

Depreciation on right-of-use assets

(iii ) (62,323 ) (62,323 )

Interest expense on lease liability

(iii ) (36,925 ) (36,928 )

Reversal of rent expense

(iii ) 35,792 37,347

Deferred income tax expense

(iv ) (3,048,337 ) (1,589,577 )

Net and comprehensive income under IFRS

8,907,925 6,530,974
Notes As reported
under ASPE
Adjustments As reported
under IFRS

As at March 31, 2021

Inventory

(ii) 31,306,782 52,366,927 83,673,709

Biological assets

(ii) - 11,401,324 11,401,324

Right-of-use assets, net

(iii) - 1,674,846 1,674,846

Trade and other payables

(iii) 6,172,256 (135,000) 6,037,256

Current lease liability

(iii) - 230,716 230,716

Non-current lease liability

(iii) - 2,000,225 2,000,225

Provisions

(i), (iii) - 520,212 520,212

Deferred tax liability

(iv) - 17,623,787 17,623,787

Retained earnings

(i),(ii),(iii),(iv) 17,141,863 45,203,157 62,345,020
Notes As reported
under ASPE
Adjustments As reported
under IFRS

As at December 31, 2020

Inventory

(ii) 26,792,382 49,309,456 76,101,838

Biological assets

(ii) - 9,098,703 9,098,703

Right-of-use assets, net

(iii) - 1,737,168 1,737,168

Trade and other payables

(iii) 9,407,837 (120,000) 9,287,837

Current lease liability

(iii) - 238,650 238,650

Non-current lease liability

(iii) - 2,001,156 2,001,156

Provisions

(i), (iii) - 405,071 405,071

Deferred tax liability

(iv) - 14,575,450 14,575,450

Retained earnings

(i),(ii),(iii),(iv) 10,828,239 43,045,000 53,873,239

11

Table of Contents

(i) Under IFRS, an adjustment is required to record the constraint on variable consideration resulting from the markdown / price reductions arrangements with customers.

(ii) Under IFRS, an adjustment is required to record biological assets at fair value less cost to sell. Further, biological assets are transferred to inventory at fair value less cost to sell. An adjustment is made to recognize inventory at cost which is the fair value less cost of sell at the point where it transferred from biological assets. The following represent the key assumptions used in the determination of the fair value of the biological assets:

Weighted average selling price (per gram) - $3.60 (December 31, 2020 - $3.18)

Yield per plant (dried bud and trim) - 1,143 grams (December 31, 2020 - 1,144 grams)

Stage of growth - 51% (December 31, 2020 - 43%)

Attrition rate - 1% (December 31, 2020 - 1%)

(iii) Under IFRS, an adjustment is required to record right-of-use assets and lease liabilities for items leased. After initial recognition, IFRS requires the discounted lease liability to be accreted to the full liability amount and associated interest expense is recognized. In preparing the estimate for the value of the lease liability, management has determined a range of incremental borrowing rates attributable to underlying leases to be 2.28% - 6.84%. Depreciation expense is recognized on the right-of use assets over the lease term or the non-cancellable lease term ranging from 2 - 21 years. Additionally, an adjustment for lease restitution costs is also required to be recognized under IFRS as a provision.

(iv) Under ASPE, the Company uses the taxes payable method of accounting for income taxes. Under IFRS, the Company is required to recognize both current and deferred taxes. Deferred tax has been recognized on any temporary differences between the carrying amounts of assets and liabilities and the corresponding tax bases used in the computation of taxable earnings. Deferred tax assets and liabilities have been measured at the tax rates that are expected to apply in the period when the asset is realized, and the liability is settled. Deferred tax assets are recognized to the extent future recovery is probable. Deferred tax assets have been reduced to the extent that it is no longer probable that sufficient taxable earnings will be available to allow all or part of the asset to be recovered.

12

Table of Contents

SCHEDULE C

(See attached)

Table of Contents

HEXO Corp.

Unaudited pro forma condensed consolidated financial statements

As at April 30, 2021 and for the nine months ended April 30, 2021 and for the year ended July 31, 2020

1

Table of Contents

UNAUDITED PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF FINANCIAL POSITION

As at April 30, 2021

(In thousands of Canadian dollars)

HEXO Corp.

April 30, 2021

Redecan Group
March 31, 2021

Note 8

Pro Forma
Adjustments
Note

Pro Forma
Consolidated

April 30, 2021

ASSETS

Current assets

Cash and cash equivalents

81,038 2,812 384,096 5) 67,946
(400,000 ) 6b)

Restricted funds

32,551 - - 32,551

Trade receivables

19,049 14,708 - 33,757

Commodity taxes recoverable and other receivables

10,202 1,533 - 11,735

Prepaid expenses - current

4,386 5,656 - 10,042

Inventory

95,223 83,673 16,327 6c) 195,223

Biological assets

9,222 11,401 - 20,623

Receivable from shareholders

- 118 - 118

Total current assets

251,671 119,901 423 371,995

Non-current assets

Property, plant and equipment

280,183 86,838 13,162 6d), 6e) 380,183

Intangible assets

16,412 319 99,681 6f) 116,412

Convertible debenture receivable

20,246 - - 20,246

Investment in associate and joint ventures

73,379 - - 73,379

Lease receivable

3,795 - - 3,795

License and prepaid royalty

- - - -

Long-term investments

4,402 - - 4,402

Prepaid expenses

3,101 - - 3,101

Deposits

- 4,796 - 4,796

Goodwill

- - 749,026 6g) 749,026

Total assets

653,189 211,854 862,292 1,727,335

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UNAUDITED PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF FINANCIAL POSITION

As at April 30, 2021

(In thousands of Canadian dollars)

HEXO Corp.

April 30, 2021

Redecan Group
March 31, 2021

Note 8

Pro Forma
Adjustments
Note

Pro Forma
Consolidated

April 30, 2021

LIABILITIES

Current Liabilities

Accounts payable and accrued liabilities

42,968 6,037 67,285 6h) 116,290

Excise taxes payable

4,315 - - 4,315

Government remittances payable

- 2,657 - 2,657

Advances from related parties - current

- 116,235 - 116,235

Warrant liabilities

13,037 - - 13,037

Lease liability

4,659 231 - 4,890

Term loan

- - - -

Onerous contract

4,763 - - 4,763

Income taxes payable

- 3,605 - 3,605

Total current liabilities

69,742 128,765 67,285 265,792

Non-current liabilities

Deferred tax liability

- 17,624 82,376 6i) 100,000

Lease liability

22,566 2,000 - 24,566

Advances from related parties

- - - -

Convertible debentures

31,951 - 384,096 5) 416,047

Other long-term liabilities

1,805 520 - 2,325

Total liabilities

126,064 148,909 533,757 808,730

Shareholders' equity

527,125 62,945 (62,945 ) 6a) 918,605
458,765 6b)
(67,285) 6h)

Total liabilities and shareholders' equity

653,189 211,854 862,292 1,727,335

See accompanying notes

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UNAUDITED PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF NET EARNINGS (LOSS)

For the nine months ended April 30, 2021

(In thousands of Canadian dollars except per share amounts)

HEXO Corp.

