Identity of Company (Form 6-K)

HEXO Corp. ("HEXO")

3000 Solandt Road

Ottawa, Ontario

K2K 2X2

Trent MacDonald, Chief Financial Officer

Telephone: 416-230-1126

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

August 30, 2021.

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

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

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

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

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

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

September 24, 2021.

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

-2-

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

-3-

SCHEDULE A

(See attached)

2579951 Ontario Inc.

Consolidated Financial Statements

December 31, 2020

2579951 Ontario Inc.

Contents

For the year ended December 31, 2020

Page

Independent Auditor's Report

To the Shareholders of 2579951 Ontario Inc.:

Opinions

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

Unmodified Opinion on the Consolidated Financial Position

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

Qualified Opinion on the Consolidated Results of Operations and Cash Flows

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

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

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

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

Other Matter - Comparative Information

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

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

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

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

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

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

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

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

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

2579951 Ontario Inc.

Consolidated Balance Sheet

As at December 31, 2020

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

1

2579951 Ontario Inc.

Consolidated Statement of Earnings (Loss)

For the year ended December 31, 2020

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

2

2579951 Ontario Inc.

Consolidated Statement of Retained Earnings (Deficit)

For the year ended December 31, 2020

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

3

2579951 Ontario Inc.

Consolidated Statement of Cash Flows

For the year ended December 31, 2020

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

4

2579951 Ontario Inc.

Notes to the Consolidated Financial Statements

For the year ended December 31, 2020

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

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

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

Basis of consolidation

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

Inventory

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

Property, plant and equipment

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

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

Revenue recognition

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

Income taxes

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

5

2579951 Ontario Inc.

Notes to the Consolidated Financial Statements

For the year ended December 31, 2020

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

Leases

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

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

Foreign currency translation

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

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

Long-lived assets and discontinued operations

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

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

Use of estimates

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

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

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

6

2579951 Ontario Inc.

Notes to the Consolidated Financial Statements

For the year ended December 31, 2020

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

Financial instruments

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

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

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

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

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

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

7

2579951 Ontario Inc.

Notes to the Consolidated Financial Statements

For the year ended December 31, 2020

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

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

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

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

Authorized

Unlimited number of common shares

8

2579951 Ontario Inc.

Notes to the Consolidated Financial Statements

For the year ended December 31, 2020

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

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

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

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

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

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

9

2579951 Ontario Inc.

Notes to the Consolidated Financial Statements

For the year ended December 31, 2020

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

Credit concentration

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

Liquidity risk

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

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

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

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

10

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

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

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

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

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

Attrition rate - 1% (2019 - 1%)

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

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

SCHEDULE B

(See attached)

2579951 Ontario Inc.

Interim Consolidated Financial Statements

March 31, 2021

(Unaudited)

2579951 Ontario Inc.

Contents

For the 3 month periods ended March 31, 2021 and 2020

(Unaudited)

Page

2579951 Ontario Inc.

Interim Consolidated Balance Sheets

As at

(Unaudited)

The accompanying notes are an integral part of these financial statements

1

2579951 Ontario Inc.

Interim Consolidated Statements of Earnings (Loss)

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

(Unaudited)

The accompanying notes are an integral part of these financial statements

2

2579951 Ontario Inc.

Interim Consolidated Statements of Retained Earnings (Deficit)

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

(Unaudited)

The accompanying notes are an integral part of these financial statements

3

2579951 Ontario Inc.

Interim Consolidated Statements of Cash Flows

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

(Unaudited)

The accompanying notes are an integral part of these financial statements

4

2579951 Ontario Inc.

Notes to the Interim Consolidated Financial Statements

For the periods ended March 31, 2021 and 2020

(Unaudited)

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

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

Basis of consolidation

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

Inventory

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

Property, plant and equipment

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

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

Revenue recognition

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

Income taxes

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

5

2579951 Ontario Inc.

Notes to the Interim Consolidated Financial Statements

For the period ended March 31, 2021 and 2020

(Unaudited)

Leases

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

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

Foreign currency translation

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

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

Long-lived assets

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

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

Use of estimates

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

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

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

Financial instruments

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

6

2579951 Ontario Inc.

Notes to the Interim Consolidated Financial Statements

For the period ended March 31, 2021 and 2020

(Unaudited)

Financial instruments(Continued from previous page)

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

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

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

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

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

7

2579951 Ontario Inc.

Notes to the Interim Consolidated Financial Statements

For the period ended March 31, 2021 and 2020

(Unaudited)

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

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

Authorized

Unlimited number of common shares

8

2579951 Ontario Inc.

Notes to the Interim Consolidated Financial Statements

For the period ended March 31, 2021 and 2020

(Unaudited)

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

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

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

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

9

2579951 Ontario Inc.

Notes to the Interim Consolidated Financial Statements

For the period ended March 31, 2021 and 2020

(Unaudited)

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

Credit concentration

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

Liquidity risk

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

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

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

10

2579951 Ontario Inc.

Notes to the Interim Consolidated Financial Statements

For the period ended March 31, 2021 and 2020

(Unaudited)

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

11

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

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

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

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

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

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

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

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

12

SCHEDULE C

(See attached)

HEXO Corp.

Unaudited pro forma condensed consolidated financial statements

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

1

UNAUDITED PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF FINANCIAL POSITION

As at April 30, 2021

(In thousands of Canadian dollars)

2

UNAUDITED PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF FINANCIAL POSITION

As at April 30, 2021

(In thousands of Canadian dollars)

See accompanying notes

3

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

For the nine months ended April 30, 2021

(In thousands of Canadian dollars except per share amounts)