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Table of Contents

|Consolidated
      Statements of Financial Position               | 1          
|----------------------------------------------------------------- | -----------
|                                                                  |            
|Consolidated
      Statements of Loss and Comprehensive Loss      | 2          
|                                                                  |            
|Consolidated
      Statements of Changes in Shar eholders Equity | 3          
|                                                                  |            
|Consolidated
      Statements of Cash Flows                       | 4          
|                                                                  |            
|Notes
      to the Consolidated Financial Statements              | 6
      40

---

Consolidated Statements of
Financial Position(Audited, expressed in CAD $000s)

|As at                                                   |  | Note   |  |   | July 31, 2019 |   |   | July 31, 2018 |  
|------------------------------------------------------- |  | ------ |  | - | ------------- | - | - | ------------- | -
|                                                        |  |        |  |   |               |   |   | (Restated    |  
|                                                        |  |        |  |   |               |   |   | see note 26   | )
|Assets                                                  |  |        |  |   |               |   |   |               |  
|Current assets                                          |  |        |  |   |               |   |   |               |  
|Cash and cash equivalents                               |  | 4      |  | $ | 113,568       |   | $ | 99,042        |  
|Restricted cash                                         |  | 5      |  |   | 22,350        |   |   |              |  
|Short-term investments                                  |  | 4      |  |   | 25,937        |   |   | 145,747       |  
|Trade receivables                                       |  | 17     |  |   | 19,693        |   |   | 644           |  
|Commodity taxes
      recoverable and other receivables |  | 6      |  |   | 15,247        |   |   | 4,237         |  
|Convertible debenture
      receivable                  |  | 15     |  |   | 13,354        |   |   | 10,000        |  
|Prepaid expenses                                        |  |        |  |   | 10,762        |   |   | 4,204         |  
|Inventory                                               |  | 7      |  |   | 86,271        |   |   | 10,415        |  
|Biological assets                                       |  | 8      |  |   | 7,371         |   |   | 2,332         |  
|                                                        |  |        |  | $ | 314,553       |   | $ | 276,621       |  
|                                                        |  |        |  |   |               |   |   |               |  
|Property, plant and equipment                           |  | 9      |  | $ | 258,793       |   | $ | 54,333        |  
|Intangible assets and other longer term
      assets    |  | 10     |  |   | 127,282       |   |   | 4,044         |  
|Investment in associate and joint
      ventures        |  | 19     |  |   | 52,849        |   |   |              |  
|License and prepaid royalty  HIP                       |  | 27     |  |   | 1,409         |   |   |              |  
|Long term investments                                   |  | 20     |  |   | 14,277        |   |   |              |  
|Goodwill                                                |  | 11     |  |   | 111,877       |   |   |              |  
|                                                        |  |        |  | $ | 881,040       |   | $ | 334,998       |  
|Liabilities                                             |  |        |  |   |               |   |   |               |  
|Current liabilities                                     |  |        |  |   |               |   |   |               |  
|Accounts payable and
      accrued liabilities          |  |        |  | $ | 45,581        |   | $ | 8,995         |  
|Excise taxes payable                                    |  |        |  |   | 3,494         |   |   |              |  
|Warrant liability                                       |  | 12, 13 |  |   | 493           |   |   | 3,130         |  
|Term loan  current                                     |  | 16     |  |   | 3,117         |   |   |              |  
|                                                        |  |        |  | $ | 52,685        |   | $ | 12,125        |  
|                                                        |  |        |  |   |               |   |   |               |  
|Term loan                                               |  | 16     |  |   | 30,257        |   |   |              |  
|Deferred rent liability                                 |  |        |  |   | 946           |   |   |              |  
|Deferred tax liability                                  |  | 29     |  |   | 20,396        |   |   |              |  
|                                                        |  |        |  | $ | 104,284       |   | $ | 12,125        |  
|Shareholders equity                                    |  |        |  |   |               |   |   |               |  
|Share capital                                           |  | 13     |  | $ | 799,706       |   | $ | 347,233       |  
|Share-based payment reserve                             |  | 13     |  |   | 40,315        |   |   | 6,139         |  
|Warrants                                                |  | 13     |  |   | 60,433        |   |   | 12,635        |  
|Deficit                                                 |  |        |  |   | (124,698      | ) |   | (43,134       | )
|Non-controlling interest                                |  | 28     |  |   | 1,000         |   |   |              |  
|                                                        |  |        |  | $ | 776,756       |   | $ | 322,873       |  
|                                                        |  |        |  | $ | 881,040       |   | $ | 334,998       |  
|Commitments and contingencies (Note 23)                 |  |        |  |   |               |   |   |               |  
|Subsequent events (Note 33)                             |  |        |  |   |               |   |   |               |  

Approved by the Board

/s/ Jason Ewart,
Director                               
/s/ Michael Munzar, Director

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

1

---

Consolidated Statements of
Loss and Comprehensive Loss(Audited, expressed in CAD
$000s except share amounts)

|For the fiscal years ended                                                                   |  | Note   |  |   | July 31, 2019 |   |   | July
      31, 2018 |  
|-------------------------------------------------------------------------------------------- |  | ------ |  | - | ------------- | - | - | ------------------- | -
|Gross revenue from sale of goods                                                             |  | 31     |  | $ | 59,256        |   | $ | 4,934               |  
|Excise taxes                                                                                 |  |        |  |   | (11,914       | ) |   |                    |  
|Net revenue from sale of goods                                                               |  |        |  |   | 47,342        |   |   | 4,934               |  
|Ancillary revenue                                                                            |  | 25     |  |   | 199           |   |   |                    |  
|Net revenue                                                                                  |  |        |  |   | 47,541        |   |   | 4,934               |  
|                                                                                             |  |        |  |   |               |   |   |                     |  
|Cost of goods sold                                                                           |  | 7, 18  |  |   | 26,197        |   |   | 2,093               |  
|Gross margin before fair value adjustments                                                   |  |        |  |   | 21,344        |   |   | 2,841               |  
|Fair value loss adjustment on sale of
      inventory                                        |  | 7      |  |   | 16,357        |   |   | 2,289               |  
|Fair value gain adjustment on
      biological assets                                        |  | 8      |  |   | (38,856       | ) |   | (7,340              | )
|Adjustment to net realizable value of
      inventory                                        |  | 7      |  |   |              |   |   | 1,491               |  
|Impairment loss on inventory                                                                 |  | 7      |  |   | 16,918        |   |   |                    |  
|Gross margin                                                                                 |  |        |  | $ | 26,925        |   | $ | 6,400               |  
|Operating Expenses                                                                           |  |        |  |   |               |   |   |                     |  
|General and administrative                                                                   |  |        |  |   | 45,947        |   |   | 9,374               |  
|Marketing and promotion                                                                      |  |        |  |   | 31,191        |   |   | 8,335               |  
|Stock-based compensation                                                                     |  | 13, 18 |  |   | 28,008        |   |   | 4,997               |  
|Research and development                                                                     |  |        |  |   | 2,822         |   |   |                    |  
|Depreciation of property, plant and
      equipment                                          |  | 9      |  |   | 1,747         |   |   | 896                 |  
|Amortization of intangible assets                                                            |  | 10     |  |   | 1,767         |   |   | 765                 |  
|                                                                                             |  | 18     |  | $ | 111,482       |   | $ | 24,367              |  
|Loss from operations                                                                         |  |        |  |   | (84,557       | ) |   | (17,966             | )
|                                                                                             |  |        |  |   |               |   |   |                     |  
|Revaluation of financial instruments loss                                                    |  | 12     |  |   | (3,730        | ) |   | (5,091              | )
|Share of loss from investment in associate
      and joint ventures                          |  | 19     |  |   | (2,964        | ) |   |                    |  
|Loss on investment                                                                           |  | 30     |  |   |              |   |   | (650                | )
|Unrealized gain on convertible debenture
      receivable                                    |  | 15     |  |   | 1,737         |   |   |                    |  
|Unrealized loss on investments                                                               |  | 20     |  |   | (315          | ) |   |                    |  
|Realized loss on investments                                                                 |  | 20     |  |   | (215          | ) |   |                    |  
|Foreign exchange loss                                                                        |  |        |  |   | (78           | ) |   | (229                | )
|Interest and financing expenses                                                              |  |        |  |   | (469          | ) |   | (1,529              | )
|Interest income                                                                              |  | 4      |  |   | 5,187         |   |   | 2,115               |  
|Net
      loss and comprehensive loss attributable to shareholders before tax
      recovery |  |        |  | $ | (85,404       | ) | $ | (23,350             | )
|                                                                                             |  |        |  |   |               |   |   |                     |  
|Income tax recovery                                                                          |  | 29     |  |   | 3,840         |   |   |                    |  
|Total net loss                                                                               |  |        |  | $ | (81,564       | ) | $ | (23,350             | )
|Net loss per share, basic and diluted                                                        |  |        |  | $ | (0. 38        | ) | $ | (0.17               | )
|Weighted average number of outstanding
      shares                                          |  |        |  |   |               |   |   |                     |  
|Basic and diluted                                                                            |  | 13     |  |   | 212,740,552   |   |   | 134,171,509         |  

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

2

---

Consolidated Statements of
Changes in Shareholders Equity(Audited, expressed in
CAD $000s except share amounts)

For the fiscal year ended
    Note
    
    Number common shares
    
    
    Share capital
    
    
    Share-based payment reserve
    
    
    Warrants
    
    
    Contributed surplus
    
    
    Non- controlling Interest
    
    
    Deficit
    
    
    Shareholders equityBalance, August 1, 2018
    
    
    193,629,116
    
    $
    347,233
    
    $
    6,139
    
    $
    12,635
    
    $
    
    
    $
    
    
    $
    (43,134
    )
    $
    322,873Share issuance  January
      offering
    13
    
    8,855,000
    
    
    57,558
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    57,558Share issuance  Newstrike
      acquisition
    11
    
    35,394,041
    
    
    322,439
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    322,439Issuance fees
    13
    
    
    
    
    (3,827
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (3,827
    )Replacement stock options
    11
    
    
    
    
    
    
    
    7,134
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    7,134Replacement warrants
    11
    
    
    
    
    
    
    
    
    
    
    12,229
    
    
    
    
    
    
    
    
    
    
    
    12,229Issuance of warrants
    19
    
    
    
    
    
    
    
    
    
    
    42,386
    
    
    
    
    
    
    
    
    
    
    
    42,386Exercise of stock options
    13
    
    3,567,867
    
    
    7,044
    
    
    (2,751
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    4,293Exercise of warrants
    12, 13
    
    13,619,202
    
    
    61,350
    
    
    
    
    
    (5,204
    )
    
    
    
    
    
    
    
    
    
    
    56,146Exercise of Broker/Finder
      warrants
    13
    
    1,916,527
    
    
    7,909
    
    
    
    
    
    (1,613
    )
    
    
    
    
    
    
    
    
    
    
    6,296Stock-based compensation
    13,18
    
    
    
    
    
    
    
    29,793
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    29,793Non-controlling interest
    28
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,000
    
    
    
    
    
    1,000Total net loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (81,564
    )
    
    (81,564
    )Balance at July 31, 2019
    
    
    256,981,753
    
    $
    799,706
    
    $
    40,315
    
    $
    60,433
    
    $
    
    
    $
    1,000
    
    $
    (124,698
    )
    $
    776,756Balance, August 1, 2017
    
    
    76,192,990
    
    $
    45,159
    
    $
    1,562
    
    $
    3,728
    
    $
    1,775
    
    
    
    
    $
    (19,785
    )
    $
    32,439Issuance of 7% unsecured
      convertible debentures
    12
    
    
    
    
    
    
    
    
    
    
    3,530
    
    
    7,283
    
    
    
    
    
    
    
    
    10,813Issuance of units
    13
    
    37,375,000
    
    
    139,029
    
    
    
    
    
    10,471
    
    
    
    
    
    
    
    
    
    
    
    149,500Issuance costs
    12
    
    
    
    
    (5,870
    )
    
    
    
    
    (768
    )
    
    (506
    )
    
    
    
    
    
    
    
    (7,144
    )Issuance of Broker/Finder
      warrants
    13
    
    
    
    
    (1,472
    )
    
    
    
    
    2,352
    
    
    
    
    
    
    
    
    
    
    
    880Conversion of 8% unsecured
      convertible debentures
    12
    
    15,853,887
    
    
    23,462
    
    
    
    
    
    
    
    
    (1,743
    )
    
    
    
    
    
    
    
    21,719Conversion of 7% unsecured
      convertible debentures
    12
    
    31,384,081
    
    
    61,555
    
    
    
    
    
    
    
    
    (6,809
    )
    
    
    
    
    
    
    
    54,746Exercise of stock options
    13
    
    907,273
    
    
    1,009
    
    
    (419
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    590Exercise of warrants
    12, 13
    
    27,897,087
    
    
    75,254
    
    
    
    
    
    (5,029
    )
    
    
    
    
    
    
    
    
    
    
    70,225Exercise of Broker/Finder
      warrants
    13
    
    4,018,798
    
    
    9,106
    
    
    
    
    
    (1,647
    )
    
    
    
    
    
    
    
    
    
    
    7,458Stock-based compensation
    13
    
    
    
    
    
    
    
    4,997
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    4,997Net loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (23,350
    )
    
    (23,350
    )Balance at July 31, 2018
    
    
    193,629,116
    
    $
    347,233
    
    $
    6,139
    
    $
    12,635
    
    $
    
    
    
    
    
    $
    43,134
    )
    $
    322,873


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

3

---

Consolidated Statements of
Cash Flows(Audited, expressed in CAD $000s)

|For the fiscal years ended                                           |  | Note  |  |   | July 31, 2019 |   |   | July 31, 2018 |  
|-------------------------------------------------------------------- |  | ----- |  | - | ------------- | - | - | ------------- | -
|                                                                     |  |       |  |   |               |   |   | (Restated    |  
|                                                                     |  |       |  |   |               |   |   | see note 26   | )
|Operating activities                                                 |  |       |  |   |               |   |   |               |  
|Total net loss                                                       |  |       |  | $ | (81,564       | ) | $ | (23,350       | )
|Items not affecting cash                                             |  |       |  |   |               |   |   |               |  
|Income tax recovery                                                  |  | 29    |  |   | (3,840        | ) |   |              |  
|Depreciation of property, plant and equipment                        |  | 9     |  |   | 1,747         |   |   | 896           |  
|Amortization of intangible assets                                    |  | 10    |  |   | 1,767         |   |   | 765           |  
|Unrealized revaluation gain on convertible debenture                 |  | 15    |  |   | (1,737        | ) |   |              |  
|Unrealized revaluation gain on biological assets                     |  | 8     |  |   | (38,856       | ) |   | (7,340        | )
|Unrealized fair value adjustment on investments                      |  | 20    |  |   | 315           |   |   |              |  
|Amortization of deferred financing costs                             |  | 16    |  |   | 596           |   |   |              |  
|Accrued interest income                                              |  | 15    |  |   | (397          | ) |   |              |  
|License depreciation and prepaid royalty expenses  HIP              |  | 27    |  |   | 117           |   |   |              |  
|Impairment loss on inventory                                         |  | 7     |  |   | 16,918        |   |   |              |  
|Share of loss on investment in joint venture                         |  | 19    |  |   | 2,964         |   |   |              |  
|Non-cash interest expense                                            |  | 11    |  |   |              |   |   | 312           |  
|Fair
      value adjustment on inventory sold                        |  | 7     |  |   | 16,357        |   |   | 2,289         |  
|Stock-based compensation                                             |  | 13,18 |  |   | 28,008        |   |   | 4,997         |  
|Stock-based compensation expensed through cost of sales              |  | 7     |  |   | 936           |   |   |              |  
|Accretion of convertible debt                                        |  | 12    |  |   |              |   |   | 1,368         |  
|Changes in non-cash operating working
      capital items            |  |       |  |   |               |   |   |               |  
|Trade receivables                                                    |  | 17    |  |   | (17,845       | ) |   | (292          | )
|Commodity taxes recoverable                                          |  |       |  |   | (6,425        | ) |   | (3,742        | )
|Prepaid expenses                                                     |  |       |  |   | (4,927        | ) |   | (4,003        | )
|Inventory                                                            |  | 7     |  |   | (90,748       | ) |   | (2,503        | )
|Biological assets                                                    |  | 8     |  |   | 37,108        |   |   |              |  
|Accounts payable and accrued liabilities                             |  |       |  |   | 6,630         |   |   | 3,399         |  
|Interest payable                                                     |  | 12    |  |   |              |   |   | (72           | )
|Excise taxes payable                                                 |  |       |  |   | 3,494         |   |   |              |  
|Deferred rent
      liability                                        |  |       |  |   | 946           |   |   |              |  
|Cash
      and cash equivalents used in operating activities         |  |       |  |   | (128,436      | ) |   | (27,276       | )
|Financing activities                                                 |  |       |  |   |               |   |   |               |  
|Share issuance  January offering                                    |  | 13    |  |   | 57,558        |   |   |              |  
|Issuance fees                                                        |  | 13    |  |   | (3,827        | ) |   | (6,393        | )
|Issuance of units                                                    |  | 12    |  |   |              |   |   | 149,500       |  
|Issuance of secured convertible
      debentures                     |  | 12    |  |   |              |   |   | 69,000        |  
|Financing fees                                                       |  | 13    |  |   |              |   |   | (3,913        | )
|Exercise of stock options                                            |  | 13    |  |   | 4,293         |   |   | 590           |  
|Exercise of warrants                                                 |  | 13    |  |   | 62,442        |   |   | 74,366        |  
|Proceeds from term loan, net of
      financing costs                |  | 16    |  |   | 32,778        |   |   |              |  
|Revaluation of foreign currency denominated warrants
      exercised |  | 12    |  |   | (2,637        | ) |   | 5,091         |  
|Cash
      provided by financing activities                          |  |       |  |   | 150,607       |   |   | 288,241       |  
|Investing activities                                                 |  |       |  |   |               |   |   |               |  
|Disposal/(Acquisition) of short-term
      investments               |  | 4     |  |   | 119,810       |   |   | (142,874      | )
|Restricted cash                                                      |  | 5     |  |   | (22,350       | ) |   |              |  
|Acquisition of property, plant and
      equipment                   |  | 9     |  |   | (138,034      | ) |   | (45,722       | )
|Purchase of intangible assets                                        |  | 10    |  |   | (3,010        | ) |   | (1,780        | )

4

---

|Investment in associate and joint
      ventures   |  | 19 |  |   | (13,427 | ) |   |         |  
|-------------------------------------------------- |  | -- |  | - | ------- | - | - | -------- | -
|Net cash acquired on business
      acquisition    |  | 11 |  |   | 49,366  |   |   |         |  
|Acquired convertible debenture                     |  | 15 |  |   |        |   |   | (10,000  | )
|Cash
      used in investing activities            |  |    |  |   | (7,645  | ) |   | (200,376 | )
|Increase in cash and cash equivalents              |  |    |  |   | (14,526 | ) |   | 60,589   |  
|Cash
      and cash equivalents, beginning of year |  |    |  |   | 99,042  |   |   | 38,453   |  
|Cash and cash equivalents, end of year             |  |    |  | $ | 113,568 |   | $ | 99,042   |  

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

5

---

Notes to the Consolidated
Financial StatementsFor the fiscal years ended
July 31, 2019 and 2018(Audited, expressed in CAD and in $000s
except share amounts or where otherwise stated)

1. Description of
Business

HEXO Corp. (formerly The Hydropothecary Corporation) (the
Company), is a publicly traded corporation, incorporated in Canada. HEXO is a
producer of cannabis and its sites are licensed by Health Canada for production
and sale. Its head office is located at 240-490 Boulevard Saint-Joseph,
Gatineau, Quebec, Canada. The Companys common shares are listed on the Toronto
Stock Exchange (TSX) and the New York Stock Exchange (NYSE), both under the
trading symbol HEXO.

Shareholder approval of the Companys name change to HEXO Corp.
formerly The Hydropothecary Corporation occurred August 28, 2018.

2. Basis of
Presentation

Statement of Compliance

The consolidated financial statements have been prepared in
compliance with International Financial Reporting Standards as issued by the
International Accounting Standards Board ("IFRS").

These consolidated financial statements were approved and
authorized for issue by the Board of Directors on October 23, 2019.

