Exhibit 99.1

 

Aphria Inc.

CONDENSED INTERIM CONSOLIDATED FINANCIAL STATEMENTS

FOR THE THREE MONTHS AND SIX MONTHS ENDED NOVEMBER 30, 2019 AND NOVEMBER 30, 2018

(Unaudited, expressed in Canadian Dollars, unless otherwise noted)

Aphria Inc.

Condensed Interim Consolidated Statements of Financial Position

(Unaudited - in thousands of Canadian dollars)

	Note	November 30, 2019			May 31, 2019
Assets
Current assets
Cash and cash equivalents		$	497,694		$	550,797
Marketable securities			–			20,199
Accounts receivable			60,695			25,488
Prepaids and other current assets	4		27,339			23,391
Inventory	5		152,196			91,529
Biological assets	6		34,370			18,725
Promissory notes receivable	14		39,200			39,200
Current portion of convertible notes receivable	11		16,926			11,500
			828,420			780,829
Capital assets	8		562,963			503,898
Intangible assets	9		384,671			392,056
Convertible notes receivable	11		8,365			20,730
Interest in equity investees	12		–			9,311
Long-term investments	13		34,977			64,922
Goodwill	10		669,663			669,846
		$	2,489,059		$	2,441,592
Liabilities
Current liabilities
Bank indebtedness	16	$	2,443		$	–
Accounts payable and accrued liabilities			117,161			105,813
Income taxes payable			2,180			2,722
Deferred revenue			23,785			23,678
Current portion of lease liabilities	3		752			–
Current portion of long-term debt	17		6,167			6,332
			152,488			138,545
Long-term liabilities
Lease liabilities	3		5,849			–
Long-term debt	17		132,189			60,895
Convertible debentures	18		358,081			421,366
Deferred tax liability	15		85,106			87,633
			733,713			708,439
Shareholders’ equity
Share capital	19		1,665,744			1,655,273
Warrants	20		1,336			1,336
Share-based payment reserve			40,742			36,151
Accumulated other comprehensive loss			(2,115	)		(119	)
Non-controlling interest	22		27,875			28,409
Retained earnings			21,764			12,103
			1,755,346			1,733,153
		$	2,489,059		$	2,441,592

Nature of operations (Note 1), Commitments and contingencies (Note 31)

Approved on behalf of the Board:

“John Herhalt”	“Irwin Simon”
Signed:  Director	Signed:  Director

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

2

Aphria Inc.

Condensed Interim Consolidated Statements of Income and Comprehensive Income

(Unaudited - in thousands of Canadian dollars, except share and per share amounts)

		For the three months ended November 30,						For the six months ended November 30,
	Note	2019			2018			2019			2018
Revenue from cannabis products		$	39,772		$	23,378		$	74,851		$	36,670
Distribution revenue			86,442			1,146			181,769			1,146
Insurance recovery			450			–			450			–
Excise taxes			(6,064	)		(2,856	)		(10,358	)		(2,856	)
Net revenue			120,600			21,668			246,712			34,960
Production costs	5		13,894			10,400			29,348			15,234
Cost of cannabis purchased			735			–			735			–
Cost of goods purchased			75,483			1,111			158,587			1,111
Gross profit before fair value adjustments			30,488			10,157			58,042			18,615
Fair value adjustment on sale of inventory	5		12,391			8,328			19,677			12,533
Fair value adjustment on growth of biological assets	6		(21,492	)		(4,154	)		(46,645	)		(13,665	)
Gross profit			39,589			5,983			85,010			19,747
Operating expenses:
General and administrative	23		22,076			12,276			44,381			21,127
Share-based compensation	24		7,563			2,574			12,519			8,696
Selling, marketing and promotion			12,254			8,336			20,068			13,077
Amortization			5,896			2,617			10,904			5,891
Research and development			672			612			1,282			874
Transaction costs			691			1,123			1,426			1,988
			49,152			27,538			90,580			51,653
Operating income (loss)			(9,563	)		(21,555	)		(5,570	)		(31,906	)
Finance income (expense), net	25		(5,006	)		4,855			(10,263	)		5,914
Non-operating income, net	26		4,568			79,376			24,871			113,806
Income (loss) before income taxes			(10,001	)		62,676			9,038			87,814
Income taxes (recovery)	15		(2,072	)		7,902			526			11,864
Net income (loss)			(7,929	)		54,774			8,512			75,950
Other comprehensive income (loss)
Other comprehensive income (loss)			(310	)		–			(1,996	)		–
Comprehensive income (loss)		$	(8,239	)	$	54,774		$	6,516		$	75,950
Total comprehensive income (loss) is attributable to:
Shareholders of Aphria Inc.			(7,876	)		54,970			7,050			76,357
Non-controlling interest	22		(363	)		(196	)		(534	)		(407	)
		$	(8,239	)	$	54,774		$	6,516		$	75,950
Weighted average number of common shares - basic			251,833,217			244,873,891			251,468,984			235,166,745
Weighted average number of common shares - diluted			251,833,217			249,303,182			252,427,777			239,417,492
Earnings (loss) per share - basic	28	$	(0.03	)	$	0.22		$	0.03		$	0.32
Earnings (loss) per share - diluted	28	$	(0.03	)	$	0.22		$	0.03		$	0.32

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

3

Aphria Inc.