April 30, 2021

Redecan Group
March 31, 2021

Note 8

Pro Forma
Adjustments
Note

Pro Forma
Consolidated

April 30, 2021

Revenue from sale of goods

120,059 98,147 - 218,206

Excise taxes

(35,219 ) (27,539 ) - (62,758 )

Net revenue from sale of goods

84,840 70,608 - 155,448

Ancillary revenue

168 - - 168

Net revenue

85,008 70,608 - 155,616

Cost of goods sold

57,391 29,910 (773 ) 6d) 86,528

Gross profit before fair value adjustments

27,617 40,698 773 69,088

Realized fair value amounts on inventory sold

17,619 72,209 - 89,828

Unrealized gain on changes in fair value of biological assets

(35,616 ) (115,454 ) - (151,070 )

Gross profit

45,614 83,943 773 130,330

Operating expenses

Selling, general and administrative

39,039 15,886 - 54,925

Marketing and promotion

6,682 1,638 - 8,320

Share-based compensation

10,904 - - 10,904

Research and development

2,901 - - 2,901

Depreciation of property, plant and equipment

4,369 1,153 195 6d) 5,755
38 6e)

Amortization of intangible assets

1,043 55 1,445 6f) 2,543

Restructuring costs

1,721 - - 1,721

Impairment of property, plant and equipment

881 626 - 1,507

Impairment of intangible assets

- - - -

Impairment of goodwill

- - - -

Recognition of onerous contract

- - - -

Disposal of long-lived assets

1,294 - - 1,294

Loss on disposal of property, plant and equipment

45 - - 45

Acquisition and transactions

2,307 - (447 ) 6h) 1,860
71,186 19,358 1,231 91,775

Earnings (loss) from Operations

(25,572 ) 64,585 (458 ) 38,555

Finance expense, net

(7,311 ) (161 ) (42,951 ) 5) (50,423 )

Non-operating expense, net

(12,864 ) (148 ) - (13,012 )

Earnings (loss) and comprehensive income (loss) attributable to shareholders before tax

(45,747 ) 64,276 (43,409 ) (24,880 )

Provision for income taxes

- (4,185 ) 272 6i) (3,913 )

Income tax payable

- (12,672 ) - (12,672 )

Other comprehensive income

Foreign currency translation

3 - - 3

Net earnings (loss) and comprehensive income (loss)

(45,744 ) 47,419 (43,137 ) (41,462 )

Comprehensive income (loss) attributable to:

Shareholders of Hexo Corp

(45,744 ) 47,419 (43,137 ) (41,462 )

Non-controlling interest

- - - -
(45,744 ) 47,419 (43,137 ) (41,462 )

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UNAUDITED PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF NET EARNINGS (LOSS)

For the nine months ended April 30, 2021

(In thousands of Canadian dollars except per share amounts)

HEXO Corp.

April 30, 2021

Redecan Group
March 31, 2021

Note 8

Pro Forma
Adjustments
Note

Pro Forma
Consolidated

April 30, 2021

Basic net loss per common share

$ (0.38 ) 7 $ (0.22 )

Diluted net loss per common share

$ (0.38 ) 7 $ (0.22 )

Basic weighted average number of outstanding shares

121,749,456 7 191,470,572

Diluted weighted average number of outstanding shares

121,749,456 7 191,470,572

See accompanying notes

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UNAUDITED PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF NET EARNINGS (LOSS)

For the year ended July 31, 2020

(In thousands of Canadian dollars except per share amounts)

HEXO Corp.

July 31, 2020

Note 3

Redecan Group
September 30, 2020

Note 8

Pro Forma
Adjustments
Note

Pro Forma
Consolidated

July 31, 2020

Revenue from sale of goods

110,149 74,478 - 184,627

Excise taxes

(29,598 ) (20,285 ) - (49,883 )

Net revenue from sale of goods

80,551 54,193 - 134,744

Ancillary revenue

233 - - 233

Net revenue

80,784 54,193 - 134,977

Cost of goods sold

127,205 27,922 1,535 6d) 156,662

Gross (loss) / profit before fair value adjustments

(46,421 ) 26,271 (1,535 ) (21,685 )

Realized fair value amounts on inventory sold

40,910 47,465 - 88,375

Unrealized gain on changes in fair value of biological assets

(29,356 ) (102,715 ) - (132,071 )

Gross (loss) / profit

(57,975 ) 81,521 (1,535 ) 22,011

Operating expenses

Selling, general and administrative

52,793 14,127 - 66,920

Marketing and promotion

12,474 421 - 12,895

Share-based compensation

25,790 - - 25,790

Research and development

4,639 - - 4,639

Depreciation of property, plant and equipment

6,072 1,557 240 6d) 7,920
51 6e)

Amortization of intangible assets

3,939 235 1,765 6f) 5,939

Restructuring costs

4,767 - - 4,767

Impairment of property, plant and equipment

79,418 - - 79,418

Impairment of intangible assets

108,189 - - 108,189

Impairment of goodwill

111,877 - - 111,877

Recognition of onerous contract

4,763 - - 4,763

Disposal of long-lived assets

- - - -

Loss on disposal of property, plant and equipment

3,855 - - 3,855

Acquisition and transactions

- - - -
418,576 16,340 2,056 436,972

Earnings (loss) from operations

(476,551 ) 65,181 (3,591 ) (414,961 )

Finance income (expense), net

(8,141 ) (114 ) (60,853 ) 5) (69,108 )

Non-operating income (expense), net

(67,820 ) (2 ) - (67,822 )

Earnings (loss) and comprehensive income (loss) attributable to shareholders before tax

(552,512 ) 65,065 (64,444 ) (551,891 )

Provision for income taxes

- (2,377 ) 1,241 6i) (1,136 )

Income tax recovery (payable)

6,023 (15,528 ) - (9,505 )

Other comprehensive income

Foreign currency translation

- - - -

Net earnings (loss) and comprehensive income (loss)

(546,489 ) 47,160 (63,203 ) (562,532 )

Comprehensive income (loss) attributable to:

Shareholders of HEXO Corp.

(546,489 ) 47,160 (63,203 ) (562,532 )

Non-controlling interest

- - - -
(546,489 ) 47,160 (63,203 ) (562,532 )

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UNAUDITED PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF NET EARNINGS (LOSS)

For the year ended July 31, 2020

(In thousands of Canadian dollars except per share amounts)

HEXO Corp.

July 31, 2020

Note 3

Redecan Group
September 30, 2020

Note 8

Pro Forma
Adjustments
Note

Pro Forma
Consolidated

July 31, 2020

Basic net loss per common share

$ (1.77 ) 7 $ (1.48 )

Diluted net loss per common share

$ (1.77 ) 7 $ (1.48 )

Basic weighted average number of outstanding shares

309,504,695 7 379,225,811

Diluted weighted average number of outstanding shares

309,504,695 7 379,225,811

See accompanying notes

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1.