Basis of Measurement and Consolidation

The consolidated financial statements have been prepared on an
historical cost basis except for cash and cash equivalents, restricted cash,
short term investments, biological assets, convertible debentures receivable,
long term investments, and the warrant liability, which are measured at fair
value on a recurring basis and include the accounts of the Company and entities
controlled by the Company and its subsidiaries.

Historical cost is the fair value of the consideration given in
exchange for goods and services based upon the fair value at the time of the
transaction of the consideration provided.

Fair value is the price that would be received to sell an asset
or paid to transfer a liability in an orderly transaction between market
participants at the measurement date, regardless of whether that price is
directly observable or estimated using another valuation technique. In
estimating the fair value of an asset or a liability, the Company takes into
account the characteristics of the asset or liability if market participants
would take those characteristics into account when pricing the asset or
liability at the measurement date. Fair value for measurement and/or disclosure
purposes in these consolidated financial statements is determined on such a
basis, except for share-based payment transactions that are within the scope of
IFRS 2, Share-based paymentand measurements that have some similarities
to fair value but are not fair value, such as net realizable value in IAS 2,
Inventories.

In addition, for financial reporting purposes, fair value
measurements are categorized into Level 1, 2 or 3 based on the degree to which
the inputs to the fair value measurements are observable and the significance of
the inputs to the fair value measurement in its entirety, which are described as
follows: Level 1 - inputs are quoted prices (unadjusted) in active markets for
identical assets or liabilities that the entity can access at the measurement
date; Level 2 - inputs are inputs other than quoted prices included within Level
1, that are observable for the asset or liability, either directly or
indirectly; and Level 3 - inputs are unobservable inputs for the asset or
liability.

(a) INVESTMENT IN ASSOCIATES AND JOINT VENTURES

When determining the appropriate basis of accounting for the
Companys interests in affiliates, the Company makes judgments about the degree
of influence that it exerts directly or through an arrangement over the
investees relevant activities.

Judgment was used to determine whether the joint venture
arrangements described in Note 19 should be accounted for as a joint operation
or a joint venture. Given the Company has rights to the net assets of the
separate legal entities, the Company has concluded they will be accounted for as
joint ventures. The Company will recognize the initial investment at cost and
the carrying amount is increased or decreased to recognize the Companys share
of the profit or loss of the venture after the date of acquisition.

(b) FUNCTIONAL AND PRESENTATION CURRENCY

These consolidated financial statements are presented in
Canadian dollars, the functional currency of the Company and its
subsidiaries.

6

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(c) BASIS OF CONSOLIDATION

Subsidiaries are entities controlled by the Company. Control
exists when the Company has the power, directly and indirectly, to govern the
financial and operating policies of an entity and be exposed to the variable
returns from its activities. The financial statements of subsidiaries are
included in the consolidated financial statements from the date that control
commences until the date that control ceases.

|MAJOR SUBSIDIARIES                            | JURISDICTION    | INTEREST HELD
|--------------------------------------------- | --------------- | -------------
|HEXO Operations Inc.1                         | Ontario, Canada | 100%         
|Newstrike Brands Ltd.2                        | Ontario, Canada | 100%         
|HEXO USA Inc.                                 | Deleware, USA   | 100%         
|Keystone Isolation Technologies Inc. (KIT) | Ontario, Canada | 60%          

1Holds 100% interest in 8980268 Canada Inc., a
company for which it holds a right to acquire the outstanding shares at any time
for a nominal amount.

2Holds one wholly-owned subsidiary 1977121 Ontario
Inc., which wholly-owns the subsidiary Up Cannabis Inc. and holds a 60% interest
in the joint venture Neal Up Brands Inc.

3. Significant Accounting
Policies, Accounting Standards and Interpretations

FOREIGN CURRENCY TRANSLATION

Foreign currency transactions are translated into Canadian
dollars at exchange rates in effect on the date of the transactions. Monetary
assets and liabilities denominated in foreign currencies at the consolidated
statement of financial position date are translated to Canadian dollars at the
foreign exchange rate applicable at that date. Realized and unrealized exchange
gains and losses are recognized through profit or loss.

Non-monetary assets and liabilities that are measured in terms
of historical cost in a foreign currency are translated using the exchange rate
at the date of the transaction.

CASH AND CASH EQUIVALENTS

Cash and cash equivalents are comprised of cash and highly
liquid investments that are readily convertibles into known amounts of cash with
original maturities of three months or less.

SHORT TERM INVESTMENTS

Short term investments are comprised of liquid investments with
maturities between 3 and 12 months. Short term investments are recognized
initially at fair value and subsequently adjusted to fair value through profit
or loss.

BIOLOGICAL ASSETS

The Company measures biological assets consisting of cannabis
plants using the income approach at fair value less costs to sell up to the
point of harvest, which becomes the basis for the cost of finished goods
inventories after harvest. The Company capitalizes all the direct and indirect
costs as incurred related to the biological transformation of the biological
assets between the point of initial recognition and the point of harvest
including labour related costs, grow consumables, materials, utilities,
facilities costs, depreciation, overhead, stock-based compensation of applicable
employees, quality and testing costs. The identified capitalized direct and
indirect costs of biological assets are subsequently recorded within the line
item costs of goods sold on the statement of loss and comprehensive loss in
the period that the related product is sold. Seeds are measured at fair value.
Unrealized gains or losses arising from changes in fair value less cost to sell
during the period are included in the results of operations and presented on a
separate line of statement of comprehensive loss of the related period.

INVENTORY

Inventory is valued at the lower of cost and net realizable
value. Cost is determined using the weighted average method. Inventories of
harvested cannabis are transferred from biological assets at their fair value at
harvest, 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. Subsequent costs include materials, overhead,
amortization, stock-based compensation of applicable employees and labour
involved in packaging and quality assurance. The identified capitalized direct
and indirect costs related to inventory are subsequently recorded within cost
of goods sold on the statement of loss and comprehensive loss at the time the
product is sold, with the exclusion of realized fair value amounts included in
inventory sold which are recorded as a separate line within gross margin. Net
realizable value is determined as the estimated selling price in the ordinary
course of business less the estimated costs of completion and the estimated
costs necessary to make the sale. Packaging and supplies are initially valued at
cost and subsequently at the lower of cost and net realizable value.

PROPERTY, PLANT AND EQUIPMENT

Property, plant and equipment is measured at cost less
accumulated amortization and impairment losses. Amortization is provided using
the following terms and method:

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|Land                                 | Not amortized | No term      
|------------------------------------ | ------------- | -------------
|Buildings                            | Straight line | 5 to 20 years
|Leasehold improvements               | Straight line | lease term   
|Furniture and equipment              | Straight line | 5 years      
|Cultivation and production equipment | Straight line | 5 to 20 years
|Vehicles                             | Straight line | 5 years      
|Computers                            | Straight line | 3 years      
|Construction in progress             | Not amortized | No term      

An assets residual value, useful life and amortization method
are reviewed at each financial year and adjusted if appropriate. When parts of
an item of equipment have different useful lives, they are accounted for as
separate items (major components) of property, plant and equipment.

Gains and losses on disposal of an item of equipment are
determined by comparing the proceeds from disposal with the carrying amount of
the equipment and are recognized in profit or loss.

Construction in progress is transferred to property, plant and
equipment when the assets are available for use and amortization of the assets
commences at that point.

FINITE LIFE INTANGIBLE ASSETS

Finite life intangible assets are recorded at cost less
accumulated amortization and accumulated impairment losses. Amortization is
provided on a straight-line basis over the following terms:

|Domain names           | Straight line | 10 years    
|---------------------- | ------------- | ------------
|Health Canada licenses | Straight line | 20 years    
|Software               | Straight line | 3 to 5 years
|Patents                | Straight line | 20 years    

The estimated useful life and amortization method are reviewed
at the end of each reporting period, with the effect of any changes in estimate
being accounted for on a prospective basis.

INDEFINITE INTANGIBLE ASSETS

Indefinite intangible assets are deemed to have no foreseeable
limit over which the asset is expected to generate net cash inflows. Following
initial recognition, intangible assets with indefinite useful lives are carried
at cost less any accumulated impairment losses and are tested annually for
impairment, or more frequently if events or changes in circumstances indicate
that they might be impaired. The Company intends to utilize the brand
indefinitely.

|Brand | Not amortized | Indefinite
|----- | ------------- | ----------

INVESTMENT IN ASSOCIATE

Associates are entities over which the Company has significant
influence and that is neither a subsidiary nor an interest in a joint venture.
Significant influence represents the power to participate in the financial and
operating policy decisions of the investee but does not represent the right to
exercise control or joint control over those policies.

A joint venture is a contractual arrangement whereby the
Company and other parties undertake an economic activity that is subject to
joint control (i.e. when the strategic, financial and operating policy decisions
relating to the activities of the joint venture require the unanimous consent of
the parties sharing control).

Investments in associates and joint ventures are accounted for
using the equity method and are initially recognized at cost inclusive of
transaction costs.

IMPAIRMENT OF LONG-LIVED ASSETS

Long-lived assets, including property, plant and equipment,
goodwill and intangible assets are reviewed for impairment at the end of each
financial reporting period or whenever events or changes in circumstances
indicate that the carrying amount of an asset exceeds its recoverable amount.
For the purpose of impairment testing, assets that cannot be tested individually
are grouped together into the smallest group of assets that generates cash
inflows from continuing use that are largely independent of the cash inflows of
other assets or groups of assets (the cash-generating unit, or "CGU"). The
recoverable amount of an asset or a CGU is the higher of its fair value, less
costs of disposal, and its value in use. If the carrying amountof an
asset exceeds its recoverable amount, an impairment charge is recognized
immediately in profit or loss by the amount by which the carrying amount of the
asset exceeds the recoverable amount. Where an impairment loss subsequently
reverses, the carrying amount of the asset is increased to the lesser of the
revised estimate of recoverable amount, and the carrying amount that would have
been recorded had no impairment loss been recognized previously.

The Company assesses impairment of property, plant and
equipment when an impairment indicator arises. When the asset does not generate
cash inflows that are largely independent of those from other assets or group of
assets, the asset is tested at the CGU level. In assessing an impairment, the
Company compares the carrying amount of the asset or CGU to the recoverable
amount, which is determined as the higher of the asset or CGUs fair value less
costs of disposal and its value-in-use. Value-in-use is assessed based on the estimated future cash flows, discounted to their present
value using a pre-tax discount rate that reflects applicable market and economic
conditions, the time value of money and the risks specific to the asset.

8

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Goodwill and indefinite life intangible assets are tested
annually and the end of the fiscal year for impairment by comparing the carrying
value of each CGU containing the assets to its recoverable amount. Goodwill is
allocated to CGUs or groups of CGUs for impairment testing based on the level
at which it is monitored by management, and not at a level higher than an
operating segment. Operating segments are components of the Company that engage
in business activities which generate revenues and incur expenses. Goodwill is
allocated to those CGUs or groups of CGUs expected to benefit from the business
combination from which the goodwill arose, which requires the use of judgment.
The Company has determined that goodwill and indefinite life intangibles are
tested at the adult-use cannabis level representing the primary operations of
the Company as described in note 1.

An impairment loss is recognized for the amount by which the
CGUs carrying amount exceeds its recoverable amount. The recoverable amounts of
the CGUs assets have been determined based on its fair value less costs of
disposal. Impairment losses recognized in respect of a CGU are first allocated
to the carrying value of goodwill and any excess is allocated to the carrying
value of assets in the CGU. In allocating a reversal of an impairment loss, the
carrying amount of an asset shall not be increased above the lower of its
recoverable amount and the carrying amount that would have been determined had
no impairment loss been recognized for the asset in prior period. Impairment
losses on goodwill are not subsequently reversed.

Impairment losses are recognized whenever the carrying amount
of the asset or CGU exceeds its recoverable amount and is recorded in the
consolidated statements of comprehensive (loss) income.

The Company estimated the recoverable amounts of goodwill and
indefinite life intangible assets by estimating the higher of their fair value
less costs of disposal and value in use, which are level 3 measurements within
the fair value hierarchy. The key assumption that drove managements
determination of the recoverable amounts of the CGUs were capacity multiples of
comparable industry peers.

GOODWILL

Goodwill represents the excess of the purchase price paid for
the acquisition of the Companys subsidiary Newstrike over the fair value of the
net tangible and intangible assets acquired. Following initial recognition,
goodwill is measured at cost less any accumulated impairment losses. Goodwill is
tested for impairment annually, and whenever events or circumstances that make
it more likely than not that an impairment may have occurred, such as a
significant adverse change in the business climate or a decision to sell or
dispose all or a portion of a reporting unit.

LEASED ASSETS

Leases are classified as an operating lease whenever the terms
of the lease do not transfer substantially all of the risks and rewards of
ownership to the lessee. Lease payments are recognized as an expense on a
straight-line basis over the lease term, except where another systematic basis
is more representative of the time pattern in which the economic benefits are
consumed.

BUSINESS ACQUISITION

A business combination is a transaction or event in which an
acquirer obtains control of one or more businesses and is accounted for using
the acquisition method. The total consideration paid for the acquisition is the
aggregate of the fair values of assets acquired, liabilities assumed, and equity
instruments issued in exchange for control of the acquiree at the acquisition
date. The acquisition date is the date when the Company obtains control of the
acquiree. The identifiable assets acquired and liabilities assumed are
recognized at their acquisition date fair values, except for deferred taxes and
share-based payment awards where IFRS provides exceptions to recording the
amounts at fair value. Goodwill represents the difference between total
consideration paid and the fair value of the net-identifiable assets acquired.
Acquisition costs incurred are expensed to profit or loss. Contingent
consideration is measured at its acquisition date fair value and is included as
part of the consideration transferred in a business combination, subject to the
applicable terms and conditions. Contingent consideration that is classified as
equity is not remeasured at subsequent reporting dates and its subsequent
settlement is accounted for within equity. Contingent consideration that is
classified as an asset or a liability is remeasured at subsequent reporting
dates in accordance with IFRS 9 Financial Instruments with the corresponding
gain or loss recognized in profit or loss.

Based on the facts and circumstances that existed at the
acquisition date, management will perform a valuation analysis to allocate the
purchase price based on the fair values of the identifiable assets acquired and
liabilities assumed on the acquisition date. Management has one year from the
acquisition date to confirm and finalize the facts and circumstances that
support the finalized fair value analysis and related purchase price allocation.
Until such time, these values are provisionally reported and are subject to
change. Changes to fair values and allocations are retrospectively adjusted in
subsequent periods.

REVENUE RECOGNITION

The Company has effectively applied the new IFRS 15 standard to
the current fiscal year and retrospectively, seeNew IFRS Effective August
1, 2018.

COST OF GOODS SOLD

Cost of goods sold includes cost of inventory expensed,
packaging costs, shipping costs and related labour.

RESEARCH AND DEVELOPMENT

Research costs are expensed as incurred. Development
expenditures are capitalized only if development costs can be measured reliably,
the product or process is technically and commercially feasible, future economic
benefits are probable, and the Company intends to and has sufficient resources to complete development to use or sell
the asset. Other development expenditures are recognized in profit and loss as
incurred.

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INCOME TAXES

The Company uses the liability method to account for income
taxes. Deferred income tax assets and liabilities are recognized for the future
tax consequences attributable to differences between the carrying amounts of
existing assets and liabilities for accounting purposes, and the irrespective
tax bases. Deferred income tax assets and liabilities are measured using tax
rates that have been enacted or substantively enacted applied to taxable income
in the years in which those temporary differences are expected to be recovered
or settled. The effect on deferred income tax assets and liabilities of a change
in statutory tax rates is recognized in profit or loss in the year of change.
Deferred income tax assets are recorded when their recoverability is considered
probable and are reviewed at the end of each reporting period.

SHARE-BASED COMPENSATION

The Company has an employee stock option plan. The Company
measures equity settled share-based payments based on their fair value at the
grant date and recognizes compensation expense over the vesting period based on
the Companys estimate of equity instruments that will eventually vest.
Forfeitures are adjusted for on an actual basis. The impact of the revision of
the original estimate is recognized in profit or loss such that the cumulative
expense reflects the revised estimate. For stock options granted to
non-employees the compensation expense is measured at the fair value of goods
and services receivedexcept where the fair value cannot be estimated in
which case it is measured at the fair value of the equity instruments granted.
Consideration paid by employees or non-employees on the exercise of stock
options is recorded as share capital and the related share-based compensation is
transferred from share-based payment reserve to share capital.

NON-CONTROLLING INTEREST

Non-controlling interest (NCI) is recognized at the NCIs
proportionate share of the net assets.

LOSS PER SHARE

Loss per common share represents loss for the period
attributable to common shareholders divided by the weighted average number of
common shares outstanding during the year. Diluted loss per common share is
calculated by dividing the applicable loss for the year by the sum of the
weighted average number of common shares outstanding and all additional common
shares that would have been outstanding if potentially dilutive common shares
had been issued during the year. The calculation of diluted loss per share
excludes the effects of various conversions and exercise of options and warrants
that would be anti-dilutive.

BORROWING COSTS

Borrowing costs directly attributable to the acquisition,
construction or production of qualifying assets, which are assets that
necessarily take a substantial period of time to get ready for their intended
use or sale, are added to the cost of those assets, until such time as the
assets are substantially ready for their intended use or sale.

All other borrowing costs are recognized in profit or loss in
the period which they are incurred.

FINANCIAL INSTRUMENTS

Financial assets and liabilities are recognized when the
Company becomes a party to the contractual provision of the respective
instrument.

Fair value estimates are made at the consolidated statement of
financial position date based upon the relevant market conditions and
information about the financial instrument. The Company has made the following
classifications:

|                                         | IFRS 9 Classification
|---------------------------------------- | ---------------------
|Financial assets                         |                      
|Cash and cash equivalents                | FVTPL                
|Restricted cash                          | FVTPL                
|Short-term investments                   | FVTPL                
|Trade receivables                        | Amortized cost       
|Convertible debenture receivable         | FVTPL                
|Long term investment                     | FVTPL                
|Financial liabilities                    |                      
|Accounts payable and accrued liabilities | Amortized cost       
|Warrant liability                        | FVTPL                
|Deferred rent liability                  | Amortized cost       
|Term loan                                | Amortized cost       

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Fair Value Through Profit or Loss (FVTPL) Financial Assets

Financial assets classified and measured at FVTPL are those
assets that do not meet the criteria to be classified at amortized cost or at
FVTOCI. This category includes debt instruments whose cash flow characteristics
are not solely payments of principal and interest (SPPI) or are not held
within a business model whose objective is either to collect contractual cash
flows, or to both collect contractual cash flows and sell the financial
asset.

Amortized Cost Financial Assets

Financial assets at amortized cost are non-derivative financial
assets which are held within a business model whose objective is to hold assets
to collect contractual cash flows and its contractual terms give rise on
specified dates to cash flows that are solely payments of principal and interest
on the principal amount outstanding. A financial asset is initially measured at
fair value, including transaction costs and subsequently at amortized cost.

Impairment of Financial Assets

Financial assets, other than those classified at fair value
through profit and loss, are assessed for indicators of impairment at the end of
the reporting period. Financial assets are considered to be impaired when there
is objective evidence that, as a result of one or more events that occurred
after the initial recognition of the financial asset, the estimated future cash
flows of the investment have been affected.

Financial Liabilities and Other Financial Liabilities

Financial liabilities are classified as either financial
liabilities at FVTPL or other financial liabilities. Financial liabilities at
FVTPL are stated at fair value, with changes being recognized through the
consolidated statements of income. Other financial liabilities are initially
measured at fair value, net of transaction costs, and are subsequently measured
at amortized cost using the effective interest method.

Embedded Derivatives

Derivatives are initially measured at fair value in conjunction
with the host contract; no bifurcation is performed, and any directly
attributable transaction costs are recognised in profit or loss as incurred.
Subsequent to initial recognition, the entire instrument, including the embedded
derivative is measured at fair value and changes therein are recognised in
profit or loss. The Company has a convertible loan receivable whereby the
balance can be converted into equity. See Note 15 for transaction and valuation
details.

Compound Instruments

The component parts of compound instruments (convertible
debentures) issued by the Company are classified separately as financial
liabilities and equity in accordance with the substance of the contractual
arrangements and the definitions of a financial liability and an equity
instrument. A conversion option that will be settled by the exchange of a fixed
amount of cash or another financial asset for a fixed number of the Companys
own equity instruments is an equity instrument.