Condensed Interim Consolidated Statements of Changes in Equity

(Unaudited - in thousands of Canadian dollars, except share amounts)

	Number of common shares			Share capital (Note 19)			Warrants (Note 20)			Share-based payment reserve			Accumulated other comprehensive loss			Non- controlling interest (Note 22)			Retained earnings			Total
Balance at May 31, 2018		210,169,924		$	1,113,981		$	1,375		$	22,006		$	(801	)	$	9,580		$	27,452		$	1,173,593
Share issuance - June 2018 bought deal		21,835,510			245,925			–			–			–			–			–			245,925
Additional share issuance - Broken Coast acquisition		19,963			297			–			–			–			–			–			297
Share issuance - LATAM acquisition		15,678,310			273,900			–			–			–									273,900
Share issuance - warrants exercised		316,063			1,409			(39	)		–			–			–			–			1,370
Share issuance - options exercised		1,911,974			11,139			–			(7,390	)		–			–			–			3,749
Income tax recovery on share issuance costs		–			3,426			–			–			–			–			–			3,426
Share-based payments		–			–			–			8,085			–			–			–			8,085
Elimination of CTA on disposal of equity investee		–			–			–			–			801			–			(801	)		–
Non-controlling interest		–			–			–			–			–			9,439			–			9,439
Comprehensive income (loss) for the period		–			–			–			–			–			(407	)		76,357			75,950
Balance at November 30, 2018		249,931,744		$	1,650,077		$	1,336		$	22,701		$	–		$	18,612		$	103,008		$	1,795,734
	Number of common shares			Share capital (Note 19)			Warrants (Note 20)			Share-based payment reserve			Accumulated other comprehensive loss			Non- controlling interest (Note 22)			Retained earnings			Total
Balance at May 31, 2019		250,989,120		$	1,655,273		$	1,336		$	36,151		$	(119	)	$	28,409		$	12,103		$	1,733,153
Share issuance - options exercised		1,099,858			6,571			–			(2,470	)		–			–			–			4,101
Share issuance - RSUs exercised		568,488			3,803			–			–			–			–			–			3,803
Share issuance - warrants exercised		474,545			712			–			–			–			–			–			712
Cancelled shares		(500,000	)		(615	)		–			–			–			–			615			–
Share-based payments		–			–			–			7,061			–			–			–			7,061
Comprehensive income (loss) for the period		–			–			–			–			(1,996	)		(534	)		9,046			6,516
Balance at November 30, 2019		252,632,011		$	1,665,744		$	1,336		$	40,742		$	(2,115	)	$	27,875		$	21,764		$	1,755,346

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

4

Aphria Inc.

Condensed Interim Consolidated Statements of Cash Flows

(Unaudited - in thousands of Canadian dollars)

		For the six months ended November 30,
	Note	2019			2018
Cash used in operating activities:
Net income for the period		$	8,512		$	75,950
Adjustments for:
Future income taxes	15		(2,175	)		3,785
Fair value adjustment on sale of inventory	5		19,677			12,533
Fair value adjustment on growth of biological assets	6		(46,645	)		(13,665	)
Loss on marketable securities			338			110
Unrealized foreign exchange gain (loss)			931			(6	)
Amortization	8,9		21,531			8,860
Unrealized (gain) loss on convertible notes receivable	11		6,939			(2,862	)
Gain on dilution of ownership in equity investee			–			(2,210	)
Loss on equity investee			–			822
Gain on sale of equity investee	12		–			(57,351	)
Deferred gain recognized			–			(618	)
Other non-cash items			14			(1	)
Share-based compensation	24		12,519			8,696
(Gain) loss on long-term investments	27		22,741			(53,203	)
Unrealized gain on convertible debentures			(63,285	)		–
Unrealized loss on financial liabilities			–			975
Change in non-cash working capital	29		(52,322	)		2,013
			(71,225	)		(16,172	)
Cash provided by (used in) financing activities:
Share capital issued, net of cash issuance costs			–			245,925
Share capital issued on warrants, options and DSUs exercised			8,616			5,119
Proceeds from long-term debt			79,400			24,927
Repayment of long-term debt			(8,285	)		(863	)
Repayment of lease liabilities			(542	)		–
Increase in bank indebtedness			2,443			–
			81,632			275,108
Cash used in investing activities:
Proceeds from disposal of marketable securities			19,861			12,205
Investment in capital and intangible assets			(66,050	)		(113,399	)
Proceeds from disposal of capital assets			886			–
Convertible notes advances			–			(10,000	)
Repayment of convertible and promissory notes receivable			–			1,942
Investment in long-term investments and equity investees			–			(61,027	)
Proceeds from disposal of long-term investments and equity investees			16,515			5,027
Net cash paid on business acquisitions	10		(34,722	)		(1,347	)
			(63,510	)		(166,599	)
Net increase (decrease) in cash and cash equivalents			(53,103	)		92,337
Cash and cash equivalents, beginning of period			550,797			59,737
Cash and cash equivalents, end of period		$	497,694		$	152,074
Cash is comprised of:
Cash in bank		$	497,491		$	22,274
Short-term deposits			203			129,800
Cash and cash equivalents		$	497,694		$	152,074

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

5 

Aphria Inc.

Notes to the Interim Condensed Consolidated Financial Statements

For the three months ended November 30, 2019 and November 30, 2018

(Unaudited - in thousands of Canadian dollars, except share and per share amounts)

1. Nature of operations

Aphria Inc. (the "Company" or “Aphria”) existing under the laws of Business Corporations Act (Ontario), is licensed to produce and sell cannabis under The Cannabis Act. In February 2018, the Company acquired Broken Coast Cannabis Ltd. (“Broken Coast”). Broken Coast is licensed to produce and sell cannabis under The Cannabis Act. In March 2018, the Company acquired Nuuvera Inc. (“Nuuvera”). Nuuvera is an international organization with a focus on building a global cannabis brand, with operations in Germany, Italy, Malta, and Lesotho. In September 2018, the Company acquired LATAM Holdings Inc. (“LATAM”) (Note 10). This purchase provides Aphria an early foothold into the Latin American cannabis market whereby LATAM holds licenses and license applications presently in-process for production, import, export and sale of cannabis and cannabis derivatives in Colombia, Argentina and Jamaica. In January 2019, Aphria through wholly-owned subsidiary Nuuvera Deutschland GmbH acquired CC Pharma GmbH (“CC Pharma”) (Note 10). CC Pharma is a distributor of pharmaceutical products to pharmacies in Germany and is a key part of the Company’s distribution strategy for cannabis in Germany.