Description of the Transaction

On May 28, 2021 HEXO Corp. ("HEXO" or the "Company") entered into a definitive share purchase agreement (the "Share Purchase Agreement) to acquire the Redecan Group comprised of 2526356 Ontario Inc., 2579951 Ontario Inc. and 9037136 Canada Inc. ("Redecan"). Under the terms of the Share Purchase Agreement and based on the closing price of common shares on July 6, 2021, the consideration payable is estimated to be $858,765, payable in (i) $400,000 of cash, and (ii) an aggregate of 69,721,116 common shares to be issued by the Company. The Acquisition is expected to close in Q1 of the Company's 2022 fiscal year, subject to the satisfaction of customary closing conditions, including the receipt of regulatory approvals. HEXO has raised debt financing which the Company will use to finance the cash consideration payable in connection with the Acquisition.

These unaudited pro forma condensed consolidated financial statements present the impact of the following transactions and have been prepared on the basis described in Note 2, Basis of Preparation:

a)

The Acquisition as described in Note 4, The Acquisition

b)

The incurrence of indebtedness under the senior secured convertible notes (the "Notes") with proceeds of $384,096 (USD$312,655), as described in Note 5, Senior Secured Convertible Notes

2.

Basis of Preparation

The Company's unaudited pro forma condensed consolidated statement of financial position as at April 30, 2021 and the unaudited pro forma condensed consolidated statements of net earnings (loss) for the nine months ended April 30, 2021 and the year ended July 31, 2020 have been prepared by management for the purpose of presenting the impact of the Acquisition, as described herein. Although the Acquisition had not closed as of the date of these pro forma financial statements, the unaudited pro forma condensed consolidated statement of financial position includes the effect of these transactions as if they had occurred on April 30, 2021. The unaudited pro forma condensed consolidated statement of net earnings (loss) for the nine months ended April 30, 2021 and the year ended July 31, 2020 give effect to these transactions as if they had occurred on August 1, 2019. These unaudited pro forma condensed consolidated financial statements also reflect and give effect to the issuance of the Notes, which were issued in order to finance the cash component of the purchase price of the Acquisition as described in Note 5-Senior Secured Convertible Notes, however, they do not reflect or assume the issuance of any number of HEXO common shares upon conversion, redemption or exchange of any Notes.

The accounting policies used in the preparation of these unaudited pro forma condensed consolidated financial statements, incorporate the significant accounting policies used by HEXO Corp. for the respective periods in the Company's consolidated financial statements filed with or furnished to, as applicable, the Canadian and U.S. securities regulatory authorities. The unaudited pro forma condensed consolidated financial statements include all adjustments necessary for the fair presentation of these unaudited pro forma financial statements.

Pro forma adjustments reflected in these unaudited pro forma condensed consolidated financial statements are based on items that are factually supportable, directly attributable to the Acquisition for which there are firm commitments, and are expected to have a continuing impact on these unaudited pro forma condensed consolidated financial statements for which completed financial effects are objectively determinable.

All dollar amounts, except for per share information, or unless otherwise specified are expressed in thousands of Canadian dollars ("CAD" or "$"), which is the presentation currency of HEXO Corp.

These unaudited pro forma condensed consolidated financial statements have been prepared using the following information:

The unaudited condensed interim consolidated statement of financial position of HEXO as at April 30, 2021 and the unaudited condensed interim consolidated statement of net loss and comprehensive loss for the nine-month period ended April 30, 2021 have been extracted from the unaudited condensed interim consolidated financial statements prepared in accordance with International Accounting Standards 34 ("IAS 34") as issued by the IASB.

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The consolidated statements of net loss and comprehensive loss of HEXO for the year ended July 31, 2020 has been extracted from the Company's audited consolidated financial statements prepared in accordance with International Financial Reporting Standards ("IFRS") as issued by the International Accounting Standards Board ("IASB") as filed with or furnished to the Canadian and U.S. securities regulatory authorities.

The unaudited condensed interim consolidated balance sheet of Redecan as at March 31, 2021 and the unaudited condensed interim consolidated statements of earnings (loss) for the three months ended March 31, 2021 have been extracted from Redecan's unaudited condensed interim consolidated financial statements prepared in accordance with Canadian accounting standards for private enterprises ("ASPE") as issued by the Accounting Standards Board in Canada ("AcSB").

The unaudited condensed interim consolidated statement of net earnings (loss) of Redecan for the nine month period ended March 31, 2021 has been derived from the audited consolidated statement of earnings (loss) of Redecan for the year ended December 31, 2020 prepared in accordance with ASPE as issued by the AcSB. The unaudited interim statement of earnings (loss) of Redecan for the nine-month period ended March 31, 2021 has been constructed by subtracting the unaudited financial information from the accounting records for the six-month period ended June 30, 2020 from the audited income statement for the year ended December 31, 2020 and adding the unaudited financial information extracted from the unaudited condensed interim consolidated statements of statements of earnings (loss) for the three months ended March 31, 2021. Adjustments have been made to Redecan's historical financial information to conform with HEXO's IFRS accounting policies (see Note 8, Adjustments to the Historical Financial Statements of Redecan).

The unaudited condensed consolidated statement of net earnings (loss) of Redecan for the twelve months ended September 30, 2020 has been derived from the unaudited consolidated statement of earnings (loss) of Redecan for the year ended December 31, 2019 prepared in accordance with ASPE and the unaudited financial informationis derived from the accounting records of Redecan for the nine-month periods ended September 30, 2020 and September 30, 2019. The unaudited condensed consolidated statement of net earnings (loss) of Redecan for the twelve-month period ended September 30, 2020 has been constructed by subtracting the unaudited financial information from the accounting records for the nine-month period ended September 30, 2019 from the unaudited consolidated statement of earnings (loss) for the year ended December 31, 2019 and adding the unaudited financial information derived from the accounting records for the nine-month period ended September 30, 2020. Adjustments have been made to Redecan's historical financial information to conform with HEXO's IFRS accounting policies (see Note 8, Adjustments to the Historical Financial Statements of Redecan).

These unaudited pro forma condensed consolidated financial statements, including the notes thereto, should be read in conjunction with HEXO's historical financial statements, and respective Management's Discussion and Analysis of financial condition and results of operations as filed with or furnished to, as applicable, the Canadian and U.S. securities regulatory authorities and Redecan's historical financial statements.

These unaudited pro forma condensed consolidated financial statements are based on assumptions and adjustments that are described in the accompanying notes. The unaudited pro forma condensed consolidated financial statements do not give effect to the potential impact of current financial conditions, regulatory matters, operating efficiencies or other savings or expenses that may be associated with the integration of the Acquisition. The unaudited pro forma condensed consolidated financial statements have been prepared for illustrative purposes only and are not necessarily indicative of the financial position or results of operations in future periods or the results that actually would have been realized if HEXO and the acquired company (being the Redecan Group) had been a consolidated company during the specified periods.

