Document:

EX-4.4

Table of Contents

 Exhibit 4.4 
  

 
  
 

 
 Condensed interim consolidated 

financial statements of HEXO Corp. 

(formerly The Hydropothecary Corporation) 

For the three months ended October 31, 2018 and 2017 

Table of Contents

 Table of Contents 

 

					
	 Condensed Interim Consolidated Statements of Financial
Position
	  	 	1	 
	 Condensed Interim Consolidated Statements of Loss and Comprehensive Loss

	  	 	2	 
	 Condensed Interim Consolidated Statements of Changes in Shareholders’
 Equity
	  	 	3	 
	 Condensed Interim Consolidated Statements of Cash Flows
	  	 	4	 
	 Notes to the Condensed Interim Consolidated Financial
Statements
	  	 	5-25	 

Table of Contents

 Condensed Interim Consolidated Statements of Financial Position 

(Unaudited, in Canadian dollars) 
  

													
	 As at
	  	Note	 	  	October 31, 2018	 	 	July 31, 2018	 
	 Assets
	  				  				 			
	 Current assets
	  				  				 			
	 Cash and cash equivalents
	  				  	$	23,278,012	 	 	$	39,341,688	 
	 Restricted cash
	  	 	4	 	  	 	5,000,000	 	 	 	—  	 
	 Short-term investments
	  	 	5	 	  	 	148,608,728	 	 	 	205,446,830	 
	 Trade receivables
	  	 	15	 	  	 	6,975,573	 	 	 	643,596	 
	 Commodity taxes recoverable
	  				  	 	4,387,193	 	 	 	4,237,465	 
	 Convertible debenture receivable
	  	 	13	 	  	 	13,648,593	 	 	 	10,000,000	 
	 Promissory note receivable
	  	 	17	 	  	 	20,333,702	 	 	 	—  	 
	 Prepaid expenses
	  				  	 	3,238,193	 	 	 	4,203,693	 
	 Inventory
	  	 	6	 	  	 	16,240,283	 	 	 	10,414,624	 
	 Biological assets
	  	 	7	 	  	 	2,640,808	 	 	 	2,331,959	 
		  				  	  
	  
	 	 	  
	  
	 
		  				  	$	244,351,085	 	 	$	276,619,855	 
		  				  	  
	  
	 	 	  
	  
	 
	 Property, plant and equipment
	  	 	8	 	  	 	85,266,400	 	 	 	54,333,051	 
	 Intangible assets and other longer term assets
	  	 	9	 	  	 	4,428,471	 	 	 	4,044,527	 
	 Investment in joint ventures
	  	 	17	 	  	 	49,259,827	 	 	 	—  	 
		  				  	  
	  
	 	 	  
	  
	 
		  				  	$	383,305,783	 	 	$	334,997,433	 
		  				  	  
	  
	 	 	  
	  
	 
	 Liabilities
	  				  				 			
	 Current liabilities
	  				  				 			
	 Accounts payable and accrued liabilities
	  				  	$	14,632,644	 	 	$	8,994,789	 
	 Warrant liability
	  	 	10, 11	 	  	 	2,805,221	 	 	 	3,129,769	 
		  				  	  
	  
	 	 	  
	  
	 
		  				  	$	17,437,865	 	 	$	12,124,558	 
		  				  	  
	  
	 	 	  
	  
	 
	 Shareholders’ equity
	  				  				 			
	 Share capital
	  	 	11	 	  	 	357,402,419	 	 	 	347,232,724	 
	 Share-based payment reserve
	  	 	11	 	  	 	10,675,375	 	 	 	6,139,179	 
	 Warrants
	  	 	11	 	  	 	53,727,767	 	 	 	12,635,339	 
	 Deficit
	  				  	 	(55,937,643	) 	 	 	(43,134,367	) 
		  				  	  
	  
	 	 	  
	  
	 
		  				  	$	365,867,918	 	 	$	322,872,875	 
		  				  	  
	  
	 	 	  
	  
	 
		  				  	$	383,305,783	 	 	$	334,997,433	 
		  				  	  
	  
	 	 	  
	  
	 

 Commitments and contingencies (Note 20) 

Subsequent events (Note 24) 
 Approved by the Board 

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

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

  
  

1 

Table of Contents

 Condensed Interim Consolidated Statements of Loss and Comprehensive Loss

 (Unaudited, in Canadian dollars) 
  

													
	 For the three months ended
	  	Note	 	  	October 31, 2018	 	 	October 31, 2017	 
	 Gross revenue from sale of goods
	  				  	$	6,630,001	 	 	$	1,101,502	 
	 Excise taxes
	  				  	 	(1,014,478	) 	 	 	—  	 
		  				  	  
	  
	 	 	  
	  
	 
	 Net revenue from sale of goods
	  				  	 	5,615,523	 	 	 	1,101,502	 
	 Ancillary revenue
	  	 	22	 	  	 	47,370	 	 	 	—  	 
		  				  	  
	  
	 	 	  
	  
	 
	 Net revenue
	  				  	 	5,662,893	 	 	 	1,101,502	 
	 Cost of goods sold
	  	 	6, 11	 	  	 	2,830,764	 	 	 	463,000	 
		  				  	  
	  
	 	 	  
	  
	 
	 Gross margin before fair value adjustments
	  				  	 	2,832,129	 	 	 	638,502	 
	 Fair value adjustment on sale of inventory
	  	 	6	 	  	 	717,489	 	 	 	814,499	 
	 Fair value adjustment on biological assets
	  	 	7	 	  	 	(5,122,845	) 	 	 	(2,639,257	) 
		  				  	  
	  
	 	 	  
	  
	 
	 Gross margin
	  				  	$	7,237,485	 	 	$	2,463,260	 
		  				  	  
	  
	 	 	  
	  
	 
	 Operating Expenses
	  				  				 			
	 General and administrative
	  				  	 	4,911,627	 	 	 	1,167,929	 
	 Marketing and promotion
	  				  	 	11,710,941	 	 	 	1,114,584	 
	 Stock-based compensation
	  	 	11, 16	 	  	 	4,689,303	 	 	 	313,539	 
	 Amortization of property, plant and equipment
	  	 	8	 	  	 	573,398	 	 	 	124,112	 
	 Amortization of intangible assets
	  	 	9	 	  	 	149,536	 	 	 	62,810	 
	 Research and development
	  				  	 	—  	 	 	 	61,400	 
		  				  	  
	  
	 	 	  
	  
	 
		  	 	16	 	  	$	22,034,805	 	 	$	2,844,374	 
		  				  	  
	  
	 	 	  
	  
	 
	 Loss from operations
	  				  	 	(14,797,320	) 	 	 	(381,114	) 
	 Revaluation of financial instruments loss
	  	 	10	 	  	 	(2,336,730	) 	 	 	(1,282,436	) 
	 Share of loss from investment in joint venture
	  	 	17	 	  	 	(161,104	) 	 	 	—  	 
	 Unrealized gain on convertible debenture receivable
	  	 	13	 	  	 	3,433,798	 	 	 	—  	 
	 Foreign exchange gain/(loss)
	  				  	 	(14	) 	 	 	84,992	 
	 Interest expense
	  	 	10	 	  	 	(7,934	) 	 	 	(432,908	) 
	 Interest income
	  	 	5, 13, 17	 	  	 	1,066,028	 	 	 	93,264	 
		  				  	  
	  
	 	 	  
	  
	 
	 Net loss and comprehensive loss attributable to shareholders
	  				  	$	(12,803,276	) 	 	$	(1,918,202	) 
		  				  	  
	  
	 	 	  
	  
	 
	 Net loss per share, basic and diluted
	  				  	$	(0.07	) 	 	$	(0.03	) 
		  				  	  
	  
	 	 	  
	  
	 
	 Weighted average number of outstanding shares
	  				  				 			
	 Basic and diluted
	  	 	12	 	  	 	194,033,380	 	 	 	76,480,085	 
		  				  	  
	  
	 	 	  
	  
	 

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

  
  

2 

Table of Contents

 Condensed Interim Consolidated Statements of Changes in Shareholders’
Equity 
 (Unaudited, in Canadian dollars) 
  

																																	
	 For the three months ended

October 31, 2018 and 2017
	  	Note	 	  	Number
common shares	 	  	Share capital	 	  	Share-based
payment
reserve	 	 	Warrants	 	 	Contributed
surplus	 	  	Deficit	 	 	Shareholders’
equity	 
	 Balance, August 1, 2018
	  				  	 	193,629,116	 	  	$	 347,232,724	 	  	$	 6,139,179	 	 	$	 12,635,339	 	 	$	 —  	 	  	$	(43,134,367	) 	 	$	 322,872,875	 
	 Issuance of warrants
	  	 	11	 	  	 	—  	 	  	 	—  	 	  	 	—  	 	 	 	42,386,162	 	 	 	—  	 	  	 	—  	 	 	 	42,386,162	 
	 Exercise of stock options
	  	 	11	 	  	 	621,729	 	  	 	626,167	 	  	 	(263,716	) 	 	 	—  	 	 				  	 	—  	 	 	 	362,451	 
	 Exercise of warrants
	  	 	10, 11	 	  	 	1,937,885	 	  	 	4,806,904	 	  	 	—  	 	 	 	(991,722	) 	 	 	—  	 	  	 	—  	 	 	 	3,815,182	 
	 Exercise of Broker/Finder warrants
	  	 	11	 	  	 	1,199,861	 	  	 	4,736,624	 	  	 	—  	 	 	 	(302,012	) 	 	 	—  	 	  	 	—  	 	 	 	4,434,612	 
	 Stock-based compensation
	  	 	11	 	  	 	—  	 	  	 	—  	 	  	 	4,799,912	 	 	 	—  	 	 	 	—  	 	  	 	—  	 	 	 	4,799,912	 
	 Net loss
	  				  	 	—  	 	  	 	—  	 	  	 	—  	 	 	 	—  	 	 	 	—  	 	  	 	(12,803,276	) 	 	 	(12,803,276	) 
		  				  	  
	  
	 	  	  
	  
	 	  	  
	  
	 	 	  
	  
	 	 	  
	  
	 	  	  
	  
	 	 	  
	  
	 
	 Balance at October 31, 2018
	  				  	 	197,388,591	 	  	$	 357,402,419	 	  	$	 10,675,375	 	 	$	 53,727,767	 	 	$	 —  	 	  	$	 (55,937,643	) 	 	$	 365,867,918	 
		  				  	  
	  
	 	  	  
	  
	 	  	  
	  
	 	 	  
	  
	 	 	  
	  
	 	  	  
	  
	 	 	  
	  
	 
	 Balance, August 1, 2017
	  				  	 	76,192,990	 	  	 	45,159,336	 	  	 	1,561,587	 	 	 	3,728,255	 	 	 	1,774,880	 	  	 	(19,784,568	) 	 	 	32,439,490	 
	 Exercise of warrants
	  	 	10, 11	 	  	 	481,896	 	  	 	625,788	 	  	 	—  	 	 	 	(32,594	) 	 	 	—  	 	  	 	—  	 	 	 	593,194	 
	 Stock-based compensation
	  	 	11	 	  	 	—  	 	  	 	—  	 	  	 	313,539	 	 	 	—  	 	 	 	—  	 	  	 	—  	 	 	 	313,539	 
	 Net loss
	  				  	 	—  	 	  	 	—  	 	  	 	—  	 	 	 	—  	 	 	 	—  	 	  	 	(1,918,202	) 	 	 	(1,918,202	) 
		  				  	  
	  
	 	  	  
	  
	 	  	  
	  
	 	 	  
	  
	 	 	  
	  
	 	  	  
	  
	 	 	  
	  
	 
	 Balance at October 31, 2017
	  				  	 	76,674,886	 	  	$	 45,785,124	 	  	$	 1,875,126	 	 	$	 3,695,661	 	 	$	 1,774,880	 	  	$	 (21,702,770	) 	 	$	 31,428,021	 
		  				  	  
	  
	 	  	  
	  
	 	  	  
	  
	 	 	  
	  
	 	 	  
	  
	 	  	  
	  
	 	 	  
	  
	 

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

  
  

3 

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 Condensed Interim Consolidated Statements of Cash Flows 

(Unaudited, in Canadian dollars) 
  

											
	 For the three months ended
	  	Note	  	October 31, 2018	 	 	October 31, 2017	 
	 Operating activities
	  		  				 			
	 Net loss and comprehensive loss
	  		  	$	(12,803,276	) 	 	$	(1,918,202	) 
	 Items not affecting cash
	  		  				 			
	 Amortization of property, plant and equipment
	  	8	  	 	929,596	 	 	 	124,112	 
	 Amortization of intangible assets
	  	9	  	 	149,536	 	 	 	62,810	 
	 Unrealized revaluation gain on convertible debenture
	  	13	  	 	(3,433,798	) 	 	 	—  	 
	 Unrealized revaluation gain on biological assets
	  	7	  	 	(5,122,845	) 	 	 	(2,827,285	) 
	 Accrued interest income
	  	13	  	 	(214,795	) 	 	 	—  	 
	 Share of loss on investment
	  	17	  	 	161,104	 	 	 	—  	 
	 Fair value adjustment on inventory sold
	  	6	  	 	717,489	 	 	 	—  	 
	 Stock-based compensation
	  	11,16	  	 	4,799,912	 	 	 	313,539	 
	 Accretion of convertible debt
	  	10	  	 	—  	 	 	 	493,981	 
	 Revaluation of foreign currency denominated warrants
	  	10	  	 	2,336,730	 	 	 	1,282,436	 
	 Liability value of foreign currency denominated warrants exercised
	  	10	  	 	(2,661,304	) 	 	 	—  	 
	 Changes in non-cash operating working capital
items
	  		  				 			
	 Trade receivables
	  		  	 	(6,331,977	) 	 	 	55,470	 
	 Commodity taxes recoverable
	  		  	 	(149,728	) 	 	 	(192,082	) 
	 Prepaid expenses
	  		  	 	965,500	 	 	 	(62,502	) 
	 Inventory
	  	6	  	 	(1,729,152	) 	 	 	563,422	 
	 Accounts payable and accrued liabilities
	  		  	 	(713,736	) 	 	 	428,341	 
	 Warrant liability
	  		  	 	(324,548	) 	 	 	—  	 
	 Interest payable
	  	10	  	 	—  	 	 	 	502,000	 
		  		  	  
	  
	 	 	  
	  
	 
	 Cash and cash equivalents used in operating activities
	  		  	 	(23,425,292	) 	 	 	(1,173,960	) 
		  		  	  
	  
	 	 	  
	  
	 
	 Financing activities
	  		  				 			
	 Exercise of stock options
	  	11	  	 	362,451	 	 	 	—  	 
	 Exercise of warrants
	  	11	  	 	8,249,798	 	 	 	405,778	 
		  		  	  
	  
	 	 	  
	  
	 
	 Cash provided by financing activities
	  		  	 	8,612,249	 	 	 	405,778	 
		  		  	  
	  
	 	 	  
	  
	 
	 Investing activities
	  		  				 			
	 Disposal of short-term investments
	  	5	  	 	56,838,102	 	 	 	(30,639,563	) 
	 Issuance of promissory note receivable
	  	17	  	 	(20,333,702	) 	 	 	—  	 
	 Restricted cash
	  	4	  	 	(5,000,000	) 	 	 	—  	 
	 Acquisition of property, plant and equipment
	  	8	  	 	(25,341,028	) 	 	 	(5,242,818	) 
	 Purchase of intangible assets
	  	9	  	 	(379,236	) 	 	 	(58,454	) 
	 Investment in joint ventures
	  	17	  	 	(7,034,769	) 	 	 	—  	 
		  		  	  
	  
	 	 	  
	  
	 
	 Cash used in investing activities
	  		  	 	(1,250,633	) 	 	 	(35,940,835	) 
		  		  	  
	  
	 	 	  
	  
	 
	 Decrease in cash and cash equivalents
	  		  	 	(16,063,676	) 	 	 	(36,709,017	) 
	 Cash and cash equivalents, beginning of year
	  		  	 	39,341,688	 	 	 	38,452,823	 
		  		  	  
	  
	 	 	  
	  
	 
	 Cash and cash equivalents, end of year
	  		  	$	23,278,012	 	 	$	1,743,806	 
		  		  	  
	  
	 	 	  
	  
	 

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

  
  

4 

Table of Contents

 Notes to the Condensed Interim Consolidated Financial Statements 

For the three months ended October 31, 2018 and 2017 

(Unaudited, in Canadian dollars) 
 1. Description of
Business 
 HEXO Corp. (formerly The Hydropothecary Corporation), formerly BFK Capital Corp. (the “Company”), has one wholly-owned subsidiary,
HEXO Operations Inc. (formerly 10074241 Canada Inc. and 167151 Canada Inc.) (“HOI”). HOI has two wholly-owned subsidiaries: Banta Health Group and Coral Health Group (together “HEXO”). HEXO is a producer of cannabis and its
site is licensed by Health Canada for production and sale. Its head office is located at 240-490 Boulevard Sainte-Joseph, Gatineau, Quebec, Canada. The Company is a publicly traded corporation, incorporated in
Ontario. The Company’s common shares are listed on the Toronto Stock Exchange (“TSX”), under the trading symbol “HEXO”. 

The Company was incorporated under the name BFK Capital Corp. by articles of incorporation pursuant to the provisions of the Business Corporations Act
(Ontario) on October 29, 2013, and after completing its initial public offering of shares on the TSX-V on November 17, 2014, it was classified as a Capital Pool Corporation as defined in policy
2.4 of the TSX-V. The principal business of the Company at that time was to identify and evaluate businesses or assets with a view to completing a qualifying transaction (a “Qualifying
Transaction”) under relevant policies of the TSX-V. The Company had one wholly-owned subsidiary, HOI, which was incorporated with the sole purpose of facilitating a future Qualifying Transaction. 

On March 15, 2017, the Company completed its Qualifying Transaction which was effective pursuant to an agreement between the Company and the legacy
entity, The Hydropothecary Corporation (“Hydropothecary”). As part of the Qualifying Transaction, the Company changed its name to The Hydropothecary Corporation and consolidated its 2,756,655 shares on a 1.5 to 1 basis to
1,837,770. Following this change, Hydropothecary amalgamated with 10100170 Canada Inc., which resulted in the creation of a new entity, 10074241 Canada Inc. (HOI). In connection with that amalgamation, HEXO acquired all of the issued and
outstanding shares of the Company and the former shareholders of Hydropothecary received a total of 68,428,824 post-consolidation common shares. Immediately following closing, the Company had a total 70,266,594 common shares outstanding. 