1974568 Ontario Ltd. (“Aphria Diamond”) is a 51% majority owned subsidiary of the Company, incorporated in November 2017. In November 2019, Aphria Diamond received its cultivation licence under the provisions of The Cannabis Act.

The registered office of the Company is located at 1 Adelaide Street East, Suite 2310, Toronto, Ontario.

The Company’s common shares are listed under the symbol “APHA” on the Toronto Stock Exchange (“TSX”) in Canada and the New York Stock Exchange (“NYSE”) in the United States.

These consolidated financial statements were approved by the Company’s Board of Directors on January 13, 2020.

2. Basis of preparation

(a)          Statement of compliance

The Company’s condensed interim consolidated financial statements have been prepared in accordance with IAS 34, “Interim Financial Reporting”. These condensed interim consolidated financial statements do not include all notes of the type normally included within the annual financial report and should be read in conjunction with the audited financial statements of the Company for the year ended May 31, 2019, which have been prepared in accordance with International Financial Reporting Standards (“IFRS”) as issued by the International Accounting Standards Board and Interpretations of the IFRS Interpretations Committee

(b)          Basis of measurement

These condensed interim consolidated financial statements have been prepared on the going concern basis, under the historical cost convention except for certain financial instruments that are measured at fair value and biological assets that are measured at fair value less costs to sell, as detailed in the Company’s accounting policies.

(c)          Functional currency

All figures presented in the consolidated financial statements are reflected in Canadian dollars; however, the functional currency of the Company includes the Canadian dollar and the Euro.

Foreign currency transactions are translated to the respective functional currencies of the Company’s entities at the exchange rates in effect on the date of the transactions. Monetary assets and liabilities denominated in foreign currencies are translated to the functional currency at the foreign exchange rate applicable at the statement of financial position date. Non-monetary items carried at historical cost denominated in foreign currencies are translated to the functional currency at the date of the transactions. Non-monetary items carried at fair value denominated in foreign currencies are translated to the functional currency at the date when the fair value was determined. Realized and unrealized exchange gains and losses are recognized through profit and loss.

On consolidation, the assets and liabilities of foreign operations reported in their functional currencies, including marketable securities and long-term investments, are translated into Canadian dollars, the Group’s presentation currency, at period-end exchange rates. Income and expenses, and cash flows of foreign operations are translated into Canadian dollars using average exchange rates. Exchange differences resulting from translating foreign operations are recognized in other comprehensive income and accumulated in equity. The Company and all of its subsidiaries’ functional currency is Canadian dollars, with the exception of CC Pharma GmbH whose functional currency is the Euro.

6 

Aphria Inc.

Notes to the Interim Condensed Consolidated Financial Statements

For the three months ended November 30, 2019 and November 30, 2018

(Unaudited - in thousands of Canadian dollars, except share and per share amounts)

(d) Basis of consolidation

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

Subsidiaries	Jurisdiction of incorporation	Ownership interest(1)
Broken Coast Cannabis Ltd.	British Columbia, Canada	100%
LATAM Holdings Inc.	British Columbia, Canada	100%
Marigold Acquisitions Inc.	British Columbia, Canada	100%
MMJ International Investments Inc.	British Columbia, Canada	100%
Nuuvera Holdings Limited	Ontario, Canada	100%
ARA - Avanti Rx Analytics Inc.	Ontario, Canada	100%
MMJ Colombia Partners Inc.	Ontario, Canada	100%
Nuuvera Israel Ltd.(2)	Israel	100%
FL-Group	Italy	100%
Goodfields Supply Co. Ltd.	United Kingdom	100%
Hampstead International Inc.	Barbados	100%
ABP, S.A.	Argentina	100%
Nuuvera Deutschland GmbH	Germany	100%
Aphria Deutschland GmbH	Germany	100%
CC Pharma GmbH	Germany	100%
CC Pharma Research and Development GmbH	Germany	100%
Aphria Wellbeing GmbH	Germany	100%
Marigold Projects Jamaica Limited	Jamaica	95% (3)
Nuuvera Malta Ltd.	Malta	90%
ASG Pharma Ltd.	Malta	90% (4)
QSG Health Ltd.	Malta	90% (4)
ColCanna S.A.S.	Colombia	90%
CC Pharma Nordic ApS	Denmark	75%
1974568 Ontario Ltd.	Ontario, Canada	51%
Aphria Terra S.R.L.	Italy	51%
Aphria Italy S.p.A.(2)	Italy	51%
APL - Aphria Portugal, Lda.	Portugal	51%
CannInvest Africa Ltd.	South Africa	50%
Verve Dynamics Incorporated (Pty) Ltd.	Lesotho	30% (5)

⁽¹⁾ The Company defines ownership interest as the interest in which the Company is entitled to a proportionate share of net income. Legal ownership of some subsidiaries differ from ownership interest shown above.

⁽²⁾ Represents inactive subsidiaries, which have no operations and do not own any assets, save and except for related party balances owing to the Company and are in the process of being dissolved.

⁽³⁾ The Company holds 49% of the issued and outstanding shares of Marigold Projects Jamaica Limited, through wholly owned subsidiary Marigold Acquisitions Inc. The Company holds rights through a licensing agreement to 95% of the results of operations of Marigold Projects Jamaica Limited.

⁽⁴⁾ The Company holds 100% of the issued and outstanding shares of ASG Pharma Ltd. and QSG Health Ltd., through 90% owned subsidiary Nuuvera Malta Ltd.

⁽⁵⁾ The Company holds 60% of the issued and outstanding shares of Verve Dynamics Incorporated (Pty) Ltd., through 50% owned subsidiary CannInvest Africa Ltd.