At the date of issue, the fair value of the liability component
is estimated using the prevailing market interest rate for similar
non-convertible instruments. This amount is recorded as a liability on an
amortized cost basis using the effective interest rate method until extinguished
upon conversion or at the instruments maturity date.

The conversion option classified as equity is determined by
deducting the amount of the liability component from the fair value of the
compound instrument as a whole. This is recognized and included in equity and is
not subsequently remeasured. In addition, the conversion option classified as
equity will remain in equity. No gain or loss is recognized in profit or loss
upon conversion or expiration of the conversion option.

Transaction costs that relate to the issue of the convertible
debentures are allocated to the liability and equity components in proportion to
the allocation of the gross proceeds. Transaction costs relating to the equity
component are recognized directly in equity. Transaction costs relating to the
liability component are included in the carrying amount of the liability
component and are amortized over the term of the convertible debentures using
the effective interest method.

For compound instruments with non-equity derivatives, the fair
value of the embedded derivative is determined first based on the contractual
terms, and the initial carrying amount of the host instrument is the residual
amount after separating the embedded derivative.

Transaction Costs

Transaction costs that are directly attributable to the
acquisition or issue of financial assets and financial liabilities (other than
financial assets and financial liabilities at fair value through profit or loss)
are added to or deducted from the fair value of the financial assets or
financial liabilities, as appropriate, on initial recognition. Transaction costs
directly attributable to the acquisition of financial assets or financial
liabilities at fair value through profit or loss are recognized immediately in
profit or loss.

CRITICAL ACCOUNTING ESTIMATES AND JUDGEMENTS

The preparation of the consolidated financial statements in
conformity with IFRS requires management to make judgments, estimates and
assumptions that affect the application of accounting policies and the reported
amounts of assets, liabilities, income and expenses. Actual results may differ
from these estimates. Estimates and underlying assumptions are reviewed on an
ongoing basis. Revisions to accounting estimates are recognized in the period in
which the estimates are revised and in any future periods affected.

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Valuation of Biological Assets and Inventory

In calculating the value of the biological assets and
inventory, management is required to make a number of estimates, including
estimating the stage of growth of the cannabis, harvesting costs, selling costs,
sales price and expected yields for the cannabis plant. In calculating final
inventory values, management is required to determine an estimate of spoiled or
expired inventory and compares the inventory cost versus net realizable value.

Estimated Useful Lives, Amortization and Impairment of
Property, Plant and Equipment and Intangible Assets

Amortization of property, plant and equipment and intangible
assets are dependent upon estimates of useful lives, which are determined
through the exercise of judgment. The assessment of any impairment of these
assets is dependent upon estimates of recoverable amounts that take into account
factors such as economic and market conditions and the useful lives of assets.
The impairment is amount by which the carrying amount of the asset or CGU
exceeds its recoverable amount. The recoverable amount is the higher of the fair
value less costs of disposal and its value in use. Management exercises
judgement in the determination of the Companys CGUs.Share-Based
Compensation

In calculating the share-based compensation expense, key
estimates such as the value of the common share, the rate of forfeiture of
options granted, the expected life of the option, the volatility of the
Companys stock price and the risk-free interest rate are used.Warrants

In calculating the value of the warrants, key estimates such as
the value of the common share, the expected life of the warrant, the volatility
of the Companys stock price and the risk free interest rate are used.

All broker/compensation warrants were measured at the fair
value of the equity instruments granted, as the fair value of the related
services cannot be reliably measured.

Provisions

Provisions are recognized when the Company has a present
obligation, legal or constructive as a result of a previous event, if it is
probable that the Company will be required to settle the obligation and a
reliable estimate can be made of the obligation. The amount recognized is the
best estimate of the expenditure required to settle the present obligation at
the end of the reporting period, taking into account the risks and uncertainties
surrounding the obligations. Provisions are reviewed at the end of each
reporting period and adjusted to reflect the current best estimate of the
expected future cash flows.

Allocation of Purchase Price

In determining the allocation of the purchase price, estimates
are used based on market research and appraisal values.

Joint Ventures and Investments in Associates

Joint ventures are joint arrangements whereby the parties that
have joint control of the arrangement have rights to the net assets of the
arrangement. Investments in associates are arrangements whereby the Company
exercises significant influence. Judgement is required in the assessment of
these arrangements and has been determined as follows:

|Entity                  | Assessment                                                                                                                                                                                | Classification               
|----------------------- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | -----------------------------
|(as defined in Note 19) |                                                                                                                                                                                           |                              
|                        |                                                                                                                                                                                           |                              
|Truss                   | Management has
      determined joint control is not present due to the inability to direct the
      day to day operations of the entity.                                                | Investment in
      associate
|Belleville Complex Inc. | Management has determined joint
      control is present based upon the board composition, decision making and
      the ability to direct the day to day operations of the entity.       | Joint venture                
|HEXO MED                | Management has
      determined joint control is present based upon the board composition,
      decision making and the ability to direct the day to day operations of the
      entity. | Joint venture                

Business Acquisitions

In determining the fair value of all identifiable assets
acquired and liabilities assumed, the most significant estimates relate to
private investments and intangible assets acquired. Management exercises
judgment in estimating the probability and timing of when cash flows are
expected to be achieved, which is used as the basis for estimating fair
value.

Identified intangible assets are fair valued using appropriate
valuation techniques which are generally based on a forecast of the total
expected future net cash flows of the acquiree. Valuations are highly dependent
on the inputs used and assumptions made by management regarding the future
performance of these assets and any changes in the discount rate applied.

Acquisitions that do not meet the definition of a business
combination are accounted for as asset acquisitions. Consideration paid for an
asset acquisition is allocated to the individual identifiable assets acquired
and liabilities assumed based on their relative fair values. Asset acquisitions
do not give rise to goodwill.

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Estimation on Revenue Recognition

The Companys revenue streams include variable consideration as
a result of return provisions and price concessions which require estimation
based on historical results and forward looking expectations.

Expected Credit Losses (ECL) on Trade Accounts
Receivable

The Company applies the simplified approach, as defined in
IFRS, to measure expected credit losses, which requires the use of the lifetime
expected credit loss provision for all trade receivables. To measure lifetime
expected credit losses, trade receivables are first classified into groups with
shared credit characteristics and the age of days past due, followed by an
assessment of the Companys historical experience of bad debts including the
customers ability to pay and the impact of any relevant economic conditions
which are expected during the life of the balance. The loss allowance is
determined according to a provision matrix incorporating historical experiences
adjusted for current and future conditions expected for the life of the
balance.

Convertible debentures

The fair value of the convertible debentures is determined
using the public market price. As the convertible debentures are classified as
FVTPL, the subsequent interest as well as change in the fair value will flow
through the consolidated statements of comprehensive income.

Deferred taxes

Significant estimates are required in determining the Companys
income tax provision. Some estimates are based on interpretations of existing
tax laws or regulations. Various internal and external factors may have
favorable or unfavorable effects on the Companys future effective tax rate.
These include, but are not limited to, changes in tax laws, regulations and/or
rates, changing interpretations of existing tax laws or regulations, results of
tax audits by tax authorities, changes in estimates of prior years items and
changes in overall levels of pre-tax earnings.

Going Concern

Management has applied significant judgment in the assessment
of the Company's ability to continue as a going concern when preparing its
consolidated financial statements for the years ended July 31, 2019 and 2018.
Management prepares the consolidated financial statements on a going concern
basis unless management either intends to liquidate the entity or to cease
trading or has no realistic alternative but to do so. The Company has considered
the private placement subsequent to July 31, 2019 as disclosed in Note 33 in
making this assessment.

New IFRS Effective August 1,
2018IFRS 15, REVENUE FROM CONTRACTS WITH CUSTOMERS

IFRS 15 was issued by the IASB in May 2014 and specifies how
and when revenue should be recognized based on a five-step model, which is
applied to all contracts with customers. On April 12, 2016, the IASB published
final clarifications to IFRS 15 with respect to identifying performance
obligations, principal versus agent considerations, and licensing.

The Company has applied IFRS 15 retrospectively and determined
that there is no change to the comparative period or transitional adjustments
required as a result of the adoption. The Companys accounting policy for
revenue recognition under IFRS 15 is as follows:

|1. | Identifying the contract with a customer;                                                   
|-- | --------------------------------------------------------------------------------------------
|   |                                                                                             
|2. | Identifying the performance obligation(s) in the
      contract;                            
|   |                                                                                             
|3. | Determining the transaction price;                                                          
|   |                                                                                             
|4. | Allocating the transaction price to the performance
      obligation(s) in the contract; and
|   |                                                                                             
|5. | Recognizing revenue when or as the Company satisfies the
      performance obligation(s).   

Revenue from the direct sale of cannabis to customers for a
fixed price is recognized when the Company transfers the control of the good(s)
to the customer upon delivery and acceptance by the customer, the timing of
which is consistent with the Companys previous revenue recognition policy under
IAS 18. The Company recognizes revenue in an amount that reflects the
consideration which the Company expects to receive taking into account the
impact which may arise from any rights of return on sales, price concessions or
similar obligations. Net revenue is presented net of taxes, estimated returns,
allowances and discounts.

Effective October 17, 2018, Canada Revenue Agency (CRA) began
levying an excise taxes on the sale of medical and adult-us cannabis products.
The Company becomes liable for these excise duties when cannabis products are
delivered to the customer. The excise taxes payable is the higher of (i) a
flat-rate duty which is imposed when a cannabis product is packaged, and (ii) an
advalorem duty that is imposed when a cannabis product is delivered to the
customer.

Effective May 1, 2019, excise tax calculated on edible cannabis
products, cannabis extracts and cannabis topicals will prospectively be
calculated as a flat rate based on the quantity of total tetrahydrocannabinol
(THC) contained in the final product. There were no changes in the legislation
in calculating excise taxes for fresh cannabis, dried cannabis, seeds and
plants. Net revenue from sale of goods, as presented on the consolidated statements of
comprehensive (loss) income, represents revenue from the sale of goods less
applicable excise taxes. Given that the excise tax payable/paid to CRA cannot be
reclaimed and is not always billed to customers, the Company recognizes that the
excise tax is an operating cost that affects gross margin to the extent that it
is not recovered from its customers.

13

---

IFRS 9, FINANCIAL INSTRUMENTS

The Company adopted IFRS 9 retroactively and determined that
there is no change to the comparative period or transitional adjustments
required as a result of the adoption.

IFRS 9 was issued by the International Accounting Standards
Board ("IASB") in November 2009 and October 2010 and will replace IAS 39. IFRS 9
uses a single approach to determine whether a financial asset is classified and
measured at amortized cost or at fair value. The classification and measurement
of financial assets is based on the Companys business models for managing its
financial assets and whether the contractual cash flows represent solely
payments of principal and interest (SPPI). Financial assets under IFRS 9 are
initially measured at fair value and are subsequently measured at either
amortized cost; fair value through other comprehensive income (FVTOCI) or;
fair value through profit or loss (FVTPL).

Amortized Cost

Financial assets classified and measured at amortized cost are
those assets that are held within a business model whose objective is to hold
financial assets in order to collect contractual cash flows, and the contractual
terms of the financial asset give rise to cash flows that are SPPI. Financial
assets classified at amortized cost are measured using the effective interest
method.

FVTOCI

Financial assets classified and measured at FVTOCI are those
assets that are held within a business model whose objective is achieved by both
collecting contractual cash flows and selling financial assets, and the
contractual terms of the financial asset give rise to cash flows that are
SPPI.

This classification includes certain equity instruments where
IFRS 9 allows an entity to make an irrevocable election to classify the equity
instruments, on an instrument-by-instrument basis, that would otherwise be
measured at FVTPL to present subsequent changes in FVTOCI.

FVTPL

Financial assets classified and measured at FVTPL are those
assets that do not meet the criteria to be classified at amortized cost or at
FVTOCI. This category includes debt instruments whose cash flow characteristics
are not SPPI or are not held within a business model whose objective is either
to collect contractual cash flows, or to both collect contractual cash flows and
sell the financial asset.

The following table summarizes the Companys financial
instruments under IAS 39 and IFRS 9:

|                                         | IAS 39 Classification       | IFRS 9 Classification
|---------------------------------------- | --------------------------- | ---------------------
|Financial assets                         |                             |                      
|Cash and cash equivalents                | FVTPL                       | FVTPL                
|Restricted cash                          | FVTPL                       | FVTPL                
|Short-term investments                   | FVTPL                       | FVTPL                
|Trade receivables                        | Loans and receivables       | Amortized cost       
|Convertible debenture
      receivable   | FVTPL                       | FVTPL                
|Long term investment                     | N/A                         | FVTPL                
|Financial liabilities                    |                             |                      
|Accounts payable and accrued liabilities | Other financial liabilities | Amortized cost       
|Warrant liability                        | FVTPL                       | FVTPL                
|Deferred rent liability                  | N/A                         | Amortized cost       
|Term loan                                | N/A                         | Amortized cost       

The adoption of IFRS 9 did not have a quantitative impact and
did not have a material impact to the Companys classification and measurement
of financial assets and liabilities.

IFRS 9 uses an expected credit loss impairment model as opposed
to an incurred credit loss model under IAS 39. The impairment model is
applicable to financial assets measured at amortized cost where any expected
future credit losses are provided for, irrespective of whether a loss event has
occurred as at the reporting date. For trade receivables, the Company has
measured the expected credit losses based on lifetime expected credit losses
taking into consideration historical credit loss experience and financial
factors specific to the debtors and other factors. The carrying amount of trade
receivables is reduced for any expected credit losses through the use of an
allowance account. Changes in the carrying amount of the allowance account are
recognized in the statements of loss and comprehensive loss. At the point when the Company is satisfied that no
recovery of the amount owing is possible, the amount is considered not
recoverable and the financial asset is written off. Evidence of impairment may
include indications that a debtor or a group of debtors is experiencing
significant financial difficulty, default or delinquency in interest or
principal payments, the probability that they will enter bankruptcy or other
financial reorganization and where observable data indicates that there is a
measurable decrease in the estimated future cash flows, such as changes in
arrears or economic conditions that correlate with defaults. Trade receivables
are reviewed qualitatively on a case-by-case basis to determine whether they
need to be written off. The adoption of the new expected credit loss impairment
model had a negligible impact on the carrying amounts of financial assets at
amortized cost.

14

---

Classification and Measurement of Financial Liabilities

Accounting for financial liabilities remains largely the same
under IFRS 9 and subsequently the Companys liabilities were not significantly
impacted by the adoption.

Financial liabilities are initially measured at fair value,
and, where applicable, adjusted for transaction costs unless the Company
designates a financial liability at fair value through profit or loss.
Subsequently, financial liabilities are measured at amortized cost using the
effective interest method except for derivatives and financial liabilities
designated at FVTPL, which are carried subsequently at fair value with gains or
losses recognised in profit or loss (other than derivative financial instruments
that are designated and effective as hedging instruments).

New and Revised IFRS in Issue but Not Yet Effective

IFRS 16, LEASES

In January 2016, the IASB issued IFRS 16 Leases, which will
replace IAS 17 Leases. This standard introduces a single lessee accounting model
and requires a lessee to recognize assets and liabilities for all leases with a
term greater than twelve months, unless the underlying assets value is
insignificant. A lessee is required to recognize a right-of-use asset
representing its right to use the underlying asset and a lease liability
representing its obligation to make lease payments. Lessors will continue to
classify leases as operating or finance, with lessor accounting remaining
substantially unchanged from the preceding guidance under IAS 17, Leases.

The
  Company is currently executing its implementation plan and has completed the
  initial scoping phase to identify material lease contracts. The analysis of such
  contracts to quantify the transitional impact is ongoing. The most significant
  impact of IFRS 16 will be our initial recognition of the present value of future
  lease payments as right-of-use assets under property, plant and equipment and
  the corresponding recognition of a lease liability on the consolidated statement
  of financial position. All material, long-term property leases, which are
  currently treated as operating leases, are expected to be impacted by the new
  standard which will result in lower rent expense, higher depreciation expense
  and higher finance costs related to accretion and interest expense of the lease
  liability.

IFRS 16 will also impact the presentation of the consolidated
statement of cash flows by decreasing operating cash flows and increasing
financing cash flows. The standard will be effective for the Company for the
fiscal year commencing August 1, 2019. The Company will be adopting the standard
using the modified approach by recognizing the cumulative impact of initial
adoption in opening retained earnings (i.e. the difference between the
right-of-use asset and the lease liability). The Company will measure the
right-of-use asset at an amount equal to the lease liability on the commencement
date, apply a single discount rate to leases with similar remaining lease terms
for similar classes of underlying assets and will not separate non-lease
components from lease components for certain classes of underlying assets.
Consistent with the guidance, the Company will not apply this standard to
short-term leases and leases for which the underlying asset is of low value.

4. Cash, Cash Equivalents
and Short-Term Investments

Cash and cash equivalents are highly liquid investments with a
maturity of 3 months or less. Short term investments are comprised of liquid
investments with maturities of less than 12 months. Short term investments are
recognized initially at fair value and subsequently adjusted to fair value
through profit or loss. The comparative period of July 31, 2018 has been
restated  see note 26.

|                                     |               |                            |   | July 31, 2019 |  |   | July 31, 2018 |  
|------------------------------------ | ------------- | -------------------------- | - | ------------- |  | - | ------------- | -
|                                     |               |                            |   | Total         |  |   | Total         |  
|                                     | Interest rate |                            |   |               |  |   | (Restated    |  
|                                     |               |                            |   |               |  |   | see note 26   | )
|Operating cash                       |              |                            | $ | 5,993         |  | $ | 66,438        |  
|High interest
      savings accounts | 1.45%2.10%   |                            |   | 107,575       |  |   | 32,604        |  
|Total cash and cash equivalents      |               |                            | $ | 113,568       |  | $ | 99,042        |  
|                                     |               |                            |   |               |  |   |               |  
|Term deposits & GIC                  | 2.85%4.25%   | maturity of 3 to 12 months | $ | 25,937        |  | $ | 145,747       |  
|Total short-term
      investments   |               |                            | $ | 25,937        |  | $ | 145,747       |  

15

---

Interest income earned in the period amounted to $5,187 (July
31, 2018 - $2,115).

5. Restricted Cash

As at July 31, 2019, the Company had $22,350 of restricted
funds. Of this, $3,433 is currently in escrow to facilitate the purchase of
supply agreements with vendors. The amount of $433 shall be drawn down on a
pro-rata basis based upon the delivery of goods to the Company. The remaining
balance of $3,000 may be contributed to or drawn upon, in order to retain 15% of
the future expected purchases.

A balance of $3,141 has been restricted to secure the
implementation of greenhouse infrastructure with a vendor (Note 23).
Additionally, the Company had a capital contribution of $4,076 held in trust as
at July 31, 2019.

The remaining balance of $9,200 has been restricted due to a
minimum balance to be held in a debt service reserve account as required under
the Companys term loan agreement (Note 23). A balance of $2,500 is held in
trust related the Companys joint venture Neal Brothers Inc (Note 28).

6. Commodity Taxes
Recoverable and Other Receivables

|                            |   | July 31, 2019 |  |   | July
      31, 2018 | 
|--------------------------- | - | ------------- |  | - | ------------------- | 
|Commodity taxes recoverable | $ | 14,415        |  | $ | 4,237               | 
|Accrued interest income     |   | 570           |  |   |                    | 
|Other receivables (Note 20) |   | 262           |  |   |                    | 
|                            | $ | 15,247        |  | $ | 4,237               | 

7.
Inventory

|                         |   |             |  |   |                       |  |   | July 31, 2019 | 
|------------------------ | - | ----------- |  | - | --------------------- |  | - | ------------- | 
|                         |   | Capitalized |  |   | Biological asset fair |  |   |               | 
|                         |   | cost        |  |   | value adjustment      |  |   | Total         | 
|Dried cannabis           | $ | 28,996      |  | $ | 21,766                |  | $ | 50,762        | 
|Oils                     |   | 17,377      |  |   | 5,366                 |  |   | 22,743        | 
|Hemp derived distillate  |   | 1,523       |  |   |                      |  |   | 1,523         | 
|Purchased dried cannabis |   | 8,087       |  |   |                      |  |   | 8,087         | 
|Packaging and supplies   |   | 3,156       |  |   |                      |  |   | 3,156         | 
|                         | $ | 59,139      |  | $ | 27,132                |  | $ | 86,271        | 

The inventory expensed to cost of goods sold in the year ended
July 31, 2019, was $18,565 (July 31, 2018  $965). Total stock-based
compensation expensed to costs of sales in the period as $936. The fair value
adjustment on the sale of inventory during the period was $16,357 (July 31, 2018
 $2,289). The Company recorded an impairment loss on inventory of $16,918,
realized on cannabis purchased in which the cost exceeds its net realizable
value.