Upon closing of the transaction, the shareholders of Hydropothecary owned 97.4% of the common shares of the Company and as a result, the transaction was
considered a reverse acquisition of the Company by Hydropothecary. For accounting purposes Hydropothecary was considered the acquirer and the Company was considered the acquiree. Accordingly, the annual consolidated financial statements are in the
name of HEXO Corp. (formerly BFK Capital Corp.); however, they are a continuation of the financial statements of Hydropothecary. 
 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 
 These condensed interim
consolidated financial statements have been prepared in compliance with International Accounting Standard 34, Interim Financial Reporting (“IAS 34”). These condensed interim consolidated financial statements should be read in conjunction
with the annual consolidated financial statements of the Company for the fiscal year ended July 31, 2017, which have been prepared in accordance with International Financial Reporting Standards (“IFRS”). 

These condensed interim consolidated financial statements were approved and authorized for issue by the Board of Directors on December 12, 2018. 

Basis of Measurement and Consolidation 
 The condensed
interim 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 debenture receivable, 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. They include its wholly-owned subsidiary, HOI (formerly 10074241 Canada Inc and 167151 Canada
Inc.). They also include Banta Health Group and Coral Health Group, two wholly-owned subsidiaries of HEXO Operations Inc. They also include the accounts of 8980268 Canada Inc., a company for which HOI holds a right to acquire the outstanding shares
at any time for a nominal amount. All subsidiaries are located in Canada. 
 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. 

  
  

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 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 condensed interim 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 payment and 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. 

SIGNIFICANT ACCOUNTING JUDGEMENTS, ESTIMATES AND ASSUMPTIONS 

The preparation of these condensed interim consolidated financial statements requires the use of certain critical accounting estimates, which requires
management to exercise judgement in applying the Company’s accounting policies. The areas involving a higher degree of judgement or complexity, or areas where assumptions and estimates are significant to these condensed interim consolidated
financial statements have been set out in Note 3 of the audited consolidated financial statements for the year ended July 31, 2018, with the exception of the new areas of significant judgements, estimates and assumptions presented below. 

(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 17 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 annual consolidated financial statements are presented in Canadian dollars, the functional currency of the Company and its
subsidiaries. 
 3. Changes to Policies and Accounting Standards and Interpretations 

Change in Accounting Policies 
 Effective August 1,
2018, the Company changed its accounting policy with respect to the capitalization of indirect costs related to biological assets and inventory within the biological transformation and harvesting process. The Company now capitalizes
production related depreciation and amortization, overhead and stock-based compensation to the costs of goods sold as inventory is sold. The Company’s voluntary change in accounting policy was applied retrospectively and resulted in an
insignificant impact to the comparative period. 
 The Company’s amended policies are as follows: 

(a) 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. 

  
  

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 (b) 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 before depreciation. 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. 
 New IFRS Effective
August 1, 2018 
 IFRS 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. 

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. 

  
  

7 

Table of Contents

 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
	 Promissory note receivable
	  	Loans and receivables	  	Amortized cost
	 Financial liabilities
	  		  	
	 Accounts payable and accrued liabilities
	  	Other financial liabilities	  	Amortized cost
	 Warrant liability
	  	FVTPL	  	FVTPL

 The adoption of IFRS 9 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. The adoption of the new expected credit loss impairment model had a negligible impact on the carrying amounts of financial
assets at amortized cost. 
 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 
 IFRS 16 was issued by the IASB in January
2016, and specifies the requirements to recognize, measure, present and disclose leases. IFRS 16 is effective for annual periods beginning on or after January 1, 2019, with early adoption permitted. The Company is assessing the impact of the
new or revised IFRS standard in issue but not yet effective on its condensed interim consolidated financial statements. 
 4. Restricted Cash 

As at October 31, 2018, the Company had $5,000,000 of restricted funds placed in escrow to facilitate a purchase agreement with a vendor. The purchase
agreement shall be amortized on a pro-rata basis based upon delivery milestones over the five months period ended March 31, 2019. 

  
  

8 

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 5. Short-Term Investments 

Short-term investments consist of in various guaranteed investment certificates, term deposits, and fixed income securities that mature on dates between
January 27, 2019 and June 21, 2019 with annual interest rates ranging from 0.45% to 1.85%. 
 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 Company intends to hold the high interest savings funds for a
period greater than 3 months. Short term investments contain restricted funds of $3,117,000 due to a held letter of credit (see note 20). 
  

													
	 	  	 	  	 	  	October 31, 2018	 	  	July 31, 2018	 
	 	  	Interest rate	  	Maturity date	  	Total	 	  	Total	 
	 Guaranteed investment certificates
	  	0.45%–0.50%	  	January 27, 2019 to June 21, 2019	  	$	1,314	 	  	$	712,284	 
	 Term deposits
	  	1.2%–1.75%	  	To desired term	  	 	3,163,886	 	  	 	49,483,945	 
	 High interest savings accounts
	  	1.4%–1.85%	  	April 26, 2019 to desired term	  	 	145,443,528	 	  	 	155,250,602	 
		  		  		  	  
	  
	 	  	  
	  
	 
		  		  		  	$	148,608,728	 	  	$	205,446,830	 
		  		  		  	  
	  
	 	  	  
	  
	 

 6. Inventory 
  

													
	 	  	October 31, 2018	 
	 	  	Capitalized
cost	 	  	Biological asset
fair value
adjustment	 	  	Total	 
	 Dried cannabis
	  	$	5,195,138	 	  	$	7,493,389	 	  	$	12,688,527	 
	 Oils
	  	 	1,871,507	 	  	 	703,282	 	  	 	2,574,789	 
	 Packaging and supplies
	  	 	976,967	 	  	 	—  	 	  	 	976,967	 
		  	  
	  
	 	  	  
	  
	 	  	  
	  
	 
		  	$	8,043,612	 	  	$	8,196,671	 	  	$	16,240,283	 
		  	  
	  
	 	  	  
	  
	 	  	  
	  
	 

 The inventory expensed to cost of goods sold in the three months ended October 31, 2018, was $2,830,764 (October 31, 2017
– $1,040,099). 
  

													
	 	  	July 31, 2018	 
	 	  	Capitalized
cost	 	  	Biological asset
fair value
adjustment	 	  	Total	 
	 Dried cannabis
	  	$	2,115,464	 	  	$	4,440,195	 	  	$	6,555,659	 
	 Oils
	  	 	2,280,780	 	  	 	881,432	 	  	 	3,162,212	 
	 Packaging and supplies
	  	 	696,753	 	  	 	—  	 	  	 	696,753	 
		  	  
	  
	 	  	  
	  
	 	  	  
	  
	 
		  	$	5,092,997	 	  	$	5,321,627	 	  	$	10,414,624	 
		  	  
	  
	 	  	  
	  
	 	  	  
	  
	 

 7. 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: 

 

									
	 	  	October 31, 2018	 	  	July 31, 2018	 
	 Carrying amount, beginning of period
	  	$	2,331,959	 	  	$	1,504,186	 
	 Production costs capitalized
	  	 	1,536,852	 	  	 	993,469	 
	 Net increase in fair value due to biological transformation less cost to sell
	  	 	5,122,845	 	  	 	7,339,566	 
	 Transferred to inventory upon harvest
	  	 	(6,350,848	) 	  	 	(7,505,262	) 
		  	  
	  
	 	  	  
	  
	 
	 Carrying amount, end of period
	  	$	2,640,808	 	  	$	2,331,959	 
		  	  
	  
	 	  	  
	  
	 

  
  

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 As at October 31, 2018, the fair value of biological assets included $6,200 in seeds and $2,634,608 in
cannabis plants ($6,200 in seeds and $2,325,759 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 (Note 2). As
at October 31, 2018, it is expected that the Company’s biological assets will yield approximately 4,846,294 grams of cannabis (July 31, 2018 – 4,373,775 grams 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 plant’s life relative to the stages within the harvest cycle. 

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

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

 

					
	 Unobservable inputs
	  	 Input values
	  	 Sensitivity analysis

			
	 Average selling price
 Obtained through
actual retail prices on a per strain basis.
	  	$5.00 per dried gram.	  	An increase or decrease of 5% applied to the average selling price would result in a change of approximately $131,700 to the valuation.
			
	 Yield per plant
 Obtained through
historical harvest cycle results on a per strain basis.
	  	54–235 grams per plant.	  	An increase or decrease of 5% applied to the average yield per plant would result in a change up to approximately $373,100 in valuation.
			
	 Stage of growth
 Obtained through the
estimates of stage of completion within the harvest cycle.
	  	Average of 38% completion.	  	An increase or decrease of 5% applied to the average stage of growth per plant would result in a change of approximately $325,100 in valuation.
			
	 Wastage
 Obtained through the estimates
of wastage within the cultivation and production cycle.
	  	0%–30% dependent upon the stage within the harvest cycle.	  	An increase or decrease of 5% applied to the wastage expectation would result in a change of approximately $134,400 in valuation.

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

 

					
	 Unobservable inputs
	  	 Input values
	  	 Sensitivity analysis

			
	 Average selling price
 Obtained through
actual retail prices on a per strain basis.
	  	$4.66 per dried gram.	  	An increase or decrease of 5% applied to the average selling price would result in a change of approximately $329,000 to the valuation.
			
	 Yield per plant
 Obtained through
historical harvest cycle results on a per strain basis.
	  	50–235 grams per plant.	  	An increase of decrease of 5% applied to the average yield per plant would not result in a material change in valuation.
			
	 Stage of growth
 Obtained through the
estimates of stage of completion within the harvest cycle.
	  	Average of 32% completion.	  	An increase or decrease of 5% applied to the average stage of growth per plant would result in a change of approximately $320,000 in valuation.
			
	 Wastage
 Obtained through the estimates
of wastage within the cultivation and production cycle.
	  	0%–30% dependent upon the stage within the harvest cycle.	  	An increase of decrease of 5% applied to the average yield per plant would not result in a material change in valuation.

  
  

10 

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 8. Property, Plant and Equipment 

 

																	
	 Cost
	  	Balance at
July 31, 2018	 	  	Additions	 	  	Adjustments	 	  	Balance at
October 31, 2018	 
	 Land
	  	$	1,038,720	 	  	$	—  	 	  	$
 	—
  	
	  	$	1,038,720	 
	 Buildings
	  	 	32,535,728	 	  	 	3,352,494	 	  	 	—  	 	  	 	35,888,222	 
	 Leasehold Improvements
	  	 	205,456	 	  	 	221,251	 	  	 	—  	 	  	 	426,707	 
	 Furniture and equipment
	  	 	1,660,688	 	  	 	581,049	 	  	 	—  	 	  	 	2,241,737	 
	 Cultivation and production equipment
	  	 	4,031,629	 	  	 	1,596,017	 	  	 	—  	 	  	 	5,627,646	 
	 Vehicles
	  	 	151,251	 	  	 	31,082	 	  	 	—  	 	  	 	182,333	 
	 Computers
	  	 	658,802	 	  	 	146,361	 	  	 	—  	 	  	 	805,163	 
	 Construction in progress
	  	 	15,432,973	 	  	 	25,945,046	 	  	 	—  	 	  	 	41,378,019	 
		  	  
	  
	 	  	  
	  
	 	  	  
	  
	 	  	  
	  
	 
		  	$	55,715,247	 	  	$	31,873,300	 	  	$	—  	 	  	$	87,588,547	 
		  	  
	  
	 	  	  
	  
	 	  	  
	  
	 	  	  
	  
	 
					
	 Accumulated amortization
	  	Balance at
July 31, 2018	 	  	Amortization	 	  	Adjustments	 	  	Balance at
October 31, 2018	 
	 Land
	  	$	—  	 	  	$	—  	 	  	$	—  	 	  	$	—  	 
	 Buildings
	  	 	533,180	 	  	 	462,165	 	  	 	—  	 	  	 	995,345	 
	 Leasehold Improvements
	  	 	8,313	 	  	 	32,905	 	  	 	—  	 	  	 	41,218	 
	 Furniture and equipment
	  	 	527,556	 	  	 	101,214	 	  	 	—  	 	  	 	628,770	 
	 Cultivation and production equipment
	  	 	68,759	 	  	 	272,126	 	  	 	—  	 	  	 	340,885	 
	 Vehicles
	  	 	55,792	 	  	 	8,340	 	  	 	—  	 	  	 	64,132	 
	 Computers
	  	 	188,596	 	  	 	63,201	 	  	 	—  	 	  	 	251,797	 
		  	  
	  
	 	  	  
	  
	 	  	  
	  
	 	  	  
	  
	 
		  	$	1,382,196	 	  	$	939,951	 	  	$	—  	 	  	$	2,322,147	 
		  	  
	  
	 	  	  
	  
	 	  	  
	  
	 	  	  
	  
	 
	 Net carrying value
	  	$	54,333,051	 	  				  				  	$	85,266,400	 
		  	  
	  
	 	  				  				  	  
	  
	 

 As at October 31, 2018, there was $6,165,719 (July 31, 2018 – $3,920,069) of property, plant and equipment in
accounts payable and accrued liabilities. During the three months ended October 31, 2018, the Company capitalized $366,553 of amortization to inventory. During the three months ended October 31, 2018, the Company capitalized borrowing
costs to buildings in the amount of $Nil (July 31, 2018 – $993,611). 
 Adjustments reflect the activation of an asset’s useful life,
transitioning from construction in progress to the appropriate property, plant and equipment classification. Adjustments as well, consist of re-classifications. 

  
  

11 

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	 Cost
	  	Balance at
July 31, 2017	 	  	Additions	 	  	Adjustments	 	  	Balance at
July 31, 2018	 
	 Land
	  	$	358,405	 	  	$	680,315	 	  	$	—  	 	  	$	1,038,720	 
	 Buildings
	  	 	3,744,759	 	  	 	3,930,217	 	  	 	24,860,752	 	  	 	32,535,728	 
	 Leasehold Improvements
	  	 	—  	 	  	 	205,456	 	  	 	—  	 	  	 	205,456	 
	 Furniture and equipment
	  	 	900,395	 	  	 	1,232,613	 	  	 	(472,320	) 	  	 	1,660,688	 
	 Cultivation and production equipment
	  	 	379,992	 	  	 	3,165,199	 	  	 	486,438	 	  	 	4,031,629	 
	 Vehicles
	  	 	113,926	 	  	 	32,900	 	  	 	4,425	 	  	 	151,251	 
	 Computers
	  	 	233,685	 	  	 	425,117	 	  	 	—  	 	  	 	658,802	 
	 Construction in progress
	  	 	605,015	 	  	 	39,707,253	 	  	 	(24,879,295	) 	  	 	15,432,973	 
		  	  
	  
	 	  	  
	  
	 	  	  
	  
	 	  	  
	  
	 
		  	$	6,336,177	 	  	$	49,379,070	 	  	$	—  	 	  	$	55,715,247	 
		  	  
	  
	 	  	  
	  
	 	  	  
	  
	 	  	  
	  
	 
					
	 Accumulated amortization
	  	Balance at
July 31, 2017	 	  	Amortization	 	  	Adjustments	 	  	Balance at
July 31, 2018	 
	 Land
	  	$	—  	 	  	$	—  	 	  	$	—  	 	  	$	—  	 
	 Buildings
	  	 	194,187	 	  	 	338,993	 	  	 	—  	 	  	 	533,180	 
	 Leasehold Improvements
	  	 	—  	 	  	 	8,313	 	  	 	—  	 	  	 	8,313	 
	 Furniture and equipment
	  	 	165,086	 	  	 	195,086	 	  	 	167,384	 	  	 	527,556	 
	 Cultivation and production equipment
	  	 	23,068	 	  	 	213,075	 	  	 	(167,384	) 	  	 	68,759	 
	 Vehicles
	  	 	25,589	 	  	 	30,203	 	  	 	—  	 	  	 	55,792	 
	 Computers
	  	 	78,552	 	  	 	110,044	 	  	 	—  	 	  	 	188,596	 
		  	  
	  
	 	  	  
	  
	 	  	  
	  
	 	  	  
	  
	 
		  	$	486,482	 	  	$	895,714	 	  	$	—  	 	  	$	1,382,196	 
		  	  
	  
	 	  	  
	  
	 	  	  
	  
	 	  	  
	  
	 
	 Net carrying value
	  	$	5,849,695	 	  				  				  	$	54,333,051	 
		  	  
	  
	 	  				  				  	  
	  
	 

 9. Intangible Assets and Other Longer Term Assets 

 

																	
	 Cost
	  	Balance at
July 31, 2018	 	  	Additions	 	  	Adjustments	 	  	Balance at
October 31, 2018	 
	 ACMPR License
	  	$	2,544,696	 	  	$	—  	 	  	$	—  	 	  	$	2,544,696	 
	 Software
	  	 	1,800,139	 	  	 	567,414	 	  	 	—  	 	  	 	2,367,553	 
	 Domain names
	  	 	585,283	 	  	 	—  	 	  	 	—  	 	  	 	585,283	 
	 Patents
	  	 	—  	 	  	 	177,892	 	  	 	—  	 	  	 	177,892	 
	 Investments held at cost
	  	 	100,000	 	  	 	—  	 	  	 	—  	 	  	 	100,000	 
	 Capitalized transaction costs
	  	 	211,826	 	  	 	—  	 	  	 	(211,826	) 	  	 	—  	 
		  	  
	  
	 	  	  
	  
	 	  	  
	  
	 	  	  
	  
	 
		  	$	5,241,944	 	  	$	745,306	 	  	$	(211,826	) 	  	$	5,775,424	 
		  	  
	  
	 	  	  
	  
	 	  	  
	  
	 	  	  
	  
	 
					
	 Accumulated amortization
	  	Balance at
July 31, 2018	 	  	Amortization	 	  	Adjustments	 	  	Balance at
October 31, 2018	 
	 ACMPR License
	  	$	403,090	 	  	$	31,629	 	  	$	—  	 	  	$	434,719	 
	 Software
	  	 	784,572	 	  	 	105,714	 	  	 	—  	 	  	 	890,286	 
	 Domain name
	  	 	9,755	 	  	 	12,193	 	  	 	—  	 	  	 	21,948	 
		  	  
	  
	 	  	  
	  
	 	  	  
	  
	 	  	  
	  
	 
		  	$	1,197,417	 	  	$	149,536	 	  	$	—  	 	  	$	1,346,953	 
		  	  
	  
	 	  	  
	  
	 	  	  
	  
	 	  	  
	  
	 
	 Net carrying value
	  	$	4,044,527	 	  				  				  	$	4,428,471	 
		  	  
	  
	 	  				  				  	  
	  
	 

 Software includes $690,350 and $392,456 relating to an enterprise resource planning software and an online sales platform,
respectively (October 31, 2017—$180,186 and $Nil, respectively). Both assets are not yet available for use. Accordingly, no amortization has been taken during the three months ended October 31, 2018. As at October 31, 2018, there was
$154,244 (July 31, 2018 – $265,757) of intangible assets in accounts payable and accrued liabilities. The adjustment represents capitalized transaction costs being allocated to the joint venture Truss (Note 17). 