Intragroup balances, and any unrealized gains and losses or income and expenses arising from transactions with jointly controlled entities are eliminated to the extent of the Company’s interest in the entity.

7 

Aphria Inc.

Notes to the Interim Condensed Consolidated Financial Statements

For the three months ended November 30, 2019 and November 30, 2018

(Unaudited - in thousands of Canadian dollars, except share and per share amounts)

The Company treats transactions with non-controlling interests that do not result in a loss of control as transactions with equity owners of the Company. A change in ownership interest results in an adjustment between the carrying amounts of the controlling and non-controlling interests to reflect their relative interests in the subsidiary. Any difference between the amount of the adjustment to non-controlling interests and any consideration paid or received is recognized in a separate reserve within equity attributable to the owners of the Company.

(e) Interest in equity investees

In accordance with IFRS 10, associates are those in which the Company has significant influence, but not control or joint control over the financial and accounting policies.

Interests in associates are accounted for using the equity method in accordance with IAS 28. They are recognized initially at cost, which includes transaction costs. After initial recognition, the consolidated financial statements include the Company’s share of the profit or loss and other comprehensive income (“OCI”) of equity investees until the date on which significant influence ceases.

If the Company’s share of losses in an equity investment equals or exceeds its interest in the entity, including any other unsecured long-term receivables, the group does not recognize further losses, unless it has incurred obligations or made payments on behalf of the other entity.

Unrealized gains on transactions between the Company and its associates are eliminated to the extent of the Company’s interest in these entities. Unrealized losses are also eliminated unless the transaction provides evidence of an impairment of the asset transferred. 

3. Significant accounting policies

These condensed interim consolidated financial statements have been prepared following the same accounting policies used in the preparation of the audited financial statements of the Company for the year ended May 31, 2019, with the exception of the adoption of IFRS 16, Leases (“IFRS 16”), as described below.

New standards and interpretations applicable effective June 1, 2019

 Adoption of IFRS 16 - Leases 

IFRS 16 introduced a single, on-balance sheet accounting model for leases. The Company, as a leasee, has recognized right-of-use assets representing its rights to use the underlying assets and lease liabilities representing its obligation to make lease payments. 

The Company has applied IFRS 16 using the modified retrospective method and has elected to set the right-of-use asset equal to the lease liability. As such the cumulative effect of initial application recognized in retained earnings at June 1, 2019 is nil. Accordingly, the comparative information presented for the prior period has not been restated and is presented as previously reported under IAS 17 and related interpretations. 

Previously, the Company determined at contract inception whether an arrangement was or contained a lease under IFRIC 4 Determining Whether an Arrangement contains a lease. The Company now determines whether a contract is or contains a lease based on the new definition of a lease. Under IFRS 16, a contract is or contains a lease if the contract conveys a right to control the use of an identified asset for a period of time in exchange for consideration. 

The Company recognizes a right-of-use asset and a lease liability at the lease commencement date. The right-of-use asset is Initially measured at cost, and subsequently at cost less any accumulated depreciation or impairment losses and adjusted for certain re-measurements of the lease liability. The lease liability is initially measured at the present value of the lease payments that are not paid at the commencement date, discounted using the interest rate implicit in the lease or, if that rate cannot be readily determined, the Company's incremental borrowing rate. The Company primarily uses its incremental borrowing rate as the discount rate. The weighted average discount rate used was 5.0%. The lease liability is subsequently increased by the interest cost on the lease liability and decreased by lease payments made. It is remeasured when there is a change in future lease payments arising from a change in an index or rate, a change in the estimate of the amount expected to be payable under a residual value guarantee, or as appropriate, changes in the assessment of whether a purchase or extension option is reasonably certain to be exercised or a termination option is reasonably certain not to be exercised.

8 

Aphria Inc.

Notes to the Interim Condensed Consolidated Financial Statements

For the three months ended November 30, 2019 and November 30, 2018

(Unaudited - in thousands of Canadian dollars, except share and per share amounts)

On transition to IFRS 16, the Company elected to apply the practical expedient to grandfather the assessment of which transactions represent leases. The Company applied IFRS 16 only to contracts that were previously identified as leases under IAS 17 and IFRIC 4. Therefore, the definition of a lease under IFRS 16 was applied only to contracts entered into, or changed, on or after June 1, 2019. 

The Company used the following additional practical expedients:

• Applied a single discount rate to a portfolio of leases with similar characteristics;

• Applied the exemption not to recognize right-of-use assets and lease liabilities for short-term leases with terms less than 12 months and leases of low-value assets. The Company recognizes the lease payments associated with these leases as an expense on a straight-line or other systematic basis over the lease term;

• Excluded initial direct costs from the measurement of the right-of-use asset at the date of initial application; and

• Used hindsight when determining the lease term if the contract contains options to extend or terminate the lease.

The Company has furthermore applied judgment to determine the applicable discount rate. The discount rate is based on the Company's incremental borrowing rate and reflects the current market assessments of the time value of money and the associated risks for which the estimates of future cash flows have not been adjusted for.

On transition to IFRS 16, the Company recognized right-of-use assets and corresponding lease liabilities of $6,619 on June 1, 2019 for a combination of vehicle and office lease agreements. The Company has recognized amortization expense of $314 and $606 and finance costs of $80 and $161 in the condensed consolidated interim statements of income and comprehensive income for the three and six months ended November 30, 2019.

There are no other standards that are not yet effective and that would be expected to have a material impact on the Company in the current or future reporting periods and on foreseeable future transactions.

The Company has reclassified certain immaterial items on the comparative consolidated statements of financial position, consolidated statements of income and comprehensive income, and consolidated statements of cash flows to improve clarity.

4. Prepaids and other current assets

Prepaids and other current assets are comprised of:

	November 30, 2019		May 31, 2019
Sales tax receivable	$	3,178	$	7,583
Accrued interest		1,065		2,779
Prepaid assets		20,477		10,696
Other		2,619		2,333
	$	27,339	$	23,391

9 

Aphria Inc.