During the year ended July 31, 2018, the Company recorded an
adjustment to the net realizable value of inventories of $1,491. This was due to
the decrease in the estimated market selling price input of the inventory
valuation which was caused by the onset of the adult-use market and is
reflective of competitive market prices.

|                       |   |             |  |   |                        |  |   | July
      31, 2018 | 
|---------------------- | - | ----------- |  | - | ---------------------- |  | - | ------------------- | 
|                       |   | Capitalized |  |   | Biological asset fair  |  |   |                     | 
|                       |   | Cost        |  |   | value
      adjustment |  |   | Total               | 
|Dried cannabis         | $ | 2,115       |  | $ | 4,440                  |  | $ | 6,555               | 
|Oils                   |   | 2,281       |  |   | 882                    |  |   | 3,163               | 
|Packaging and supplies |   | 697         |  |   |                       |  |   | 697                 | 
|                       | $ | 5,093       |  | $ | 5,322                  |  | $ | 10,415              | 

16

---

8. Biological Assets

The Companys biological assets consist of cannabis plants from
seeds all the way through to mature plants. The changes in the carrying value of
biological assets are as follows:

|                                                                                    |   | July 31, 2019 |   |   | July
      31, 2018 |  
|----------------------------------------------------------------------------------- | - | ------------- | - | - | ------------------- | -
|Carrying amount, beginning of period                                                | $ | 2,332         |   | $ | 1,504               |  
|Acquired through acquisition1                                                       |   | 3,291         |   |   |                    |  
|Production costs capitalized                                                        |   | 19,215        |   |   | 993                 |  
|Net increase in fair value due to biological
      transformation less cost to sell |   | 38,856        |   |   | 7,340               |  
|Transferred to inventory upon harvest                                               |   | (56,323       | ) |   | (7,505              | )
|Carrying
      amount, end of period                                                | $ | 7,371         |   | $ | 2,332               |  

1Acquired through the Newstrike acquisition on May
24, 2019 (see Note 11)

As at July 31, 2019, the fair value of biological assets
included $2 in seeds and $7,369 in cannabis plants ($6 in seeds and $2,326 in
cannabis plants as at July 31, 2018). The significant estimates used in
determining the fair value of cannabis plants are as follows:

| | yield by plant;                                                                                                                                                                                                                                                                                            
|- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | stage of growth estimated as the percentage of costs
      incurred as a percentage of total cost as applied to the estimated total
      fair value per gram (less fulfilment costs) to arrive at an in-process
      fair value for estimated biological assets, which have not yet been
      harvested;
| | percentage of costs incurred for each stage of plant
      growth.                                                                                                                                                                                                                                         
| | fair value selling price per gram less cost to complete
      and cost to sell.                                                                                                                                                                                                                            
| | destruction/wastage of plants during the harvesting and
      processing process.                                                                                                                                                                                                                          

All biological assets are classified as current assets in the
statement of financial position and are considered Level 3 fair value estimates.
As at July 31, 2019, it is expected that the Companys biological assets will
yield approximately 17,571 kilograms of cannabis (July 31, 2018  4,374
kilograms of cannabis). The Companys estimates are, by their nature, subject to
change. Changes in the anticipated yield will be reflected in future changes in
the fair values of biological assets.

The valuation of biological assets is based on an income
approach in which the fair value at the point of harvesting is estimated based
on selling prices less the costs to sell. For in process biological assets, the
fair value at point of harvest is adjusted based on the stage of growth at
period end. Stage of growth is determined by reference to the cost incurred as a
percentage of total cost as applied to estimated total fair value per gram (less
fulfilment costs) to arrive at an in-process fair value for estimated biological
assets, which have not yet been harvested.

Managements identified significant unobservable inputs, their
range of values and sensitivity analysis are presented in the tables below.

The following table summarizes the unobservable inputs for the
period ended July 31, 2019:

|Unobservable
      inputs                          | Input
      values                    | Sensitivity analysis                                              
|-------------------------------------------------- | ------------------------------------- | ------------------------------------------------------------------
|                                                   |                                       |                                                                   
|Average selling price                              |                                       | An increase or decrease of 5% applied to the
      average        
|Obtained through actual retail prices on a per     | $4.23  $5.01 per dried gram.         | selling price would result in a change of
      approximately $480
|strain basis.                                      |                                       | to the
      valuation.                                           
|                                                   |                                       |                                                                   
|Yield per plant                                    |                                       | An increase or decrease of 5% applied to the
      average yield  
|Obtained through historical harvest cycle results  | 15  123 grams per plant.             | per plant would result in a change up to
      approximately $344 
|on a per strain
      basis.                       |                                       | in
      valuation.                                               
|                                                   |                                       |                                                                   
|Stage of growth                                    |                                       | An increase or decrease of 5% applied to the
      average stage  
|Obtained through the estimates of stage of         | Average of 29% completion.            | of growth per plant would result in a change of                   
|completion within
      the harvest cycle.         |                                       | approximately $1,148 in valuation.                                
|                                                   |                                       |                                                                   
|Wastage                                            |                                       | An increase or decrease of 5% applied to the
      wastage        
|Obtained through the estimates of wastage          | 0%30% dependent upon the             | expectation would result in a change of
      approximately $302  
|within the
      cultivation and production cycle. | stage
      within the harvest cycle. | in
      valuation.                                               

17

---

The following table summarizes the unobservable inputs for the
period ended July 31, 2018:

|Unobservable
      inputs                          | Input
      values                    | Sensitivity analysis                                               
|-------------------------------------------------- | ------------------------------------- | -------------------------------------------------------------------
|                                                   |                                       |                                                                    
|Average selling price                              |                                       | An increase or decrease of 5% applied to the
      average         
|Obtained through actual retail prices on a per     | $4.66 per dried gram.                 | selling price would result in a change of
      approximately $329 
|strain basis.                                      |                                       | to the
      valuation.                                            
|                                                   |                                       |                                                                    
|Yield per plant                                    |                                       |                                                                    
|Obtained through historical harvest cycle results  | 50235 grams per plant.               | An increase of decrease of 5% applied to the
      average yield   
|on a per strain
      basis.                       |                                       | per
      plant would not result in a material change in valuation.
|                                                   |                                       |                                                                    
|Stage of growth                                    |                                       |                                                                    
|Obtained through the estimates of stage of         | Average of 32% completion.            | An increase or decrease of 5% applied to the
      average stage   
|completion within the harvest cycle.               |                                       | of growth per plant would result in a change of                    
|                                                   |                                       | approximately $320 in valuation.                                   
|                                                   |                                       |                                                                    
|Wastage                                            |                                       |                                                                    
|Obtained through the estimates of wastage          | 0%30% dependent upon the             | An increase of decrease of 5% applied to the
      average yield   
|within the
      cultivation and production cycle. | stage
      within the harvest cycle. | per
      plant would not result in a material change in valuation.

9. Property, Plant and
Equipment

Balance at
    
    
    Additions from
    
    
    
    
    
    
    
    
    Balance atbusinessCost
    
    July
      31, 2018
    
    
    acquisitions
    
    
    Additions
    
    
    Adjustments
    
    
    July 31, 2019Land
    $
    1,038
    
    $
    4,301
    
    $
    
    
    $
    
    
    $
    5,339Buildings
    
    32,536
    
    
    18,855
    
    
    11,365
    
    
    88,078
    
    
    150,834Leasehold Improvements
    
    206
    
    
    
    
    
    421
    
    
    
    
    
    627Furniture and equipment
    
    1,661
    
    
    119
    
    
    4,576
    
    
    
    
    
    6,356Cultivation and production
      equipment
    
    4,031
    
    
    9,913
    
    
    28,085
    
    
    
    
    
    42,029Vehicles
    
    151
    
    
    
    
    
    880
    
    
    
    
    
    1,031Computers
    
    659
    
    
    529
    
    
    1,793
    
    
    
    
    
    2,981Construction in progress
    
    15,433
    
    
    12,286
    
    
    117,909
    
    
    (88,078
    )
    
    57,550$
    55,715
    
    $
    46,003
    
    $
    165,029
    
    $
    
    
    $
    266,747


Balance at
    
    
    Additions from
    
    
    
    
    
    
    
    
    Balance atbusinessAccumulated depreciation
    
    July
      31, 2018
    
    
    acquisitions
    
    
    Depreciation
    
    
    Adjustments
    
    
    July 31, 2019Land
    $
    
    
    $
    
    
    $
    
    
    $
    
    
    $
    Buildings
    
    533
    
    
    
    
    
    3,859
    
    
    
    
    
    4,392Leasehold Improvements
    
    9
    
    
    
    
    
    121
    
    
    
    
    
    130Furniture and equipment
    
    527
    
    
    
    
    
    585
    
    
    (650
    )
    
    462Cultivation and production
      equipment
    
    69
    
    
    
    
    
    1,497
    
    
    650
    
    
    2,216Vehicles
    
    56
    
    
    
    
    
    77
    
    
    
    
    
    133Computers
    
    188
    
    
    
    
    
    433
    
    
    
    
    
    621$
    1,382
    
    $
    
    
    $
    6,572
    
    $
    
    
    $
    7,954


18

---

Balance at
    
    
    Additions from
    
    
    
    
    
    
    
    
    Balance atbusiness
    
    
    Net Additions /Net Carrying Value
    
    July
      31, 2018
    
    
    acquisitions
    
    
    (Deductions)
    
    
    Adjustments
    
    
    July 31, 2019Land
    $
    1,038
    
    $
    4,301
    
    $
    
    
    $
    
    
    $
    5,339Buildings
    
    32,003
    
    
    18,855
    
    
    7,506
    
    
    88,078
    
    
    146,442Leasehold Improvements
    
    197
    
    
    
    
    
    300
    
    
    
    
    
    497Furniture and equipment
    
    1,134
    
    
    119
    
    
    3,991
    
    
    650
    
    
    5,894Cultivation and production
      equipment
    
    3,962
    
    
    9,913
    
    
    26,588
    
    
    (650
    )
    
    39,813Vehicles
    
    95
    
    
    
    
    
    803
    
    
    
    
    
    898Computers
    
    471
    
    
    529
    
    
    1,360
    
    
    
    
    
    2,360Construction in progress
    
    15,433
    
    
    12,286
    
    
    117,909
    
    
    (88,078
    )
    
    57,550$
    54,333
    
    $
    46,003
    
    $
    158,457
    
    $
    
    
    $
    258,793


As at July 31, 2019, there was $21,265 (July 31, 2018  $3,920)
of property, plant and equipment in accounts payable and accrued liabilities.
During the year ended July 31, 2019, the Company capitalized $4,825 of
depreciation to inventory and capitalized borrowing costs to buildings in the
amount of $511 (July 31, 2018  $994) at an average annual interest rate of 3.2%
.. During the period depreciation expensed to the statement of loss was $1,474
(July 31, 2018 - $876).

Adjustments during the period, reflect the activation of an
assets useful life, transitioning from construction in progress to the
appropriate property, plant and equipment classification. The Company has
contractual commitments for remaining leasehold improvements of $33,455 payable
in fiscal year 2020 as at July 31, 2019 (July 31, 2018 - $40,471).

|                                           |   | Balance at          |  |   |           |  |   |             |   |   | Balance at    | 
|------------------------------------------ | - | ------------------- |  | - | --------- |  | - | ----------- | - | - | ------------- | 
|Cost                                       |   | July
      31, 2017 |  |   | Additions |  |   | Adjustments |   |   | July 31, 2018 | 
|Land                                       | $ | 358                 |  | $ | 680       |  | $ |            |   | $ | 1,038         | 
|Buildings                                  |   | 3,745               |  |   | 3,930     |  |   | 24,861      |   |   | 32,536        | 
|Leasehold Improvements                     |   |                    |  |   | 206       |  |   |            |   |   | 206           | 
|Furniture and equipment                    |   | 900                 |  |   | 1,233     |  |   | (472        | ) |   | 1,661         | 
|Cultivation and production
      equipment |   | 380                 |  |   | 3,165     |  |   | 486         |   |   | 4,031         | 
|Vehicles                                   |   | 114                 |  |   | 33        |  |   | 4           |   |   | 151           | 
|Computers                                  |   | 234                 |  |   | 425       |  |   |            |   |   | 659           | 
|Construction in progress                   |   | 605                 |  |   | 39,707    |  |   | (24,879     | ) |   | 15,433        | 
|                                           | $ | 6,336               |  | $ | 49,379    |  | $ |            |   | $ | 55,715        | 

|                                           |   | Balance at          |  |   |              |  |   |             |   |   | Balance at    | 
|------------------------------------------ | - | ------------------- |  | - | ------------ |  | - | ----------- | - | - | ------------- | 
|Accumulated depreciation                   |   | July
      31, 2017 |  |   | Depreciation |  |   | Adjustments |   |   | July 31, 2018 | 
|Land                                       | $ |                    |  | $ |             |  | $ |            |   | $ |              | 
|Buildings                                  |   | 194                 |  |   | 339          |  |   |            |   |   | 533           | 
|Leasehold Improvements                     |   |                    |  |   | 9            |  |   |            |   |   | 9             | 
|Furniture and equipment                    |   | 165                 |  |   | 195          |  |   | 167         |   |   | 527           | 
|Cultivation and production
      equipment |   | 23                  |  |   | 213          |  |   | (167        | ) |   | 69            | 
|Vehicles                                   |   | 26                  |  |   | 30           |  |   |            |   |   | 56            | 
|Computers                                  |   | 78                  |  |   | 110          |  |   |            |   |   | 188           | 
|                                           | $ | 486                 |  | $ | 896          |  | $ |            |   | $ | 1,382         | 

19

---

|                                     |   | Balance at          |  |   | Net Additions / |  |   |             |   |   | Balance at    | 
|------------------------------------ | - | ------------------- |  | - | --------------- |  | - | ----------- | - | - | ------------- | 
|Net Carrying Value                   |   |                     |  |   |                 |  |   | Adjustments |   |   |               | 
|                                     |   | July
      31, 2017 |  |   | (Deductions)    |  |   |             |   |   | July 31, 2018 | 
|Land                                 | $ | 358                 |  | $ | 680             |  | $ |            |   | $ | 1,038         | 
|Buildings                            |   | 3,551               |  |   | 3,591           |  |   | 24,861      |   |   | 32,003        | 
|Leasehold Improvements               |   |                    |  |   | 197             |  |   |            |   |   | 197           | 
|Furniture and equipment              |   | 735                 |  |   | 1,038           |  |   | (639        | ) |   | 1,134         | 
|Cultivation and production equipment |   | 357                 |  |   | 2,952           |  |   | 653         |   |   | 3,962         | 
|Vehicles                             |   | 88                  |  |   | 3               |  |   | 4           |   |   | 95            | 
|Computers                            |   | 156                 |  |   | 315             |  |   |            |   |   | 471           | 
|Construction in
      progress       |   | 605                 |  |   | 39,707          |  |   | (24,879     | ) |   | 15,433        | 
|                                     | $ | 5,850               |  | $ | 48,483          |  | $ |            |   | $ | 54,333        | 

10. Intangible Assets and
Other Longer Term Assets

Balance at
    
    
    Additions from
    
    
    
    
    
    
    
    
    Balance atbusinessCost
    
    July
      31, 2018
    
    
    acquisitions
    
    
    Additions
    
    
    Adjustments
    
    
    July 31, 2019Cultivating and processing license
    $
    2,545
    
    $
    113,888
    
    $
    
    
    $
    
    
    $
    116,433Brand
    
    
    
    
    8,440
    
    
    
    
    
    
    
    
    8,440Software
    
    1,800
    
    
    12
    
    
    1,746
    
    
    
    
    
    3,558Domain names
    
    585
    
    
    
    
    
    
    
    
    
    
    
    585Patents
    
    
    
    
    
    
    
    1,231
    
    
    
    
    
    1,231Other longer term assets and capitalized
    
    312
    
    
    
    
    
    
    
    
    (312
    )
    
    transaction costs$
    5,242
    
    $
    122,340
    
    $
    2,977
    
    $
    (312
    )
    $
    130,247


Balance at
    
    
    Additions from
    
    
    
    
    
    
    
    
    Balance atbusinessAccumulated
      amortization
    
    July
      31, 2018
    
    
    acquisitions
    
    
    Amortization
    
    
    Adjustments
    
    
    July 31, 2019Cultivating and processing license
    $
    403
    
    $
    
    
    $
    1,198
    
    $
    
    
    $
    1,601Software
    
    786
    
    
    
    
    
    483
    
    
    
    
    
    1,269Domain name
    
    9
    
    
    
    
    
    57
    
    
    
    
    
    66Patents
    
    
    
    
    
    
    
    29
    
    
    
    
    
    29$
    1,198
    
    $
    
    
    $
    1,767
    
    $
    
    
    $
    2,965


Balance at
    
    
    Additions from
    
    
    
    
    
    
    
    
    Balance atbusiness
    
    
    Net Additions /Net Carrying
      Value
    
    July
      31, 2018
    
    
    acquisitions
    
    
    (Deductions)
    
    
    Adjustments
    
    
    July 31, 2019Cultivating and processing license
    $
    2,142
    
    $
    113,888
    
    $
    (1,198
    )
    $
    
    
    $
    114,832Brand
    
    
    
    
    8,440
    
    
    
    
    
    
    
    
    8,440Software
    
    1,014
    
    
    12
    
    
    1,263
    
    
    
    
    
    2,289Domain names
    
    576
    
    
    
    
    
    (57
    )
    
    
    
    
    519Patents
    
    
    
    
    
    
    
    1,202
    
    
    
    
    
    1,202Other longer term assets and capitalized
    
    312
    
    
    
    
    
    
    
    
    (312
    )
    
    transaction costs$
    4,044
    
    $
    122,340
    
    $
    1,210
    
    $
    (312
    )
    $
    127,282


Software includes $121 relating to managerial software (July
31, 2018 - $258) not yet available for use. Accordingly, no amortization has
been taken during the year ended July 31, 2019 on these inactive assets. As at
July 31, 2019, there was $422 (July 31, 2018  $266) of intangible assets in
accounts payable and accrued liabilities. The adjustment represents $212 of
capitalized transaction costs being allocated to the Truss investment in
associate (Note 19a) and $100 other longer term investment has been reclassified
to long term investments.

Research and development expenses in the period amounted to
$2,822 (July 31, 2018 - $Nil).