  
  

12 

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	 Cost
	  	Balance at
July 31, 2017	 	  	Additions	 	  	Disposals/
adjustments	 	  	Balance at
July 31, 2018	 
	 ACMPR License
	  	$	2,544,696	 	  	$	—  	 	  	$	—  	 	  	$	2,544,696	 
	 Software
	  	 	651,247	 	  	 	1,148,892	 	  	 	—  	 	  	 	1,800,139	 
	 Domain names
	  	 	—  	 	  	 	585,283	 	  	 	—  	 	  	 	585,283	 
	 Investments held at cost
	  	 	—  	 	  	 	100,000	 	  	 	—  	 	  	 	100,000	 
	 Capitalized transaction costs
	  	 	—  	 	  	 	211,826	 	  	 	—  	 	  	 	211,826	 
		  	  
	  
	 	  	  
	  
	 	  	  
	  
	 	  	  
	  
	 
		  	$	3,195,943	 	  	$	2,046,001	 	  	$
 	—
  	
	  	$	5,241,944	 
		  	  
	  
	 	  	  
	  
	 	  	  
	  
	 	  	  
	  
	 
					
	 Accumulated amortization
	  	Balance at
July 31, 2017	 	  	Amortization	 	  	Disposals/
adjustments	 	  	Balance at
July 31, 2018	 
	 ACMPR License
	  	$	276,909	 	  	$	126,181	 	  	$	—  	 	  	$	403,090	 
	 Software
	  	 	155,270	 	  	 	629,302	 	  	 	—  	 	  	 	784,572	 
	 Domain name
	  	 	—  	 	  	 	9,755	 	  	 	—  	 	  	 	9,755	 
		  	  
	  
	 	  	  
	  
	 	  	  
	  
	 	  	  
	  
	 
		  	$	432,179	 	  	$	765,238	 	  	$	—  	 	  	$	1,197,417	 
		  	  
	  
	 	  	  
	  
	 	  	  
	  
	 	  	  
	  
	 
	 Net carrying value
	  	$	2,763,764	 	  				  				  	$	4,044,527	 
		  	  
	  
	 	  				  				  	  
	  
	 

 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
	  	$	(87,478	) 	  	$	(119,136	) 	  	$	(99,874	) 	  	$	(2,765	) 	  	$	Nil	 

 10. Convertible Debentures 
  

													
	 	  	2017 unsecured
convertible
debentures 8%	 	  	2018 unsecured
convertible
debentures 7%	 	  	Total	 
	 Balance at July 31, 2017
	  	 	20,638,930	 	  	 	—  	 	  	 	20,638,930	 
	 Gross proceeds
	  	 	—  	 	  	 	69,000,000	 	  	 	69,000,000	 
	 Issuance costs
	  	 	—  	 	  	 	(4,791,642	) 	  	 	(4,791,642	) 
	 Warrants, net of issuance costs
	  	 	—  	 	  	 	(3,284,648	) 	  	 	(3,284,648	) 
	 Conversion feature, net of issuance costs
	  	 	—  	 	  	 	(6,777,317	) 	  	 	(6,777,317	) 
	 Accretion
	  	 	814,304	 	  	 	553,710	 	  	 	1,368,014	 
	 Conversion of debenture
	  	 	(21,453,234	) 	  	 	(54,700,103	) 	  	 	(76,153,337	) 
		  	  
	  
	 	  	  
	  
	 	  	  
	  
	 
	 Balance at July 31, 2018
	  	 	—  	 	  	 	—  	 	  	 	—  	 
		  	  
	  
	 	  	  
	  
	 	  	  
	  
	 

  
  

13 

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 2017 Secured Convertible Debentures 

During the three months ended October 31, 2018, 399,958, warrants were exercised for total proceeds of $392,331 (US$303,554, 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 $2,661,278 (US$2,048,536); using the following variables:

  

	 	•	 	 stock price of various; 

 

	 	•	 	 expected life of 12 months; 

 

	 	•	 	 $Nil dividends; 

  

	 	•	 	 60% volatility based upon comparative market indicators and historical data; 

 

	 	•	 	 risk free interest rate of 0.75%; 

 

	 	•	 	 USD/CAD exchange rate of various. 

The exercise of these warrants resulted in an increase to share capital of $3,064,051. 

The remaining warrant liability was revalued on October 31, 2018 using the Black-Scholes-Merton option pricing model. The warrant liability was revalued
to $2,805,221 (US$2,134,546); with a stock price of US$4.49; expected life of 12 months; $Nil dividends; 60% volatility based upon comparative market indicators and historical data; risk free interest rate of 0.75%; and USD/CAD exchange rate of
1.3142. The (loss)/gain on the revaluation of the warrant liability for the three months ended October 31, 2018 was $2,336,730 (October 31, 2017 – $1,282,436), 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 three months ended October 31,
2018 and fiscal year ended July 31, 2018. 
  

									
	 	  	October 31, 2018	 	  	July 31, 2018	 
	 Opening balance
	  	$	3,129,769	 	  	$	1,355,587	 
	 Granted
	  	 	—  	 	  	 	—  	 
	 Expired
	  	 	—  	 	  	 	—  	 
	 Exercised
	  	 	(2,661,278	) 	  	 	(3,317,278	) 
	 Revaluation due to foreign exchange
	  	 	2,336,730	 	  	 	5,091,460	 
		  	  
	  
	 	  	  
	  
	 
	 Closing balance
	  	$	2,805,221	 	  	$	3,129,769	 
		  	  
	  
	 	  	  
	  
	 

 2017 Unsecured Convertible Debentures 8% 

Pursuant to the conversion of the 8.0% Debentures, holders of the 8.0% Debentures received 625 Common Shares for each $1,000 principal amount of 8.0%
Debentures held. In addition, the accrued and unpaid interest on each $1,000 principal amount of the 8.0% Debentures for the period from issuance on July 18, 2017 to but excluding the conversion date was $36.00 and 8.0% Debenture holders
received an additional 22.5 Common Shares for each $1,000 principal amount of 8.0% Debentures held on account of accrued and unpaid interest, for a total of 647.5 Common Shares for each $1,000 principal amount of 8.0% Debentures held at the
conversion date. Accordingly, at the date of conversion the carrying value of the debentures of $21,453,234, interest payable paid through shares of $266,219 and the conversion feature of $1,742,779 resulted in the cumulative increase to share
capital of $23,462,232.     
 Interest expensed to the statement of loss and comprehensive loss was $Nil and interest capitalized to
property, plant, and equipment was $Nil for the three months ended October 31, 2018 (October 31, 2017 – $502,000 and $563,349 respectively). Accretion for the three months ended October 31, 2018 was $Nil (October 31, 2017 –
$493,982 ). 
 2018 Unsecured Convertible Debentures 7% 

On November 24, 2017, the Company issued $69,000,000 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 $58,187,146 using a discount rate of 14%. The residual proceeds of $10,812,854 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. 

  
  

14 

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 The warrants were valued with a fair value $8,647,797 using the following assumptions: 

 

	 	•	 	 stock price of $2.62; 

  

	 	•	 	 expected life of one year; 

 

	 	•	 	 $Nil dividends; 65% volatility; 

 

	 	•	 	 risk free interest rate of 1.25%. 

The conversion option was valued with a fair value of $17,843,269 using the following assumptions: 

 

	 	•	 	 stock price of $2.62; 

  

	 	•	 	 expected life of three months; 

 

	 	•	 	 $Nil dividends; 65% volatility; 

 

	 	•	 	 risk free interest rate of 1.25%. 

Based on the fair value of the warrants and conversion option, the residual proceeds of $10,812,854 were allocated as $3,529,770 to the warrants and
$7,283,084 to the conversion option, less allocation of issuance costs. 
 In connection with the closing of the debentures, the Company paid a placement
fee of $3,450,000 from the gross proceeds of the financing and incurred an additional $475,824 of issuance costs. The Company also issued broker warrants exercisable to acquire 1,568,181 common shares at an exercise price of $3.00 per share. 

The broker warrants were attributed a fair value of $865,818 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; 

  

	 	•	 	 risk free interest rate of 1.25%. 

The total issuance costs amounted to $4,791,642 and were allocated on pro-rata basis as follows: Debt –
$4,040,753, Conversion option – $505,767, and the Warrants – $245,122. 
 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 $54,700,103, interest payable paid through shares of $45,824 and the conversion feature of $6,809,418 resulted in
the cumulative increase to share capital of $61,555,345.     
 Accretion for the three months ended October 31, 2018 was $Nil
(October 31, 2017 – $Nil). During the three months ended October 31, 2018, the Company paid $Nil (October 31, 2017 – $Nil) of interest owing through shares, and $Nil (October 31, 2017 – $Nil) of interest owing in cash. 

The unsecured convertible debentures balance net of interest payable was $Nil for the three months ended October 31, 2018 and $21,132,911 for the three
months ended October 31, 2017. 

  
  

15 

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 11. Share Capital 

(a) Authorized 
 An unlimited number of common shares 

(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 $405,778, 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 $30,936,897. 

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 $149,500,000.
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 $6,379,728 which consisted of underwriters’ commissions of $5,980,000, underwriters’ expenses of $10,000,
underwriters’ legal fees of $96,522 and incurred $311,206 of additional cash issuance costs. In addition, the Company issued an aggregate of 1,495,000 compensation warrants to the underwriters at a fair value of $1,485,797. 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; 

  

	 	•	 	 65% volatility based upon comparative market indicators and historical data; 

 

	 	•	 	 risk free interest rate of 1.25%. 

The Company allocated $7,342,461 of the issuance costs to the common shares and $523,064 to the warrants. 

During the third quarter of fiscal 2018, 2,474,813 warrants with exercise prices ranging from $0.75 to $5.60 and US$0.76 were exercised for proceeds of
$4,422,747, resulting in the issuance of 2,474,813 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. 

  
  

16 

Table of Contents

 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 $38,600,682, 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 warrants 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
$5,588,503, resulting in the issuance of 3,137,746 common shares. 
 As at October 31, 2018, there were 197,388,591 common shares outstanding and
34,787,758 warrants outstanding. 
 The following is a summary of warrants on October 31, 2018. 

 

									
	 	  	Number
outstanding	 	  	Book value	 
	 Warrants issued with $0.75 Units
	  				  			
	 Exercise price of $0.83 expiring April 28, 2019
	  	 	13,332	 	  	$	2,383	 
	 Exercise price of $0.83 expiring May 19, 2019
	  	 	19,332	 	  	 	3,456	 
	 Exercise price of $0.83 expiring June 2, 2019
	  	 	333,330	 	  	 	59,598	 
	 Exercise price of $0.83 expiring June 8, 2019
	  	 	1,333,332	 	  	 	261,999	 
	 Exercise price of $0.83 expiring June 23, 2019
	  	 	66,672	 	  	 	11,921	 
	 Exercise price of $0.83 expiring June 28, 2019
	  	 	266,670	 	  	 	47,680	 
	 Exercise price of $0.83 expiring July 21, 2019
	  	 	66,672	 	  	 	11,921	 
	 Exercise price of $0.83 expiring August 18, 2019
	  	 	66,672	 	  	 	11,921	 
	 Exercise price of $0.83 expiring August 31, 2019
	  	 	39,600	 	  	 	7,194	 
	 2015 secured convertible debenture warrants
	  				  			
	 Exercise price of $0.75 expiring July 15, 2019
	  	 	866,040	 	  	 	166,303	 
	 2016 unsecured convertible debenture warrants
	  				  			
	 Exercise price of $0.83 expiring July 18, 2019
	  	 	75,000	 	  	 	11,285	 
	 2018 Equity financing
	  				  			
	 Exercise price of $5.60 expiring January 30, 2020
	  	 	18,541,000	 	  	 	9,965,705	 
	 Broker / Consultant warrants
	  				  			
	 Exercise price of $0.75 expiring November 9, 2019
	  	 	41,598	 	  	 	15,091	 
	 Exercise price of USD$0.70 expiring November 14, 2019
	  	 	526	 	  	 	130	 
	 Exercise price of $0.75 expiring November 3, 2021
	  	 	244,284	 	  	 	108,935	 
	 Exercise price of $0.75 expiring March 14, 2022
	  	 	144,282	 	  	 	100,474	 
	 Exercise price of $4.00 expiring January 30, 2020
	  	 	598,000	 	  	 	555,609	 
	 Joint Venture MOLSON warrants
	  				  			
	 Exercise price of $6.00 expiring October 4, 2021
	  	 	11,500,000	 	  	 	42,386,162	 
		  	  
	  
	 	  	  
	  
	 
		  	 	34,216,342	 	  	 	53,727,767	 
	 2016 secured convertible debenture warrants
	  				  			
	 Exercise price of USD$0.76 expiring November 14, 2019
	  	 	571,416	 	  	 	2,805,221	 
		  	  
	  
	 	  	  
	  
	 
		  	 	34,787,758	 	  	$	56,532,988	 
		  	  
	  
	 	  	  
	  
	 

  
  

17 

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 The following table summarizes warrant activity during the three months ended October 31, 2018 and
fiscal year ended July 31, 2018. 
  

																	
	 	  	October 31, 2018	 	  	July 31, 2018	 
	 	  	Number of
warrants	 	  	Weighted average
exercise price	 	  	Number of
warrants	 	  	Weighted average
exercise price	 
	 Outstanding, beginning of period
	  	 	26,425,504	 	  	$	4.35	 	  	 	20,994,123	 	  	$	1.31	 
	 Expired during the period
	  	 	—  	 	  	 	—  	 	  	 	(62,728	) 	  	 	3.00	 
	 Issued during the period
	  	 	11,500,000	 	  	 	6.00	 	  	 	37,413,681	 	  	 	4.34	 
	 Exercised during the period
	  	 	(3,137,746	) 	  	 	1.73	 	  	 	(31,919,572	) 	  	 	2.33	 
		  	  
	  
	 	  	  
	  
	 	  	  
	  
	 	  	  
	  
	 
	 Outstanding, end of the period
	  	 	34,787,758	 	  	$	5.14	 	  	 	26,425,504	 	  	$	4.35	 
		  	  
	  
	 	  	  
	  
	 	  	  
	  
	 	  	  
	  
	 

 Stock Option Plan 
 The
Company has a share option plan (the “Plan”) 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 19,738,859 common shares as at October 31, 2018. 
 The following table summarizes the stock option grants during
the three months ended October 31, 2018. 
  

																					
	 	  	 	 	  	Options granted	 	  	 	 	  	 	 
	 Grant date
	  	Exercise price	 	  	Executive and
directors	 	  	Non-executive
employees	 	  	Vesting terms	 	  	Vesting period	 
	 September 8, 2017
	  	$	1.37	 	  	 	650,000	 	  	 	1,000	 	  	 	Terms A	 	  	 	10 years	 
	 November 6, 2017
	  	$	2.48	 	  	 	125,000	 	  	 	3,000	 	  	 	Terms A	 	  	 	10 years	 
	 December 4, 2017
	  	$	2.69	 	  	 	1,750,000	 	  	 	20,000	 	  	 	Terms B	 	  	 	10 years	 
	 January 29, 2018
	  	$	4.24	 	  	 	—  	 	  	 	261,000	 	  	 	Terms A, C	 	  	 	10 years	 
	 March 12, 2018
	  	$	3.89	 	  	 	325,000	 	  	 	—  	 	  	 	Terms A	 	  	 	10 years	 
	 April 16, 2018
	  	$	4.27	 	  	 	845,000	 	  	 	61,500	 	  	 	Terms A	 	  	 	10 years	 
	 June 8, 2018
	  	$	5.14	 	  	 	—  	 	  	 	441,000	 	  	 	Terms A	 	  	 	10 years	 
	 July 11, 2018
	  	$	4.89	 	  	 	4,325,000	 	  	 	1,366,500	 	  	 	Terms A	 	  	 	10 years	 
	 September 17, 2018
	  	$	7.93	 	  	 	650,000	 	  	 	523,500	 	  	 	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. 
 The following table summarizes stock option activity during the three months ended October 31, 2018 and the fiscal year
July 31, 2018. 
  

																	
	 	  	October 31, 2018	 	  	July 31, 2018	 
	 	  	Options
issued	 	  	Weighted average
exercise price	 	  	Options
issued	 	  	Weighted average
exercise price	 
	 Opening balance
	  	 	14,388,066	 	  	$	1.05	 	  	 	5,748,169	 	  	$	0.68	 
	 Granted
	  	 	1,173,500	 	  	 	7.93	 	  	 	10,174,000	 	  	 	4.16	 
	 Expired
	  	 	—  	 	  	 	—  	 	  	 	—  	 	  	 	—  	 
	 Forfeited
	  	 	(169,996	) 	  	 	1.99	 	  	 	(626,830	) 	  	 	3.44	 
	 Exercised
	  	 	(621,729	) 	  	 	0.58	 	  	 	(907,273	) 	  	 	0.65	 
		  	  
	  
	 	  	  
	  
	 	  	  
	  
	 	  	  
	  
	 
	 Closing balance
	  	 	14,769,841	 	  	$	3.53	 	  	 	14,388,066	 	  	$	1.05	 
		  	  
	  
	 	  	  
	  
	 	  	  
	  
	 	  	  
	  
	 

 The weighted average share price at the time of exercise during the period was $5.32 (July 31, 2018 – $4.31). 

  
  

18 

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 The following table summarizes information concerning stock options outstanding as at October 31, 2018.

