An anonymous director reports

HEXO ANNOUNCES CLOSING OF NON-BROKERED PRIVATE PLACEMENT AND AMENDMENTS TO ARRANGEMENT AGREEMENT AND WAIVER AND AMENDMENT AGREEMENT

Hexo Corp. has closed the first of two tranches of a non-brokered private placement consisting of the issuance of newly created Series 1 preferred shares to a single institutional investor. The first tranche consisted of the issuance of 11.5 million preferred shares at an issue price of $1.00 (U.S.) per preferred share for gross proceeds to the company of $11.5-million (U.S.). The preferred shares are non-voting and are entitled to a preference over the common shares of the company with respect to the payment of dividends and distributions and in the event of liquidation or dissolution up to the liquidation and redemption price of $1.22 (U.S.) per preferred share.

In addition, $13.5-million (U.S.) was deposited into escrow by the investor, representing the second tranche of the private placement. Upon satisfaction or waiver of all closing conditions set forth in the arrangement agreement dated April 10, 2023, between Tilray Brands, Inc. and the company, the company will receive the escrowed amount and will issue 13.5 million preferred shares to the investor. The escrowed amount will be returned to the investor if the release condition is not satisfied on or before Aug. 31, 2023.

Concurrently with the private placement, and in satisfaction of a condition precedent to the obligation of the investor to acquire the preferred shares, the company and Tilray have amended the arrangement agreement and the plan of arrangement such that Tilray has agreed, subject to the satisfaction or waiver of the conditions precedent set out in the arrangement agreement, as amended, to acquire all outstanding preferred shares based on the applicable preferred share exchange ratio pursuant to the plan of arrangement. "Preferred share exchange ratio" means such fraction of a share of Tilray common stock equal to the quotient obtained from dividing: (1) the preferred share liquidation and redemption price ($1.22 (U.S.)) per preferred share, by (2) the lower of (a) the closing price of the Tilray shares on the Nasdaq Stock Market, and (b) the five-day volume-weighted average trading price (VWAP) of a Tilray share on Nasdaq, each calculated as of the end of the third business day immediately prior to the effective date of the arrangement.

In connection with the arrangement amendments, Hexo and Tilray have also agreed to amend the waiver and amendment agreement entered into on April 10, 2023. The waiver and amendment agreement provides for, among other things, a waiver by Tilray of, and the amendment to, certain covenants under the amended and restated senior secured convertible note due 2026 issued by the company and held by Tilray to mitigate the risk of covenant breaches by Hexo until the consummation of the arrangement and to allow Hexo to use existing cash resources to satisfy the company's payment and contractual obligations and operate its business, in consideration for the payment of certain cash and non-cash consideration by Hexo to Tilray as previously disclosed. The consent and amendment to the waiver and amendment agreement agreed to in connection with the arrangement amendments provides for, among other things, Tilray's agreement that in consideration for payment of $100,000 (U.S.) by the company to Tilray, the minimum liquidity threshold set out in Section 9(M) of the amended senior secured note is reduced from $4-million (U.S.) to $1 (U.S.) for the duration of the applicable waiver period.

As previously disclosed, the waiver and amendment agreement provides for the possibility of an additional cash payment by Hexo to Tilray of up to $10-million (U.S.) in consideration for the termination of the services agreement between the parties, which additional payment is payable, among other, in the event Hexo generates a sufficient amount of unrestricted cash from any financing of Hexo permitted by Tilray after the signature of the waiver and amendment and prior to closing, and subject to the satisfaction of certain other conditions described in the waiver and amendment agreement. On this basis, the consent and amendment to the waiver and amendment agreement provides that an amount equal to $6.4-million (U.S.) shall be paid immediately by Hexo to Tilray out of the gross proceeds received by Hexo under the first tranche of the private placement, and shall be applied in accordance with the provisions of the waiver and amendment agreement. In addition, upon satisfaction of the applicable release condition, an additional amount equal to $6-million (U.S.) shall be paid by Hexo to Tilray under the second tranche of the private placement and shall be applied in accordance with the provisions of the waiver and amendment agreement. Hexo is not required to make any further payment to Tilray from the aggregate gross proceeds received under the private placement.

After payment of the amounts set out above under the consent and amendment to the waiver and amendment agreement, the company intends to use the remaining net proceeds from the private placement to pay certain expenses, liabilities, contractual commitments and otherwise provide additional liquidity for operations.

The board of the company and the independent special committee of the company formed to consider and make recommendations in connection with the arrangement each determined that the private placement, the arrangement amendments and the consent and amendment to the waiver and amendment agreement do not change their previous determinations and recommendations in connection with the arrangement, including that the arrangement is in the best interests of the company and is fair to the shareholders of the company.

If the arrangement agreement is terminated, and subject to approval by Hexo shareholders, the holder of preferred shares may convert their preferred shares into a number of common shares of the company determined by dividing the preferred share liquidation and redemption price by the five-day VWAP of a common share of the company on the date notice of conversion is provided by the holder.

Subject to compliance with the applicable provisions of the Business Corporations Act (Ontario), any outstanding preferred shares will be automatically redeemed for cash at the redemption price on the earlier of (i) the 12-month anniversary of the issue date, and (ii) the 30th day following the date of the requisite approval by Hexo shareholders.

The company received conditional approval of the Toronto Stock Exchange for the private placement on May 31, 2023. The conditional approval of the TSX includes the conditional listing of up to 30.5 million additional common shares of the company which would be issuable (solely in the event the arrangement agreement is terminated) upon conversion of the Series 1 preferred shares. In such event, the TSX would require as a condition to such issuance of common shares of the company upon conversion that such issuance be approved by security holders of the company by a majority of vote cast, on the basis that: (i) the conversion price could be below market price less the maximum allowable discount under TSX private placement rules; (ii) dilution could exceed 25 per cent of the current issued and outstanding shares; and (iii) such issuance of common shares of the company could have a material effect on control of the company.

The arrangement amendments and the consent and amendment to the waiver and amendment agreement relating to the private placement will be filed under Hexo's profiles on SEDAR and on EDGAR.

For additional details on the arrangement, please see the company's news releases dated April 10, 2023, and May 16, 2023, filed under its profile on SEDAR.

Advisers

Canaccord Genuity Corp. and ATB Capital Markets Inc. acted as financial advisers to the company with respect to the private placement.

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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