The application of the acquisition method of accounting depends on certain valuations and other studies that have yet to be completed. Accordingly, the pro forma adjustments are preliminary, subject to further revisions as additional information becomes available and additional analyses are performed and have been made solely for the purposes of providing unaudited pro forma condensed consolidated financial statements. Differences between these preliminary estimates and the final acquisition accounting will occur and these differences could have a material impact on the accompanying unaudited pro forma condensed consolidated financial statements and the consolidated company's future earnings and financial position. Further, differences between the preliminary and final amounts will likely occur as a result of changes in the fair value of HEXO's common shares to determine the actual purchase consideration as well as the actual amount of cash used in Redecan's operations, and other changes in assets and liabilities.

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3.

Presentation Reclassification Adjustments to HEXO's Condensed Consolidated Statement of Net Earnings (Loss) for the Year ended July 31, 2020

For the nine months ended April 30, 2021, HEXO simplified its presentation for the condensed interim consolidated statements of net loss and comprehensive loss. For consistency between the unaudited pro forma condensed consolidated statement of net earnings (loss) for the nine months ended April 30, 2021 and the year ended July 31, 2020, the following presentation reclassification adjustments which had a $nil impact on net earnings (loss) and comprehensive income (loss) were made to HEXO's condensed consolidated statement of net earnings (loss) for the year ended July 31, 2020:

HEXO CONDENSED CONSOLIDATED STATEMENT OF NET EARNINGS (LOSS)

For the year ended July 31, 2020

(In thousands of Canadian dollars except per share amounts)

As reported
HEXO Corp.

July 31, 2020
Presentation
reclassification
Adjusted
Presentation

Revenue from sale of goods

110,149 - 110,149

Excise taxes

(29,598 ) - (29,598 )

Net revenue from sale of goods

80,551 - 80,551

Ancillary revenue

233 - 233

Net revenue

80,784 - 80,784

Cost of goods sold

127,205 - 127,205

Gross loss before fair value adjustments

(46,421 ) - (46,421 )

Realized fair value amounts on inventory sold

40,910 - 40,910

Unrealized gain on changes in fair value of biological assets

(29,356 ) - (29,356 )

Gross loss

(57,975 ) (57,975 )

Operating expenses

Selling, general and administrative

52,793 - 52,793

Marketing and promotion

12,474 - 12,474

Share-based compensation

25,790 - 25,790

Research and development

4,639 - 4,639

Depreciation of property, plant and equipment

6,072 - 6,072

Amortization of intangible assets

3,939 - 3,939

Restructuring costs

4,767 - 4,767

Impairment of property, plant and equipment

79,418 - 79,418

Impairment of intangible assets

108,189 - 108,189

Impairment of goodwill

111,877 - 111,877

Recognition of onerous contract

- 4,763 4,763

Loss on onerous contract

4,763 (4,763 ) -

Loss on disposal of property, plant and equipment

3,855 - 3,855
418,576 - 418,576

Loss from operations

(476,551 ) - (476,551 )

Finance expense, net

- (8,141 ) (8,141 )

Non-operating expense, net

- (67,820 ) (67,820 )

Revaluation of financial instruments gain

6,533 (6,533 ) -

Share of loss from investment in associate and joint ventures

(6,331 ) 6,331 -

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Loss on induced conversion of debentures

(54,283 ) 54,283 -

Realized loss on convertible debentures receivable

(4,806 ) 4,806 -

Unrealized loss on investments

(12,880 ) 12,880 -

Realized gain on investments

24 (24 ) -

Foreign exchange gain

1,392 (1,392 ) -

Interest and financing expenses

(10,043 ) 10,043 -

Interest income

1,902 (1,902 ) -

Other income

2,531 (2,531 ) -

Loss and comprehensive loss attributable to shareholders before tax

(552,512 ) - (552,512 )

Income tax recovery

6,023 - 6,023

Other comprehensive income

Foreign currency translation

- - -

Net loss and comprehensive loss

(546,489 ) - (546,489 )

Comprehensive loss attributable to:

Shareholders of HEXO Corp.

(546,489 ) - (546,489 )

Non-controlling interest

- - -
(546,489 ) - (546,489 )
4.

The Acquisition

Upon completion of the Acquisition, HEXO will pay cash and issue common shares of its capital to the shareholders of Redecan in consideration and exchange for all of the issued and outstanding shares of the Redecan Group. The purchase consideration is approximately $400,000 of cash and 69,721,116 common shares with an estimated value of approximately $458,765 for total consideration of $858,765. The cash consideration component is subject to adjustments on and following the closing date for working capital target surplus (deficit).

The estimated purchase price for Redecan is based on the closing price of HEXO common shares on July 6, 2021. The requirement to base the final purchase price on the share price as of the closing date could result in a purchase price that is materially different (either higher or lower) from that assumed in these unaudited pro forma condensed consolidated financial statements and the purchase price included in these pro forma financial statements should not be taken to represent what the actual consideration transferred will be when the Acquisition is completed. The actual purchase price will fluctuate until the effective date of the Acquisition and the final valuation could differ significantly from the current estimate.

Number of HEXO common shares to be issued

69,721,116

HEXO share price per share(i)

$ 6.58

Equity portion of purchase price

$ 458,765

Cash consideration

$ 400,000

Purchase price

$ 858,765
(i)

HEXO's Canadian dollar closing share price of $6.58 from the TSX on July 6, 2021.

The following table shows the effect of an increase (decrease) in the purchase price and the change in timing of the close of the Acquisition on the purchase price and goodwill:

Purchase Price
$
Goodwill
$

As presented in the pro forma combined results

$ 858,765 749,026

15% increase in common share price

$ 927,580 817,841

15% decrease in common share price

$ 789,950 680,211

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As of the date of these pro forma financial statements, the Company's detailed identification and valuation exercise of Redecan's net assets has not yet significantly begun. Therefore, the Company has prepared a preliminary estimate of the fair market values of the assets to be acquired and the liabilities assumed under the Acquisition using high level approximations of a consistent $100,000 value for inventory, property, plant and equipment, identifiable intangible assets and the deferred tax liability. Pro forma adjustments have been made to eliminate Redecan's historical carrying values and to reflect the allocation of the preliminary purchase price where there is a difference between the carrying value and fair value.

The final purchase price allocation will be determined when the Company has completed the detailed valuations and necessary calculations. The final purchase price allocation could differ materially from the preliminary purchase price allocation and may include changes in fair values of property, plant and equipment, changes in allocation to intangibles assets such as brands, trade names, technology, licenses and customer relationships as well as goodwill.

The following table summarizes the allocation of the preliminary purchase price:

Net identifiable assets acquired As at April 30, 2021
$

Financial assets

29,623

Inventory

100,000

Biological assets

11,401

Property, plant and equipment

100,000

Identifiable intangible assets

100,000

Financial liabilities

(124,929 )

Lease liability

(2,231 )

Income taxes payable

(3,605 )

Deferred tax liability

(100,000 )

Other long-term liabilities

(520 )

Total net identifiable assets

109,739

Goodwill

749,026

Purchase price

858,765
5.