  

																			
	 Exercise price
	 	 	Number outstanding	 	 	Weighted average
remaining contractual
life (years)	 	 	Number exercisable	 	 	Weighted average
remaining contractual
life (years)	 
	$	0.16	 	 	 	285,000	 	 	 	0.11	 	 	 	285,000	 	 	 	0.40	 
	 	0.58	 	 	 	1,206,900	 	 	 	0.49	 	 	 	1,206,900	 	 	 	1.84	 
	 	0.75	 	 	 	1,931,500	 	 	 	0.98	 	 	 	1,136,000	 	 	 	2.14	 
	 	1.27	 	 	 	600,991	 	 	 	0.33	 	 	 	350,578	 	 	 	0.71	 
	 	1.37	 	 	 	542,450	 	 	 	0.33	 	 	 	108,450	 	 	 	0.24	 
	 	2.48	 	 	 	128,000	 	 	 	0.08	 	 	 	—  	 	 	 	—  	 
	 	2.69	 	 	 	1,695,000	 	 	 	1.04	 	 	 	885,000	 	 	 	2.03	 
	 	3.89	 	 	 	325,000	 	 	 	0.21	 	 	 	—  	 	 	 	—  	 
	 	4.24	 	 	 	258,000	 	 	 	0.16	 	 	 	—  	 	 	 	—  	 
	 	4.27	 	 	 	884,000	 	 	 	0.57	 	 	 	—  	 	 	 	—  	 
	 	4.89	 	 	 	5,644,500	 	 	 	3.71	 	 	 	—  	 	 	 	—  	 
	 	5.14	 	 	 	110,000	 	 	 	0.07	 	 	 	—  	 	 	 	—  	 
	$	7.93	 	 	 	1,158,500	 	 	 	0.78	 	 	 	—  	 	 	 	—  	 
				 	  
	  
	 	 	  
	  
	 	 	  
	  
	 	 	  
	  
	 
				 	 	14,769,841	 	 				 	 	3,971,928	 	 			
				 	  
	  
	 	 				 	  
	  
	 	 			

 Stock-based Compensation 

For the three months ended October 31, 2018, the Company recorded $4,799,912 (October 31, 2017 – $313,539) 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. 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: 
  

									
	 	  	October 31, 2018	 	 	October 31, 2017	 
	 Exercise price
	  	$	0.75–$7.93	 	 	$	0.16–$1.37	 
	 Risk-free interest rate
	  	 	2.06%–2.42	% 	 	 	2.13	% 
	 Expected life of options (years)
	  	 	7	 	 	 	7	 
	 Expected annualized volatility
	  	 	65%–70	% 	 	 	65	% 

 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 three-month period ended October 31, 2018, the Company allocated $110,609 (October 31, 2017
– $Nil) of stock-based compensation expenses to cost of sales based upon those expenses applicable to direct and indirect labour in the selling and production process. 

  
  

19 

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 12. 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: 
  

									
	 	  	October 31, 2018	 	  	October 31, 2017	 
	 2017 Unsecured convertible debentures
	  	 	—  	 	  	 	15,687,500	 
	 Options
	  	 	14,754,841	 	  	 	6,399,169	 
	 Warrants issued with $0.75 units
	  	 	2,205,612	 	  	 	4,911,186	 
	 2015 Secured convertible debentures warrants
	  	 	866,040	 	  	 	2,210,358	 
	 2015 Unsecured convertible debenture amendment warrants
	  	 	—  	 	  	 	38,100	 
	 2016 Unsecured convertible debenture warrants
	  	 	75,000	 	  	 	426,660	 
	 2016 Secured convertible debenture warrants
	  	 	571,416	 	  	 	1,839,216	 
	 2017 8% Unsecured convertible debenture warrants
	  	 	—  	 	  	 	7,856,300	 
	 2018 Equity warrants
	  	 	18,541,000	 	  	 	—  	 
	 Joint venture issued warrants
	  	 	11,500,000	 	  	 	—  	 
	 Convertible debenture broker/finder warrants
	  	 	1,028,690	 	  	 	3,230,407	 
		  	  
	  
	 	  	  
	  
	 
		  	 	49,542,599	 	  	 	42,598,896	 
		  	  
	  
	 	  	  
	  
	 

 13. Convertible Debenture Receivable 

On July 26, 2018, the Company lent $10,000,000 to an unrelated entity, Fire and Flower (“FF”) in the form of an unsecured and subordinated
convertible debenture. The convertible debenture bears interest at 8%, paid semi-annually, matures July 31, 2019 and includes the right to convert the debenture into common shares of FF at the lesser of $1.15 or 90% of the deemed price per
common share upon maturity or a triggering event as defined within the agreement. The Company issued the debenture as a part of a strategic investment into the private retail cannabis market. 

The option to settle the loan in common shares represents a call option to the Company and is included in the fair value of the loan. During the quarter the
Company’s convertible debenture receivable increased by $3,433,798 (October 31, 2017 – $Nil) representing the change in fair value on the note. 

As at October 31, 2018, the Company’s debenture receivable from FF accrued interest of $214,795 (October 31, 2017 – $Nil) and the convertible
debenture receivable totalled $13,648,593 (July 31, 2018 – $10,000,000). 
 The fair value of the note at the reporting date was estimated using the
Black-Scholes Merton model and based on the following assumptions: 
  

	 	•	 	 exercise price of $1.15; 

 

	 	•	 	 expected life of 2 months; 

 

	 	•	 	 $Nil dividends; 

  

	 	•	 	 70% volatility; 

  

	 	•	 	 risk free interest rate of 0.75%. 

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

  
  

20 

Table of Contents

 15. Financial Instruments 

Interest Risk 
 The Company’s exposure to interest
rate risk only relates 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. As at October 31,
2018, the Company had short term investments of $148,608,728. 
 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 October 31, 2018, 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 and cash equivalents are held by one of the largest cooperative financial groups in Canada. The short-term investments are held in various guaranteed
investment certificates, term deposits, and fixed income securities. 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
the crown corporations of Quebec, Ontario and British Columbia as well as one of the largest medical insurance companies in Canada. Credit risk from the convertible debenture receivable and promissory note 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, convertible note receivable and promissory note
receivable represents the maximum exposure to credit risk and as at October 31, 2018; this amounted to $217,844,608. 
 The following table summarizes
the Company’s aging of receivables as at October 31, 2018 and July 31, 2018: 
  

									
	 	  	October 31,
2018	 	  	July 31,
2018	 
		  	$	 	 	  	$	 	 
	 0–30 days
	  	 	6,196,932	 	  	 	262,448	 
	 31–60 days
	  	 	180,175	 	  	 	187,446	 
	 61–90 days
	  	 	200,252	 	  	 	90,656	 
	 Over 90 days
	  	 	398,215	 	  	 	103,046	 
		  	  
	  
	 	  	  
	  
	 
	 Total
	  	 	6,975,573	 	  	 	643,596	 
		  	  
	  
	 	  	  
	  
	 

 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 78% (October 31, 2017 – Nil%) of total sales in the three months ended October 31, 2018. 

The Company holds trade receivables from three crown corporations representing 84% of total trade receivables as of October 31, 2018 (October 31, 2017
– 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 October 31, 2018, the Company had $171,886,740
of cash and cash equivalents and short-term investments. 
 The Company is obligated to pay accounts payable and accrued liabilities with a carrying amount
and contractual cash flows amounting to $14,632,644 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. 

  
  

21 

Table of Contents

 16. Operating Expenses by Nature 

 

									
	 	  	October 31, 2018	 	  	October 31, 2017	 
	 Marketing and promotion
	  	$	9,588,928	 	  	$	286,226	 
	 Stock based compensation
	  	 	4,689,303	 	  	 	313,539	 
	 Salaries and benefits
	  	 	3,245,524	 	  	 	1,158,663	 
	 Consulting
	  	 	1,437,951	 	  	 	181,611	 
	 Facilities
	  	 	922,755	 	  	 	155,196	 
	 Professional fees
	  	 	825,069	 	  	 	136,604	 
	 Amortization of property, plant and equipment
	  	 	573,398	 	  	 	124,112	 
	 Travel
	  	 	328,962	 	  	 	107,529	 
	 General and administrative
	  	 	273,379	 	  	 	318,084	 
	 Amortization of intangible assets
	  	 	149,536	 	  	 	62,810	 
		  	  
	  
	 	  	  
	  
	 
	 Total
	  	$	22,034,805	 	  	$	2,844,374	 
		  	  
	  
	 	  	  
	  
	 

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

 

					
	 	  	October 31, 2018	 
	 General and administrative related stock based compensation
	  	$	4,458,651	 
	 Marketing and promotion related stock based compensation
	  	 	230,652	 
		  	  
	  
	 
	 Total operating expense related stock based compensation
	  	 	4,689,303	 
	 Stock based compensation allocated to cost of sales
	  	 	110,609	 
		  	  
	  
	 
	 Total stock based compensation
	  	$	4,799,912	 
		  	  
	  
	 

 17. Investment in Joint Ventures 

Molson Coors Canada Joint Venture – Truss 
  

									
	 	  	October 31, 2018	 	  	July 31, 2018	 
	 Opening Balance
	  	$	—  	 	  	$	—  	 
	 Cash consideration of investment
	  	 	6,375,425	 	  	 	—  	 
	 Fair value of warrant consideration
	  	 	42,386,162	 	  			
	 Capitalized transaction costs
	  	 	659,344	 	  	 	—  	 
	 Share of net loss
	  	 	(161,104	) 	  	 	—  	 
		  	  
	  
	 	  	  
	  
	 
	 Ending Balance
	  	$	49,259,827	 	  	$	—  	 
		  	  
	  
	 	  	  
	  
	 

 On October 4, 2018, the formation of the joint venture 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 HEXO 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 $42,386,162 of warrant consideration (see Note 11 for fair value inputs and
assumptions). 
 Transaction costs of $659,344 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 three months quarter ended October 31, 2018, the Company’s share in the net
loss of Truss was $161,104 (July 31, 2018 – $Nil). 

  
  

22 

Table of Contents

 Belleville Complex Inc Joint Venture 

During the period ended October 31, 2018, the Company acquired a 25% interest in the joint venture Belleville Complex Inc. (“BCI”) with a
related party holding the remaining 75% in BCI. The joint venture purchased an initially configured 2 million sq. ft. facility through a $20,279,188 loan issued by the Company on September 7, 2018, repayable within 120 days, bearing an
annual 4% interest rate, which interest is payable monthly. The loan is secured by the first mortgage over the building. 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 Company accrued interest of $54,514 on the note for a total receivable of $20,333,702. 
 18. 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 8.57% of the outstanding shares of the Company as at October 31, 2018
(October 31, 2017 – 22.40%). 
 Compensation provided to key management during the period was as follows: 

 

									
	 	  	October 31, 2018	 	  	October 31, 2017	 
	 Salary and/or consulting fees
	  	$	668,733	 	  	$	383,891	 
	 Bonus compensation
	  	 	214,438	 	  	 	—  	 
	 Stock-based compensation
	  	 	3,288,985	 	  	 	261,209	 
		  	  
	  
	 	  	  
	  
	 
		  	$	4,172,156	 	  	$	645,100	 
		  	  
	  
	 	  	  
	  
	 

 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
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. 

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. 
 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 $20,272,188 on
September 7, 2018, to the related party BCI to be used in the purchase of a facility in Belleville, Ontario and matures in January 2019. The loan bears annual interest of 4% which is repayable monthly. 

19. 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 October 31, 2018 total managed capital was comprised of shareholders’ equity of $365,867,918 (July 31, 2018 –
$322,872,875). There were no changes in the Company’s approach to capital management during the period. 

  
  

23 

Table of Contents

 20. Commitments and Contingencies 

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: 
  

					
	 2019
	  	$	64,136,910	 
	 2020
	  	 	4,077,506	 
	 2021
	  	 	4,038,172	 
	 2022
	  	 	3,978,223	 
	 2023
	  	 	3,177,654	 
	 Thereafter
	  	 	50,051,833	 
		  	  
	  
	 
		  	$	129,460,298	 
		  	  
	  
	 

 Inclusive of the commitments balance is $64,926,107 related to the Belleville Complex Inc
20-year anchor tenant agreement ending September 7, 2038. See note 17. 
 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 $3,117,000 subject to certain operational requirements. The letter of credit has a one year expiry from the date of issue. The credit facility is secured by a guaranteed investment certificate
(“GIC”). As at October 31, 2018, 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 $2,000,000. 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. 
 21. Fair Value of Financial
Instruments 
 The carrying values of the financial instruments as at October 31, 2018 are summarized in the following table: 

 

																	
	 	  	Amortized
costs	 	  	Financial assets
designated as
FVTPL	 	  	Financial liabilities
designated as
FVTPL	 	  	Total	 
	 Assets
	  	$	 	 	  	$	 	 	  	$	 	 	  	$	 	 
	 Cash and cash equivalents
	  	 	—  	 	  	 	23,278,012	 	  	 	—  	 	  	 	23,278,012	 
	 Restricted cash
	  	 	—  	 	  	 	5,000,000	 	  	 	—  	 	  	 	5,000,000	 
	 Short-term investments
	  	 	—  	 	  	 	148,608,728	 	  	 	—  	 	  	 	148,608,728	 
	 Trade receivables
	  	 	6,975,573	 	  	 	—  	 	  	 	—  	 	  	 	6,975,573	 
	 Convertible debenture receivable
	  	 	—  	 	  	 	13,648,593	 	  	 	—  	 	  	 	13,648,593	 
	 Promissory note receivable
	  	 	20,333,702	 	  	 	—  	 	  	 	—  	 	  	 	20,333,702	 
		  	  
	  
	 	  	  
	  
	 	  	  
	  
	 	  	  
	  
	 
	 Liabilities
	  	$	 	 	  	$	 	 	  	$	 	 	  	$	 	 
	 Accounts payable and accrued liabilities
	  	 	14,632,644	 	  	 	—  	 	  	 	—  	 	  	 	14,632,644	 
	 Warrant liability
	  	 	—  	 	  	 	—  	 	  	 	2,805,221	 	  	 	2,805,221	 

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

  
  

24 

Table of Contents

 22. Ancillary Revenue 

Ancillary revenues are those sales outside of the primary business of the Company as outlined in Note 1. During the three months period ended the Company
realized net revenues of $47,370 (October 31, 2017 – $Nil) related to management fees. 
 23. Comparative Amounts 

Certain comparative amounts have been reclassified to conform to the current presentation, none of which were material. 

24. Subsequent Events 
 Filing of Final Base Shelf
Prospectus 
 On November 21, 2018, the Company announcing the filing of the final short form base shelf prospectus with securities regulatory
authorities in each of the provinces and territories of Canada. The shelf prospectus is valid for a 25-month period, during which HEXO may make offerings of up to $800 million of common shares, warrants,
subscription receipts and units or a combination of thereof of the Company from time to time, separately or together, in amounts, at prices and on terms to be determined based on market conditions at the time of the offering. The specific terms of
any future offering will be established in a prospectus supplement to the shelf prospectus, which supplement will be filed with the applicable Canadian securities regulatory authorities. Unless otherwise specified in the prospectus supplement
relating to a particular offering of securities, the net proceeds from any sale of any securities may be used by HEXO for general corporate purposes, including funding ongoing operations and/or working capital requirements, to repay indebtedness
from time to time, capital projects and potential future acquisitions, including in relation to international expansion. 

  
  

25EX-4.5

 Exhibit 4.5 
  

 

 Management Discussion & Analysis 

For the three months ended October 31, 2018 
 (In
thousands of Canadian dollars, except share and per share amounts, and where otherwise noted) 
 This management discussion and analysis
(“MD&A”) of the financial condition and results of operations of HEXO Corp. (formerly The Hydropothecary Corporation) and our wholly owned subsidiaries (collectively, “we” or “us” or “our” or
“Company” or “HEXO Corp.”) is for the three months ended October 31, 2018 (“Q1 of Fiscal 2019”). It is supplemental to, and should be read in conjunction with, our audited consolidated financial statements and the
accompanying notes for the fiscal year ended July 31, 2018. Our consolidated financial statements are prepared in accordance with International Financial Reporting Standards (“IFRS”). All amounts presented herein are stated in
Canadian dollars, unless otherwise indicated. 
 This MD&A has been prepared by reference to the MD&A disclosure requirements established
under National Instrument 51-102, Continuous Disclosure Obligations, of the Canadian Securities Administrators. Additional information regarding the Company is available on our websites at
thehydropothecary.com or hexo.com or through the SEDAR website at sedar.com. 
 Certain information in this MD&A contains or incorporates
comments that constitute forward-looking information within the meaning of applicable securities legislation. Forward-looking information, in general, can be identified by the use of forward-looking terminology such as “may”,
“expect”, “intend”, “estimate”, “anticipate”, “believe”, “should”, “plans”, “continue”, “objective”, or similar expressions suggesting future outcomes or
events. They include, but are not limited to, statements with respect to expectations, projections or other characterizations of future events or circumstances; our objectives, goals, strategies, beliefs, intentions, plans, estimates, projections
and outlook, including statements relating to our plans and objectives; estimates or predictions of actions of customers, suppliers, competitors or regulatory authorities; and statements regarding our future economic performance. Such statements are
not historical facts but instead represent management beliefs regarding future events, many of which, by their nature, are inherently uncertain and beyond management control. We have based these forward-looking statements on our current expectations
about future events. Although the forward-looking statements contained in this MD&A are based on what we believe are reasonable assumptions, these assumptions are subject to a number of risks beyond our control, and there can be no assurance
that actual results will be consistent with these forward-looking statements. Factors that could cause actual results to differ materially from those set forth in the forward-looking statements and information include, but are not limited to,
financial risks; industry competition; general economic conditions and global events; product development, facility and technological risks; changes to government laws, regulations or policies, including tax; agricultural risks; supply risks;
product risks; dependence on senior management; sufficiency of insurance; and other risks and factors described from time to time in the documents filed by us with securities regulators. For more information on the risk factors that could cause our
actual results to differ from current expectations, see “Risk Factors”. All forward-looking information is provided as of the date of this MD&A. We do not undertake to update any such forward-looking information whether as a result of
new information, future events or otherwise, except as required by law. 
 This MD&A is dated December 12, 2018. 

  
  

1 

 Company Overview 

HEXO Corp. is helping shape an entirely new legal cannabis market – in Canada and abroad. 

Just five years ago, two entrepreneurs set out to corner the cannabis market in Canada. Laying roots in the province of Quebec, the company was influential in
stimulating market acceptance and support, raising $326.6 million in public markets since July 2017. We have landmark supply agreements in place with five provincial governments, including a five-year contract with Quebec’s
Société québécoise du cannabis that is worth $1 billion or more in potential revenue over its life, and which represents 35% of the province’s adult-use sales in the first
year of legalization alone. In total, we have provincial or private retail distribution agreements in most major markets in Canada. 
 Today, HEXO Corp. is
a consumer-packaged goods cannabis ingredient company that has turned its attention globally. Through our hub and spoke strategy, we are partnering with Fortune 500 companies, bringing our brand value, cannabinoid isolation and delivery technology,
licensed infrastructure and regulatory expertise to established companies, leveraging their distribution networks and capacity. 
 Our foothold in Greece
will allow us to establish a Eurozone processing, production, and distribution centre and will unlock our access to customers across Europe and we will leverage this approach in other international markets, including Latin America and the U.S. 

Ultimately, our focus is on the customers we serve. We are among the cannabis industry’s top innovators, with award-winning products such as Elixir,
Canada’s first and only line of cannabis peppermint oil sublingual sprays, and decarb, an activated cannabis powder designed for oral consumption. We are also pioneering a line of women’s sexual health products with Fleur de Lune. Our
ability to develop consistent advanced cannabis formulations for use in world-renowned brands – beverages, food, cosmetics, and more – has already garnered the attention of Molson Coors Canada and resulted in the creation of Truss, an
exclusive joint venture to develop non-alcoholic, cannabis-infused beverages. 
 The global cannabis market is
estimated to reach $250B. HEXO believes that in a few years, a handful of companies will control 80% of this market share. We believe HEXO is poised to be one of those companies. 