Notes to the Interim Condensed Consolidated Financial Statements

For the three months ended November 30, 2019 and November 30, 2018

(Unaudited - in thousands of Canadian dollars, except share and per share amounts)

5. Inventory

Inventory is comprised of:

	Capitalized cost		Fair value adjustment		November 30, 2019		May 31, 2019
Harvested cannabis	$	16,918	$	20,331	$	37,249	$	23,253
Purchased cannabis		5,349		–		5,349		–
Harvested cannabis trim		4,069		5,023		9,092		5,789
Cannabis oil		21,615		21,638		43,253		19,601
Softgel capsules		298		296		594		764
Distribution inventory		36,702		–		36,702		32,944
Other inventory items		19,957		–		19,957		9,178
	$	104,908	$	47,288	$	152,196	$	91,529

During the three and six months ended November 30, 2019, the Company recorded $13,894 and $29,348 (2018 - $10,400 and $15,234) of production costs. Included in production costs for the three and six months ended November 30, 2019 is $303 and $729 of internal cannabis oil conversion costs (2018 - $155 and $302), $nil and $nil of external cannabis oil conversion costs (2018 - $892 and $892), and amortization of $2,254 and $4,149 (2018 - $1,020 and 1,533). The Company also included $4,163 and $6,478 of amortization which remains in inventory for the three and six months ended November 30, 2019 (2018 - $854 and $1,436) related to capital assets utilized in production. During the three and six months ended November 30, 2019, the Company expensed $12,391 and $19,677 (2018 -$8,328 and $12,533) of fair value adjustments on the growth of biological assets included in inventory sold.

The Company holds 10,051.2 kgs of harvested cannabis (May 31, 2019 - 6,309.9 kgs), 1,528.3 kgs of purchased cannabis (May 31, 2019 - nil kgs), 3,207.2 kgs of harvested cannabis trim (May 31, 2019 - 1,908.0 kgs) and 70,939.4 litres of cannabis oils or 12,337.3 kgs equivalent in various stages of production (May 31, 2019 - 28,458.1 litres or 4,949.2 kgs equivalent), 977.7 litres of cannabis oils used in softgel capsules or 170.0 kgs equivalent at November 30, 2019 (May 31, 2019 - 982.0 litres or 218.2 kgs equivalent).

6. Biological assets

Biological assets are comprised of:

	Amount
Balance at May 31, 2018	$7,331
Changes in fair value less costs to sell due to biological transformation	40,607
Production costs capitalized	47,747
Transferred to inventory upon harvest	(76,960)
Balance at May 31, 2019	$18,725
Changes in fair value less costs to sell due to biological transformation	46,645
Production costs capitalized	65,217
Transferred to inventory upon harvest	(96,217)
Balance at November 30, 2019	$34,370

The Company values cannabis plants at cost, which approximates fair value from the date of initial clipping from mother plants until half way through the flowering cycle of the plants. Measurement of the biological transformation of the plant at fair value less costs to sell begins in the fourth week prior to harvest and is recognized evenly until the point of harvest. The number of weeks in the growing cycle is between twelve and sixteen weeks from propagation to harvest. The Company has determined the fair value less costs to sell of harvested cannabis and harvested cannabis trim to be $3.50 and $2.75 per gram respectively, upon harvest for greenhouse produced cannabis (May 31, 2019 - $3.50 and $2.75 per gram) and $4.00 and $3.25 per gram respectively (May 31, 2019 - $4.00 and $3.25 per gram), upon harvest for indoor produced cannabis.

The effect of the fair value less cost to sell over and above historical cost was an increase in non-cash value of biological assets and inventory of $21,492 and $46,645 during the three and six months ended November 30, 2019 (2018 - $4,154 and $13,665).

10 

Aphria Inc.

Notes to the Interim Condensed Consolidated Financial Statements

For the three months ended November 30, 2019 and November 30, 2018

(Unaudited - in thousands of Canadian dollars, except share and per share amounts)

The fair value of biological assets is determined using a valuation model to estimate expected harvest yield per plant applied to the estimated price per gram less processing and selling costs. Only when there is a material change from the expected fair value used for cannabis does the Company make any adjustments to the fair value used. During the period, there was no material change to these inputs and therefore there has been no change in the determined fair value per plant.

In determining the fair value of biological assets, management has made the following estimates in this valuation model:

• The harvest yield is between 20 grams and 60 grams per plant;

• The selling price is between $3.00 and $7.00 per gram;

• Processing costs include drying and curing, testing, post-harvest overhead allocation, packaging and labelling costs between $0.30 and $0.80 per gram;

• Selling costs include shipping, order fulfilment, patient acquisition and patient maintenance costs between $0.00 and $1.50 per gram;

Sales price used in the valuation of biological assets is based on the average selling price of all cannabis products and can vary based on different strains being grown as well as the proportion of sales derived from wholesale compared to retail. Selling costs vary depending on methods of selling and are considered based on the expected method of selling and the determined additional costs which would be incurred. Expected yields for the cannabis plant is also subject to a variety of factors, such as strains being grown, length of growing cycle, and space allocated for growing. Management reviews all significant inputs based on historical information obtained as well as based on planned production schedules.

Management has quantified the sensitivity of the inputs and determined the following:

• Selling price per gram - a decrease in the average selling price per gram by 5% would result in the biological asset value decreasing by $807 (May 31, 2019 - $516) and inventory decreasing by $4,509 (May 31, 2019 - $2,470)

• Harvest yield per plant - a decrease in the harvest yield per plant of 5% would result in the biological asset value decreasing by $458 (May 31, 2019 - $266)

These inputs are level 3 on the fair value hierarchy and are subject to volatility in market prices and several uncontrollable factors, which could significantly affect the fair value of biological assets in future periods.