Senior Secured Convertible Notes

On May 27, 2021, the Company closed an offering of US$360 million aggregate principal amount of senior secured convertible notes (the "Notes") directly to an institutional purchaser and certain of its affiliates or related funds.

The Notes were sold at a purchase price of US$327.6 million, or approximately 91.0% of their principal amount. The Notes mature on May 1, 2023. Subject to certain limitations, the Notes will be convertible into freely tradable common shares of the Company at the option of the holder and, subject to conditions and limitations, at the option of the Company. If not previously converted, all principal repayments of the Notes will be made at a price equal to 110% of the principal amount of the Notes being repaid. The Notes do not bear interest except upon the occurrence of an event of default. The Notes were issued in registered form, without coupons, under a trust indenture.

The unaudited pro forma condensed consolidated statement of financial position has been adjusted to reflect an increase in cash and Notes of $384,096 (US$312,655), net of estimated transaction costs of $18,360 (USD$14,945). The following table shows the interest expense incurred on the new Notes assuming such Notes had been issued on the first day of the periods presented therein:

For the nine
months ended
April 30, 2021

$
For the year ended
July 31, 2020
$

Finance income (expense), net(i)

(42,951 ) (60,853 )
(i)

Although the notes do not carry an interest rate (other than after the occurrence of an event of default), the above interest expense (presented as net finance expense) represents for accounting purposes, the implied finance expense attributable to the difference between the discounted price at which the Notes were originally issued and the principal amount outstanding under the Notes.

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6.

Pro Forma Adjustments and Assumptions for the Acquisition of Redecan

The unaudited pro forma condensed consolidated financial statements include the following pro forma assumptions and adjustments:

a)

Equity

This pro forma adjustment eliminates Redecan's historical equity of $62,945.

b)

Purchase Price

Records the purchase price consideration, which is cash of $400,000 and the fair value of the equity interests of $458,765 to be issued by HEXO to acquire Redecan (Note 4, The Acquisition).

c)

Inventory

Increases Redecan's inventory to an estimated fair value of approximately $100,000, an increase of $16,327 from the carrying value. The fair value was determined based on the estimated selling price of the inventory, less the manufacturing processing and selling costs and a normal profit margin on those manufacturing and selling efforts. After the Acquisition the $16,327 increase in inventory value will increase cost of goods sold over approximately 12 months as the inventory is sold. This increase is not reflected in the unaudited pro forma condensed consolidated statements of net earnings (loss) because it does not have a continuing impact.

d)

Property, plant and equipment

Increases Redecan's property, plant and equipment to an estimated fair value of approximately $100,000, an overall increase of $13,162 from the carrying value. The estimated useful lives (excluding land) range from 3 to 20 years. The Company capitalizes a portion of depreciation and amortization to biological assets and inventory and the increase in property, plant and equipment value will increase cost of goods sold. The estimated adjustment to depreciation of property, plant and equipment and cost of goods sold related to the acquired property, plant and equipment calculated on a straight line basis was $195 and $(773) respectively for the nine months ended April 30, 2021 and $240 and $1,535 respectively for the twelve months ended July 31, 2020.

e)

Leases

Included in property, plant and equipment is $1,675 related to right-of-use lease assets. The carrying value has been adjusted to the corresponding carrying value of the lease liability of $2,231, resulting in a pro forma increase of $556. The corresponding impact to depreciation of property, plant and equipment related to the acquired leases was $38 for the nine months ended April 30, 2021 and $51 for the twelve months ended July 31, 2020.

f)

Intangible assets

Reflects the fair value adjustment to intangible assets of approximately $100,000, an overall increase of $99,681 from the carrying value. Intangible assets currently identified as part of the preliminary valuation study for intangible assets include brands, trade names, technology, licenses and customer relationships. The preliminary valuation used an income approach that forecasts the expected future cash flows. The midpoint of the estimated range of fair values was used.

The estimated value fair of the currently identifiable intangible assets has been equally allocated across the assets due to the limitation of information held at the very early stages of the identification and valuation assessment. The estimated fair value and useful lives of the acquired intangibles are as follows

Estimated Fair Value
$
Estimated useful life
(years)

Domain names

20,000 10 years

Health Canada licenses

20,000 20 years

Software

20,000 3 to 5 years

Patents

20,000 20 years

Brands

20,000 Indefinite
100,000

After the Acquisition, the estimated adjustment to amortization expense related to the acquired intangibles calculated on a straight line basis was $1,445 for the nine months ended April 30, 2021 and $1,765 for the twelve months ended July 31, 2020.

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The preliminary estimates of fair value and estimated useful lives will likely differ from the final amounts after completing the valuation study, and the difference could have a material effect on the pro forma financial statements. A 15% change in the estimated fair value of intangible assets would cause a corresponding increase or decrease of $15,000 in the balance of goodwill. A 15% change would also cause the amortization expense in the unaudited pro forma condensed consolidated statement of earnings (loss) for the nine months ended April 30, 2021 and for the twelve months ended July 31. 2020 to increase or decrease by approximately $256 and $341 respectively (assumes a weighted average useful life of 11 years).

g)

Goodwill

Recognizes goodwill of $749,026 to reflect the purchase price allocation described in Note 4, The Acquisition.

h)

Transaction costs

Represents the elimination of non-recurring transaction costs incurred and recognized during the nine month period ended April 30, 2021 of $447 that are directly related to the acquisition of Redecan. This amount has been removed from the pro forma statement of earnings and loss because it is non-recurring in nature and would not reflect expense of the combined entity on an ongoing basis.

Transaction costs that are directly attributable to the acquisition of Redecan and factually supportable but have not yet been expensed in HEXO or Redecan's historical income statements or accrued in the balance sheet are reflected as an increase to accounts payable and accrued liabilities and a corresponding decrease in shareholder's equity of $67,285 on the unaudited pro forma condensed consolidated statement of financial position.

i)

Income taxes For the purpose of the pro forma adjustments included in these unaudited pro forma condensed consolidated financial statements, the following tax rates were applied:

HEXO's effective income tax rate was nil% for the nine months ended April 30, 2021 and for the year ended July 31, 2020. The effective tax rate is different than the statutory rate primarily due to the non-recognition of deferred tax assets for unused tax losses. As a result, no tax is recorded on the pro-forma adjustment of acquisition related costs incurred by HEXO.

Redecan's effective income tax rates of 30.13% for the nine months ended April 30, 2021 and 34.57% for the year ended July 31, 2020 were used in determining a corresponding decrease in provision for income taxes of $272 and $1,241, respectively, as a result of adjustments to cost of goods sold, depreciation of property, plant and equipment and amortization of intangible assets.

The deferred tax liability of $100,000 (an overall increase of $82,376 from the carrying value) arising on the Acquisition is composed of the cumulative amount of tax applicable to temporary differences between the accounting and tax values of assets and liabilities related to the Acquisition. Deferred income tax assets and liabilities are measured at the tax rates expected to be in effect when these differences reverse.

7.