To date, we have sold over 2 million grams of adult-use and medical cannabis to thousands of Canadians who count
on us for safe, high-quality products. We have developed an extensive and award-winning product range, and gained valuable experience and knowledge, while serving our customers. We currently possess the single largest and longest national forward
supply amount among all licensed producers, based upon announced provincial supply agreements. In Quebec alone, we will supply 20,000 kg in the first year of legalized adult-use cannabis and up to
approximately 200,000 kg over the first five years of legalized adult-use cannabis. We believe all of this positions us well to become one of the top two companies in Canada serving the legal adult-use market. 
 We currently operate with 310,000 sq. ft. of licensed production space with an estimated annual
production capacity of 25,000 kg; have an additional 1,000,000 sq. ft. of production space on-time and on-budget to be completed by the end of December 2018 ; 579,000
sq. ft. of industrial real estate for manufacturing, distribution and product research and development needs in Belleville, Ontario; another 58,000 sq. ft. of leased distribution space in Montreal, Quebec, and leased commercial office space in
downtown Gatineau, Quebec. 
 As at October 31, 2018, we employed approximately 283 people, including 155 people in cultivation, harvesting,
manufacturing, processing and quality and assurance; 65 in sales and marketing; and 63 in corporate services and executive management. 
 Investors have
responded positively to both our strategy and execution. We have zero debt, and are one of the best-capitalized companies in the industry. 
 We do not, and
do not intend to, engage in direct or indirect business with any business that derives revenue, directly or indirectly, from the sale of cannabis or cannabis products in any jurisdiction where the sale of cannabis is unlawful under applicable laws.

 Canadian Cannabis Market 
 According to Statistics
Canada, nearly five million Canadians purchased approximately 760,000 kg of cannabis worth $5.7 billion in 2017, mostly from illegal sources. The federal agency estimates that the average price was $7.50 per gram. Various market studies have
estimated the size of the legal Canadian cannabis market at over $10 billion per year. We are uniquely positioned to serve that market through holding the largest forward supply contract of all licensed producers. 

As of August 13, 2018, all provinces and territories have announced their cannabis market retail approach, ranging from privately owned stores to
government-owned retail, as well as a combined approach in several jurisdictions. We have positioned ourselves through strategic supply agreements with the Quebec, Ontario and British Columbia provincial governments, as well as through an investment
in the private cannabis retail sector, in order to offer our award-winning and innovative products across all channels throughout Canada. 

  
  

2 

 Anticipated retail distribution channels by province and territory: 

 
 

 
 We have established supply channels within five provinces – Quebec, Ontario, Saskatchewan, Alberta and British
Columbia – through supply agreements with both governmental boards and private retailers. We hold the single largest forward supply contract among licensed producers, based upon announced agreements for year one of legalization, with 20,000 kg
to be supplied to Quebec in the first year. 
  
 

 

  
  

3 

 QUEBEC 

In Quebec, which has a population of 8.45 million, or approximately 23% of the Canadian population, the Société québécoise du
cannabis (“SQDC”) operates the distribution and sale of adult-use cannabis. The SQDC has established 12 retail locations throughout the province, for in-store
cannabis sales. It expects to increase this number to 50 locations within the first year of legalization. It will also sell cannabis online. 
 In the first
year of legalization, we hold a 35% market share in Quebec. Our agreement with the SQDC spans a potential five-year period, with us supplying an estimated 200,000 kg or more of cannabis, representing $1 billion in potential revenues. 

In addition, we hold a distribution agreement with the SQDC, in which we house and distribute all of the SQDC’s online sales to end-users. This includes the product of all licensed producers with established supply agreements held with the SQDC. Operations of the distribution centre began in October 2018. 

ONTARIO 
 In Ontario, which has a population of
14.4 million, or approximately 40% of the Canadian population, the government currently offers consumers a variety of cannabis products through the Ontario Cannabis Store (“OCS”) online web sales. The province will also allow
privately owned retail locations that serve the adult-use market. Initially, products will include dried cannabis, oil and capsule products, pre-rolled, and clones and
seeds. 
 We have entered into a supply agreement with the OCS, in which we supply the province with THC and CBD Elixir and Fleur de Lune products, two of
our most innovative oil-based and smokeless offerings. In the future, once our 1 million sq. ft. greenhouse expansion is operational in late December 2018, we will offer our full suite of products. This
approach will allow us to initially serve the Ontario market for smokeless cannabis products through the OCS. 
 BRITISH COLUMBIA 

British Columbia, which has a population of 4.6 million, or approximately 13% of the Canadian population, will serve the
adult-use cannabis market through a dual private–government approach. The British Columbia Liquor Distribution Branch (“BCLDB”) will manage the distribution of cannabis and cannabis-based
products. We hold a supply agreement with the BCLDB, in which we supply our THC and CBD oil-based Elixir and Fleur de Lune products. 

We have also aligned ourselves with Fire & Flower (“F&F”), a private cannabis retailer, through a strategic investment of a
$10 million convertible loan. F&F is expected to hold store locations throughout British Columbia, allowing HEXO products to be distributed via the private retail route in tandem with the BCLDB. 

OTHER CANADIAN PRIVATE MARKETS 
 We expect to enter the
remaining private-sector Canadian cannabis markets via strategic investments in private retailers, such as our investment in F&F. Currently, F&F holds two licensed retail locations within Saskatchewan and ten licensed retail locations within
Alberta. Currently, F&F is undergoing licensing processing in Alberta, for several additional licenses. F&F has also begun the process of acquiring licenses and locations in Manitoba. 

  
  

4 

 CANADIAN LEGISLATIVE LANDSCAPE 

Regulation of the sale of adult-use cannabis in retail and online environments is the responsibility of the provinces
and territories. Only licensed producers will be authorized to sell cannabis within the adult-use market. As at October 31, 2018, there are 132 licensed producers under Cannabis Regulations. 

 
 

 
 Strategic Priorities 

Since inception, we have laid the foundation to be a world leader that serves both adult-use and medical cannabis
markets. In everything we do – cultivation, production, product development, innovation, distribution – we exercise rigour in order to offer medical cannabis patients and adult recreational users uncompromising quality and safety, while
earning and maintaining the trust of all of our stakeholders. We believe that we can leverage our demonstrated success in Canada to global cannabis markets. 

Given the different regulations governing the sale of adult-use cannabis across Canada, the number of large-scale
licensed producers and today’s limited but growing cultivation capacity, among other factors, we believe the initial years following legalization will be the most critical in determining the future shape of the cannabis industry in Canada, and
we believe early distribution and financial performance will be critical to securing a market leader position. 
 For this and other reasons, we have
deliberately set out to build a commanding position in our initial jurisdiction, Quebec, while making strategic inroads in select other markets across the country through provincial supply agreements and private retail partnerships. Now having
entered the adult-use market as one of the top producers and suppliers, we are looking beyond the Canadian border to take HEXO Corp. international, where regulations permit. We are making continuous efforts to
assess global opportunities in current and future medical and adult-use markets, including Europe, where we are expanding into Greece. 

We have positioned ourselves to meet the smokeless cannabis alternative market demand through our joint venture with Molson Canada, and we continue to explore
other opportunities for similar ventures in this market. Even as we continue to prove our business model and operational excellence in Quebec and across the country, the Company has already established itself as a desirable business partner for
cannabis control authorities, private retail, and Fortune 500 joint-arrangement partners across Canada and globally. 
 Our uncompromising commitment to
quality and safety is supported by our compliance with Health Canada’s stringent quality control requirements, our pharmaceutical-grade production system, full
seed-to-sale traceability, third party independent testing and an online system to post our product testing results. 

  
  

5 

 Our overall strategy is built on four pillars: be a top two market share licensed producer in Canada,
demonstrate brand leadership, innovate products – and support that work through operational scalability. As we enter the adult-use market, we are focused on the execution of these four strategic
priorities. 
  
 

 
 Top Two in Canada 

After establishing a dominant presence within our home market of Quebec, we look to expand nationally on a larger scale. Our objective is to execute on our
supply agreements with the OCS and the BCLDB, as well as on our long-term supply agreement with the SQDC, and to successfully manage our distribution centre responsible for all SQDC online sale–based cannabis distribution. We also possess a
strategic relationship with the private cannabis retailer F&F. This private retail presence will allow us to expand our expected distribution presence across six provinces and secure a top two public forward sales contract ranking. 

SQDC SUPPLY AGREEMENT 
 The strategic value of our SQDC
relationship cannot be understated. We hold the single largest forward contract in the history of the emerging cannabis industry with the SQDC and are the preferred supplier for cannabis products for the Quebec market for the first five years
following legalization. We will supply the SQDC with 20,000 kg of products in the first year, and we expect to supply 35,000 kg and 45,000 kg in years two and three, respectively. Thereafter, based on an expected market growth rate of 10%, we intend
to supply 49,500 kg and 54,450 kg in years four and five, respectively. The Company estimates the total volume to be supplied over the five-year term of the agreement to be in excess of 200,000 kg. Based on the current agreements signed between the
SQDC and five other licensed producers, we have obtained the highest year one volume, representing approximately 35% market share within Quebec, and we are aiming to remain the largest supplier in subsequent years. 

Volume and Market Share % in the Province of Quebec 
  

 

  
  

6 

 Brand 

Since our inception as a medical cannabis producer in 2013, we have built a trusted brand. Our robust product development team has introduced products that
offer consumers a full range of experiences and price points, including a variety of ways to consume cannabis. This team works hand-in-hand with our marketing team in
leveraging these products to build brand awareness in a highly regulated environment. 

 

 

 
 HEXO – ADULT-USE 

During this past quarter, the Company announced HEXO as the adult-use brand name that will serve the legalized
Canadian adult-use market. The goal of HEXO is to continue to offer a premium house of brands, signaling innovation, quality and consistency of experience, and become a top two Canadian market share brand and
obtain a 2% international market share. As a brand, HEXO shares the same focus on award-winning product innovation and high-quality cannabis that the market has come to expect from its medical sister brand, Hydropothecary. 

PRODUCT OFFERINGS 
 Initially, HEXO will offer dried
cannabis and cannabis-derived products under two product types: dried – flower, milled and pre roll; and oils – Elixir and Fleur de Lune. 

Flower, Milled and Pre Roll – The HEXO adult-use brand offers a relatively wide spectrum of CBD and THC
levels, through sativa, hybrid and indica plant strains. HEXO offers 9 flower products and 2 milled cannabis products in 3.5g and 15g formats. HEXO also carries 4 pre roll products. 

Elixir and Fleur de Lune—Elixir, a cannabis oil sublingual spray product line, includes both a high THC, high CBD and 1:1 content, and is
Canada’s only peppermint-based cannabis oil product. All three products are also available in an MCT carrier oil. Fleur de Lune is one of Canada’s first cannabis-based THC intimate oils. Both products provide alternative, smokeless methods
to consume cannabis. HEXO offers six oil-based spray products as well as an intimate-use oil product. 

 

 

 
 HYDROPOTHECARY – MEDICAL 

Hydropothecary sells premium as well as mid-market medical cannabis, offering over 24 products in dried, decarb and
oil formats. Hydropothecary has been serving the medical market with its award-winning products for over three years, and will continue to serve our medical patients with the utmost levels of quality and customer service. 

PRODUCT OFFERINGS 
 Hydropothecary continues to offer
dried cannabis and cannabis-derived products under three product types: dried – flower and milled; oils – Elixir and Fleur de Lune; and decarb. 

Flower and Milled – Premium and mid-range products offered under the Time of Day and H2 lines. Both lines
offer a relatively wide spectrum of CBD and THC levels, through sativa, hybrid and indica plant strains. HEXO offers 15 flower and milled cannabis products. Each product is carefully selected to treat symptoms universally reported by patients and
meet the needs of adult consumers. 
 Elixir and Fleur de Lune; Oil-Based Products – Elixir, a cannabis
oil sublingual spray product line, includes both a high THC and high CBD content, and is Canada’s only peppermint-based cannabis oil product. 
 Fleur
de Lune is one of Canada’s first cannabis-based THC intimate oils. Both products provide alternative, smokeless methods to consume cannabis. 
 HEXO
offers three oil-based spray products as well as an intimate-use oil product. 

Decarb – Decarb is an activated fine-milled cannabis powder product offered in a range of high to low CBD and THC content. Decarb is offered in
six products and is orally consumed for consumers desiring smokeless cannabis. 

 

  
  

7 

 HEXO’s Elixir recently won the “Cannabis Product of the Year” and “Innovation of the
Year” awards at the 2018 Canadian Cannabis Awards. HEXO was also nominated for “Brand of the year.” Our decarb product was voted “Top New Product’’ at the 2017 Canadian Cannabis Awards. 

Product Innovation 
 Our strategic priorities reflect our
belief that companies that achieve large-scale distribution and high brand awareness will drive long-term shareholder value in our industry. We aim to be the best partner for provincial cannabis distribution and retail authorities, while being
recognized for delivering the best user experiences across the full spectrum of products, price points and delivery methods. 
 We continue to position
ourselves to meet the expected edibles market demand and consumer-preferred products for October 2019. This includes, but is not limited to, vapes; cosmetics; edibles such as confectionary and baked and dairy goods; and non-alcoholic beverages, through our joint venture with Molson Canada. 
 Our focus on research, innovation and product
development also reflects our strategic priorities. We are actively exploring ways to increase our expertise related to cannabis applications and forms of delivery, and to expand our product range and brand portfolio. Activities include current and
potential partnerships, joint ventures and strategic acquisitions of intellectual property and related transactions. 
 The cannabis industry has already
recognized us as an innovative leader, as demonstrated by our award-winning products Elixir and decarb. We also offer Fleur de Lune, one of Canada’s first intimate-use cannabis oils. 

Beyond the funds required for our currently planned investments in cultivation capacity, we expect to allocate the majority of our capital to branding,
product innovation, international expansion and production, while remaining alert for strategic transactions that create shareholder value. Supporting this focus is the acquisition of the Belleville, Ontario, facility, which among other purposes
will serve to house research and development activities for the Company and its future products. This approach will directly support our continued leadership position in the Canadian cannabis market – as both a distributor and a product
innovator. 
 Scalability 
 We have been cultivating
cannabis for five years under the CR regulatory regime, growing and producing high-quality cannabis with consistent yields. We are constantly evaluating and updating our cultivating practices and technology to further drive efficiencies. 

We chose to locate in Gatineau, Quebec, because we believe the province offers the ideal conditions for cannabis production. The key is an abundant supply of
renewable electricity at competitive rates, combined with abundant water resources and the availability of skilled people. 
 On the border of Canada’s
two largest consumer markets, Quebec and Ontario, our main campus positions us in close proximity to two of the country’s major urban areas, Greater Montreal and the National Capital Region. Furthermore, we have acquired facilities in
Belleville, Ontario, ideally situated between the National Capital Region and Toronto, and in Montreal, which conveniently serves central Quebec. 
 Our
current licensed facilities total approximately 310,000 sq. ft. They include our original 7,000 sq. ft. greenhouse, a 35,000 sq. ft. greenhouse completed in 2017, a 250,000 sq. ft. greenhouse completed in July 2018, a warehouse, two stand-alone
laboratories and two modular buildings for final packaging and customer service, all located on our 143-acre land parcel. The annual production capacity of these facilities is estimated at approximately 25,000
kg of dried cannabis. 
 In December 2017, we added to our existing 65-acre land parcel by acquiring an adjacent 78-acre land parcel upon which we are building a 1 million sq. ft. greenhouse. This newest expansion is significantly completed. It is on schedule to be operational in late December 2018 and the transfer of
plants into the facility in the first weeks of January 2019. Once completed and licensed by Health Canada, our total annual production capacity will rise to approximately 108,000 kg of dried cannabis. 

The current annual production estimate of 25,000 kg and future annual production estimate of 108,000 kg are based upon the estimated square footage of
cultivation space and the ratio of dried cannabis cultivated per plant, which is derived from the historical output of the existing facilities and estimates of future production capabilities. 

On September 26, 2018, we announced a partnership to expand into Europe. A 350,000 sq. ft. licensed facility will be established in Greece through our
joint venture with Qannabos. This venture will result in additional production capacity and Eurozone foothold to serve legal cannabis markets in the United Kingdom, France and other jurisdictions where regulations permit. 

We have accumulated a strong and skillful workforce, as well as a top management group which provides cannabis-specific industry expertise and other relevant
business knowledge derived from a variety of industries and markets. 

  
  

8 

 Distribution 

In terms of processing and distribution capacity, we have significantly increased our capabilities over the past 12 months, as annual production increased to
approximately 25,000 kg with the activation and full licensing of our new 250,000 sq. ft. greenhouse. Our extensive 1 million sq. ft. greenhouse project – is on target to be operational by calendar
year-end – will further increase production capacity to approximately 108,000 kg. 
 The Company recently
acquired an initially configured 2 million sq. ft. facility in Belleville, Ontario, through the joint venture Belleville Complex Inc. established with a related party for the purposes of manufacturing value-added cannabis products and
increasing capacity for distribution and storage. Retrofitting of the facility is well underway and expected to be operational in the spring of 2019. The centralized location and the Company’s first facility outside of Quebec is ideally
situated along primary shipping routes to distribute our products and fulfill commitments across Canada. This facility will provide a regulatory keyhole to our partners and future partners so that they may enter the cannabis industry with HEXO Corp.
and will have access to licensed infrastructure once the facility is licensed by Health Canada. This facility further delivers on our national expansion strategy and ensures necessary capacity for the manufacture of advanced cannabis products,
including cosmetics, vapes, non-alcoholic beverages and other edibles. 
 The Company bolstered its distribution
capacity with the establishment of a distribution and storage centre formed with Metro Supply Chain Inc. This 58,000 sq. ft. facility in Montreal, Quebec, was strategically acquired for logistical purposes. Through it, we supply cannabis for all direct-to-customer sales placed in Quebec through the SQDC’s online store. Additionally, through the distribution centre we house, supply and distribute direct-to-customers the cannabis products of all licensed producers who have contracts with the SQDC. 