7. Related party transactions

Key management personnel compensation for the three months ended November 30, 2019 and 2018 was comprised of:

	For the three months ended November 30,
	2019		2018
Salaries	$	1,850	$	889
Short-term employment benefits (included in office and general)		14		31
Share-based compensation		943		(678	)
	$	2,807	$	242

Key management personnel compensation for the six months ended November 30, 2019 and 2018 was comprised of:

	For the six months ended November 30,
	2019		2018
Salaries	$	3,161	$	1,677
Short-term employment benefits (included in office and general)		58		58
Share-based compensation		1,522		1,302
	$	4,741	$	3,037

Directors and officers of the Company control 0.07% or 167,209 of the voting shares of the Company.

11 

Aphria Inc.

Notes to the Interim Condensed Consolidated Financial Statements

For the three months ended November 30, 2019 and November 30, 2018

(Unaudited - in thousands of Canadian dollars, except share and per share amounts)

8. Capital assets

	Land			Production Facility			Equipment			Leasehold improvements			Construction in process			Rights-of-Use Assets			Total capital assets
Cost
At May 31, 2018	$	24,504		$	99,442		$	15,949		$	1,665		$	167,157		$	–		$	308,717
Business acquisitions		345			4,524			1,662			182			154			–			6,867
Additions		8,109			3,829			28,305			778			163,953			–			204,974
Transfers		192			124,603			33,687			(1,389	)		(157,093	)		–			–
Effect of foreign exchange		3			70			24			–			11			–			108
At May 31, 2019		33,153			232,468			79,627			1,236			174,182			–			520,666
IFRS 16 Adjustment		–			–			–			–			–			6,619			6,619
Additions		38			3,577			11,035			1,157			51,780			524			68,111
Transfers		–			34,999			89,859			910			(125,768	)		–			–
Disposals		–			–			(315	)		–			(571	)		–			(886	)
Effect of foreign exchange		(11	)		(256	)		(88	)		–			(78	)		(10	)		(443	)
At November 30, 2019	$	33,180		$	270,788		$	180,118		$	3,303		$	99,545		$	7,133		$	594,067
Accumulated depreciation
At May 31, 2018	$	–		$	2,500		$	2,957		$	109		$	–		$	–		$	5,566
Amortization		–			5,160			5,962			80			–			–			11,202
At May 31, 2019		–			7,660			8,919			189			–			–			16,768
Amortization		–			6,176			7,347			207			–			606			14,336
At November 30, 2019	$	–		$	13,836		$	16,266		$	396		$	–		$	606		$	31,104
Net book value
At May 31, 2018	$	24,504		$	96,942		$	12,992		$	1,556		$	167,157		$	–		$	303,151
At May 31, 2019	$	33,153		$	224,808		$	70,708		$	1,047		$	174,182		$	–		$	503,898
At November 30, 2019	$	33,180		$	256,952		$	163,852		$	2,907		$	99,545		$	6,527		$	562,963

12 

Aphria Inc.

Notes to the Interim Condensed Consolidated Financial Statements

For the three months ended November 30, 2019 and November 30, 2018

(Unaudited - in thousands of Canadian dollars, except share and per share amounts)

9. Intangible assets

	Customer relationships			Corporate website		Licences, permits & applications			Non-compete agreements			Intellectual property, trademarks & brands			Total intangible assets
Cost
At May 31, 2018	$	11,730		$	409	$	139,170		$	1,930		$	81,086		$	234,325
Business acquisitions		21,300			–		123,956			1,400			16,200			162,856
Additions		–			496		12,754			–			1,244			14,494
At May 31, 2019		33,030			905		275,880			3,330			98,530			411,675
Additions		–			144		1,678			–			641			2,463
Effect of foreign exchange		(1,434	)		–		(34	)		(85	)		(1,100	)		(2,653	)
At November 30, 2019	$	31,596		$	1,049	$	277,524		$	3,245		$	98,071		$	411,485
Accumulated depreciation
At May 31, 2018	$	1,274		$	256	$	277		$	314		$	5,760		$	7,881
Amortization		4,729			161		582			1,176			5,090			11,738
At May 31, 2019		6,003			417		859			1,490			10,850			19,619
Amortization		3,015			190		98			831			3,061			7,195
At November 30, 2019	$	9,018		$	607	$	957		$	2,321		$	13,911		$	26,814
Net book value
At May 31, 2018	$	10,456		$	153	$	138,893		$	1,616		$	75,326		$	226,444
At May 31, 2019	$	27,027		$	488	$	275,021		$	1,840		$	87,680		$	392,056
At November 30, 2019	$	22,578		$	442	$	276,567		$	924		$	84,160		$	384,671

Included in Licences, permits & applications is $273,579 of indefinite lived intangible assets.

10. Business Acquisitions

Acquisition of LATAM Holdings Inc.

On July 17, 2018, the Company signed a share purchase agreement with Scythian Biosciences Corp. (“Scythian”) to purchase 100% of the issued and outstanding shares of LATAM Holdings Inc. (“LATAM Holdings”); a direct wholly-owned subsidiary of Scythian. As outlined in the share purchase agreement, the negotiated purchase price was to be settled with the issuance of 15,678,310 shares of the Company valued on July 17, 2018 at $193,000 and the assumption of $1,000 USD ($1,310 CAD) short-term liabilities. The acquisition of LATAM Holdings closed on September 27, 2018. Therefore, in accordance with IFRS 3 - Business Combinations, the equity consideration transferred was measured at fair value at the acquisition date, which is the date control was obtained, which in this case was determined to be September 27, 2018. The fair value of the consideration shares on September 27, 2018 was $273,900.