20

---

|                                         |   | Balance at          |  |   |           |  |   | Disposals/  |  |   | Balance at    | 
|---------------------------------------- | - | ------------------- |  | - | --------- |  | - | ----------- |  | - | ------------- | 
|Cost                                     |   | July
      31, 2017 |  |   | Additions |  |   | adjustments |  |   | July 31, 2018 | 
|Cultivating and processing license       | $ | 2,545               |  | $ |          |  | $ |            |  | $ | 2,545         | 
|Software                                 |   | 651                 |  |   | 1,149     |  |   |            |  |   | 1,800         | 
|Domain names                             |   |                    |  |   | 585       |  |   |            |  |   | 585           | 
|Other longer term assets and capitalized |   |                    |  |   | 312       |  |   |            |  |   | 312           | 
|transaction costs                        |   |                     |  |   |           |  |   |             |  |   |               | 
|                                         | $ | 3,196               |  | $ | 2,046     |  | $ |            |  | $ | 5,242         | 

|                                   |   | Balance at          |  |   |              |  |   | Disposals/  |  |   | Balance at    | 
|---------------------------------- | - | ------------------- |  | - | ------------ |  | - | ----------- |  | - | ------------- | 
|Accumulated
      amortization     |   | July
      31, 2017 |  |   | Amortization |  |   | adjustments |  |   | July 31, 2018 | 
|Cultivating and processing license | $ | 277                 |  | $ | 126          |  | $ |            |  | $ | 403           | 
|Software                           |   | 156                 |  |   | 630          |  |   |            |  |   | 786           | 
|Domain name                        |   |                    |  |   | 9            |  |   |            |  |   | 9             | 
|                                   | $ | 433                 |  | $ | 765          |  | $ |            |  | $ | 1,198         | 

|Net Carrying
      Value                 |   | Balance at July 31, 2017 |  |   | Net
      Additions / (Deductions) |   |   | Disposals/ adjustments |  |   | Balance atJuly 31, 2018 | 
|---------------------------------------- | - | ------------------------ |  | - | ---------------------------------- | - | - | ---------------------- |  | - | ----------------------- | 
|Cultivating and processing license       | $ | 2,268                    |  | $ | (126                               | ) | $ |                       |  | $ | 2,142                   | 
|Software                                 |   | 495                      |  |   | 519                                |   |   |                       |  |   | 1,014                   | 
|Domain names                             |   |                         |  |   | 576                                |   |   |                       |  |   | 576                     | 
|Other longer term assets and capitalized |   |                         |  |   | 312                                |   |   |                       |  |   | 312                     | 
|transaction costs                        |   |                          |  |   |                                    |   |   |                        |  |   |                         | 
|                                         | $ | 2,763                    |  | $ | 1,281                              |   | $ |                       |  | $ | 4,044                   | 

During the fiscal year ended July 31, 2018, the Company
conducted a review of its intangible assets, which resulted in changes in the
expected usage of its software. Certain assets, which management previously
intended to use for 5 years from the date of purchase were replaced during the
fiscal year as well as September 2018. As a result, the expected useful lives of
these assets decreased. The effect of these changes on actual and expected
depreciation expense, in current and future years respectively is as follows.

2019
    
    
    2020
    
    
    2021
    
    
    2022
    
    
    Later(Decrease) increase in amortization expense
    $
    (87
    )
    $
    (119
    )
    $
    (100
    )
    $
    (3
    )
    $
    Nil


11. Business Acquisition

Acquisition of Newstrike Brands Limited.

On May 24, 2019, the Company acquired 100% of the issued and
outstanding common shares of Newstrike Brands Limited (Newstrike) pursuant to
an arrangement agreement entered into on March 13, 2019. Newstrike is a licensed
producer of cannabis operating in Ontario, Canada and was acquired for
additional production capacity, established sales relationships and its brand.
Under the arrangement, each former Newstrike common share was exchanged for
0.06332 of a HEXO common share (the Exchange Ratio), subject to certain
exceptions. In addition, all issued and outstanding stock options of Newstrike
were replaced with stock options of HEXO having the same terms but adjusted for
the Exchange Ratio, and all issued and outstanding common share purchase
warrants of Newstrike became exercisable for HEXO common shares adjusted for the
Exchange Ratio.

The following table summarizes the preliminary values of the
net assets acquired from Newstrike on the acquisition date. The fair values of
the acquired property, plant and equipment, deferred tax liability, private
investments and intangible assets are preliminary are subject to change within
the one-year measurement.

21

---

Note
    
    
    Number of Shares,
    
    
    Share Price
    
    
    AmountWarrants and Options
    
    
    ($)
    
    
    ($)ConsiderationShares issued
    
    (i)
    
    
    35,394,041
    
    
    9.11
    
    
    322,439Warrants
      outstanding
    
    (ii)
    
    
    7,196,164
    
    
    
    
    
    12,229Replacement options issued
    
    (iii)
    
    
    2,002,365
    
    
    
    
    
    7,134Total fair value of consideration
    
    
    
    
    
    
    
    
    
    
    341,802Net assets acquiredCurrent assetsCash and cash
      equivalents
    
    
    
    
    
    
    
    
    
    
    49,366Accounts receivable
    
    
    
    
    
    
    
    
    
    
    1,204Other
      receivables
    
    
    
    
    
    
    
    
    
    
    4,585Inventory
    
    
    
    
    
    
    
    
    
    
    22,359Biological
      assets
    
    
    
    
    
    
    
    
    
    
    3,291Long-term assetsProperty, Plant and Equipment
    
    
    
    
    
    
    
    
    
    
    46,003Investments
    
    (iv)
    
    
    
    
    
    
    
    
    14,492Convertible debenture receivable
    
    
    
    
    
    
    
    
    
    
    1,220Prepaid expenses
    
    
    
    
    
    
    
    
    
    
    1,631Prepaid expense and license
    
    
    
    
    
    
    
    
    
    
    1,526Software
    
    
    
    
    
    
    
    
    
    
    10Cultivation and processing
      license
    
    
    
    
    
    
    
    
    
    
    113,888Brand
    
    
    
    
    
    
    
    
    
    
    8,440Goodwill
    
    
    
    
    
    
    
    
    
    
    111,877Total assets
    
    
    
    
    
    
    
    
    
    
    379,892Current liabilitiesAccounts payable and accrued
      liabilities
    
    
    
    
    
    
    
    
    
    
    12,849Payment received
      in advance
    
    
    
    
    
    
    
    
    
    
    5Long-term liabilitiesDeferred tax liabilities
    
    
    
    
    
    
    
    
    
    
    24,236Total liabilities
    
    
    
    
    
    
    
    
    
    
    37,090Non-controlling interest
    
    
    
    
    
    
    
    
    
    
    1,000Total net assets acquired
    
    
    
    
    
    
    
    
    
    
    341,802Net accounts receivables acquiredTotal accounts receivable
    
    
    
    
    
    
    
    
    
    
    5,789Expected uncollectible receivables
    
    
    
    
    
    
    
    
    
    
    Net accounts receivables acquired
    
    
    
    
    
    
    
    
    
    
    5,789


|(i)  | Share price based upon the TSX market price of common
      shares as at May 24, 2019.                                                                            
|---- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(ii) | Warrants were valued using the Black-Scholes option
      pricing model as at the acquisition date May 24, 2019, using the following
      assumptions and inputs;


    Risk free rate of 1.48%  1.57%
    Expected life of 0.73  4.07
      years
    Volatility rate of 75%;
      determined using historical volatility data
    Exercise prices of $11.84 
      $27.64
    Stock price of $9.11


|(iii) | All replacement options were valued using the
      Black-Scholes option pricing model as at the acquisition date of May 24,
      2019, using the following assumptions and
inputs;
|----- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------


    Risk free rate of 1.48%  1.57%
    Expected life of 1.2  4.7 years
    Volatility rate of 75%;
      determined using historical volatility data
    Exercise prices of $6.00  $17.37
    Stock price of $9.11


22

---

|     | The fair value of the vested options as at the
      acquisition date was deemed consideration paid in the transaction. The
      fair value of those options not yet vested at the acquisition date was
      added to the Companys share-based payment reserve to be expensed over the
      remaining vesting period of the options as permitted under IFRS 3 
      Business Combinations.
|---- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|     |                                                                                                                                                                                                                                                                                                                                                                                                 
|(iv) | Included in total investments were two level 3 private
      company investments (see Greentank Technologies and Neal
      Brothers Inc. in Note 20). There existed limited financial
      information over both investments at the acquisition date. The preliminary
      fair values have been determined using the best available
    information.                                    

The above acquisition contributed net revenue of $2,770 and a
net loss of $13,699 to the Companys consolidated results since the date of
acquisition. If each acquisition had occurred on August 1, 2018, management
estimates that the Companys consolidated net revenue would have increased by
$9,287 and the net loss would have increased by $19,096 for the year ended July
31, 2019.

Goodwill arising from the acquisition represents the expected
  synergies, future income and growth, and other intangibles that do not qualify
  for separate recognition. None of the goodwill arising on these acquisitions are
  expected to be deductible for tax purposes. The NCI acquired at the acquisition
  date arises from Newstrike holding a 60% interest in Neal Brothers Inc. The net
  assets of Neal Brothers consist of cash only and the NCI was measured at its
  fair value (Note 28).

The NCI acquired at the acquisition date arises from
  Newstrike holding a 60% interest in Neal Brothers Inc. as the NCI relates to the
  joint venture Neal Up Brands Inc.

Total non-capitalized transaction expenses amounted to $3,958
in the period.

12. Convertible
Debentures

|                                                |  | 2017 unsecured |   |  | 2018 unsecured |   |  |         |  
|----------------------------------------------- |  | -------------- | - |  | -------------- | - |  | ------- | -
|                                                |  | convertible    |   |  | convertible    |   |  |         |  
|                                                |  | debentures 8%  |   |  | debentures 7%  |   |  | Total   |  
|Balance at July 31, 2017                        |  | 20,639         |   |  |               |   |  | 20,639  |  
|Gross proceeds                                  |  |               |   |  | 69,000         |   |  | 69,000  |  
|Issuance costs                                  |  |               |   |  | (4,792         | ) |  | (4,792  | )
|Warrants, net of issuance costs                 |  |               |   |  | (3,285         | ) |  | (3,285  | )
|Conversion
      feature, net of issuance costs |  |               |   |  | (6,777         | ) |  | (6,777  | )
|Accretion                                       |  | 814            |   |  | 554            |   |  | 1,368   |  
|Conversion of debenture                         |  | (21,453        | ) |  | (54,700        | ) |  | (76,153 | )
|Balance at July 31, 2018                        |  |               |   |  |               |   |  |        |  

2017 Secured Convertible Debentures

During the year ended July 31, 2019, 863,693, warrants were
exercised for total proceeds of $863 (US$656, based on an exercise price of
US$0.76) . On the various dates of exercise, the warrant liability was revalued
using the Black-Scholes-Merton option pricing model. Overall, the liability
value of the warrants exercised was $6,367 (US$4,819); using the following
variables:


    stock prices ranging from $5.90
      to $10.36;
    expected life of 12 months;
    $Nil dividends;
    75% volatility based upon
      comparative market indicators and historical data;
    risk free interest rates of 1.55%
      to 2.35%;
    USD/CAD exchange rate of various.


The exercise of these warrants resulted in an increase to share
capital of $6,367.

The remaining warrant liability was revalued on July 31, 2019
using the Black-Scholes-Merton option pricing model (Level 2). The warrant
liability was revalued to $493 (US$375); with a stock price of US$4.24; expected
life of 12 months; $Nil dividends; 74% volatility based upon historical data;
risk free interest rate of 1.61%; and USD/CAD exchange rate of 1.3148. The loss
on the revaluation of the warrant liability for the year ended July 31, 2019 was
($3,730) (July 31, 2018  ($5,091)), which is recorded in the revaluation of
financial instruments account on the statement of loss and comprehensive
loss.

The following table summarizes warrant liability activity
during the fiscal year ended July 31, 2019 and fiscal year ended July 31, 2018.

23

---

|                                    |   | July 31, 2019 |   |   | July
      31, 2018 |  
|----------------------------------- | - | ------------- | - | - | ------------------- | -
|Opening balance                     | $ | 3,130         |   | $ | 1,356               |  
|Granted                             |   |              |   |   |                    |  
|Expired                             |   |              |   |   |                    |  
|Exercised                           |   | (6,367        | ) |   | (3,317              | )
|Revaluation due to foreign exchange |   | 3,730         |   |   | 5,091               |  
|Closing balance                     | $ | 493           |   | $ | 3,130               |  

2017 Unsecured Convertible Debentures 8%

Interest related to the 2017 8% unsecured convertible
debentures (which were converted during fiscal 2017) expensed to the statement
of loss and comprehensive loss amounted to $Nil and interest capitalized to
property, plant, and equipment was $Nil for the year ended July 31, 2019 (July
31, 2018 $922 respectively). Accretion for the year ended July 31, 2019 was
$Nil (July 31, 2018  $814).

2018 Unsecured Convertible Debentures 7%

On November 24, 2017, the Company issued $69,000 principal
amount of unsecured debentures through a brokered private placement. The
debentures bear interest at 7% per annum and mature on November 24, 2020.
Interest will be accrued and paid semi-annually in arrears. The debentures were
convertible into common shares of the Company at $2.20 at the option of the
holder. The Company may force the conversion of the debentures on 30 days prior
written notice should the daily weighted average trading price of the common
shares of the Company be greater than $3.15 for any 10 consecutive trading days.
The debenture holders received 15,663,000 warrants, 227 for every $1,000 unit.
The warrants have a two-year term, expiring November 24, 2019, and have an
exercise price of $3.00. The Company has the right to accelerate the expiry of
the warrants should the closing trading price of the common shares of the
Company be greater than $4.50 for any 10 consecutive trading days.

On initial recognition, the residual method was used to
allocate the fair value of the warrants and conversion option. The fair value of
the liability component was calculated as $58,187 using a discount rate of 14%.
The residual proceeds of $10,813 were allocated between the warrants and
conversion option on a pro-rata basis relative to their fair values. The fair
values of the warrants and conversion option were determined using the
Black-Scholes-Merton option pricing model.

The warrants were valued with a fair value $8,648 using the
following assumptions:

- stock price of $2.62;
- expected life of one year;
- $Nil dividends; 65% volatility; based upon comparative market indicators
  and historical data
- risk free interest rate of 1.25%.

The conversion option was valued with a fair value of $17,843
using the following assumptions:

- stock price of $2.62;
- expected life of three months;
- $Nil dividends; 65% volatility; based upon comparative market indicators
  and historical data
- risk free interest rate of 1.25%.

Based on the fair value of the warrants and conversion option,
the residual proceeds of $10,813 were allocated as $3,530 to the warrants and
$7,283 to the conversion option, less allocation of issuance costs.

In connection with the closing of the debentures, the Company
paid a placement fee of $3,450 from the gross proceeds of the financing and
incurred an additional $476 of issuance costs. The Company also issued broker
warrants exercisable to acquire 1,568 common shares at an exercise price of
$3.00 per share.

The broker warrants were attributed a fair value of $866 based
on the Black-Scholes-Merton option pricing model with the following
assumptions:

- stock price of $2.62;
- expected life of 1 year;
- $Nil dividends;
- 65% volatility; based upon comparative market indicators and historical
  data
- risk free interest rate of 1.25%.

The total issuance costs amounted to $4,792 and were allocated
on pro-rata basis as follows: Debt  $4,041, Conversion option  $506, and the
Warrants  $245.

24

---

On December 15, 2017 the Company announced that it had elected
to exercise its right to convert all of the outstanding principal amount of the
Companys 7.0% Debentures and unpaid accrued interest thereon into Common
Shares. The Company became entitled to force the conversion of the 7.0%
Debentures on December 13, 2017 on the basis that the VWAP of the Common Shares
on the TSXV for 10 consecutive trading days was equal to or exceeded $3.15. For
the 10 consecutive trading days preceding December 13, 2017, the VWAP of the
Common Shares was $3.32. The Company provided the holders of the 7.0% Debentures
with the required 30 days advance written notice of the conversion, and the
effective date for the conversion was January 15, 2018.

Pursuant to the conversion of the 7.0% Debentures, holders of
the 7.0% Debentures received 454.54 Common Shares for each $1,000 principal
amount of 7.0% Debentures held. In addition, the accrued and unpaid interest on
each $1,000 principal amount of the 7.0% Debentures for the period from December
31, 2017 (the interest payment scheduled for December 31, 2017 was paid in cash)
up to, but excluding the conversion date, was $2.92 and 7.0% Debenture holders
received an additional 1.33 Common Shares for each $1,000 principal amount of
7.0% Debentures held on account of accrued and unpaid interest, for a total of
455.87 Common Shares for each $1,000 principal amount of 7.0% Debentures held.
Accordingly, at the date of conversion the carrying value of the debentures of
$54,700, interest payable paid through shares of $46 and the conversion feature
of $6,809 resulted in the cumulative increase to share capital of $61,555.

There exists no convertible debt as at July 31, 2019.

13. Share Capital

(a) Authorized

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

(b) Issued and Outstanding

During the first quarter of fiscal 2018, 481,896 warrants with
exercise prices of $0.75 and US$0.70 were exercised for proceeds of $406,
resulting in the issuance of 481,896 common shares.

During the second quarter of fiscal 2018, the Company issued
15,687,500 common shares from the conversion of the 8% unsecured convertible
debentures and 166,387 common shares in lieu of accrued interest, as described
Note 10 Convertible debentures.

On January 2, 2018, the Company announced that it had elected
to exercise its right to accelerate the expiry date of the common share purchase
warrants issued under the 8% convertible debentures. The Company became entitled
to accelerate the expiry date of the warrants on December 27, 2017 on the basis
that the closing trading price of the Common Shares on the TSXV exceeded $3.00
for 15 consecutive trading days. The expiry date for the warrants was
accelerated from July 18, 2019 to February 1, 2018. During the second quarter of
fiscal 2018, the Company issued 7,799,960 common shares related to the exercise
of warrants associated with the 8% convertible debentures.

During the second quarter of fiscal 2018, the Company issued
31,363,252 common shares from the conversion of the 7% unsecured convertible
debentures and 20,829 common shares in lieu of accrued interest, as described
Note 10 Convertible debentures. The Company issued 2,922,393 common shares
related to the exercise of warrants from the 7% unsecured convertible
debentures. During the second quarter of fiscal 2018, in addition to common
shares issued related to the exercise of warrants associated with the
convertible debentures, 5,025,627 warrants with exercise prices of $0.75 and
US$0.70 were exercised, resulting in the issuance of 5,021,940 common shares.
Total proceeds from the exercise of warrants were $30,937.

On January 30, 2018 the Company closed a bought deal public
offering of 37,375,000 units at a price of $4.00 per unit for gross proceeds of
$149,500. Each unit consisted one common share and one-half of one share
purchase warrant of the Company. Each warrant is exercisable into one common
share at a price of $5.60 per share for a period of two years. The fair value of
the warrants at the date of grant was estimated at $0.56 per warrants based on
the following weighted average assumptions:


    stock price of $3.93;
    expected life of 1 year;
    $Nil dividends;
    65% volatility based upon
      comparative market indicators and historical data;
    risk free interest rate of 1.25%.


Total cash share issue costs amounted to $6,380 which consisted
of underwriters commissions of $5,980, underwriters expenses of $10,
underwriters legal fees of $97 and incurred $311 of additional cash issuance
costs. In addition, the Company issued an aggregate of 1,495 compensation
warrants to the underwriters at a fair value of $1,486. The compensation
warrants have an exercise price of $4.00 and expire January 30, 2020. The fair
value of the compensation warrants at the date of grant was estimated at $0.99
per warrant based on the following weighted average assumptions:


    stock price of $3.93;
    expected life of 1 year;
    $Nil dividends;


25

---


    65% volatility based upon
      comparative market indicators and historical data;
    risk free interest rate of 1.25%.


The Company allocated $7,342 of the issuance costs to the
common shares and $523 to the warrants.

During the third quarter of fiscal 2018, 2,475 warrants with
exercise prices ranging from $0.75 to $5.60 and US$0.76 were exercised for
proceeds of $4,423, resulting in the issuance of 2,475 common shares.

On May 24, 2018, the Company announced that it had elected to
exercise its right to accelerate the expiry date governing the common share
purchase warrants issued November 24, 2017. Pursuant to the terms of the warrant
indenture the Company elected its right to accelerate the expiry date of the
remaining 5,261,043 warrants from November 24, 2019 to June 25, 2018. As at the
date of expiry all warrants were exercised. The accelerated expiry date also
applied to the remaining 1,568,181 compensation warrants originally issued to
certain investment banks on November 24, 2017. As at the date of expiry
1,505,453 compensation warrants were exercised and 62,728 warrants expired.

During the fourth quarter of fiscal 2018, 13,214,883 warrants
with exercise prices ranging from $0.75 to $5.60 and US$0.76 were exercised for
proceeds of $38,601, resulting in the issuance of 13,214,883 common shares.

On October 4, 2018 the Company closed its transaction with
joint venture partner Molson Coors in which the Company granted 11,500,000
warrants at a price of $6.00 per warrant. Each warrant is exercisable into one
common share at a price of $6.00 per share for a period of three years. The fair
value of the warrants at the date of grant was estimated at $3.69 per warrant
based on the following weighted average assumptions:


    stock price of $8.45;
    expected life of 1.5 years;
    $Nil dividends;
    65% volatility based upon
      comparative market indicators and historical data;
    risk free interest rate of 0.75%.


During the first quarter of fiscal 2019, 3,137,746 warrants
with exercise prices ranging from $0.75 to $5.60 and US$0.76 were exercised for
proceeds of $5,589, resulting in the issuance of 3,137,746 common shares.