The Company has positioned itself for the private retail distribution through an issued $10 million convertible debenture as a strategic investment in
the private cannabis retailer F&F. F&F has applied for 37 retail store licenses in the province of Alberta, targeted eight applications in British Columbia, identified 16 potential operations in Manitoba and been awarded 2 retail stores in
the province of Saskatchewan and 10 in Alberta. 
 Distribution Strategy 
  

 

  
  

9 

 Corporate Social Responsibility 

At HEXO, it is important to us that we demonstrate to the world that we can be socially and environmentally responsible while providing world-class products
and services. HEXO’s Corporate Social Responsibility (“CSR”) Charter focuses on four main priorities: People, Public, Products, and Planet. Through this holistic lens we are creating CSR partnerships with local, national and
international organizations. Some of these organizations include: 
 Local partnerships 

 

	 	•	 	 The Papineau Health Foundation 

 

	 	•	 	 The Association for People Living with Chronic Pain 

 

	 	•	 	 The Moisson-Outaouais Food Bank 

 

	 	•	 	 Ottawa Riverkeeper 

National partnerships 
  

	 	•	 	 The Gastrointestinal Society of Canada 

 

	 	•	 	 The Campaign for Cannabis Amnesty 

International partnerships 
  

	 	•	 	 The Global Cannabis Partnership: a collaboration of leaders in the cannabis industry creating an international
standard for the safe and responsible production, distribution and consumption of legal adult-use cannabis. 

  

	 	•	 	 SmartCert: an internationally recognized certification company to help us calculate and monitor our carbon
footprint. 

 Corporate Highlights 

Molson Canada Joint Venture – Truss 
 On
August 1, 2018, we announced that we have entered into a definitive agreement to form a joint venture (the “JV”) with Molson Canada (“Molson”), to pursue opportunities in the
non-alcoholic, cannabis-infused beverages market. The JV was to be structured as a stand-alone start-up with its own board of directors and an independent management
team. Molson would have a 57.5% controlling interest, with the Company owning the remaining balance. We and Molson closed the transaction to form the JV, called “Truss”, on these terms on October 4, 2018. In connection with the
closing of the transaction, we issued 11,500,000 common share purchase warrants to an affiliate of Molson, each of which is exercisable to purchase one common share of the Company at a price of $6.00 per share for three years. Molson brings to the
JV years of related beverage industry experience, product innovation and distribution expertise. This paired with the Company’s history of innovating and delivering quality cannabis products to the market and proprietary cannabinoid solutions
to its partners, positions the Company to be at the forefront of the Canadian cannabis beverage market. 
 Supply Agreement with the Ontario Cannabis
Store 
 On August 20, 2018, we announced that we have entered into a supply agreement with the Ontario Cannabis Store (“OCS”). Under the
agreement, we will supply Ontario with our award-winning Elixir product line, which will be offered in several formulations such as THC, CBD or 1:1, in either a peppermint oil or a medium-chain triglyceride (“MCT”) carrier oil. We will
also supply the OCS with the newly launched Fleur de Lune intimate-use cannabis oil. Both products are smokeless and easy to use and will be sold in childproof packaging. 

Corporate Name Change 
 On August 28, 2018, the
Company held a special meeting during which shareholders passed to change officially the legal name of The Hydropothecary Corporation to HEXO Corp. 

Acquisition of Facility in Belleville, Ontario 
 On
September 10, 2018, we announced the acquisition of an initially configured 2 million sq. ft. facility in Belleville, Ontario, through a joint venture established with a related party, Olegna Holdings Inc. (“Olegna”). The Company
acquired a 25% interest in the joint venture, with the remaining balance belonging to Olegna. The joint venture purchased the facility in part by a $20 million loan issued by HEXO Corp. repayable within 120 days, bearing an annual 4% interest
rate, payable monthly. As part of the agreement, HEXO Corp. will be the anchor tenant for a period of 20 years. HEXO currently rents 579,000 sq. ft. of the facility with the remaining space available for current and future partners. The facility
will be utilized as a centre of research and development and manufacturing. This is the first HEXO Corp. facility established outside of Quebec, further delivering on the Company’s national expansion strategy and providing capacity for the
manufacturing of advanced cannabis products, including cosmetics, vapes, non-alcoholic beverages and other edibles to be supplied across Canada. Furthermore, this facility provides a regulatory keyhole for
current and future partners to immediately access the cannabis space and licensed infrastructure. 

  
  

10 

 Warehouse and Distribution Centre 

On September 19, 2018, we announced the storage and distribution arrangement with Metro Supply Chain Group Inc. (“Metro”). Under the agreement,
HEXO Corp. and Metro will manage and run the 58,000 sq. ft. storage and distribution facility in Montreal, Quebec, to house and supply the cannabis products of all licensed producers who hold supply contracts with the Société
québécoise du cannabis (“SQDC”). The distribution centre will serve as the sole distribution point for all direct-to-customer shipments within
the province of Quebec for orders placed through the SQDC. 
 Additionally, HEXO Corp. has attained accreditation from the Autorité des
marchés financiers to contract with government organizations such as the SQDC. This is a required authorization for companies conducting over $1 million in business with the government of Quebec for both services and the supply of
products. 
 Expansion into Greece 
 On
September 26, 2018, we announced the partnership with the Greek company Qannabos. Together, we will create a partnership supported by the development of 350,000 sq. ft. of licensed infrastructure, which we will use for the manufacturing,
processing and distribution of medical cannabis. This expansion is our first international expansion and will allow us to serve the medical markets of the United Kingdom, France and other European jurisdictions, where regulations permit, with our
full suite of products. 
 250,000 Sq. Ft. B6 Greenhouse and B5 Expansion Are Fully Licensed and Operational 

As of October 10, 2018, all 10 growing zones and warehouse of the new state-of-the-art 250,000 sq. ft. greenhouse and the B5 expansion area have received final licensing from Health Canada, increasing annual production to approximately 25,000 kg of dried cannabis. The
advanced manufacturing facilities include areas for dewaxing, distillation, milling and extraction that will provide the Company the capability to transform, manufacture and package cannabis in a wide range of products. The expansion also includes
secondary trimming zones, additional storage areas and cleaning rooms. The additional facilities and associated production capacity have positioned the Company to meet the SQDC first-year demand of 20,000 kg. 

Filling of Final Base Shelf Prospectus 
 On
November 21, 2018, the Company announcing the filing of the final short form base shelf prospectus with securities regulatory authorities in each of the provinces and territories of Canada. The shelf prospectus is valid for a 25-month period, during which HEXO may make offerings of up to $800 million of common shares, warrants, subscription receipts and units or a combination of thereof of the Company from time to time, separately
or together, in amounts, at prices and on terms to be determined based on market conditions at the time of the offering. The specific terms of any future offering will be established in a prospectus supplement to the shelf prospectus, which
supplement will be filed with the applicable Canadian securities regulatory authorities. Unless otherwise specified in the prospectus supplement relating to a particular offering of securities, the net proceeds from any sale of any securities may be
used by HEXO for general corporate purposes, including funding ongoing operations and/or working capital requirements, to repay indebtedness from time to time, capital projects and potential future acquisitions, including in relation to
international expansion. 
 Executive Appointments 
 We
recently bolstered our executive team with the addition of two experienced professionals. 
 Devan Pennell, Vice-President Program Office –
Devan brings over 10 years of financial management, project management, and cross-functional team building experience to the role of Vice President, Program Office. A graduate of Saint Francis Xavier University and Chartered Professional Accountant
by training, Devan has managed cross-functional and cross-border teams on a variety of high profile consulting projects, including the independent foreclosure reviews in the United States. Most recently, Devan was the Director of Finance
at the Ottawa Sports and Entertainment Group, where he helped bring the $500M redevelopment to life. Devan joined HEXO in the fall of 2016 as Director, Business Planning to help support the financing and
go-public transaction for the company. Since then, Devan was also tasked with overseeing the construction of over 1,000,000 sq. ft. of facility expansions.

As Vice President, Program Office, Devan is responsible for leveraging our tools and people to drive shared consciousness and coordination across the
organization, thus facilitating the timely and effective delivery of projects and initiatives that support achievement of our strategic objectives. In this role, Devan is responsible for the Operational Scalability, Product Management, and
Information Services functions within HEXO.
 Jim Busey, Interim Chief Revenue Officer – Jim brings more than 30 years of experience
in management with a specific focus on operational execution aligned with strategic direction to his interim role as Chief Revenue Officer. Jim has extensive background in management of business transformation initiatives, in
organizations undergoing significant growth and change. He brought his experience to organizations such as Jetform (acquired by Adobe), SHL Systemhouse (acquired by MCI), Petro Canada, Atlantic Lottery, Bell, AMEC, Halogen,
and Hydro Ottawa.
 As interim Chief Revenue Officer, Jim oversees the sales and business development functions for HEXO Corp. 

  
  

11 

 Non-IFRS Measures 

We have included certain non-IFRS performance measures in this MD&A, including adjusted gross margin, as defined in
this section. We employ these measures internally to measure our operating and financial performance. 
 We believe that these non-IFRS financial measures, in addition to conventional measures prepared in accordance with IFRS, enable investors to evaluate our operating results, underlying performance and future prospects in a manner similar
to management. 
 As there are no standardized methods of calculating these non-IFRS measures, our methods may
differ from those used by others, and accordingly, these measures may not be directly comparable to similarly titled measures used by others. Accordingly, these non-IFRS measures are intended to provide
additional information and should not be considered in isolation or as a substitute for measures of performance prepared in accordance with IFRS. 

ADJUSTED GROSS MARGIN 
 We use adjusted gross margin to
provide a better representation of performance in the period by excluding non-cash fair value measurements as required by IFRS. We believe this measure provides useful information as it represents the gross
margin for management purposes based on cost to produce, package and ship inventory sold, exclusive of any fair value measurements as required by IFRS. The metric is calculated by removing all amounts related to biological asset fair value
accounting under IFRS, including gains on transformation of biological assets and the cost of finished harvest inventory sold, which represents the fair value measured portion of inventory cost (“fair value cost adjustment”) recognized as
cost of goods sold. 
 We believe this measure provides useful information as it measures production efficiency and may be a benchmark against our
competitors. 

  
  

12 

 Operational and Financial Highlights 

KEY FINANCIAL PERFORMANCE INDICATORS 
 Summary of results
for the three-month period ended October 31, 2018 and October 31, 2017: 
  

									
	 	  	For the three months ended	 
	 Income statement snapshot
	  	October 31, 2018	 	  	October 31, 2017	 
	 Gross revenue
	  	$	6,677		  	$	1,102	 
	 Excise taxes
	  	$	(1,014	) 	  	$	—  	 
	 Net revenue
	  	$	5,663	 	  	$	1,102	 
	 Gross margin before fair value adjustments
	  	$	2,832		  	$	639	 
	 Gross margin
	  	$	7,237		  	$	2,463	 
	 Operating expenses
	  	$	22,035		  	$	2,844	 
	 (Loss)/income from operations
	  	$	(14,797	) 	  	$	(381	) 
	 Other income/(expenses)
	  	$	1,994	 	  	$	(1,537	) 
	 Net income (loss)
	  	$	(12,803	) 	  	$	(1,918	) 
	 Weighted average shares outstanding
	  	 	194,033,380		  	 	76,480,085	 
	 Net income (loss) per share
	  	$	(0.07	) 	  	$	(0.03	) 

 REVENUE IN Q1 EXCEED TOTAL FY18 REVENUES 
  

	 	•	 	 Total revenue in the quarter increased in excess of 500% to $6,677 as compared to the same quarter of fiscal
2018. 

  

	 	•	 	 Revenue in the three months ended October 31, 2018, exceeded total revenues fiscal 2018 by $1,743 or 35%.

  

	 	•	 	 Total grams and gram equivalents sold in the period increased to 1,109,727 from 120,844 when compared to the same
quarter in fiscal 2018, and more than doubled the total quantity of 538,886 sold in fiscal 2018. 

  

	 	•	 	 New in the quarter were ancillary revenues which contributed net $47 to total revenue. 

INTRODUCTION OF ADULT-USE REVENUES 
  

	 	•	 	 The Company realized its first adult-use revenues in the fiscal quarter
ended October 31, 2018. 

  

	 	•	 	 Adult-use sales totaled $5,194 with legalization occurring
October 17, 2018 and alone outperformed the total medical revenues of fiscal 2018 of $4,934. 

  

	 	•	 	 Oils sales represented 15% of the adult-use revenues.

  

	 	•	 	 Gross revenue per gram for adult-use sales was $5.45 during the three
months ended October 31, 2018. 

  

	 	•	 	 Gram and gram equivalents sold in the adult-use market amounted to
952,223 grams. 

 PRODUCTION ON TRACK FOR EXPECTED ANNUAL YIELD OF 108,000 KG 

 

	 	•	 	 During the quarter ended October 31, 2018, the Company produced over 3,550 kg of dried cannabis.

  

	 	•	 	 Certain production areas of our existing licensed facilities have been dedicated to the commissioning of our new
1,000,000 sq. ft. facility (B9). This includes designated areas housing the mother plants to be relocated to B9, as well as a cuttings area to supply B9 with its first plants in January 2019. 

 

	 	•	 	 The Company is ramping up towards its full production capacity, with efficiency gains and increased capacity
achieved through our recently licensed 250,000 sq. ft. facility and the additional 1,000,000 sq. ft. facility, which will become operational at the end of the calendar year. The Company expects to achieve its run goal rate of 108,000 kg of annual
dried flower production. 

 INCREASED MEDICAL REVENUES 
  

	 	•	 	 Medical revenue increased 30% to $1,436 compared to $1,102 in the first quarter of fiscal 2018 and despite the
demand of the adult-use market the Company ensured the needs of the medical clients were fully met. Higher revenue was driven mainly by increased oil sales volume which command a higher revenue per gram
equivalent than dried products as well as by an increase to dried product sales. Compared to the prior quarter, the sequential revenue growth was 2% due to increased sales volume in both dried and oil products. This was partially offset by a
decrease in dried product revenue per gram of $0.22 due to the current period’s sales mix. 

  

	 	•	 	 Sales in Ontario and Quebec increased by 8% and 16% respectively in the quarter. 

 

	 	•	 	 Revenue per gram equivalent decreased to $9.12 from $9.26 in the prior quarter but remained consistent with the
first quarter of fiscal 2018 at $9.12. Gram equivalents are utilized to provide a representation of dried grams utilized within our oil products. The gram equivalency factor was an average of 6.51 dried grams per unit sold in the quarter.

  
  

13 

	 	•	 	 Sales volume increased 30% to 157,504 gram equivalents, compared to 120,844 in the same prior year period. This
is due to a higher market acceptance and an increased consumer desire for smokeless products as oil sales increased to account for 22% of total sales in the quarter. On a sequential basis, sales volume remained consistent with slight increase of 3%
and 4% in dried and oil sales respectively. 

 ORGANIZATION’S HEADCOUNT 

 

	 	•	 	 As a result of the growing scale of operations, our headcount rose by 29% to 283 employees as at October 31,
2018 from the previous quarter’s headcount of 220 on July 31, 2018. 

 FACILITY EXPANSION 

 

	 	•	 	 On September 7, 2018, the Company expanded into Ontario through the acquisition of an approximate 2,000,000
sq. ft. facility in Belleville, Ontario, through a joint venture with a related party. The Company has leased 579,000 sq. ft. for the purpose of providing state-of
the-art processing, packaging and distribution capability. The facility with further allow for continuing research and development over enhanced cannabis products as well as for its strategic logistical
position to serve the province of Ontario and Canada. The remaining portion of the facility will remain available for future licensed space for additional fortune 500 partners and business opportunities. 

 

	 	•	 	 Also, during the period, the Company leased a 58,000 sq. ft. facility in Montreal, Quebec, for the purposes of
housing and distributing the cannabis products of all licensed producers supplying the SQDC with product for the adult-use market. 

FINANCIAL POSITION 
  

	 	•	 	 As at October 31, 2018, we held cash, cash equivalents and short-term investments of $171,887 and continued
to hold no debt on our balance sheet. 

  

	 	•	 	 Subsequent to the quarter end, the Company filed its final shelf prospectus for up to $800,000 of additional
common shares, warrants, subscription receipts and units or a combination of thereof. 

 Summary of Results 

Revenue
  

																					
	 	  	Q1 ’19	 	  	Q4 ’18	 	  	Q3 ’18	 	  	Q2 ’18	 	  	Q1 ’18	 
	 Adult-use cannabis revenue1
	  	$	5,194	 	  	$	—  	 	  	$	—  	 	  	$	—  	 	  	$	—  	 
	 Dried grams and gram equivalents sold
	  	 	952,223	 	  	 	—  	 	  	 	—  	 	  	 	—  	 	  	 	—  	 
		  	  
	  
	 	  	  
	  
	 	  	  
	  
	 	  	  
	  
	 	  	  
	  
	 
	 Adult-use revenue/gram equivalent
	  	$	5.45	 	  	$	—  	 	  	$	—  	 	  	$	—  	 	  	$	—  	 
	 Medical cannabis revenue
	  	$	1,436	 	  	$	1,410	 	  	$	1,240	 	  	$	1,182	 	  	$	1,102	 
	 Dried grams and gram equivalents sold
	  	 	157,504	 	  	 	152,288	 	  	 	134,253	 	  	 	131,501	 	  	 	120,844	 
		  	  
	  
	 	  	  
	  
	 	  	  
	  
	 	  	  
	  
	 	  	  
	  
	 
	 Medical revenue/gram equivalent
	  	$	9.12	 	  	$	9.26	 	  	$	9.24	 	  	$	8.99	 	  	$	9.12	 
	 Ancillary revenue2
	  	$	47	 	  	$	—  	 	  	$	—  	 	  	$	—  	 	  	$	—  	 
		  	  
	  
	 	  	  
	  
	 	  	  
	  
	 	  	  
	  
	 	  	  
	  
	 
	 Total sales
	  	$	6,677	 	  	$	1,410	 	  	$	1,240	 	  	$	1,182	 	  	$	1,102	 
		  	  
	  
	 	  	  
	  
	 	  	  
	  
	 	  	  
	  
	 	  	  
	  
	 

  

	1	 Cannabis revenue represents adult-use market sales under the
normal course of business and is exclusive of excise taxes. 

	2	 Revenue outside of the primary operations of the Company. 

Total revenue in the first quarter of fiscal 2019 increased to $6,677 from $1,102 in the compared period of fiscal 2018. The main contributor is the
introduction of adult-use sales in the final two weeks of the quarter which accounted for 78% of total revenue. New in the period is $47 of ancillary non-direct cannabis
sales revenue related to a management agreement. 

  
  

14 

 ADULT-USE SALES 

The Company realized its first adult-use revenues during the first quarter of fiscal 2019. Adult-use sales totaled $5,194 in this period which is a 371% increase over the $1,102 of medical sales in the first quarter of 2018, and a 5% increase over the $4,934 of total medical sales in all of fiscal 2018.
This is a direct result of the Company’s introductory brand awareness campaign. 
 Sales volume in the first quarter of 2019 was 952,223 gram
equivalents sold. Dried flower represented 81% of gram equivalents sold during the period.     

