An anonymous director reports

HEXO CORP. FILES CIRCULAR FOR SPECIAL MEETING OF SHAREHOLDERS TO APPROVE ARRANGEMENT WITH TILRAY BRANDS, INC.

Hexo Corp. has mailed the management information circular for the special meeting of the common shareholders of the company, to be held virtually on June 14, 2023, at 10 a.m. (ET), in accordance with an interim order of the Ontario Superior Court of Justice (commercial list) obtained on May 10, 2023. The circular and related materials have also been filed under Hexo's profiles on SEDAR and on EDGAR.

The meeting has been called for shareholders to vote on the previously announced arrangement agreement with Tilray Brands Inc., whereby Tilray will acquire all of the issued and outstanding common shares of the company. Shareholders will receive 0.4352 of a share of Tilray common stock for each whole company share held.

The company's board of directors (excluding certain conflicted directors) and the special committee composed solely of independent directors of the company unanimously recommend that shareholders vote for the arrangement at the meeting. The board and the special committee have determined that the arrangement, as well as the previously announced and concurrently signed waiver and amendment agreement entered into by the company and Tilray, are in the best interests of the company and that the arrangement is fair to shareholders.

The circular includes full details of the recommendations of the board and the special committee, and the arrangement, including the various factors considered by the board and the special committee in making their respective recommendations. The circular also includes the formal valuation and fairness opinion of the independent valuator selected by the special committee, Haywood Securities Inc., an independent Canadian investment bank with strong cannabis industry experience.

Specifically, Haywood concluded as follows:

• The fair market value of the company shares is nil; and
• The consideration to be received by shareholders pursuant to the arrangement is fair, from a financial point of view, subject to the assumptions, limitations and qualifications contained in the fairness opinion.

Shareholders are advised to consult the circular for a more detailed list of the various factors considered by the special committee and the board in making their respective determinations and recommendations, and to carefully review the risk factors, the formal valuation, the fairness opinion and the other details described in the circular in considering whether or not to vote in favour of the arrangement.

Factors considered by the special committee and the board in recommending that shareholders vote in favour of the arrangement:

• No viable alternatives to the arrangement with Tilray -- there are a number of factors that made it extremely challenging for the company to secure any additional funding to finance its business and operations in order to meet its obligations and avoid defaulting in the near term, including:
  • The extensive contractual prohibitions, restrictions, covenants and other terms of the amended and restated senior secured convertible note due 2026 issued by the company and held by Tilray;
  • The regulatory and other constraints on the company's ability to access the public capital markets;
  • The company's high level of secured indebtedness;
  • The company's diminishing cash resources and financial condition; and
  • The company's contractual commitments, including its future monthly payment obligations to Tilray.

Therefore, the special committee and the board determined that there would have been a significant likelihood of the company defaulting on its covenants under the amended senior secured note if the company had not been able to agree on a strategic transaction with Tilray. In addition, the special committee determined that Tilray would not provide any waivers or amendments in respect of those covenants, otherwise than on the terms of the arrangement agreement, and the waiver and amendment agreement.

Consequently, the special committee and the board determined that there is no viable strategic, corporate or financing alternative available to the company, other than a transaction with Tilray, concluded on terms acceptable to Tilray, that would deliver some acceptable and fair value for shareholders while preserving the company as a continuing business for the benefit of all stakeholders. The foregoing determination was accepted by Haywood as independent valuator and provider of the fairness opinion:

• Independent valuation concludes fair market value of company shares is nil -- the independent valuator, Haywood, concluded that, subject to the assumptions, limitations and qualifications contained in the formal valuation and fairness opinion as of April 9, 2023: (i) the fair market value of the company shares is nil, and (ii) the consideration to be received by shareholders pursuant to the arrangement is fair, from a financial point of view.
• Bleak prospects for the company if arrangement is not approved and completed -- the company has consistently reported operating losses and has yet to generate positive cash flows or earnings. The company remained subject to, amongst other covenants, a minimum liquidity covenant of $20-million (U.S.) under the amended senior secured note, as well as a requirement to achieve adjusted EBITDA (earnings before interest, taxes, depreciation and amortization) of not less than $1.00 (U.S.) for each of the company's quarters, beginning with the quarter ending April 30, 2023. If the arrangement is not completed, the company will be confronted with immediate default of covenants under the amended senior secured note, with no assurance that Tilray would agree to waive or permit such default, other than as contemplated under the amended senior secured note, and the company would then be facing the prospect of a near-term insolvency event. In such circumstances, the trading value of the company shares would likely decline significantly from the current trading price, and potentially would have little to no economic value. In addition, the provisions of the amended senior secured note make it extremely unlikely that any third party would be willing either to acquire all of the company shares, or that the company would otherwise be able to secure any other strategic, corporate or financing alternative in the form of debt or equity.
• Continuing equity participation in combined entity: greater liquidity -- following the completion of the arrangement, shareholders will hold Tilray shares and participate in any future increases in the value of Tilray shares. Shareholders will thereby continue to participate in the value realized with the development and operation of the company's assets and business within Tilray. In addition, once the arrangement is consummated, shareholders will hold Tilray shares which, given the greater number of shares and the diversified resource portfolio of the combined entity, should provide shareholders with greater liquidity and long-term prospects of potential accretion in their investment.
• Access to Tilray's strategic footprint, operational scale and strong management team -- the arrangement will provide shareholders with exposure to Tilray's diversified portfolio of operating assets, with its operations in research, cultivation, and distribution across Canada and internationally, as well as to Tilray's management team, which has extensive experience and a strong record in consumer-packaged goods and cannabis. If the arrangement is approved, the resulting organization is expected to benefit from increased economies of scale to better compete in an increasingly competitive cannabis production industry, and should have an enhanced capital markets and financial profile.

Your vote is important regardless of the number of shares you own

Shareholders are encouraged to vote in advance of the meeting, in accordance with the instructions accompanying the form of proxy or voting instruction form mailed to shareholders together with the circular. Further details and voting instructions can be found in the circular or at the Hexo vote website.

The company has retained Kingsdale Advisors to act as strategic shareholder adviser and proxy solicitation agent, and Kingsdale Advisors is available to answer information requests from shareholders with regard to shareholder approval of the arrangement and related matters. Communications with Kingsdale Advisors may be made by telephone at 1-866-581-1489, toll-free in North America, or at 416-623-2516 outside of North America, or by e-mail at contactus@kingsdaleadvisors.com. To keep current with and obtain information about voting your company shares, please visit the Hexo vote website.

About Hexo Corp.

Hexo is an award-winning licensed producer of premium products for the global cannabis market. Hexo delivers a thoughtfully curated portfolio of both recreational and therapeutic cannabis products that inspire customer loyalty. Hexo's brands include Hexo, Redecan, Original Stash, Bake Sale and T 2.0, as well as medical cannabis products.

Hexo's world-class Canadian grow sites are unmatched in size, technological advantage and yield of high-quality cannabis, driving innovation through every step of the process. Hexo operates three major grow sites in Ontario and Quebec, including one of the largest growth facilities in North America.

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