LATAM Holdings, through other subsidiaries, provides the Company with access to the emerging cannabis markets in Latin America and the Caribbean. Through this acquisition, the Company secured key licenses in Colombia, Argentina and Jamaica which is anticipated to provide first mover advantage in these countries. In addition, the Company acquired an option and rights of first refusal to purchase a Brazilian incorporated entity, with the option and right of first refusal vesting only upon the entity obtaining a licence to cultivate and distribute cannabis lawfully in Brazil.

13 

Aphria Inc.

Notes to the Interim Condensed Consolidated Financial Statements

For the three months ended November 30, 2019 and November 30, 2018

(Unaudited - in thousands of Canadian dollars, except share and per share amounts)

The table below summarizes the fair value of the assets acquired and the liabilities assumed at the effective acquisition date:

	Note	Number of shares		Share price		Amount
Consideration paid
Shares issued	(i)		15,678,310	$	17.47	$	273,900
Total consideration paid						$	273,900
Net assets acquired
Current assets
Cash and cash equivalents							2,704
Accounts receivable							571
Prepaids and other current assets							106
Inventory							65
Long-term assets
Capital assets							494
Licences, permits & applications							123,956
Goodwill							189,188
Total assets							317,084
Current liabilities
Accounts payable and accrued liabilities							1,986
Income taxes payable							20
Long-term liabilities
Deferred tax liability							29,837
Total liabilities							31,843
Non-controlling interest							11,341
Total net assets acquired						$	273,900

(i)       Share price based on the price of the shares on September 27^th, 2018.

Net income and comprehensive net income for the Company would have been lower by approximately $1,139 and $1,519 for the three and six months ended November 30, 2018, if the acquisition had taken place on June 1, 2018. In connection with this transaction, the Company expensed transaction costs of $1,133.

Acquisition of CC Pharma GmbH

On November 7 ,2018, the Company signed a share purchase agreement to acquire 100% of the issued and outstanding shares of CC Pharma. The purchase price was cash consideration of €18,920 ($28,775 CAD) and additional cash consideration of up to €23,500 ($35,741 CAD) contingent on CC Pharma obtaining a specified EBITDA target. The acquisition of CC Pharma closed on January 9, 2019. During the three months ended August 31, 2019, the Company paid the additional cash consideration of €23,500 previously included in accounts payable. The value in CAD at the date of settlement was $34,722.

CC Pharma is a leading distributor of pharmaceutical products to pharmacies in Germany as well as throughout Europe. The acquisition of CC Pharma provides the Company access to the cannabis markets in Germany and ultimately pan-European platforms.

14 

Aphria Inc.

Notes to the Interim Condensed Consolidated Financial Statements

For the three months ended November 30, 2019 and November 30, 2018

(Unaudited - in thousands of Canadian dollars, except share and per share amounts)

The table below summarizes the fair value of the assets acquired and the liabilities assumed at the effective acquisition date:

	Amount
Consideration
Cash	$	28,775
Contingent consideration		35,741
Total consideration	$	64,516
Net assets acquired
Current assets
Cash and cash equivalents		7,237
Accounts receivable		33,989
Prepaids and other current assets		14,616
Inventory		28,352
Long-term assets
Capital assets		6,373
Customer relationships		21,300
Non-compete agreements		1,400
Intellectual property, trademarks & brands		16,200
Goodwill		6,146
Total assets		135,613
Current liabilities
Bank loans and overdrafts		20,255
Accounts payable and accrued liabilities		44,111
Income taxes payable		672
Long-term liabilities
Deferred tax liability		6,059
Total liabilities		71,097
Total net assets acquired	$	64,516

Revenue and for the Company would have been higher by approximately $150,000 and $300,000, net income and comprehensive net income for the Company would have been higher by approximately $2,625 and $5,250 respectively, for the three months ended November 30, 2018, if the acquisition had taken place on June 1, 2018. In connection with this transaction, the Company expensed transaction costs of $595.

Goodwill is comprised of:

	November 30, 2019			May 31, 2019
CannWay goodwill	$	1,200		$	1,200
Broken Coast goodwill		146,091			146,091
Nuuvera goodwill		377,221			377,221
LATAM goodwill		139,188			139,188
CC Pharma goodwill		6,146			6,146
Effect of foreign exchange		(183	)		–
	$	669,663		$	669,846

15 

Aphria Inc.

Notes to the Interim Condensed Consolidated Financial Statements

For the three months ended November 30, 2019 and November 30, 2018

(Unaudited - in thousands of Canadian dollars, except share and per share amounts)

11. Convertible notes receivable

	November 30, 2019			May 31, 2019
HydRx Farms Ltd. (d/b/a Scientus Pharma)	$	7,000		$	11,500
Fire & Flower Inc.		9,926			11,166
10330698 Canada Ltd. (d/b/a Starbuds)		4,179			5,204
High Tide Inc.		4,186			4,360
		25,291			32,230
Deduct - current portion		(16,926	)		(11,500	)
	$	8,365		$	20,730

HydRx Farms Ltd. (d/b/a Scientus Pharma)

On August 14, 2017, Aphria purchased $11,500 in secured convertible debentures of Scientus Pharma (“SP”). The convertible debentures bear interest at 8%, paid semi-annually, matured in two years and included the right to convert the debentures into common shares of SP at $2.75 per common share at any time before maturity. The Company has agreed with SP to extend the due date to January 16, 2020. The Company maintains a first security position on all of SP’s assets.

As at November 30, 2019, the fair value of the Company’s secured convertible debentures was $7,000 (May 31, 2019 - $11,500), which resulted in a fair value gain (loss) for the three and six months ended November 30, 2019 of $(4,500) and $(4,500) (2018 - $112 and $267). The Company determined the fair value based on expected net realizable value.

Fire & Flower Inc.