Adult-use revenue per gram equivalent was $5.45. This is reflective of 81% of these sales pertaining to dried flower
which command a competitive market sales price. The remaining balance primarily represents oil sales which command a higher revenue per gram equivalent. 

During the period, 90% of all adult-use sales were realized in Quebec through the SQDC with the remaining 10% derived
in Ontario and British Columbia via the OCS and BCLDB respectively. 
 MEDICAL SALES 

Revenue for the first quarter ended October 31, 2018 increased 30% to $1,436 compared to $1,102 in the same period in fiscal 2018. Higher revenue was
driven by increased sales volume as well higher Elixir oil sales which command a higher revenue per gram when compared to dried gram sales. Compared to the prior quarter, the sequential revenue increase was 2% reflecting a lower revenue per gram on
the dried flower sales which decreased $0.22/gram due to the current period’s sales mix of products. 
 Sales volume increased 30% to 157,504 gram
equivalents, compared to 120,844 in the same prior year period, due to an increase in our oil-based products as the product mix purchased by customers shifted towards smoke-free alternatives. Total dried grams
sold increased 10% when compared to the same prior year period. Revenue per gram equivalent remained at $9.12 as compared the same prior year period. On a sequential basis, sales volume collectively increased 3% across both dried and oil sales. 

Geographical sales in Ontario and Quebec increased 8% and 16% respectively. 

Cost of Sales and Excise Taxes 
 Cost of goods sold
includes the direct and indirect costs of materials and labour related to inventory sold, and includes harvesting, processing, packaging, shipping costs, depreciation and applicable overhead. 

Fair value adjustment on sale of inventory includes the fair value of biological assets included in the value of inventory transferred to cost of sales. 

Fair value of biological assets represents the increase or decrease in fair value of plants during the growing process less expected cost to complete and
selling costs and includes certain management estimates. 
  

									
	 	  	For the three months ended	 
	 	  	October 31, 2018	 	  	October 31, 2017	 
	 Excise taxes
	  	$	1,014	 	  	$	—  	 
	 Cost of sales
	  	 	2,831	 	  	 	463	 
	 Fair value adjustment on sale of inventory
	  	 	717	 	  	 	814	 
	 Fair value adjustment on biological assets
	  	 	(5,123	) 	  	 	(2,639	) 
		  	  
	  
	 	  	  
	  
	 
	 Total fair value adjustment
	  	$	(4,406	) 	  	$	(1,825	) 
		  	  
	  
	 	  	  
	  
	 

 Cost of sales for the quarter ended October 31, 2018 were $2,831, compared to $463 for the same quarter ended in fiscal
2018. The increase in cost of sales is the result of increased sales volumes and increases to transformation costs as the oil and other value added product production mix has increased from the first quarter of fiscal 2018. 

Fair value adjustment on the sale of inventory for the first quarter ended October 31, 2018 was $717 compared to $814 for the same quarter ended
October 31, 2017. This variance is due to increased sales volume of inventory sold when compared to the same quarter in fiscal year 2018 and the reversal of the previously recognized net realizable impairment on dried inventory. 

Fair value adjustment on biological assets for the quarter ended October 31, 2018 was ($5,123) compared to ($2,639) for the same quarter ended in fiscal
2018. This variance is due to the increase in the total number of plants as the first harvests and first full quarter of the B6 greenhouse being active. This results in significantly increased expected gram yields in the quarter and increased
production costs of operating a newly in-use facility. The increase in scale and total plants on hand is the result of preparing for the adult-use market, which began
October 17, 2018. 
 New in the period were excise taxes associated with the first adult-use and medical
recognized revenues post legalization between October 17, 2018 and October 31, 2018. These taxes totaled $1,014 and reduced the total gross margin by approximately 13%. Excise taxes are a function of fixed provincial and territorial rates
based upon the gram equivalents sold as well as a variable ad valorem component which is dependent upon the selling price of the products. 

  
  

15 

 Operating Expenses 
  

									
	.	  	For the three months ended	 
	 	  	October 31, 2018	 	  	October 31, 2017	 
	 General and administration
	  	$	4,912	 	  	$	1,168	 
	 Marketing and promotion
	  	 	11,711	 	  	 	1,115	 
	 Stock-based compensation
	  	 	4,689	 	  	 	314	 
	 Amortization of property, plant and equipment
	  	 	573	 	  	 	124	 
	 Amortization of intangible assets
	  	 	150	 	  	 	63	 
	 Research and development
	  	 	—  	 	  	 	61	 
		  	  
	  
	 	  	  
	  
	 
	 Total
	  	$	22,035	 	  	$	2,844	 
		  	  
	  
	 	  	  
	  
	 

 Operating expenses include marketing and promotion, general and administrative, research and development, stock-based
compensation, and amortization expenses. Marketing and promotion expenses include customer acquisition costs, customer experience costs, salaries for marketing and promotion staff, general corporate communications expenses, and research and
development costs. General and administrative expenses include salaries for administrative staff and executive salaries as well as general corporate expenditures including legal, insurance and professional fees. 

GENERAL AND ADMINISTRATIVE 
 General and administrative
expenses increased to $4,912 in the first quarter, compared to $1,168 for the same period in fiscal 2018. This increase reflects the general growing scale of our operations, including an increase in general, finance and administrative staffing and
additional rental space. Total general and administrative payroll increased $2,063 due to the growth in operations. Total professional fees increased by $710, as a result of the increased financial reporting and control-based regulatory requirements
accompanying public status on the TSX, additional legal fee’s pertaining to agreements such as the joint ventures established in the period, recruiting fees and increased compliance costs as a publicly listed company. 

MARKETING AND PROMOTION 
 Marketing and promotion expenses
significantly increased to $11,711 in the first quarter, compared to $1,115 for the same period in fiscal 2018. This reflects the launch of adult-use marketing and promotional events undertaken in the quarter
as we build brand recognition and establish HEXO in the cannabis market. This is inclusive of higher staff and travel-related expenses, printing and promotional materials as well as advertisement costs. 

AMORTIZATION OF PROPERTY, PLANT AND EQUIPMENT 

Amortization of property, plant and equipment increased to $573 in the quarter, compared with $124 for the same period in fiscal 2018. The increase is the
direct result of the Company’s newly built greenhouses and acquired cultivation equipment. Additionally, increases to cultivation and production equipment were incurred in order to support the larger production demands and scalability of the
Company. 
 AMORTIZATION OF INTANGIBLE ASSETS 

Amortization of intangible assets increased to $150 in the first quarter, compared with $63 for the same period in fiscal 2018. The increase is the result of
the implementation of the first phase of a new ERP system, which will replace certain software programs we currently use and capitalized licenses and web-based assets. 

Loss from Operations 
 Income/(loss) from operations for
the first quarter was ($14,797), compared to ($381) for the same period in fiscal 2018. The increased loss from operations is due mainly to higher expenses in line with the expanding scale of operations as we prepared for the legalization of the adult-use market and the realization of stock-based compensation expenses in line with the increased headcount and market share price value of the Company. 

Other Income/Expenses 
 Other income/(expense) was $1,994
for the three months ended October 31, 2018 compared to ($1,537) in the same period of fiscal 2018. Revaluation of financial instruments of ($2,337) in the latest quarter reflects the revaluation of an embedded derivative related to USD
denominated warrants issued in the prior year. Additionally, we had an unrealized fair value gain on convertible note receivable of $3,434. Interest income of $1,066 was realized for the three months ended October 31, 2018 reflective of the
interest generated from the increased short-term investments held as at October 31, 2018. 

  
  

16 

 Biological Assets – Fair Value Measurements 

As at October 31, 2018, the changes in the carrying value of biological assets are as follows: 

 

									
	 	  	October 31, 2018	 	  	July 31, 2018	 
	 Carrying amount, beginning of period
	  	$	2,332	 	  	$	1,504	 
	 Production costs capitalized
	  	 	1,537	 	  	 	993	 
	 Net increase in fair value due to biological transformation less cost to sell
	  	 	5,123	 	  	 	7,340	 
	 Transferred to inventory upon harvest
	  	 	(6,351	) 	  	 	(7,505	) 
		  	  
	  
	 	  	  
	  
	 
	 Carrying amount, end of period
	  	$	2,641	 	  	$	2,332	 
		  	  
	  
	 	  	  
	  
	 

 Our biological assets consist of cannabis plants, from seeds all the way through to mature plants. As at October 31,
2018, the carrying amount of biological assets consisted of $6 in seeds and $2,635 in cannabis plants ($6 in seeds and $2,326 in cannabis plants as at July 31, 2018). The increase in the carrying amount of biological assets is attributable to
an increase in production costs and offset by the market selling price decrease as a result of the adult-use market. The significant estimates used in determining the fair value of cannabis on 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 fulfillment 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; and 

 

	 	•	 	 destruction/wastage of plants during the harvesting and processing process. 

We view our biological assets as Level 3 fair value estimates and estimate the probability of certain harvest rates at various stages of growth. As at
October 31, 2018, it is expected that our biological assets will yield approximately 4,846,294 grams (July 31, 2018 – 4,373,775 grams). Our 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 plant’s life relative to the stages within the harvest cycle. 
 Management’s
identified significant unobservable inputs, their range of values and sensitivity analysis are presented in the table below: 
  

					
	 Unobservable inputs
	  	 Input values
	  	 Sensitivity analysis

	 Average selling price
 Obtained through
actual retail prices
on a per strain basis
	  	$5.00 per dried gram	  	An increase or decrease of 5% applied to the average selling price would result in a change of approximately $131,700 to the valuation.
			
	 Yield per plant
 Obtained through
historical harvest
 cycle results on a per strain basis
	  	54–235 grams per plant	  	An increase or decrease of 5% applied to the average yield per plant would result in a change up to approximately $373,100 in valuation.
			
	 Stage of growth
 Obtained through the
estimates of stage
 of completion within the harvest cycle
	  	Average of 38% completion	  	An increase or decrease of 5% applied to the average stage of growth per plant would result in a change of approximately $325,100 in valuation.
			
	 Wastage
 Obtained through the estimates
of stage
 of wastage within the cultivation and production cycle
	  	0%–30% dependent upon the stage within the harvest cycle	  	An increase or decrease of 5% applied to the wastage expectation would result in a change of approximately $134,400 in valuation.

  
  

17 

 Quarterly Results 

The following table presents certain unaudited financial information for each of the eight fiscal quarters up to and including the quarter ended
October 31, 2018. The information has been derived from our unaudited consolidated financial statements, which in management’s opinion have been prepared on a basis consistent with the condensed interim consolidated financial statements
for the three months ended October 31, 2018. Past performance is not a guarantee of future performance, and this information is not necessarily indicative of results for any future period. 

 

																	
	 	  	Q1 ’19
October 31, 2018	 	  	Q4 ’18
July 31, 2018	 	  	Q3 ’18
April 30, 2018	 	  	Q2 ’18
January 31, 2018	 
	 Net revenue
	  	$	5,663	 	  	$	1,410	 	  	$	1,240	 	  	$	1,182	 
	 Net income (loss)
	  	 	(12,803	) 	  	 	(10,194	) 	  	 	(1,971	) 	  	 	(8,952	) 
	 Income (loss) per share – basic
	  	 	(0.07	) 	  	 	(0.05	) 	  	 	(0.01	) 	  	 	(0.10	) 
	 Income (loss) per share – fully diluted
	  	 	(0.07	) 	  	 	(0.05	) 	  	 	(0.01	) 	  	 	(0.10	) 
					
	 	  	Q1 ’18
October 31, 2017	 	  	Q4 ’17
July 31, 2017	 	  	Q3 ’17
April 30, 2017	 	  	Q2 ’17
January 31, 2017	 
	 Net revenue
	  	$	1,102	 	  	$	862	 	  	$	1,182	 	  	$	914	 
	 Net income (loss)
	  	 	(1,918	) 	  	 	935	 	  	 	(11,808	) 	  	 	(1,114	) 
	 Income (loss) per share – basic
	  	 	(0.03	) 	  	 	0.02	 	  	 	(0.17	) 	  	 	(0.02	) 
	 Income (loss) per share – fully diluted
	  	 	(0.03	) 	  	 	0.01	 	  	 	(0.17	) 	  	 	(0.02	) 

 Financial Position 
 The
following table provides a summary of our interim condensed financial position as at October 31, 2018 and July 31, 2018: 
  

									
	 	  	October 31, 2018	 	  	July 31, 2018	 
	 Total assets
	  	$	383,306	 	  	$	334,997	 
	 Total liabilities
	  	 	17,438	 	  	 	12,124	 
	 Share capital
	  	 	357,402	 	  	 	347,233	 
	 Share-based payment reserve
	  	 	10,675	 	  	 	6,139	 
	 Warrants
	  	 	53,728	 	  	 	12,635	 
	 Deficit
	  	 	(55,937	) 	  	 	(43,134	) 

 Total Assets 
 Total
assets increased to $383,306 as at October 31, 2018 from $334,997 as at July 31, 2018, primarily due to the capitalization of $42,386 in fair value consideration related to the Truss joint venture. Property plant and equipment increased by
$30,933 due to continuing additions in the construction of the 1,000,000 sq. ft facility B9. At October 31, 2018, the Company had an unrestricted cash balance of $23,278 and short-term investments of $148,609. New the period the Company holds a
$20,334 promissory note receivable and a $3,434 unrealized gain on fair value related to the convertible debenture receivable. 
 Total Liabilities

 Total liabilities increased to $17,438 as at October 31, 2018 from $12,124 as at July 31, 2018, due to an increase in trade accounts payable
and accruals of $5,638 due to continued growth in operations and scalability. Total liabilities include a warrant liability of $2,805 as at October 31, 2018, from $3,130 as at July 31, 2018, recorded at fair value, representing exercised
USD denominated warrants and offset by the increased revaluation of the liability due to an increased market value. 
 Share Capital 

Share capital increased to $357,402 as at October 31, 2018 from $347,233 as at July 31, 2018, due to the exercising of warrants and stock options
during the period. The excising of warrants and stock options increased during the period due to the large increase in the market share price during the ramp up to adult-use legalization in October 2018. 

  
  

18 

 Share-Based Payment Reserve 

The share-based payment reserve increased to $10,675 as at October 31, 2018 from $6,139 as at July 31, 2018, primarily due to the 1,173,500 options
issued on September 17, 2018 which held fair market value of $8.43 per share at the time of granting. 
 Warrants 

The warrant reserve increased significantly to $53,728 as at October 31, 2018 from $12,635 as at July 31, 2018, primarily due to the $42,386 addition
of the fair valued Molson warrants reserve established for the 11,500,000 warrants granted as consideration in the Truss joint venture acquisition in early October 2018. The warrants possess a strike price of $6.00 and a term of 3 years. 

Liquidity and Capital Resources 
 Liquidity 

Our objectives when managing our liquidity and capital structure are to maintain sufficient cash to fund operating and organic growth requirements, and to meet
contractual obligations. Our ability to reach profitability is dependent on successful implementation of our business strategy. While management is confident in the future success of the business, there can be no assurance that our products will
gain adequate market penetration or acceptance or generate sufficient revenue to reach profitability. 
 As at October 31, 2018, we had $23,278 of cash
and cash equivalents on hand, $148,609 of short-term investments, $6,976 of trade receivables, $20,334 promissory note receivable maturing in January 2019 and $14,633 of accounts payable and accrued liabilities. As at July 31, 2018, we had
$39,342 of cash and cash equivalents on hand, $205,447 of short-term investments, $644 of trade receivables and $8,995 of accounts payable and accrued liabilities. 
  

									
	 	  	For the three months ended	 
	 Liquidity
	  	October 31, 2018	 	  	October 31, 2017	 
	 Operating activities
	  	$	(23,425	) 	  	$	(1,174	) 
	 Financing activities
	  	 	8,612	 	  	 	406	 
	 Investing activities
	  	$	(1,251	) 	  	$	(35,941	) 

 Operating Activities 
 Net
cash used in operating activities for the 3 months ended October 31, 2018 was $23,425 as a result of the net loss for the period ended of $12,803, and a decrease in non-cash working capital of $8,284,
partially offset by non-cash expense of $2,338. In the same prior year period, cash used in operating activities was $1,174, reflecting the net loss of $1,918, net
non-cash income of $550, and an increase in working capital of $1,295. The change in cash flow reflects $5,123 of an unrealized change in the fair value of biological assets and increased inventory stock and
trade receivables of $1,729 and $6,332, respectively. 
 Financing Activities 

Net cash received from financing activities for the 3 months ended October 31, 2018 was $8,612, reflecting the exercised warrants and stock options during
the period. 
 Investing Activities 
 For the 3 months
ended October 31, 2018, we used $1,251 for investing activities, primarily due to the cash consideration and capitalized transaction costs of the $7,035 Truss joint venture and the issuance of a $20,334 promissory note receivable, which is
fully repayable in March 2019. During the period, we continued additions of $25,341 to our property, plant and equipment as scalability increases and the new 1,000,000 sq. ft. greenhouse approaches significant completion. The aforementioned
reduction in cash was offset by the reduction in short-term investments of $56,838. 
 Capital Resources 

As at October 31, 2018, total current assets less current liabilities totaled $226,913. The exercise of all the issued and outstanding warrants, as at
October 31, 2018, would result in an increase in cash of approximately $178,652, and the exercise of all stock options would increase cash by approximately $52,407. 

On November 21, 2018, the Company filed the final short form prospectus with the regulatory authorities in each of the provinces and territories of
Canada. The prospectus is valid for a 25-month period, during which offerings up to $800,000 of common shares, warrants, subscription receipts and units or a combination of thereof may be executed. 

Management believes that current working capital along with the recently filled prospectus, sufficiently provides funds to fund current expansion projects and
meet contractual obligations for the next 12 months. We periodically evaluate the opportunity to raise additional funds through the public or private placement of equity capital to strengthen our financial position and to provide sufficient cash
reserves for growth and development of the business. 

  
  

19 

 Our authorized share capital is comprised of an unlimited number of common shares. The table below outlines
the number of issued and outstanding common shares, warrants and options as at July 31, 2018, October 31, 2018 and December 12, 2018. 
  

													
	 	  	December 12, 2018	 	  	October 31, 2018	 	  	July 31, 2018	 
	 Common shares
	  	 	198,172,020	 	  	 	197,388,591	 	  	 	193,629,116	 
	 Warrants
	  	 	34,651,000	 	  	 	34,787,758	 	  	 	26,425,504	 
	 Options
	  	 	14,520,224	 	  	 	14,769,841	 	  	 	14,388,066	 
		  	  
	  
	 	  	  
	  
	 	  	  
	  
	 
	 Total
	  	 	247,343,244	 	  	 	246,946,190	 	  	 	234,442,686	 
		  	  
	  
	 	  	  
	  
	 	  	  
	  
	 

 Off-Balance Sheet Arrangements and Contractual Obligations 

We have no off-balance sheet arrangements. 