Pro Forma Earnings (Loss) Per Share

Basic and diluted net income or loss per share is calculated by dividing the net income or loss for the period by the pro forma weighted average numbers of common shares that would have been outstanding during the period using the treasury stock method. The weighted average number of common shares was determined by taking the historical weighted average number of common shares outstanding and adjusting for the shares issued under the Acquisition as follows:

For the nine months
ended April 30, 2021
For the year ended
July 31, 2020

Numerator

Numerator for basic and diluted earnings per common share - Pro forma net earnings(i)

$ (41,462,000 ) $ (562,532,000 )

Denominator

Denominator for basic earnings per common share - weighted average number of common shares

121,749,456 77,376,174

Pro forma adjustment for newly-issued shares related to the Acquisition

69,721,116 69,721,116

14

Table of Contents
For the nine months
ended April 30, 2021
For the year ended
July 31, 2020

Pro Forma denominator for basic earnings per common shares - weighted average common shares

191,470,572 147,097,290

Effect of dilutive securities

40,750,951 165,862,789

Pro forma denominator for diluted earnings per common shares - weighted average common shares

232,221,523 312,960,079

Pro forma basic earnings per common share

$ (0.22 ) $ (3.82 )

Pro forma diluted earnings per common share

$ (0.22 ) $ (3.82 )
(i)

For the purpose of this footnote, Pro forma net earnings is in whole dollars

The denominator figures for common shares reflect the 4:1 stock consolidation executed December 18, 2020

15

Table of Contents
8.

Adjustments to the Historical Financial Statements of Redecan

The historical financial information of Redecan was prepared in accordance with ASPE as issued by the AcSB and presented in Canadian dollars. Redecan's fiscal year end is December 31 and historical financial information was used to present pro forma financial statements based on the fiscal year end of HEXO being July 31.

The following tables present the conversion from ASPE to IFRS and shows the presentation and reclassification adjustments which had a $nil impact on the total assets, liabilities, shareholder's equity and net earnings (loss) for the periods presented:

Redecan Adjusted Unaudited Condensed Consolidated Statement of Financial Position

ASPE IFRS
As at March
31, 2021
ASPE to
IFRS
differences

Note 8

As at
March 31,
2021
Presentation
reclassification
Adjusted
Presentation

Assets

Current assets:

Cash and cash equivalents

2,812 - 2,812 2,812

Trade receivables

14,708 - 14,708 14,708

Government remittances receivable

1,533 - 1,533 (1,533 ) -

Commodity taxes recoverable and other receivables

- - - 1,533 1,533

Inventory

31,306 52,367 (i) 83,673 83,673

Biological assets

- 11,401 (i) 11,401 11,401

Prepaid expenses - current

5,656 - 5,656 5,656

Receivable from shareholders

118 - 118 118

Total current assets

56,133 63,768 119,901 - 119,901

Property and equipment

85,482 - 85,482 1,356 86,838

Intangible assets

- - - 319 319

Deposits

4,796 - 4,796 4,796

Right-of-use assets, net

- 1,675 (ii) 1,675 (1,675 ) -

Total assets

146,411 65,443 211,854 - 211,854

Liabilities

Current liabilities

Trade and other payables

6,172 (135 ) (ii) 6,037 (6,037 ) -

Accounts payable and accrued liabilities

- - - 6,037 6,037

Government remittances payable

2,657 - 2,657 2,657

Lease liability

- 231 (ii) 231 231

Income taxes payable

3,605 - 3,605 3,605

Advances from related parties

116,235 - 116,235 116,235

Total current liabilities

128,669 96 128,765 - 128,765

Lease liability

- 2,000 (ii) 2,000 2,000

Provisions

- 23 (ii) 520 (520 ) -
497 (iii)

Advances from related parties

- - - -

Deferred tax liability

- 17,624 (iv) 17,624 17,624

Other long-term liabilities

- - - 520 520

Total liabilities

128,669 20,240 148,909 - 148,909

Shareholders' equity

17,742 63,768 (i) 62,945 62,945
(444 ) (ii)
(497 ) (iii)
(17,624 ) (iv)

Total liabilities and shareholders' equity

146,411 65,443 211,854 - 211,854

16

Table of Contents

Redecan Adjusted Unaudited Condensed Consolidated Statement of Net Earnings - Interim

ASPE IFRS
Year
ended

December
31, 2020
Six
months
ended
June 30,
2020
Three
months
ended
March 31,
2021
Nine
months
ended
March 31,
2021
ASPE to
IFRS
differences

Note 8

Nine
months
ended
March 31,
2021
Presentation
reclassification
Nine
months
ended
March 31,
2021

Revenue before returns and allowances

107,296 38,140 35,038 104,194 (1,259 ) (iii) 102,935 (102,935 ) -

Revenue from sale of goods

- - - - - - 98,147 98,147

Returns and allowances

(5,209 ) (1,542 ) (1,121 ) (4,788 ) - (4,788 ) 4,788 -

Revenue before excise taxes

102,087 36,598 33,917 99,406 (1,259 ) 98,147 - 98,147

Excise taxes

(28,438 ) (10,164 ) (9,265 ) (27,539 ) - (27,539 ) - (27,539 )

Net revenue

73,649 26,434 24,652 71,867 (1,259 ) 70,608 - 70,608

Cost of goods sold

35,812 16,107 10,280 29,985 (75 ) (ii) 29,910 - 29,910

Gross (loss) / profit before fair value adjustments

37,837 10,327 14,372 41,882 (1,184 ) 40,698 - 40,698

Realized fair value amounts on inventory sold

- - - - 72,209 (i) 72,209 - 72,209

Unrealized gain on changes in fair value of biological assets

- - - - (115,454 ) (i) (115,454 ) - (115,454 )

Gross profit

37,837 10,327 14,372 41,882 42,061 83,943 - 83,943

Operating expenses

Selling, general and administrative

- - - - - - 15,886 15,886

Marketing and promotion

- - - - - - 1,638 1,638

Advertising and promotion

997 86 727 1,638 - 1,638 (1,638 ) -

Amortization

1,304 661 379 1,022 186 (ii) 1,208 (1,208 ) -

Depreciation of property, plant and equipment

- - - - - - 1,153 1,153

Amortization of intangible assets

- - - - - - 55 55

Business taxes and licences

2,149 873 673 1,949 - 1,949 (1,949 ) -

Consulting fees

1,316 931 142 527 - 527 (527 ) -

Donations

- - - - - - - -

Freight and logistics

1,851 778 681 1,754 - 1,754 (1,754 ) -

Insurance

811 304 276 783 - 783 (783 ) -

Interest and bank charges

148 30 43 161 - 161 (161 ) -

Interest expense on lease liability

- - - - 111 (ii) 111 (111 ) -

Meals and entertainment

119 59 25 85 - 85 (85 ) -

Office and general

1,904 763 513 1,654 - 1,654 (1,654 ) -

Professional fees

261 81 16 196 - 196 (196 ) -

Property tax

101 102 54 53 - 53 (53 ) -

Rental

152 76 37 113 (110 ) (ii) 3 (3 ) -

Repairs and maintenance

1,123 421 259 961 - 961 (961 ) -

Salaries, wages and benefits

6,189 2,014 1,404 5,579 - 5,579 (5,579 ) -

Supplies

2,738 1,339 832 2,231 - 2,231 (2,231 ) -

Impairment of property, plant and equipment

589 - 37 626 - 626 - 626
21,752 8,518 6,098 19,332 187 19,519 (161 ) 19,358

Earnings from operations

16,085 1,809 8,274 22,550 41,874 64,424 161 64,585

Finance expense, net

- - - - - - (161 ) (161 )