On January 30, 2019, the Company closed its offering of
7,700,000 common shares at a price of $6.50 per share for gross proceeds of
$50,050. Included in the offering was an 1,155,000 over-allotment option pool
with a price of $6.50 per share which was exercised in full on the closing date
for $7,508 and total gross proceeds of $57,558 for total common shares issued of
8,855,000. Underwriting and legal fees accumulated to $3,827 for total net
proceeds of $53,731.

During the second quarter of fiscal 2019, 682,678 warrants with
exercise prices ranging from $0.75 to $5.60 and US$0.76 were exercised for
proceeds of $1,307, which resulted in the issuance of 682,678 common shares.

During the third quarter of fiscal 2019, 3,661,761 warrants
with exercise prices ranging from $0.75 to $5.60 and US$0.76 were exercised for
proceeds of $8,425, resulting in the issuance of 3,661,761 common shares.

On May 24, 2019, the Company completed the acquisition of
Newstrike Brands Ltd. (Note 11), resulting in the issuance of 35,394,041 common
shares.

During the fourth quarter of fiscal 2019, 8,053,544 warrants
with exercise prices ranging from $0.75 to $5.60 and US$0.76 were exercised for
proceeds of $47,396, resulting in the issuance of 8,053,544 common shares.

In fiscal 2019 a total of 15,535,729 warrants with exercise
prices ranging from $0.75 to $5.60 and US$0.76 were exercised for total proceeds
of $69,259, resulting in the issuance of 15,535,729 common shares.

As at July 31, 2019, there were 256,981,753 common shares
outstanding and 29,585,408 warrants outstanding.

26

---

The following is a consolidated summary of warrants on July 31,
2019.

|                                                            |  | Number      |  |   |                  | 
|----------------------------------------------------------- |  | ----------- |  | - | ---------------- | 
|                                                            |  | outstanding |  |   | Book
      value | 
|Classified as Equity                                        |  |             |  |   |                  | 
|2018 Equity financing                                       |  |             |  |   |                  | 
|Exercise price of $5.60 expiring
      January 30, 2020     |  | 10,512,208  |  | $ | 5,673            | 
|February 2018 financing warrants                            |  |             |  |   |                  | 
|Exercise price of $27.64 expiring
      February 16, 2020   |  | 4,413,498   |  |   | 1,331            | 
|June 2019 financing warrants                                |  |             |  |   |                  | 
|Exercise price of $15.79 expiring
      June 19, 2023       |  | 2,184,540   |  |   | 9,998            | 
|Broker / Consultant warrants                                |  |             |  |   |                  | 
|Exercise price of $20.85 expiring
      February 16, 2020   |  | 264,809     |  |   | 160              | 
|Exercise price of $11.84 expiring June 19, 2020             |  | 262,021     |  |   | 610              | 
|Exercise price of $0.75 expiring
      November 3, 2021     |  | 175,618     |  |   | 78               | 
|Exercise price of $0.75 expiring March 14, 2022             |  | 94,282      |  |   | 66               | 
|Exercise price of $15.79 expiring
      June 19, 2023       |  | 61          |  |   | 1                | 
|Inner Spirit warrants                                       |  |             |  |   |                  | 
|Exercise price of $15.63 expiring
      July 21, 2020       |  | 71,235      |  |   | 129              | 
|Joint Venture Molson warrants                               |  |             |  |   |                  | 
|Exercise price of $6.00 expiring October 4, 2021            |  | 11,500,000  |  |   | 42,386           | 
|Classified as Liability                                     |  | 29,478,272  |  |   | 60,432           | 
|2017 secured convertible debenture warrants                 |  |             |  |   |                  | 
|Exercise
      price of USD$0.76 expiring November 14, 2019 |  | 107,136     |  |   | 493              | 
|                                                            |  | 29,585,408  |  | $ | 60,925           | 

The following table summarizes warrant activity during the
years ended July 31, 2019 and 2018.

|                                                 |  |             |   |   | July 31, 2019    |  |  |             |   |   | July
      31, 2018 | 
|------------------------------------------------ |  | ----------- | - | - | ---------------- |  |  | ----------- | - | - | ------------------- | 
|                                                 |  | Number of   |   |   | Weighted average |  |  | Number of   |   |   | Weighted average    | 
|                                                 |  | warrants    |   |   | exercise price   |  |  | warrants    |   |   | exercise price      | 
|Outstanding, beginning of
      period           |  | 26,425,504  |   | $ | 4.35             |  |  | 20,994,123  |   | $ | 1.31                | 
|Expired during the period                        |  | (531        | ) |   |                 |  |  | (62,728     | ) |   | 3.00                | 
|Acquired and reissued through
      acquisition1 |  | 7,196,164   |   |   | 23.10            |  |  |            |   |   |                    | 
|Issued during the period                         |  | 11,500,000  |   |   | 6.00             |  |  | 37,413,681  |   |   | 4.34                | 
|Exercised during the period                      |  | (15,535,729 | ) |   | 3.61             |  |  | (31,919,572 | ) |   | 2.33                | 
|Outstanding, end of the period                   |  | 29,585,408  |   | $ | 9.95             |  |  | 26,425,504  |   | $ | 4.35                | 

1 Warrants acquired on May 24, 2019, via the
acquisition of Newstrike.

Exercised during the period were 1,916,527 broker compensation
warrants.

Stock Option Plan

The Company has a share option plan (the Plan) adopted in
July 2018, that is administered by the Board of Directors who establish exercise
prices and expiry dates, which are up to 10 years from issuance as determined by
the Board at the time of issuance. Unless otherwise determined by the Board,
options issued under the Plan vest over a three-year period except for options
granted to consultants or persons employed in investor relations activities (as
defined in the policies of the TSX) which vest in stages over 12 months with no
more than 1⁄4 of the options vesting in any three-month period. The maximum number
of common shares reserved for issuance for options that may be granted under the
Plan is 25,698,175 common shares as at July 31, 2019. Options issued prior to
July 2018 under the outgoing plan and the options assumed through the
acquisition of Newstrike do not contribute to the available option pool reserved
for issuance. As of July 31, 2019, the Company had 17,376,615 issued and
outstanding under the Plan.

27

---

The following table summarizes the stock option grants during
the years ended July 31, 2019 and 2018.

Options grantedExecutive and
    
    
    Non-executiveGrant date
    
    Exercise price
    
    
    directors
    
    
    employees
    
    
    Vesting terms
    
    
    Vesting periodSeptember 8, 2017
    $
    1.37
    
    
    650,000
    
    
    1,000
    
    
    Terms A
    
    
    10 yearsNovember 6, 2017
    $
    2.48
    
    
    125,000
    
    
    3,000
    
    
    Terms A
    
    
    10 yearsDecember 4, 2017
    $
    2.69
    
    
    1,750,000
    
    
    20,000
    
    
    Terms B
    
    
    10 yearsJanuary 29, 2018
    $
    4.24
    
    
    
    
    
    261,000
    
    
    Terms A, C
    
    
    10 yearsMarch 12, 2018
    $
    3.89
    
    
    325,000
    
    
    
    
    
    Terms A
    
    
    10 yearsApril 16, 2018
    $
    4.27
    
    
    845,000
    
    
    61,500
    
    
    Terms A
    
    
    10 yearsJune 8, 2018
    $
    5.14
    
    
    
    
    
    441,000
    
    
    Terms A
    
    
    10 yearsJuly 11, 2018
    $
    4.89
    
    
    4,325,000
    
    
    1,366,500
    
    
    Terms A
    
    
    10 yearsSeptember 17, 2018
    $
    7.93
    
    
    650,000
    
    
    523,500
    
    
    Terms A
    
    
    10 yearsNovember 22, 2018
    $
    5.92
    
    
    
    
    
    440,000
    
    
    Terms A
    
    
    10 yearsDecember 17, 2018
    $
    5.09
    
    
    74,000
    
    
    227,500
    
    
    Terms A, D
    
    
    10 yearsFebruary 19, 2019
    $
    7.13
    
    
    615,000
    
    
    626,000
    
    
    Terms A
    
    
    10 yearsFebruary 21, 2019
    $
    7.46
    
    
    3,333,333
    
    
    
    
    
    Terms E
    
    
    10 yearsMarch 20, 2019
    $
    8.50
    
    
    325,000
    
    
    1,077,500
    
    
    Terms A
    
    
    10 yearsApril 17, 2019
    $
    8.24
    
    
    
    
    
    1,132,500
    
    
    Terms A
    
    
    10 yearsJuly 18, 2019
    $
    6.54
    
    
    650,000
    
    
    2,768,785
    
    
    Terms A
    
    
    10 yearsJuly 26, 2019
    $
    5.88
    
    
    250,000
    
    
    
    
    
    Terms A
    
    
    10 years


|Vesting terms A  | One-third of the options will vest on the one-year
      anniversary of the date of grant and the balance will vest quarterly over
      two years thereafter.                                                                                                                                                                                                          
|----------------- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Vesting terms B  | Half of the options will vest immediately, and the
      balance will vest annually over three years thereafter.                                                                                                                                                                                                                                                        
|Vesting terms C  | Based upon organizational milestones.                                                                                                                                                                                                                                                                                                                                   
|Vesting terms D  | 54,000 of the options granted to a director will fully
      vest 6-months from the grant date.                                                                                                                                                                                                                                                                         
|Vesting terms E  | In addition to the standard vesting terms A, the grant
      defines an achievement condition in which vesting may only occur once a
      volume weighted average trading price of $10 or greater is achieved for a
      20- day period prior to a vesting date. All unvested options will carry
      over and vest if the condition is met at a future vesting date.

The following table summarizes stock option activity during the
fiscal years ended July 31, 2019 and 2018.

|                                                 |  |            |   |   | July 31, 2019    |  |  |            |   |   | July
      31, 2018 | 
|------------------------------------------------ |  | ---------- | - | - | ---------------- |  |  | ---------- | - | - | ------------------- | 
|                                                 |  | Options    |   |   | Weighted average |  |  | Options    |   |   | Weighted average    | 
|                                                 |  | issued     |   |   | exercise price   |  |  | issued     |   |   | exercise price      | 
|Opening balance                                  |  | 14,388,066 |   | $ | 3.02             |  |  | 5,748,169  |   | $ | 0.68                | 
|Granted                                          |  | 12,693,118 |   |   | 7.27             |  |  | 10,174,000 |   |   | 4.16                | 
|Acquired and reissued through
      acquisition1 |  | 2,002,365  |   |   | 9.49             |  |  |           |   |   |                    | 
|Forfeited                                        |  | (1,226,763 | ) |   | 6.33             |  |  | (626,830   | ) |   | 3.44                | 
|Exercised                                        |  | (3,567,867 | ) |   | 1.20             |  |  | (907,273   | ) |   | 0.65                | 
|Closing balance                                  |  | 24,288,919 |   | $ | 5.87             |  |  | 14,388,066 |   | $ | 3.02                | 

1 Stock options assumed on May 24, 2019, via the
acquisition of Newstrike.

28

---

The following table summarizes information concerning stock
options outstanding as at July 31, 2019.

Weighted average
    
    
    
    
    
    Weighted averageremaining contractual
    
    
    
    
    
    remaining contractualExercise price
    
    
    Number outstanding
    
    
    life
      (years)
    
    
    Number exercisable
    
    
    life
      (years)$
    0.58
    
    
    372,900
    
    
    0.08
    
    
    363,000
    
    
    0.300.75
    
    
    1,228,750
    
    
    0.34
    
    
    1,013,750
    
    
    1.071.27
    
    
    522,620
    
    
    0.16
    
    
    322,053
    
    
    0.373.15
    
    
    4,748
    
    
    0.00
    
    
    4,748
    
    
    0.006.00
    
    
    891,833
    
    
    0.04
    
    
    891,833
    
    
    0.141.37
    
    
    352,866
    
    
    0.12
    
    
    82,304
    
    
    0.102.48
    
    
    86,332
    
    
    0.03
    
    
    22,342
    
    
    0.032.69
    
    
    853,333
    
    
    0.29
    
    
    313,335
    
    
    0.414.24
    
    
    258,000
    
    
    0.09
    
    
    122,519
    
    
    0.1617.37
    
    
    253,270
    
    
    0.04
    
    
    253,270
    
    
    0.143.89
    
    
    325,000
    
    
    0.12
    
    
    135,418
    
    
    0.1816.58
    
    
    31,659
    
    
    0.00
    
    
    15,828
    
    
    0.0016.74
    
    
    56,985
    
    
    0.00
    
    
    28,488
    
    
    0.014.27
    
    
    879,002
    
    
    0.32
    
    
    366,852
    
    
    0.5016.10
    
    
    63,319
    
    
    0.00
    
    
    63,319
    
    
    0.004.89
    
    
    5,513,497
    
    
    2.03
    
    
    2,046,567
    
    
    2.875.14
    
    
    107,666
    
    
    0.04
    
    
    35,680
    
    
    0.0510.42
    
    
    162,295
    
    
    0.01
    
    
    138,549
    
    
    0.0410.42
    
    
    142,467
    
    
    0.01
    
    
    71,230
    
    
    0.0211.84
    
    
    44,322
    
    
    0.00
    
    
    11,079
    
    
    0.007.93
    
    
    1,058,500
    
    
    0.40
    
    
    
    
    
    8.21
    
    
    94,979
    
    
    0.01
    
    
    23,744
    
    
    0.015.92
    
    
    310,000
    
    
    0.12
    
    
    
    
    
    5.09
    
    
    276,500
    
    
    0.11
    
    
    54,000
    
    
    0.086.94
    
    
    94,979
    
    
    0.02
    
    
    
    
    
    8.84
    
    
    94,979
    
    
    0.02
    
    
    
    
    
    7.13
    
    
    1,136,000
    
    
    0.45
    
    
    
    
    
    7.46
    
    
    3,333,333
    
    
    1.31
    
    
    
    
    
    8.50
    
    
    1,222,500
    
    
    0.49
    
    
    
    
    
    8.24
    
    
    857,500
    
    
    0.34
    
    
    
    
    
    6.54
    
    
    3,408,785
    
    
    1.40
    
    
    
    
    
    $
    5.88
    
    
    250,000
    
    
    0.10
    
    
    
    
    
    24,288,919
    
    
    8.49
    
    
    6,379,908
    
    
    6.48


Stock-based Compensation

For the year ended July 31, 2019, the Company recorded $28,008
(July 31, 2018  $4,997) in stock-based compensation expense related to employee
options, which are measured at fair value at the date of grant and are expensed
over the vesting period (See Note 18 for stock based compensation allocation by
expense group). In determining the amount of stock-based compensation, the
Company used the Black-Scholes-Merton option pricing model to establish the fair
value of options granted by applying the following assumptions:

|                                 | July 31, 2019 | July
      31, 2018
|-------------------------------- | ------------- | -------------------
|Exercise price                   | $0.75$8.95   | $1.37$5.14        
|Stock price                      | $5.09$8.50   | $1.37$5.14        
|Risk-free interest rate          | 1.54%2.42%   | 2.06%-2.37%        
|Expected life of options (years) | 5-7           | 7                  
|Expected annualized volatility   | 64%76%       | 65%                

29

---

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

For the year ended July 31, 2019, the Company allocated to
inventory $1,724 (July 31, 2018  $Nil) of stock-based compensation applicable
to direct and indirect labour in the selling and production process.

14. Net Loss per Share

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

|                                                     |  | July 31, 2019 |  |  | July
      31, 2018 | 
|---------------------------------------------------- |  | ------------- |  |  | ------------------- | 
|Options                                              |  | 24,288,919    |  |  | 14,388,066          | 
|Warrants issued with $0.75 units                     |  |              |  |  | 3,234,960           | 
|2015 Secured convertible debentures
      warrants   |  |              |  |  | 1,318,332           | 
|2016 Unsecured convertible debenture warrants        |  |              |  |  | 100,002             | 
|2017 Secured convertible debenture warrants          |  | 107,136       |  |  | 928,542             | 
|2018 Equity warrants                                 |  | 10,512,208    |  |  | 18,570,500          | 
|2018 February 2018 financing warrants                |  | 4,413,498     |  |  |                    | 
|2019 June financing warrants                         |  | 2,184,540     |  |  |                    | 
|Joint venture and Inner Spirit issued
      warrants |  | 11,571,235    |  |  |                    | 
|Convertible
      debenture broker/finder warrants   |  | 796,791       |  |  | 2,273,168           | 
|                                                     |  | 53,874,327    |  |  | 40,813,570          | 

15. Convertible Debentures
Receivable

12% CONVERTIBLE DEBENTURE

On July 26, 2018, the Company purchased $10,000 in the form of
unsecured and subordinated convertible debentures to an unrelated entity, Fire
and Flower (F&F). The convertible debenture bears interest at 8%, paid
semi-annually, matures July 31, 2020 and includes a conversion feature to
convert the debenture into common shares of F&F at the lower of $1.15 and
the share price as defined within the agreement. The Company obtained the
debenture as a part of a strategic investment into the private retail cannabis
market. The debentures may be converted into common shares or a loan on July 31,
2020, which bears interest at 12%, at the holders option.

For the year ended July 31, 2019, the Companys debenture
increased by $1,627 (July 31, 2018  $Nil) due to fair value adjustments. At
period end, the level 2 instrument convertible debenture receivable was fair
valued using the F&F July 31, 2019 public market rate of $1.33 and totalled
$12,024 (July 31, 2018  $10,000). Accrued unpaid interest and the unrealized
gain amounted to $397 and $1,627 respectively.

ZERO INTEREST CONVERTIBLE DEBENTURE

On February 13, 2019, the Company purchased $800 in the form of
unsecured and subordinated convertible debentures to F&F. The convertible
debenture bears zero interest and matures November 30, 2019 and includes a
conversion feature to convert the debenture into common shares of F&F at
$0.80 as defined within the agreement. The debentures may be partially or
converted in-full into common shares at the maturity date at the holders
option.

The Company acquired the zero interest convertible debenture
through the acquisition of Newstrike on May 24, 2019 which carried a fair value
of $1,220. Since acquisition, for the stub period ended July 31, 2019, the
Companys zero interest debenture increased by $110 (July 31, 2018  $Nil) due
to fair value adjustments. At period end, the level 2 instrument convertible
debenture receivable was fair valued using the F&F July 31, 2019 public
market rate of $1.33 and totalled $1,330 (July 31, 2018  $Nil).

16. Term Loan

Term Loan

On February 15, 2019, the Company entered into a syndicated
credit facility with Canadian Imperial Bank of Commerce (CIBC) as Sole
Bookrunner, Co-Lead Arranger and Administrative Agent and Bank of Montreal as
Co-Lead Arranger and Syndication Agent (together the Lenders). The Lenders
will provide the Company up to $65 million in secured debt financing at a rate
of interest that is expected to average in the mid-to-high 5% per annum range.
The credit facility consists of a $50 million term loan and a $15 million
revolving loan with an uncommitted option to increase the facility up to $135
million. Both loans mature in 2022. The Company may repay the loan without
penalty, at any time and contains customary financial and restrictive covenants.
The Company shall repay at minimum 2.5% of the outstanding balance each quarter
per the terms of the credit facility agreement. The term loan possess several
covenants which the Company has met as of July 31, 2019.

On February 14, 2019, the Company received $35,000 and incurred
financing costs to secure the loan of $1,347.

30

---

As of July 31, 2019, the Company has drawn a total of $35,000
on the term loan, of which $3,500 is due within 12 months in according with the
terms of the credit facility. Carrying value net of deferred financing costs of
total term loan is $33,374.

The total interest expense and total interest capitalized was
$252 and $511, respectively. The total accretion of deferred financing costs was
$387 for the year ended July 31, 2019.

The following table illustrates the continuity schedule of the
term loan:

|Term Loan                |   | Current |   |   | Long term |  
|------------------------ | - | ------- | - | - | --------- | -
|July 31, 2018            | $ |        |   | $ |          |  
|Term loan                |   |         |   |   |           |  
|Additions                |   |        |   |   | 35,000    |  
|Adjustments              |   | 3,500   |   |   | (3,500    | )
|Repayments               |   | (87     | ) |   | (788      | )
|                         | $ | 3,413   |   | $ | 30,712    |  
|Deferred financing costs |   |         |   |   |           |  
|Additions                |   | (296    | ) |   | (1,347    | )
|Adjustments              |   |        |   |   | 296       |  
|Realized expense         |   |        |   |   | 596       |  
|July 31, 2019            | $ | 3,117   |   | $ | 30,257    |  

17. Financial
Instruments

Market Risk

Interest Risk

The Company has exposure to interest rate risk related to any
investments of surplus cash. The Company may invest surplus cash in highly
liquid investments with short terms to maturity that would accumulate interest
at prevailing rates for such investments. The Company also has exposure to
interest rate risk related to the outstanding balance of the term loan. The
fluctuation of the interest rate may result in a material increase to the
associated interest. As at July 31, 2019, the Company had short term investments
and a convertible debenture of $517 and a long term loan of $33,374. All
interest rates are fixed. An increase or decrease of 5% to the applicable
interest rates would not result in a material variance to net loss.