We have certain contractual financial obligations related to service agreements and construction contracts for the construction in progress shown in Note 8 of
the interim consolidated financial statements and the accompanying notes for the three months ended October 31, 2018. Commitments are inclusive of $64,926,107 related to the 20-year anchor rental
commitment regarding the Belleville facility. 
 These contracts have optional renewal terms that we may exercise at our option. The annual minimum payments
payable under these contracts over the next five years are as follows: 
  

					
	 	  	$	 
	 2019
	  	 	64,136,910	 
	 2020
	  	 	4,077,506	 
	 2021
	  	 	4,038,172	 
	 2022
	  	 	3,978,223	 
	 2023
	  	 	3,177,654	 
	 Thereafter
	  	 	50,051,833	 
		  	  
	  
	 
		  	 	129,460,298	 
		  	  
	  
	 

 Financial Risk Management 

We are exposed to risks of varying degrees of significance which could affect our ability to achieve our strategic objectives for growth. The main objectives
of our risk management process are to ensure that risks are properly identified and that the capital base is adequate in relation to these risks. The principal financial risks to which we are exposed are described below. 

Interest Risk 
 Our exposure to interest rate risk only
relates to any investments of surplus cash. We may invest surplus cash in highly liquid investments with short terms to maturity that would accumulate interest at prevailing rates for such investments. As at October 31, 2018, we had short term
investments of $148,609. 
 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 October 31, 2018, 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 and cash equivalents are held by one of the largest cooperative financial groups in Canada. The short-term investments are held in various guaranteed
investment certificates, term deposits, and fixed income securities. 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
the crown corporations of Quebec, Ontario and British Columbia as well as one of the largest medical insurance companies in Canada. Credit risk from the convertible debenture receivable and promissory note 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, convertible note receivable and promissory note
receivable represents the maximum exposure to credit risk and as at October 31, 2018; this amounted to $217,845. 

  
  

20 

 The following table summarizes the Company’s aging of receivables as at October 31, 2018 and
July 31, 2018: 
  

									
	 	  	October 31,
2018
$	 	  	July 31,
2018
$	 
	 0–30 days
	  	 	6,196,932	 	  	 	262,448	 
	 31–60 days
	  	 	180,175	 	  	 	187,446	 
	 61–90 days
	  	 	200,252	 	  	 	90,656	 
	 Over 90 days
	  	 	398,214	 	  	 	103,046	 
		  	  
	  
	 	  	  
	  
	 
	 Total
	  	 	6,975,573	 	  	 	643,596	 
		  	  
	  
	 	  	  
	  
	 

 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 78% (October 31, 2017 – Nil%) of total sales in the three months ended October 31, 2018. 

The Company holds trade receivables from three crown corporations representing 84% of total trade receivables as of October 31, 2018 (October 31, 2017
– 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 October 31, 2018, the Company had $171,887 of
cash and cash equivalents and short-term investments. 
 The Company is obligated to pay accounts payable and accrued liabilities with a carrying amount and
contractual cash flows amounting to $14,633 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. 
 Critical Accounting Assumptions 

Our financial statements are prepared in accordance with IFRS. Management makes estimates and assumptions and uses judgment in applying these accounting
policies and reporting the amounts of assets and liabilities, revenue and expenses, and the related disclosure of contingent assets and liabilities. Significant estimates in the accompanying financial statements relate to the valuation of biological
assets and inventory, stock-based compensation, warrants, the estimated useful lives of property, plant and equipment, and intangible assets. Actual results could differ from these estimates. Our critical accounting assumptions are presented in Note
3 of the Company’s annual audited consolidated financial statements for the fiscal year ended July 31, 2018, which is available under HEXO’s profile on SEDAR. 

Adopted and Upcoming Changes in Accounting Standards 

IFRS 15, Revenues 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. 

  
  

21 

 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 Fair Value through Other Comprehensive Income (“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
	Promissory note receivable	  	Loans and receivables	  	Amortized cost
	Financial liabilities	  		  	
	Accounts payable and accrued liabilities	  	Other financial liabilities	  	Amortized cost
	Warrant liability	  	FVTPL	  	FVTPL

 The adoption of IFRS 9 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 statement of comprehensive income. 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. The adoption of the new expected credit loss impairment model had a negligible impact on the carrying amounts of financial assets at amortized
cost. 

  
  

22 

 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). 

IFRS 16, Leases 
 IFRS 16 was issued
by the IASB in January 2016, and specifies the requirements to recognize, measure, present and disclose leases. IFRS 16 is effective for annual periods beginning on or after January 1, 2019, with early adoption permitted. The Company is
assessing the impact of the new or revised IFRS standard in issue but not yet effective on its consolidated financial statements. 
 Related Party
Transactions 
 Key Management Personnel Compensation 

Key management personnel are those persons having the authority and responsibility for planning, directing and controlling our operations, directly or
indirectly. Our key management personnel are the members of the executive management team and Board of Directors, who collectively control approximately 8.57% of the outstanding common shares as at October 31, 2018 (July 31, 2018 –
22.40%). 
 Compensation provided to key management for the three months ended October 31, 2018 and 2017 was as follows: 

 

									
	.	  	For the three months ended	 
	 	  	October 31, 2018	 	  	October 31, 2017	 
	 Salary and/or consulting fees
	  	$	669	 	  	$	384	 
	 Bonus compensation
	  	 	214	 	  	 	—  	 
	 Stock-based compensation
	  	 	3,289	 	  	 	261	 
		  	  
	  
	 	  	  
	  
	 
	 Total
	  	$	4,172	 	  	$	645	 
		  	  
	  
	 	  	  
	  
	 

 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 September 17, 2018, the Company granted certain
its executives a total of 650,000 stock options with an exercise price of $7.93. 
 On July 11, 2018, the Company granted certain of its directors and
officers a total of 4,325,000 stock options with an exercise price of $4.89. 
 On April 16, 2018, the Company granted certain 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 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 a total of
1,750,000 stock options with an exercise price of $2.69, half of which vested immediately and the balance over a three-year period. 
 On September 8,
2017, the Company granted certain of our executives a total of 650,000 stock options with an exercise price of $1.37. 
 On September 10, 2018, the
Company announced the leasing of a new facility. The building is owned by Belleville Complex Inc., a joint venture in which HEXO holds a 25% interest and Olegna will hold a 75% interest. Olegna is controlled by a HEXO director and a
non–arm’s length related party. In addition to its initial lease of 500,000 sq. ft. of the space under a long-term lease, HEXO will have rights of first offer and first refusal to lease the remaining space in the building. As part of the
transaction, HEXO has loaned $20,272 to Belleville Complex to acquire the building. The loan will be repaid within 120 days from September 7, 2018, and bears interest at an annual rate of 4%, in which interest shall be payable monthly. The loan
is secured by a first mortgage over the building. HEXO has also agreed to be the anchor tenant of the facility for a period of 20 years. 
 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. 

  
  

23 

 Internal Controls over Financial Reporting 

In accordance with National Instrument 52-109 Certification of Disclosure in Issuers’ Annual and Interim
Filings (“NI 52-109”), the establishment and maintenance of Disclosure Controls and Procedures (“DCP”) and Internal Control Over Financial Reporting (“ICFR”) is the
responsibility of management. The DCP and ICFR have been designed by management based on the 2013 Internal Control Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”) to provide
reasonable assurance that the Company’s financial reporting is reliable and that its financial statements have been prepared in accordance with IFRS. 

Regardless of how well the DCP and ICFR are designed, internal controls have inherent limitations and can only provide reasonable assurance that the controls
are meeting the Company’s objectives in providing reliable financial reporting information in accordance with IFRS. These inherent limitations include, but are not limited to, human error and circumvention of controls and as such, there can be
no assurance that the controls will prevent or detect all misstatements due to errors or fraud, if any. 
 The Company maintains a set of disclosure
controls and procedures designed to provide reasonable assurance that information required to be publicly disclosed is recorded, processed, summarized and reported on a timely basis. An evaluation of the design of Disclosure Controls was done under
the supervision and with the participation of management, including our Chief Executive Officer and Chief Financial Officer. Based upon this evaluation, the material changes to the control environment and the material weakness in our internal
control over financial reporting as at October 31, 2018, are set forth below. 
 Material Changes to the Control Environment 

During the period the Company continued to embark on a transformation project, enabled by a new end to end Enterprise Resource Planning (“ERP”)
system. When completed, the project will provide an integrated system for inventory tracking and valuation from seed to sale. The project was launched in November 2017 to standardize and automate business processes and controls across the
organization. Currently, the system is operational in Finance, Sales and Procurement processes. It will continue to be rolled out for inventory tracking and processing throughout the fiscal year. The project is a major initiative that is
utilizing third party consultants, and a solution designed specifically for the cannabis industry. The new ERP is intended to facilitate improved reporting and oversight and enhance internal controls over financial reporting. 

Identified Material Weaknesses and Remediation Plan 

COMPLEX SPREADSHEET CONTROLS 
 Management concluded that
the Company did not implement and maintain effective controls surrounding complex spreadsheets. Spreadsheets are inherently prone to error due to the manual nature and increased risk of human error. The Company’s controls related to complex
spreadsheets did not address all identified material risks associated with manual data entry, documentation of assumptions, completeness of data entry, and the accuracy of formulas. 

The Company has engaged a third party to aid in the identification, assessment and remediation over the design and implementation effectiveness of complex
spreadsheet internal controls over financial reporting. The Company intends to move towards an ERP which possesses specific functionality to remove the manual nature and usage of complex spreadsheets in future periods. 

IMPLEMENTATION OF AN ERP 
 The Company did not have
effective information technology (IT) general controls over all operating systems, databases, and IT applications supporting financial reports. Accordingly, process-level automated controls and manual controls that were dependent upon the
information derived from IT systems were also determined to be ineffective. 
 The Company has engaged a third party to aid in the identification,
assessment and remediation over the design and implementation effectiveness of IT related internal controls over financial reporting. The Company intends to fully implement the ERP during fiscal 2019 and will only take reliance upon such controls
once the appropriate level of testing is reached. 

  
  

24 

 Risk Factors 

Our overall performance and results of operations are subject to various risks and uncertainties which could cause actual performance, results and achievements
to differ materially from those expressed or implied by forward-looking statements and forward-looking information, including, without limitation, the following factors, which are discussed in our Annual Information Form dated October 26, 2018
available under our profile on www.sedar.com, which risk factors are incorporated by reference into this document, and should be reviewed in detail by all readers: 
  

	 	•	 	 We operate in a dynamic, rapidly changing environment that involves risks and uncertainties, and as a result,
management expectations may not be realized for a number of reasons. An investment in our securities is speculative and involves a high degree of risk and uncertainty. 

 

	 	•	 	 Reliance on management’s and key persons’ ability to execute on strategy. This exposes us to
management’s ability to perform, as well as the risk of management leaving the Company. 

  

	 	•	 	 We face intense competition from licensed producers and other companies, some of which may have greater financial
resources and more industry, manufacturing and marketing experience than we do. 

  

	 	•	 	 The number of licenses granted, and the number of licensed producers ultimately authorized by Health Canada could
have an impact on our operations. We expect to face additional competition from new market entrants that are granted licences under the ACMPR or existing license holders which are not yet active in the industry. 

 

	 	•	 	 We may be subject to growth-related risks including capacity constraints and pressure on our internal systems and
controls. Our ability to manage growth effectively will require it to continue to implement and improve our operational and financial systems and to expand, train and manage our employee base. 

 

	 	•	 	 We maintain various types of insurance such as, but not limited to, errors and omissions insurance;
directors’ and officers’ insurance; property coverage; and general commercial insurance, recall insurance, cyber security insurance, warehouseman insurance and cargo insurance. A judgment against any member of the Company in excess of
available coverage could have a material adverse effect on us in terms of damages awarded and the impact on our reputation. 

  

	 	•	 	 Given the nature of our business, we may from time to time be subject to claims or complaints from investors or
others in the normal course of business which could adversely affect the public’s perception of the Company. 

  

	 	•	 	 We may become party to litigation from time to time in the ordinary course of business which could adversely
affect our business. 

  

	 	•	 	 Failure to adhere to laws and regulations may result in possible sanctions including the revocation or imposition
of conditions on licenses to operate our business; the suspension or expulsion from a particular market or jurisdiction or of our key personnel; and the imposition of fines and censures. 

 

	 	•	 	 Achievement of our business objectives is contingent, in part, upon compliance with regulatory requirements
enacted by these governmental authorities and obtaining all regulatory approvals, where necessary, for the production and sale of our products. We cannot predict the time required to secure all appropriate regulatory approvals for our products, or
the extent of testing and documentation that may be required by governmental authorities. 

  

	 	•	 	 While to the knowledge of our management, it is currently in compliance with all laws, regulations and guidelines
relating to the marketing, acquisition, manufacture, management, transportation, storage, sale and disposal of cannabis and also including laws and regulations relating to health and safety, the conduct of operations and the protection of the
environment, changes to such laws, regulations and guidelines due to matters beyond our control may cause adverse effects to our operations. 

  

	 	•	 	 Our business operations are dependent on our license under the Cannabis Regulations. The license must be
renewed by Health Canada. Our current license expires on October 15, 2019. Failure to comply with the requirements of the license or any failure to renew the license would have a material adverse impact on our business, financial condition and
operating results. 

  

	 	•	 	 Our activities and resources are currently primarily focused on our production facilities on the Gatineau campus,
and we will continue to be focused on this facility for the foreseeable future. Adverse changes or developments affecting the Gatineau campus would have a material and adverse effect on our business, financial condition and prospects.

  

	 	•	 	 We have incurred operating losses since commencing operations and may incur losses in the future and may not
achieve profitability. 

  

	 	•	 	 Our growth strategy contemplates outfitting the Company’s multiple facilities with additional production
resources. There is a risk that these additional resources will not be completed on time, on budget, or at all. 

  

	 	•	 	 A key aspect of our business is growing cannabis, and as such we are exposed to the risks inherent in any
agriculture business, such as disease spread, hazards, pests and similar agricultural risks that may create crop failures and supply interruptions for our customers. 

 

	 	•	 	 Our cannabis growing operations consume considerable energy, making us vulnerable to rising energy costs. Rising
or volatile energy costs may adversely impact our business and our ability to operate profitably. 

  
  

25 

	 	•	 	 We believe the cannabis industry is highly dependent upon consumer perception regarding the safety, efficacy and
quality of the cannabis produced. Consumer perception of our products can be significantly influenced by scientific research or findings, regulatory investigations, litigation, media attention and other publicity regarding the consumption of
cannabis products. There can be no assurance that future scientific research, findings, regulatory proceedings, litigation, media attention or other research findings or publicity will be favourable to the cannabis market or any particular product,
or consistent with earlier publicity. 

  

	 	•	 	 As a manufacturer and distributor of products designed to be ingested or inhaled by humans, we face an inherent
risk of exposure to product liability claims, regulatory action and litigation if our products are alleged to have caused significant loss or injury. In addition, the manufacture and sale of our products involve the risk of injury or loss to
consumers due to tampering by unauthorized third parties, product contamination, unauthorized use by consumers or other third parties. 

  

	 	•	 	 Manufacturers and distributors of products are sometimes subject to the recall or return of their products for a
variety of reasons, including product defects, such as contamination, unintended harmful side effects or interactions with other substances, packaging safety and inadequate or inaccurate labelling disclosure. 

 

	 	•	 	 Our business is dependent on a number of key inputs and their related costs including raw materials and supplies
related to our growing operations, as well as electricity, water and other local utilities. Any significant interruption or negative change in the availability or economics of the supply chain for key inputs could materially impact our business,
financial condition and operating results. 

  

	 	•	 	 We must rely largely on our own market research to forecast sales as detailed forecasts are not generally
obtainable from other sources at this early stage of the medical marijuana industry in Canada. 

  

	 	•	 	 We have no earnings or dividend record and may not pay any dividends on our common shares in the foreseeable
future. 

  

	 	•	 	 Our common shares are listed on the TSX; however, there can be no assurance that an active and liquid market for
the common shares will be maintained, and an investor may find it difficult to resell such shares. 

  

	 	•	 	 The market price for our common shares may be volatile and subject to wide fluctuations in response to numerous
factors, including governmental and regulatory regimes, community support for the cannabis industry, variations in our operating results, changes in our business prospects, as well as many other factors that are beyond our control.

  

	 	•	 	 We may issue additional common shares in the future, which may dilute a shareholder’s holdings in the
Company. 

  

	 	•	 	 Our operations are subject to environmental and safety laws and regulations concerning, among other things,
emissions and discharges to water, air and land, the handling and disposal of hazardous and non-hazardous materials and wastes, and employee health and safety. We will incur ongoing costs and obligations
related to compliance with environmental and employee health and safety matters. Failure to comply with environmental and safety laws and regulations may result in additional costs for corrective measures, in penalties or in restrictions on our
manufacturing operations. 

  

	 	•	 	 The development of our business and operating results may be hindered by applicable restrictions on sales and
marketing activities imposed by Health Canada. 

  

	 	•	 	 In the fiscal year 2018, the Company initiated the implementation of new ERP systems. The implementation is
expected to be completed in the fiscal year ended July 31, 2019. Upon full commencement of the implementation, the scoping, requirements definition, business process definition, design and testing of the integrated ERP system could result in
problems which could, in turn, result in disruption, delays and errors to the operations and processes within the business and/or inaccurate information for management and financial reporting. 

 

	 	•	 	 We are exposed to the risk that our employees, independent contractors and consultants may engage in fraudulent
or other illegal activity. Misconduct by these parties could include intentional, reckless and/or negligent conduct or disclosure of unauthorized activities to the Company that violates: (i) government regulations; (ii) manufacturing
standards; (iii) federal and provincial healthcare fraud and abuse laws and regulations; or (iv) laws that require the true, complete and accurate reporting of financial information or data. 

 

	 	•	 	 Our TSX’s listing conditions required us to deliver an undertaking confirming that, while listed on the TSX,
we will only conduct the business of production, acquisition, sale and distribution of cannabis in Canada as permitted under the Health Canada license. 

  

	 	•	 	 The Company is subject to continuous evolving corporate governance, internal controls and disclosure regulations
that may increase the risk of non-compliance, which could adversely impact the Company, its market perception and valuation. 

 

	 	•	 	 The Company is subject to changed rules and regulations as implemented by a number of governmental and
self-regulated bodies, including, but not limited to, the Canadian Securities Administration, the TSX and the International Accounting Standards Board. These rules and regulations continue to evolve in scope and complexity, creating many new
requirements. 

  
  

26

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