Non-operating expense, net

- - - - - - (148 ) (148 )

Earnings and comprehensive earnings attributable to shareholders before tax

16,085 1,809 8,274 22,550 41,874 64,424 (148 ) 64,276

Provision for income taxes

(4,500 ) (1,545 ) (1,230 ) (4,185 ) - (4,185 ) (4,185 )

Deferred income tax expense

- - - - (12,672 ) (iv) (12,672 ) 12,672 -

Income tax payable

- - - - - - (12,672 ) (12,672 )

Other comprehensive income

Foreign exchange gain (loss)

37 55 (130 ) (148 ) - (148 ) 148 -

Net earnings and comprehensive income

11,622 319 6,914 18,217 29,202 47,419 - 47,419

17

Table of Contents

Redecan Adjusted Unaudited Condensed Consolidated Statement of Net Earnings - Annual

ASPE IFRS
Year
ended

December
31, 2019
Nine
months
ended
September
30, 2020
Nine
months
ended
September
30, 2019
Twelve
months
ended
September
30, 2020
ASPE to
IFRS
differences

Note 8

Twelve
months
ended
September
30, 2020
Presentation
reclassification
Twelve
months
ended
September
30, 2020

Revenue before returns and allowances

17,337 10,545 72,015 78,807 (367 ) (iii) 78,440 (78,440 ) -

Revenue from sale of goods

- - - - - - 74,478 74,478

Returns and allowances

(152 ) (121 ) (3,931 ) (3,962 ) - (3,962 ) 3,962 -

Revenue before excise taxes

17,185 10,424 68,084 74,845 (367 ) 74,478 - 74,478

Excise taxes

(3,965 ) (2,575 ) (18,895 ) (20,285 ) - (20,285 ) - (20,285 )

Net revenue

13,220 7,849 49,189 54,560 (367 ) 54,193 - 54,193

Cost of goods sold

6,028 3,946 25,940 28,022 (100 ) (ii) 27,922 - 27,922

Gross (loss) / profit before fair value adjustments

7,192 3,903 23,249 26,538 (267 ) 26,271 - 26,271

Realized fair value amounts on inventory sold

- - - - 47,465 (i) 47,465 - 47,465

Unrealized gain on changes in fair value of biological assets

- - - - (102,715 ) (i) (102,715 ) - (102,715 )

Gross profit

7,192 3,903 23,249 26,538 54,983 81,521 - 81,521

Operating expenses

Selling, general and administrative

- - - - - - 14,127 14,127

Marketing and promotion

- - - - - - 421 421

Advertising and promotion

319 169 271 421 - 421 (421 ) -

Amortization

1,022 515 1,040 1,547 245 (ii) 1,792 (1,792 ) -

Depreciation of property, plant and equipment

- - - - - - 1,557 1,557

Amortization of intangible assets

- - - - - - 235 235

Business taxes and licences

486 339 1,547 1,694 - 1,694 (1,694 ) -

Consulting fees

- - 1,131 1,131 - 1,131 (1,131 ) -

Donations

2 1 - 1 - 1 (1 ) -

Freight and logistics

284 177 1,385 1,492 - 1,492 (1,492 ) -

Insurance

514 362 538 690 - 690 (690 ) -

Interest and bank charges

89 54 79 114 - 114 (114 ) -

Interest expense on lease liability

- - - - 148 (ii) 148 (148 ) -

Meals and entertainment

100 79 87 108 - 108 (108 ) -

Office and general

489 341 1,271 1,419 - 1,419 (1,419 ) -

Professional fees

174 142 168 200 - 200 (200 ) -

Property tax

64 - 102 166 - 166 (166 ) -

Rental

191 117 114 188 (214 ) (ii) (26 ) 26 -

Repairs and maintenance

271 205 831 897 - 897 (897 ) -

Salaries, wages and benefits

2,420 1,739 3,265 3,946 - 3,946 (3,946 ) -

Supplies

727 574 2,108 2,261 - 2,261 (2,261 ) -
7,152 4,814 13,937 16,275 179 16,454 (114 ) 16,340

Earnings (loss) from operations

40 (911 ) 9,312 10,263 54,804 65,067 114 65,181

Finance expense, net

- - - - - - (114 ) (114 )

Non-operating expense, net

- - - - - - (2 ) (2 )

Earnings (loss) and comprehensive income (loss) attributable to shareholders before tax

40 (911 ) 9,312 10,263 54,804 65,067 (2 ) 65,065

Provision for income taxes

(123 ) - (2,254 ) (2,377 ) - (2,377 ) (2,377 )

Deferred income tax expense

- - - - (15,528 ) (iv) (15,528 ) 15,528 -

Income tax payable

- - - - - - (15,528 ) (15,528 )

Other comprehensive income

Foreign exchange gain (loss)

44 14 (32 ) (2 ) - (2 ) 2 -

Net earnings (loss) and comprehensive income (loss)

(39 ) (897 ) 7,026 7,884 39,276 47,160 - 47,160

18

Table of Contents

IFRS differs in material respects in certain areas from ASPE. The following material adjustments have been made to reflect Redecan's historical consolidated statement of earnings on an IFRS basis for the purposes of the unaudited pro forma financial information, these adjustments are before the reclassification adjustments:

i.

Biological assets and inventory

Cannabis plants are recognized as biological assets under IFRS. Under IFRS, biological assets are accounted for using the income approach at fair value less costs to sell and are revalued at each subsequent reporting date up to the point of harvest, which becomes the basis for the cost of inventories after harvest. Under IFRS, unrealized gains or losses arising from changes in fair value less cost to sell during the period are included in the statement of net earnings.

Inventory is valued at the lower of cost and net realizable value. Under ASPE, cannabis plants are recorded at the lower of cost and net realizable value. Cost is determined by the weighted average method, and includes purchase price of direct materials, direct labour and an allocation of certain overheads. Inventories of harvested cannabis are transferred from biological assets at their fair value at harvest date, which becomes the initial deemed cost of the inventory. Any subsequent post-harvest costs are capitalized to inventory to the extent that cost is less than net realizable value. The identified capitalized direct and indirect costs related to inventory are subsequently recorded within 'cost of goods sold' on the statement of net earnings at the time the product is sold, with the exclusion of realized fair value amounts on inventory sold which are recorded as a separate line within gross profit.