Price Risk

Price risk is the risk of variability in fair value due to
movements in equity or market prices. The Companys level 1 and 2 investments
are susceptible to price risk arising from uncertainties about their future
outlook, future values and the impact of market conditions. The fair value of
marketable securities and derivatives held in publicly traded entities are based
on quoted market prices which the shares of the investments can be exchanged
for.

If the fair value of these financial assets were to increase or
decrease by 10% as of July 31, 2019, the Company would incur an associated
increase or decrease in comprehensive loss of approximately $340 (2018 - $Nil).
The price risk exposure as at July 31, 2019 is presented in the table below.

$Financial assets
    
    16,756Financial
      liabilities
    
    (493
    )Total exposure
    
    16,263


Credit Risk

Credit risk is the risk of financial loss to the Company if a
customer or counterparty to a financial instrument fails to meet its contractual
obligations and arises principally from the Companys trade receivables,
promissory note receivable and convertible debenture receivable. As at July 31,
2019, the Company was exposed to credit related losses in the event of
non-performance by the counterparties.

The Company provides credit to its customers in the normal
course of business and has established credit evaluation and monitoring
processes to mitigate credit risk. Since the majority of the medical sales are
transacted with clients that are covered under various insurance programs, the
Company has limited credit risk.

Cash, cash equivalents and short-term investments are held by
some of the largest cooperative financial groups in Canada. Since the inception
of the Company, no losses have been incurred in relation to cash held by the
financial institution. The majority of the trade receivables balance are held
with crown corporations of Quebec, Ontario and Alberta as well as one of the
largest medical insurance companies in Canada. Credit worthiness of a
counterparty is evaluated prior to the granting of credit. The Company has
estimated the expected credit loss using a lifetime credit loss approach. The
current expected credit loss for the year ended July 31, 2019 is $37 (July 31,
2018 - $94).

31

---

In measuring the expected credit losses, the adult-use cannabis
trade receivables have been assessed on a per customer basis as they consist of
a low number of material contracts. Medical trade receivables have been assessed
collectively as they possess share credit risk characteristics. They have been
grouped based on the days past due.

Credit risk from the convertible debenture receivable arises
from the possibility that principal and/or interest due may become
uncollectible. The Company mitigates this risk by managing and monitoring the
underlying business relationship.

The carrying amount of cash and cash equivalents, restricted
cash, short-term investments, trade receivables and convertible debentures
receivable represents the maximum exposure to credit risk and as at July 31,
2019; this amounted to $194,902. The following table summarizes the Companys
aging of trade receivables as at July 31, 2019 and 2018:

|             |  | July 31, |  |  | July 31, | 
|------------ |  | -------- |  |  | -------- | 
|             |  | 2019     |  |  | 2018     | 
|             |  | $        |  |  | $        | 
|030 days    |  | 14,102   |  |  | 262      | 
|31 60 days  |  | 1,826    |  |  | 188      | 
|61 90 days  |  | 166      |  |  | 91       | 
|Over 90 days |  | 3,599    |  |  | 103      | 
|Total        |  | 19,693   |  |  | 644      | 

The following table summarizes the Companys ECL by aging group
as at July 31, 2019 and 2018:

|             |  | July 31, |  |  | July 31, | 
|------------ |  | -------- |  |  | -------- | 
|             |  | 2019     |  |  | 2018     | 
|             |  | $        |  |  | $        | 
|030 days    |  | 3        |  |  | -        | 
|31 60 days  |  | 7        |  |  | -        | 
|61 90 days  |  | 3        |  |  | -        | 
|Over 90 days |  | 24       |  |  | 94       | 
|Total        |  | 37       |  |  | 94       | 

Economic Dependence Risk

Economic dependence risk is the risk of reliance upon a select
number of customers which significantly impact the financial performance of the
Company. The Company recorded sales from three crown corporations representing
81% (July 31, 2018  Nil%) of total sales in the year ended July 31, 2019.

The Company holds trade receivables from three crown
corporations representing 79% of total trade receivables as of July 31, 2019
(July 31, 2018  Nil%).

Liquidity Risk

Liquidity risk is the risk that the Company will not be able to
meet its financial obligations as they become due. The Company manages its
liquidity risk by reviewing on an ongoing basis its capital requirements. As at
July 31, 2019, the Company had $139,505 of cash and cash equivalents and
short-term investments.

The Company is obligated to pay accounts payable and accrued
liabilities, excise taxes payable and current portions of the term loan with
total carrying amounts and contractual cash flows amounting to $52,685 due in
the next 12 months.

The carrying values of cash, trade receivable, accounts payable
and accrued liabilities approximate their fair values due to their short term to
maturity. The carrying value of the term loan approximates its fair value as
there has been no change the Companys risk profile and no changes to the market
interest rate.

32

---

18. Operating Expenses by
Nature

|For the years
      ended                           |   | July 31, 2019 |  |   | July
      31, 2018 | 
|--------------------------------------------------- | - | ------------- |  | - | ------------------- | 
|Stock based compensation                            | $ | 28,008        |  | $ | 4,997               | 
|Marketing and promotion                             |   | 22,308        |  |   | 2,447               | 
|Salaries and benefits                               |   | 25,349        |  |   | 6,992               | 
|Consulting                                          |   | 11,176        |  |   | 3,659               | 
|Professional fees                                   |   | 8,258         |  |   | 1,761               | 
|Facilities                                          |   | 5,697         |  |   | 919                 | 
|General and administrative                          |   | 4,462         |  |   | 1,442               | 
|Travel                                              |   | 2,710         |  |   | 488                 | 
|Amortization of intangible assets                   |   | 1,767         |  |   | 765                 | 
|Depreciation of
      property, plant and equipment |   | 1,747         |  |   | 896                 | 
|Total                                               | $ | 111,482       |  | $ | 24,367              | 

The following table summarizes the nature of stock based
compensation in the period:

|For the year
      ended                                           |   | July 31, 2019 | 
|------------------------------------------------------------------ | - | ------------- | 
|General and administrative related stock
      -based compensation | $ | 26,322        | 
|Marketing and
      promotion related stock -based compensation    |   | 1,686         | 
|Total operating expense related stock-based
      compensation     |   | 28,008        | 
|Stock based
      compensation capitalized to inventory            |   | 1,724         | 
|Total stock-based compensation                                     | $ | 29,732        | 

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

|For the year
      ended                                    |   | July 31, 2019 | 
|----------------------------------------------------------- | - | ------------- | 
|General and administrative related wages
      and benefits | $ | 17,975        | 
|Marketing and promotion related wages and benefits          |   | 6,162         | 
|Research and development related wages and benefits         |   | 1,212         | 
|Total operating expense related wages and benefits          |   | 25,349        | 
|Wages and benefits expensed through cost of sales           |   | 10,905        | 
|Total wages and
      benefits expensed in the period       | $ | 36,254        | 

19. Investment in Associate
and Joint Ventures

The following is a summary of financial information for the
Companys joint ventures for the periods presented based on the latest publicly
available information. Note that the numbers have not been pro-rated for the
Companys ownership interest.

|                                |  | Truss         |  |  | Belleville Complex Inc |  |  | HEXO
      MED | 
|------------------------------- |  | ------------- |  |  | ---------------------- |  |  | -------------- | 
|Period                          |  | July 31, 2019 |  |  | July 31, 2019          |  |  | July 31, 2019  | 
|Statement of Financial Position |  | $             |  |  | $                      |  |  | $              | 
|Cash and cash equivalents       |  | 14,318        |  |  | 278                    |  |  | 542            | 
|Current assets                  |  | 5,701         |  |  | 2,604                  |  |  | 59             | 
|Non- current assets             |  | 7,880         |  |  | 19,906                 |  |  | 22             | 
|                                |  |               |  |  |                        |  |  |                | 
|Current liabilities             |  | 7,477         |  |  | 1,155                  |  |  | 26             | 
|Non-current labilities          |  |              |  |  | 21,909                 |  |  |               | 
|                                |  |               |  |  |                        |  |  |                | 

33

---

|*Period*                                  |  | 11 months ended July 31, 2019 |   |  | August 21, 2018 to July 31, 2019 |   |  | December 22, 2018 to July 31,
      2019 |  
|----------------------------------------- |  | ----------------------------- | - |  | -------------------------------- | - |  | ---------------------------------------- | -
|                                          |  |                               |   |  |                                  |   |  |                                          |  
|Statement of Comprehensive
      Loss     |  |                               |   |  |                                  |   |  |                                          |  
|Revenue                                   |  |                              |   |  | 4,018                            |   |  |                                         |  
|                                          |  |                               |   |  |                                  |   |  |                                          |  
|Operating expenses excluding depreciation |  |                               |   |  |                                  |   |  |                                          |  
|and amortization                          |  | (6,579                        | ) |  | (3,716                           | ) |  |                                         |  
|Depreciation and amortization             |  |                              |   |  | (578                             | ) |  |                                         |  
|Other expenses                            |  |                              |   |  |                                 |   |  | (503                                     | )
|                                          |  |                               |   |  |                                  |   |  |                                          |  
|Loss from operations                      |  | (6,579                        | ) |  | (276                             | ) |  | (503                                     | )
|Income tax expenses                       |  |                              |   |  |                                 |   |  |                                         |  
|Total comprehensive loss                  |  | (6,579                        | ) |  | (276                             | ) |  | (503                                     | )

(a) Truss  Investment in Associate

|                                    |   | July 31, 2019 |   |   | July
      31, 2018 | 
|----------------------------------- | - | ------------- | - | - | ------------------- | 
|Opening Balance                     | $ |              |   | $ |                    | 
|Cash consideration of investment    |   | 11,476        |   |   |                    | 
|Fair value of warrant consideration |   | 42,386        |   |   |                    | 
|Capitalized transaction costs       |   | 721           |   |   |                    | 
|Share of net loss                   |   | (2,796        | ) |   |                    | 
|Ending Balance                      | $ | 51,786        |   | $ |                    | 

On October 4, 2018, the formation of the entity Truss between
the Company and Molson Coors Canada (the Partner) was finalized. Truss is a
standalone start-up company with its own board of directors and an independent
management team and is incorporated in Canada. Truss is private company and its
principle activities consist of pursuing opportunities to develop non-alcoholic,
cannabis-infused beverages and is currently operating in Gatineau, Quebec.

The Partner holds 57,500 common shares representing 57.5%
controlling interest in Truss with the Company holding 42,500 common shares and
controlling the remaining 42.5% . In connection with the transaction the Company
has granted the Partner 11,500,000 common share warrants at an exercise price of
$6.00 for a period of 3 years.

Included in the initial investment cost is the capitalized fair
value $42,386 of warrant consideration (see Note 11 for fair value inputs and
assumptions).

Transaction costs of $721 in respect to the definitive
agreement to form the joint venture were capitalized.

The joint venture is accounted for using the equity method.
During the year ended July 31, 2019, the Companys share in the net loss of
Truss was ($2,796) (July 31, 2018  $Nil).

(b)Belleville Complex Inc - Joint
Venture

On October 31, 2018, the Company acquired a 25% interest in the
joint venture Belleville Complex Inc. (BCI) with a related party Olegna
Holdings Inc., owned and controlled by a director of the Company, holding the
remaining 75% in BCI. The joint venture purchased a configured 1.5 million sq.
ft. facility through a $20,279 loan issued by the Company on September 7, 2018,
bearing an annual 4% interest rate and interest payable monthly. The loan and
all remaining accrued interest were repaid in full during the period and
interest income of $454 was realized.

As a part of the agreement, the Company will be the anchor
tenant for a period of 20 years. Consideration for the 25% interest on the joint
venture is deemed $Nil. The carrying value of BCI as at July 31, 2019 is $Nil
(July 31, 2018 - $Nil).

34

---

(c) HEXO MED - Joint Venture

|                                 |   | July 31, 2019 |   |   | July
      31, 2018 | 
|-------------------------------- | - | ------------- | - | - | ------------------- | 
|Opening Balance                  | $ |              |   | $ |                    | 
|Cash consideration of investment |   | 1,106         |   |   |                    | 
|Capitalized transaction costs    |   | 125           |   |   |                     | 
|Share of net loss                |   | (168          | ) |   |                    | 
|Ending Balance                   | $ | 1,063         |   | $ |                    | 

HEXO MED is a Greece based joint venture established with
partner QNBS P.C. (formerly Qannabos) and will serve as the Companys entry
point into the European medical cannabis markets. During the fiscal year 2019,
the Company contributed a total of EUR$250 for a 33.34% interest in HEXO MED in
cash. As of July 31, 2019, the Company has also accrued an additional EUR$500
per the terms of the shareholders agreement. Once remitted, the Companys
interest will increase to 51% (see Note 32). The carrying value of HEXO MED as
at July 31, 2019 is $1,063 (July 31, 2018 - $Nil).

20. Long-term Investments

Cost July 31, 2018
    
    
    Fair value July 31, 2018
    
    
    Investment
    
    
    Divesture/ Transfer
    
    
    Subtotal July 31, 2019
    
    
    Change in fair value
    
    
    Fair value July 31, 2019$
    
    
    $
    
    
    $
    
    
    $
    
    
    $
    
    
    $
    
    
    $Level 1 InvestmentsFire & Flower Inc. common shares
    
    
    
    
    
    
    
    2,970
    
    
    (2,493
    )
    
    477
    
    
    (477
    )
    
    Fire & Flower Inc. common share
      purchase warrants1
    
    
    
    
    
    
    
    505
    
    
    (262
    )
    
    243
    
    
    (243
    )
    
    Inner Spirit common shares1
    
    
    
    
    
    
    
    2,850
    
    
    
    
    
    2,850
    
    
    150
    
    
    3,000Level 2 InvestmentsInner Spirit common share purchase warrants1
    
    
    
    
    
    
    
    414
    
    
    
    
    
    414
    
    
    (11
    )
    
    403Level 3 InvestmentsGreentank Technologies1
    
    
    
    
    
    
    
    6,723
    
    
    
    
    
    6,723
    
    
    (149
    )
    
    6,574Neal Brothers Inc. 1
    
    
    
    
    
    
    
    4,000
    
    
    
    
    
    4,000
    
    
    
    
    
    4,000Segra
      International Corp.
    
    
    
    
    100
    
    
    
    
    
    
    
    
    100
    
    
    200
    
    
    300Total
    
    
    
    
    100
    
    
    17,462
    
    
    2,755
    
    
    14,807
    
    
    (530
    )
    
    14,277


1Acquired in the Newstrike acquisition on May 24,
2019 at fair market value

Fire & Flower Inc.

Common Shares

On November 1, 2018, the Company obtained 1,980,000
subscription receipts in the entity F&F for proceeds of $2,970. The
subscription receipts converted to common shares of F&F at a 1:1 ratio on
February 19, 2019 upon the commencement of trading on the TSX Venture and held
an initial fair value of $2,970. On July 25, 2019, the Company liquidated the
investment in full resulting in a cash injection net of fees of $2,493. The
Level 1 long term investment and associated realized loss as at July 30, 2019,
were $Nil and ($477), respectively.

Common Share Purchase Warrants

On May 24, 2019, through the acquisition of Newstrike, the
Company obtained 1,000,000 common share purchase warrants in the entity F&F.
Each warrant entitles the Company to a common share at a ratio of 1:1. The
warrants held an initial fair value of $505. The investment was fair valued
through the Black Scholes-Merton model at $243 and disposed of as at July 30,
2019. The Company realized a loss of ($243) as at July 30, 2019 based upon the
following assumptions and inputs:

| | market price of $1.33;                                                             
|- | -----------------------------------------------------------------------------------
| | expected life of 0.70 year;                                                        
| | $Nil dividends;                                                                    
| | 100% volatility based upon
      comparative market indicators and historical data;
| | risk free interest rate of 1.46%.                                                  

35

---

Inner Spirit Holding Inc.

Common Shares

On May 24, 2019, through the acquisition of Newstrike, the
Company obtained 15,000,000 common shares in the entity Inner Spirit Holdings
Inc. which held a fair value of $2,850. The investment held an unrealized gain
of $150 as at July 31, 2019 based upon the market price of $0.20 per common
share.

Common Share Purchase Warrants

On May 24, 2019, through the acquisition of Newstrike, the
Company obtained 7,500,000 common share purchase warrants in the entity Inner
Spirit Holdings Inc. Each warrant entitles the Company to a common share at a
ratio of 1:1. The warrants held an initial fair value of $414. The investment
was fair valued through the Black Scholes-Merton model and held an unrealized
loss of ($11) as at July 31, 2019 based upon the following assumptions and
inputs:

| | market price of $0.20;                                                             
|- | -----------------------------------------------------------------------------------
| | expected life of 1.00 year;                                                        
| | $Nil dividends;                                                                    
| | 100% volatility based upon
      comparative market indicators and historical data;
| | risk free interest rate of 1.48%.                                                  

Greentank Technologies.

On February 22, 2019, Newstrike acquired 1,953,125 preferred
shares of Greentank Technologies for cash consideration of $6,622 (USD$5,000).
The investment is strategic and long term in nature. The investments initial
fair value upon the acquisition of Newstrike was $6,723 and is measured through
fair value through profit and loss. The fair value was established using the
information from a recent financing which demonstrates the same underlying
preferred share value as the original investment consideration. During the stub
period ended July 31, 2019, there was a decrease in fair value of $149 due to a
reduction of CAD/USD rate (July 31, 2018 - $Nil). A variance of 5% to the
underlying preferred share price would result in a change of $331 to the
investments fair value.

Neal Brothers Inc.

The Company also acquired 19.9% of the shares of Neal Brothers
Inc. through the acquisition of Newstrike on May 24, 2019. The Company holds no
board seat. The initial investment was for cash consideration of $5,604. The
Company has measured these investments at fair value upon the date of
acquisition which was determined to be $4,000. During the stub period ended July
31, 2019, there was no change in fair value (July 31, 2018 - $Nil). A variance
of 5% to the underlying investment would result in a change of $200 to the
investments fair value.

Segra International Corp.

The Company holds 400,000 shares in the private entity Segra
International Corp. The investment represents a strategic long term investment
in the cannabis micropropogation entity. The initial investment was made for
$0.25 per share. The Company has measured this investment to its fair value of
$0.75 per share which totalled $300 as at July 31, 2019 (July 31, 2018  $100).
The fair value measurement was based upon the most recent financing information
and the associated unrealized gain of $200 (July 31, 2018 - $Nil) was recorded
through profit and loss. A variance of 5% to the underlying share price would
result in a nominal change to the investments fair value.

21. Related Party
Disclosure

Key Management Personnel Compensation

Key management personnel are those persons having the authority
and responsibility for planning, directing and controlling the Companys
operations, directly or indirectly. The key management personnel of the Company
are the members of the executive management team and Board of Directors, and
they control approximately 6.15% of the outstanding shares of the Company as at
July 31, 2019 (July 31, 2018  8.77%) .

Compensation provided to key management during the period was
as follows:

|For the years ended           |   | July 31, 2019 |  |   | July 31, 2018 | 
|----------------------------- | - | ------------- |  | - | ------------- | 
|Salary and/or consulting fees | $ | 3,550         |  | $ | 1,969         | 
|Bonus compensation            |   | 481           |  |   | 275           | 
|Stock-based compensation      |   | 16,235        |  |   | 3,836         | 
|Total                         | $ | 20,266        |  | $ | 6,080         | 

36

---

These transactions are in the normal course of operations and
are measured at the exchange amount, which is the amount of consideration
established and agreed by the related parties.

Unless otherwise stated the below granted stock options will
vest on the one-year anniversary of the date of grant and the balance will vest
quarterly over two years thereafter.

On July 26, 2019, the Company granted certain of its executives
a total 250,000 stock options with an exercise price of $5.88

On July 18, 2019,
  the Company granted certain of its executives a total 650,000 stock options with
  an exercise price of $6.54. On March 20, 2019, the Company granted certain of
  its executives a total 325,000 stock options with an exercise price of $8.50.

On
  February 21, 2019, the Company granted the CEO 3,333,333 stock options with an
  exercise price of $7.46. Additional to the standard vesting terms as defined in
  Note 11, is an achievement condition in which vesting may only occur once a
  volume weighted average trading price of $10 or greater is achieved for a 20-day
  period prior to a vesting date. All unvested options will carry over and vest if
  the condition is met at a future vesting date.

On February 19, 2019, the Company granted certain of its
executives a total 615,000 stock options with an exercise price of $7.13.

On
  December 17, 2018, the Company granted certain of its executives a total 74,000
  stock options with an exercise price of $5.09. Of which, 54,000 stock options
  will fully vest at the 6-month anniversary of the grant date.

On September 17, 2018, the Company granted certain executives
of the Company a total of 650,000 stock options with an exercise price of $7.93.

On July 11, 2018, the Company granted certain directors and
executives of the Company a total of 4,325,000 stock options with an exercise
price of $4.89. Within the grant there exist 350,000 stock option which fully
vest on April 30, 2019.

On April 16, 2018, the Company granted certain directors and
executives of the Company a total of 845,000 stock options with an exercise
price of $4.27.

On March 12, 2018, the Company granted certain directors and
executives of the Company a total of 325,000 stock options with an exercise
price of $3.89.

On December 4, 2017, the Company granted certain directors and
executives of the Company a total of 1,750,000 stock options with an exercise
price of $2.69, of which half of the options will vest immediately, and the
balance will vest annually over three years thereafter with the exception of
75,000 stock options which vest in full by April 30, 2019.

On November 6, 2017, the Company granted certain directors of
the Company a total of 125,000 stock options with an exercise price of
$2.48.

On September 8, 2017, the Company granted certain executives of
the Company a total of 650,000 stock options with an exercise price of
$1.37.

The Company loaned $20,279 on September 7, 2018, to the related
party BCI to be used in the purchase of a facility in Belleville, Ontario and
was repaid in full during the third quarter of fiscal 2019.

22. Capital Management

The Companys objective is to maintain sufficient capital so as
to maintain investor, creditor and customer confidence and to sustain future
development of the business and provide the ability to continue as a going
concern. Management defines capital as the Companys shareholders equity. The
Board of Directors does not establish quantitative return on capital criteria
for management. The Company has not paid any dividends to its shareholders. The
Company is not subject to any externally imposed capital requirements.

As at
  July 31, 2019 total managed capital was comprised of shareholders equity of
  $776,756 (July 31, 2018  $322,873). There were no changes in the Companys
  approach to capital management during the period.

23. Commitments and
Contingencies

COMMITMENTS

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

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

37

---

|2020       | $ | 93,647  | 
|---------- | - | ------- | 
|2021       |   | 7,332   | 
|2022       |   | 5,804   | 
|2023       |   | 5,259   | 
|2024       |   | 4,970   | 
|Thereafter |   | 75,218  | 
|           | $ | 192,230 | 

Inclusive of the commitments balance is $99,652 related to the
Belleville Complex Inc 20-year anchor tenant agreement ending September 7, 2038
(Note 17) and additional lease commitments amounting to $2,089.

The following table summarizes the Companys proportionate
share of the annual minimum payments and commitments held by its investment in
associate and joint ventures.

|2020 | $ | 26,962 | 
|---- | - | ------ | 
|2021 |   | 1,794  | 
|2022 |   | 26     | 
|2023 |   | 26     | 
|2024 |   | 27     | 
|     | $ | 28,835 | 

Letter of Credit

On June 28, 2018, the Company executed a letter of credit with
a Canadian credit union as required under an agreement with a public utility
provider entitling the Company up to a maximum limit of $3,141 subject to
certain operational requirements. The letter of credit has a one-year expiry
from the date of issuance with an autorenewal feature and was still in effect as
at July 31, 2019. The credit facility is secured by a guaranteed investment
certificate (GIC). As at July 31, 2019, the letter of credit has not been
drawn upon (July 31, 2018  $Nil) and is in compliance with the specified
requirements.

Surety Bond

On June 28, 2018, the Company entered into an indemnity
agreement to obtain a commercial surety bond with a North American insurance
provider entitling the Company up to a maximum of $2,000. The bond bears a
premium at 0.1% annually. The Company obtained the surety bond as required under
the Canada Revenue Agencys excise tax laws for the transporting of commercial
goods throughout Canada.

CONTINGENCIES

The Company may be, from time to time, subject to various
administrative and other legal proceedings arising in the ordinary course of
business. Contingent liabilities associated with legal proceedings are recorded
when a liability is probable, and the contingent liability can be reasonably
estimated.

24. Fair Value of Financial
Instruments

The carrying values of the financial instruments as at July 31,
2019 are summarized in the following table:

38

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Financial assets
    
    
    Financial liabilitiesAmortized
    
    
    designated as
    
    
    designatedNote
    
    
    costs
    
    
    FVTPL
    
    
    as
      FVTPL
    
    
    TotalAssets
    
    
    
    
    $
    
    
    $
    
    
    $
    
    
    $Cash and cash equivalents
    
    4
    
    
    
    
    
    113,568
    
    
    
    
    
    113,568Restricted cash
    
    5
    
    
    
    
    
    22,350
    
    
    
    
    
    22,350Short-term investments
    
    4
    
    
    
    
    
    25,937
    
    
    
    
    
    25,937Trade receivables
    
    
    
    
    19,693
    
    
    
    
    
    
    
    
    19,693Commodity taxes recoverable and other
      receivables
    
    6
    
    
    15,247
    
    
    
    
    
    
    
    
    15,247Convertible debenture
      receivable
    
    15
    
    
    
    
    
    13,354
    
    
    
    
    
    13,354Long
      term investments
    
    20
    
    
    
    
    
    14,277
    
    
    
    
    
    14,277Liabilities
    
    
    
    
    $
    
    
    $
    
    
    $
    
    
    $Accounts payable and accrued liabilities
    
    
    
    
    45,581
    
    
    
    
    
    
    
    
    45,581Warrant liability
    
    12
    
    
    
    
    
    
    
    
    493
    
    
    493Deferred rent liability
    
    
    
    
    946
    
    
    
    
    
    
    
    
    946Term loan
    
    16
    
    
    33,374
    
    
    
    
    
    
    
    
    33,374


The carrying values of trade receivables, accounts payable,
accrued liabilities and the term loan approximate their fair values due to their
relatively short periods to maturity.

The carrying values of the financial instruments as at July 31,
2018 are summarized in the following table:

Financial assets
    
    
    Financial liabilitiesAmortized
    
    
    designated as
    
    
    designatedNote
    
    
    costs
    
    
    FVTPL
    
    
    as
      FVTPL
    
    
    TotalAssets
    
    
    
    
    $
    
    
    $
    
    
    $
    
    
    $Cash and cash equivalents (Restated)
    
    4, 26
    
    
    
    
    
    99,042
    
    
    
    
    
    99,042Short-term investments
      (Restated)
    
    4, 26
    
    
    
    
    
    145,747
    
    
    
    
    
    145,747Trade receivables
    
    
    
    
    644
    
    
    
    
    
    
    
    
    644Commodity taxes recoverable
      and
    
    6
    
    
    4,237
    
    
    
    
    
    
    
    
    4,237other receivablesConvertible debenture receivable
    
    15
    
    
    
    
    
    10,000
    
    
    
    
    
    10,000Liabilities
    
    
    
    
    $
    
    
    $
    
    
    $
    
    
    $Accounts payable and accrued
      liabilities
    
    
    
    
    8,995
    
    
    
    
    
    
    
    
    8,995Warrant liability
    
    12
    
    
    
    
    
    
    
    
    3,130
    
    
    3,130


25. Ancillary Revenue

Ancillary revenues are those sales outside of the primary
business of the Company as outlined in Note 1. During the year ended July 31,
2019 the Company realized net revenues of $199 (July 31, 2018  $Nil) related to
management fees.

26. Comparative Amounts

The Company identified an error in relation to the
classification of cash and cash equivalents and short-term investments for the
year ended July 31, 2018. The Company has identified $98,209 of high
interest-bearing cash accounts previously classified as short-term investments
as well as $38,509 of term deposits, previously classified as cash and cash
equivalents. Accordingly, the Company has increased cash and cash equivalents
and decreased short term investments by the net amount of $59,700 in the
consolidated statements of financial position as at July 31, 2018. The Company
has increased cash and cash equivalents and reduced disposal/(acquisition) of
short-term investments by $59,700 in the consolidated statements of cash flows
for the year ended July 31, 2018.

39

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27. License and Prepaid Royalty  HIP

On May 24, 2019, through the acquisition of Newstrike, the
Company inherited a royalty agreement with the Tragically Hip (the Hip
Agreement) with an effective date of January 12, 2017, expiring after five
years with an option of renewal for a two-year period. Newstrikes initial
consideration was 3,000,000 common shares with an initial fair value of $2,655
and an ongoing royalty of 2.5% of revenues of cannabis products sold by the
Company inspired by the Tragically Hip. The issuance of the 3,000,000 common
shares includes a payment of 1,000,000 common shares that will be applied
against future royalties payable. The fair value of the license and prepaid
asset as at the acquisition date of May 24, 2019 was $926 and $600,
respectively.

During the stub period ended July 31, 2019, the Company
recorded amortization of $59 using the straight-line method over a five-year
term from the effective date of the License, and $58 was drawn down on the
prepaid royalty.

|                                   |   | July 31, 2019 |  |   | July
      31, 2018 | 
|---------------------------------- | - | ------------- |  | - | ------------------- | 
|License  HIP, net of amortization | $ | 867           |  | $ |                    | 
|Prepaid Royalty 
      HIP        |   | 542           |  |   |                    | 
|License and prepaid royalty  HIP  | $ | 1,409         |  | $ |                    | 

28. Non-Controlling Interest

The following table summarizes the information relating to the
Companys subsidiary Neal Up Brands Inc., before intercompany eliminations.

|                                   |   | July 31, 2019 |  |   | July
      31, 2018 | 
|---------------------------------- | - | ------------- |  | - | ------------------- | 
|Current assets                     | $ | 2,500         |  | $ |                    | 
|Non-current assets                 |   |              |  |   |                    | 
|Current liabilities                |   |              |  |   |                    | 
|Non-current
      liabilities      |   |              |  |   |                    | 
|Net assets                         |   | 2,500         |  |   |                    | 
|Non-controlling
      interest (%) |   | 40%           |  |   |                     | 
|Non-controlling interest           | $ | 1,000         |  | $ |                    | 

29. Income Taxes

Income tax expense recognized in comprehensive loss consists of
the following components:

|                                    |   | July 31, 2019 |  |   | July
      31, 2018 | 
|----------------------------------- | - | ------------- |  | - | ------------------- | 
|Current tax for the year            | $ |              |  | $ |                    | 
|Adjustments of
      previous years |   |              |  |   |                    | 
|Total                               | $ |              |  | $ |                    | 

Components of deferred income tax expense (recovery):

|                                                                                   |   | July 31, 2019 |   |   | July
      31, 2018 |  
|---------------------------------------------------------------------------------- | - | ------------- | - | - | ------------------- | -
|Origination and reversal of temporary
      differences                            | $ | (12,988       | ) | $ | (6,780              | )
|Difference between statutory tax rate and deferred tax rate                        |   | 152           |   |   | (7                  | )
|Change in temporary difference for which no deferred tax
      assets are recorded |   | 6,996         |   |   | 6,787               |  
|Deferred income
      tax recovery                                                 | $ | (3,840        | ) | $ |                    |  

40

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The Company's expected tax rate is different from the combined
federal and provincial income tax rate in Canada. These differences result from
the following elements:

|                                                                           |   | July 31, 2019 |   |   | July
      31, 2018 |  
|-------------------------------------------------------------------------- | - | ------------- | - | - | ------------------- | -
|Expected tax rate                                                          |   | 26.64%        |   |   | 26.9%               |  
|Earnings before income taxes                                               | $ | (85,404       | ) | $ | (23,350             | )
|                                                                           |   |               |   |   |                     |  
|Expected tax benefit resulting from loss                                   |   | (22,732       | ) |   | (6,281              | )
|                                                                           |   |               |   |   |                     |  
|Adjustments for the following items:                                       |   |               |   |   |                     |  
|Tax rate differences                                                       |   | 152           |   |   | (7                  | )
|Permanent differences                                                      |   | 9,454         |   |   | 3,095               |  
|Change in temporary
      differences for which no tax assets are recorded |   | 6,622         |   |   | 2,401               |  
|True up and other                                                          |   | 664           |   |   | 792                 |  
|                                                                           | $ | (3,840        | ) | $ |                    |  

The following is a reconciliation of the deferred tax assets
and liabilities recognized by the Company:

|                                       |  | Opening        |   |  | Recognized in |   |  | Recognized in |   |  | Ending              |  
|-------------------------------------- |  | -------------- | - |  | ------------- | - |  | ------------- | - |  | ------------------- | -
|                                       |  | August 1, 2018 |   |  | income        |   |  | goodwill      |   |  | July
      31, 2019 |  
|                                       |  | $              |   |  | $             |   |  | $             |   |  | $                   |  
|Deductible temporary
      differences |  |               |   |  | 119           |   |  | (220          | ) |  | 101                 |  
|Taxable temporary differences          |  | (117           | ) |  |              |   |  |              |   |  | (117                | )
|Biological assets                      |  | (458           | ) |  | 81            |   |  | (292          | ) |  | (669                | )
|Inventory                              |  | (1,432         | ) |  | 1,560         |   |  | (559          | ) |  | (431                | )
|Loss carryforward                      |  | 2,007          |   |  | 1,886         |   |  | 7,303         |   |  | 11,196              |  
|Share issue costs                      |  |               |   |  | (89           | ) |  | 1,724         |   |  | 1,635               |  
|Intangible assets                      |  |               |   |  | 284           |   |  | (32,193       | ) |  | (31,909             | )
|                                       |  |               |   |  | 3,840         |   |  | (24,236       | ) |  | (20,396             | )

|                                              |  | Opening |   |  | Recognized in |   |  | Recognized in |   |  | Ending              |  
|--------------------------------------------- |  | ------- | - |  | ------------- | - |  | ------------- | - |  | ------------------- | -
|                                              |  | August  |   |  | Income        |   |  | Equity/OCI    |   |  | July
      31, 2018 |  
|                                              |  | $       |   |  | $             |   |  | $             |   |  | $                   |  
|Deferred tax assets                           |  | 813     |   |  |              |   |  | (813          | ) |  |                    |  
|Taxable temporary differences                 |  |        |   |  | (117          | ) |  |              |   |  | (117                | )
|Biological assets                             |  |        |   |  | (458          | ) |  |              |   |  | (458                | )
|Inventory                                     |  |        |   |  | (1,432        | ) |  |              |   |  | (1,432              | )
|Loss carryforward                             |  |        |   |  | 2,007         |   |  |              |   |  | 2,007               |  
|Revaluation of financial instruments - Equity |  | (813    | ) |  |              |   |  | 813           |   |  |                    |  
|                                              |  |        |   |  |              |   |  |              |   |  |                    |  

Deferred income taxes reflect the impact of loss carryforwards
and of temporary differences between amounts of assets and liabilities for
financial reporting purposes and such amounts as measured by tax laws. At July
31, 2019 deductible temporary differences and unused tax losses for which no
deferred tax assets have been recognized are attributable to the following:

|                                      |  | July 31, 2019 |  |  | July
      31, 2018 | 
|------------------------------------- |  | ------------- |  |  | ------------------- | 
|                                      |  | $             |  |  | $                   | 
|Losses carried forward                |  | 52,554        |  |  | 20,672              | 
|Research and development expenditures |  | 266           |  |  | 266                 | 
|Fixed Assets                          |  | 6,021         |  |  |                    | 
|Share issue costs                     |  | 10,089        |  |  | 13,352              | 
|                                      |  | 68,929        |  |  | 34,289              | 

41

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The Company has approximated non-capital losses available to
reduce future years' federal and provincial taxable income which expires as
follows:

$2031
    
    1182032
    
    5622033
    
    2812034
    
    1,4202035
    
    3,5102036
    
    6,0302037
    
    10,6692038
    
    33,3952039
    
    52,909108,510


30. Loss on Investment

During the fiscal year ended July 31, 2018, the Company
realized a loss on investment activities in the amount of $650. The Company
continues to take legal action to recover the loss.

31. Gross Revenue

|Year ended                                   |  | July 31, 2019 |  |  | July
      31, 2018 | 
|-------------------------------------------- |  | ------------- |  |  | ------------------- | 
|Gross Cannabis Revenue                       |  | $             |  |  | $                   | 
|Retail                                       |  | 53,590        |  |  |                    | 
|Medical                                      |  | 5,288         |  |  | 4,934               | 
|Wholesale                                    |  | 378           |  |  |                    | 
|Total gross
      revenue from sale of goods |  | 59,256        |  |  | 4,934               | 

Gross revenue is inclusive of sales returns and recoveries.
During the fiscal year ended July 31, 2019, the Company incurred $6,718 (July
31, 2018 - $Nil) of sales provisions.

32. Segmented Information

The Company operates in one operating segment. All property,
plant and equipment and intangible assets are located in Canada.

33. Subsequent
Events

Amalgamation of Subsidiaries

On August 1, 2019, the Company completed the amalgamation of
the subsidiaries 8980268 Canada Inc and Newstrike Brands Ltd into HEXO
Operations Inc. The resulting entity retained the name HEXO Corp.

Letter of Credit

On August 2, 2019, the Company amendedthe letter of credit
(Note 23) that was issued in favor of a public utility provider. The amount of
the letter was reduced to $2,581 from $3,142. This amended letter is secured
against the companys revolving loan and no longer secured by a GIC.

Increased Ownership in HEXO MED

On September 24, 2019, the Company increased its ownership in
its European based joint venture HEXO MED from 33.3% to 51% which an additional
capital injection of $729.

$70 Million Private Placement

On October 23, 2019, the Company announced it has entered into
subscription agreements with a group of investors pursuant to which the
investors have agreed to purchase, on a private placement basis, $70,001
principal amount of 8.0% unsecured debentures of the Company (the
Debentures).

The Debentures will bear interest from the date of closing at
8.0% per annum payable quarterly and will mature on the date which is three
years from issuance. Following the date, which is one year from issuance, the
Debentures will be convertible at the option of the holder into common shares of the Company at any time prior to
maturity at a conversion price of $3.16 per share (the Conversion Price),
subject to adjustment in certain events.

42

---

Beginning on the date which is one year from issuance, the
Company may force the conversion of all of the principal amount of the then
outstanding Debentures at the Conversion Price on not less than 30 days notice
should the daily volume weighted average trading price of the common shares of
the Company be greater than $7.50 for any 15 consecutive trading days.

At any time on or before the date which is one year from
issuance, the Company may repay all, but not less than all, of the principal
amount of the Debentures, plus accrued and unpaid interest.

Upon any repayment of the principal amount of the Debentures,
the Company shall have the right to satisfy the repayment of the principal
amount, together with all accrued and unpaid interest thereon, through the
conversion of such amounts into common shares of the Company at the Conversion
Price.

Upon a change of control of the Company, holders of the
Debentures will have the right to require the Company to repurchase their
Debentures, in whole or in part, on the date that is 30 days following the
giving of notice of the change of control, at a price equal to 115% of the
principal amount of the Convertible Debentures then outstanding plus accrued and
unpaid interest thereon (the Offer Price). If 90% or more of the principal
amount of the Convertible Debentures outstanding on the date of the notice of
the change of control have been tendered for redemption, the Company will have
the right to redeem all of the remaining Debentures at the Offer Price.

The Debentures and any common shares of the Company issuable
upon conversion thereof will be subject to a statutory hold period lasting four
months and one day following the closing date.

The Company intends to use the net proceeds of the private
placement for working capital and general corporate purposes.

Closing of the Offering is expected to occur on or about
November 15, 2019. The private placement is subject to certain conditions
including, but not limited to, the receipt of all necessary regulatory and stock
exchange approvals, including the approvals of the Toronto Stock Exchange and
the New York Stock Exchange.

43

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