The following table shows the addition of the fair value adjustment to the cost basis of biological assets and inventory under ASPE to reflect the fair value of cannabis plants in accordance with IFRS and includes a corresponding impact to shareholder's equity:

As at March 31, 2021
$

Inventory

52,367

Biological assets

11,401

Shareholder's equity

63,768

The following table reflects the addition of the changes in fair value recognized in the period of change within the unaudited condensed consolidated statement of net earnings for the nine months ended March 31, 2021:

Year ended
December 31,
2020

$
Six months
ended June 30,
2020

$
Three months
ended March 31,
2021

$
Nine months
ended March 31,
2021

$

Realized fair value amounts on inventory sold

81,213 24,476 15,472 72,209

Unrealized gain on changes in fair value of biological assets

(122,237 ) (27,615 ) (20,832 ) (115,454 )

The following table reflects the addition of the changes in fair value recognized in the period of change within the unaudited condensed consolidated statement of net earnings for the twelve months ended September 30, 2020:

Year ended
December 31,
2019

$
Nine months
ended
September 30,
2019

$
Nine months
ended
September 30,
2020

$
Twelve months
ended
September 30,
2020

$

Realized fair value amounts on inventory sold

6,014 3,499 44,950 47,465

Unrealized gain on changes in fair value of biological assets

(18,933 ) (8,574 ) (92,356 ) (102,715 )
ii.

Leases

For lessees, IFRS does not distinguish between operating and finance lease requirements and recognizes a right-of-use asset and lease liability at the commencement of all leases except short-term leases and leases of low value assets. To reflect the IFRS lease accounting requirements, the following adjustments were made to the unaudited condensed consolidated statement of financial position:

19

Table of Contents
As at March 31, 2021
$

Increase in right-of-use assets, net

1,675

Decrease in trade and other payables

(135 )

Increase in current lease liability

231

Increase in non-current lease liability

2,000

Increase in provisions

23

Decrease in shareholders' equity

(444 )

To recognize the depreciation of the right-of-use assets and interest on lease liabilities in the unaudited condensed consolidated statement of net earnings for the nine months ended March 31, 2021, the following adjustments were made:

Year ended
December 31,
2020

$
Six months
ended June 30,
2020

$
Three months
ended March 31,
2021

$
Nine months
ended March 31,
2021

$

Cost of goods sold

(100 ) (50 ) (25 ) (75 )

Amortization

249 125 62 186

Interest expense on lease liability

148 74 37 111

Rental expense

(149 ) (75 ) (36 ) (110 )

To recognize the depreciation of the right-of-use assets and interest on lease liabilities in the unaudited condensed consolidated statement of net earnings for the twelve months ended September 30, 2020, the following adjustments were made:

Year ended
December 31,
2019

$
Nine months
ended
September 30,
2019

$
Nine months
ended
September 30,
2020

$
Twelve months
ended
September 30,
2020

$

Cost of goods sold

(75 ) (50 ) (75 ) (100 )

Amortization

198 140 187 245

Interest expense on lease liability

146 109 111 148

Rental expense

(190 ) (88 ) (112 ) (214 )
iii.

Revenue

IFRS applies a five step control based model for revenue recognition, whereas ASPE recognizes revenue once the risk and rewards have been transferred to the customer. Under IFRS, variable consideration in customer contracts can result in consideration paid or payable to customers if a distinct good or service is received from the customer as a reduction of the transaction price. As at March 31, 2021, to reflect the impact of variable consideration an increase of $497 was recognized as a contract liability with a corresponding adjustment to shareholder's equity.

The impact of the variable consideration from discount features resulted in the following adjustments on the unaudited condensed consolidated statement of net earnings for the nine months ended March 31, 2021:

Year ended
December 31,
2020

$
Six months
ended June 30,
2020

$
Three months
ended March 31,
2021

$
Nine months
ended March 31,
2021

$

Decrease to revenue before returns and allowances

(250 ) 730 (279 ) (1,259 )

The impact of the variable consideration from discount features resulted in the following adjustments on the unaudited condensed consolidated statement of net earnings for the twelve months ended September 30, 2020:

20

Table of Contents
Year ended
December 31,
2019

$
Nine months
ended
September 30,
2019

$
Nine months
ended
September 30,
2020

$
Twelve months
ended
September 30,
2020

$

Decrease to revenue before returns and allowances

(113 ) - (254 ) (367 )
iv.

Income taxes

IFRS requires an entity to recognize both current and deferred taxes whereas ASPE permits the taxes payable method. Deferred tax is required to be recognized on any temporary differences between the carrying amount of assts and liabilities and the corresponding tax bases used in the calculation of taxable earnings. Deferred tax aessets and liabilities have been measured at the tax rates that are expected to apply in the period when the asset is realized, and the liability is settled. Deferred tax assets are recognized to the extent future recovery is probable. Deferred tax assets have been reduced to the extent that it is no longer probable that sufficient taxable earnings will be available to allow all or part of the asset to be recovered.

As at March 31, 2021, a deferred tax liability of $17,624 was recognized with a corresponding adjustment to shareholder's equity.

The impact of the applying deferred tax accounting resulted in the following adjustment on the unaudited condensed consolidated statement of net earnings for the nine months ended March 31, 2021:

Year ended
December 31,
2020

$
Six months
ended June 30,
2020

$
Three months
ended March 31,
2021

$
Nine months
ended March 31,
2021

$

Deferred income tax expense

(10,619 ) (995 ) (3,048 ) (12,672 )

The impact of the applying deferred tax accounting resulted in the following adjustment on the unaudited condensed consolidated statement of net earnings for the twelve months ended September 30, 2020:

Year ended
December 31,
2019

$
Nine months
ended
September 30,
2019

$
Nine months
ended
September 30,
2020

$
Twelve
months ended
September 30,
2020

$

Deferred income tax expense

(3,956 ) (1,781 ) (13,353 ) (15,528 )

21

Disclaimer

Hexo Corp. published this content on 24 September 2021 and is solely responsible for the information contained therein. Distributed by Public, unedited and unaltered, on 24 September 2021 21:31:09 UTC.


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Financials
Sales 2021 118 M 95,6 M 95,6 M
Net income 2021 -56,7 M -45,8 M -45,8 M
Net cash 2021 15,5 M 12,5 M 12,5 M
P/E ratio 2021 -4,72x
Yield 2021 -
Capitalization 623 M 504 M 503 M
EV / Sales 2021 5,13x
EV / Sales 2022 2,57x
Nbr of Employees -
Free-Float 96,9%
Chart HEXO CORP.
Duration : Period :
HEXO Corp. Technical Analysis Chart | HEXO | CA4283043079 | MarketScreener
Technical analysis trends HEXO CORP.
Short TermMid-TermLong Term
TrendsBearishBearishBearish
Income Statement Evolution
Consensus
Sell
Buy
Mean consensus HOLD
Number of Analysts 12
Last Close Price 2,05 CAD
Average target price 5,84 CAD
Spread / Average Target 185%
EPS Revisions
Managers and Directors
Scott Cooper President & Chief Executive Officer
Trent MacDonald Chief Financial Officer
Michael Munzar Chairman & Medical Director
Donald J. Courtney Chief Operating Officer
Jason G. Ewart Independent Director
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