On July 26, 2018, Aphria purchased $10,000 in unsecured convertible debentures of Fire & Flower Inc. (“F&F”). The convertible debentures bear interest at 8% per annum compounded, accrued and paid semi-annually in arrears. The debentures mature on July 31, 2020, at which point, they automatically convert into common shares of F&F at the lower of $1.15 and the share price on July 31, 2020. The debentures may also be converted into a loan on July 31, 2020 bearing interest at 12%, at the holder’s option.

As at November 30, 2019, the fair value of the unsecured convertible debentures was $9,926 (May 31, 2019 - $11,166), which resulted in a fair value gain (loss) for the three and six months ended November 30, 2019 of $(1,929)and $(1,240) (2018 - $2,455 and $2,595).

10330698 Canada Ltd. (d/b/a Starbuds)

On December 28, 2018, Aphria purchased $5,000 in secured convertible debentures of Starbuds. The convertible debentures bear interest at 8.5% per annum accruing daily due on the December 28, 2020. The debentures are secured against the assets of Starbuds. The debentures and any accrued and unpaid interest are convertible into common shares for $0.50 per common share and mature on December 28, 2020.

As at November 30, 2019, the fair value of the Company’s secured convertible debentures was $4,179 (May 31, 2019 - $5,204), which includes $392 (May 31, 2019 - $nil) of accrued interest. The remaining decrease resulted in a fair value gain (loss) for the three and six months ended November 30, 2019 of $(1,413) and $(1,025) (2018 - $nil and $nil).

High Tide Inc.

On April 10, 2019, Aphria purchased $4,500 in unsecured convertible debentures of High Tide Inc. (“High Tide”). The convertible debentures bear interest at 10% per annum, payable annually up front in common shares of High Tide based on the 10-day volume weighted average price (the “Debentures”). The debentures mature on April 10, 2021 and are convertible into common shares of High Tide at a price of $0.75 at the option of the holder. In addition to the debentures, the Company received 6,000,000 warrants in High Tide as part of the purchase of the unsecured convertible debentures (Note 13).

As at November 30, 2019, the fair value of the unsecured convertible debentures was $4,186 (May 31, 2019 -$4,360), which resulted in a fair value gain (loss) for the three and six months ended November 30, 2019 of $(252) and $(174) (2018 - $nil and $nil).

16 

Aphria Inc.

Notes to the Interim Condensed Consolidated Financial Statements

For the three months ended November 30, 2019 and November 30, 2018

(Unaudited - in thousands of Canadian dollars, except share and per share amounts)

Convertible notes receivable

During the three and six months ended November 30, 2019, the Company purchased a total of $nil (2018 - $10,000) in convertible notes. The unrealized gain (loss) on convertible notes receivable recognized in the results of operations amounts to $(8,094) and $(6,939) for the three and six months ended November 30, 2019 (2018 - $2,567 and $2,862).

The fair value was determined using the Black-Scholes option pricing model using the following assumptions: the risk-free rate of 1.51%; expected life of the convertible note; volatility of 70% based on comparable companies; forfeiture rate of nil; dividend yield of nil; and, the exercise price of the respective conversion feature.

12. Interest in equity investees

Althea Group Holdings Ltd. (“Althea”)

As at November 30, 2019 the Company held 12,250,000 common shares of Althea (May 31, 2019 - 50,750,000) representing an ownership interest of below 10% (May 31, 2019 - 25%).

On July 25, 2019 Althea issued 30,000,000 common shares for gross proceeds of $30,000 AUD. During the first quarter of the 2020 fiscal year, the Company sold 652,094 common shares in Althea reducing the Company’s ownership interest in Althea to 21.5% (Note 27). The Company also relinquished its board representation and ability to participate in Althea’s policy making process. As a result of these transactions, the Company ceased to account for this investment as an equity investee. In accordance with IAS 28, the Company recognized a gain on the change from equity accounting to fair value through profit and loss of $24,255 and reclassified its ownership interest to long-term investments (Note 13 and 27).

13. Long-term investments

	Cost May 31, 2019		Fair value May 31, 2019		Investment		Divesture/ Transfer			Subtotal November 30, 2019		Change in fair value			Fair value November 30, 2019
Level 1 on fair value hierarchy
Tetra Bio-Pharma Inc.	$	19,057	$	17,216	$	–	$	–		$	17,216	$	(7,263	)	$	9,953
National Access Cannabis Corp.		11,574		7,147		–		(5,415	)		1,732		(1,196	)		536
Aleafia Health Inc.		10,000		8,445		–		–			8,445		(4,601	)		3,844
Rapid Dose Therapeutics Inc.		5,400		5,832		–		(128	)		5,704		(2,253	)		3,451
Fire & Flower Inc.		3,416		2,823		397		–			3,220		(842	)		2,378
High Tide Inc.		450		340		–		–			340		(132	)		208
Althea Group Holdings Ltd.		–		–		–		2,206			2,206		2,087			4,293
		49,897		41,803		397		(3,337	)		38,863		(14,200	)		24,663
Level 3 on fair value hierarchy
Resolve Digital Health Inc.		718		1,100		–		–			1,100		(1,100	)		–
Resolve Digital Health Inc.		282		282		–		–			282		(282	)		–
Green Acre Capital Fund I		2,000		4,290		–		–			4,290		(2,357	)		1,933
Green Tank Holdings Corp.		1,890		5,334		–		–			5,334		(4,005	)		1,329
IBBZ Krankenhaus GmbH		1,956		1,965		–		–			1,965		(58	)		1,907
Greenwell Brands GmbH		152		153		–		–			153		(5	)		148
HighArchy Ventures Ltd.		9,995		9,995		–		–			9,995		(4,998	)		4,997
		16,993		23,119		–		–			23,119		(12,805	)		10,314
	$	66,890	$	64,922	$	397	$	(3,337	)	$	61,982	$	(27,005	)	$	34,977

17 

Aphria Inc.

Notes to the Interim Condensed Consolidated Financial Statements

For the three months ended November 30, 2019 and November 30, 2018

(Unaudited - in thousands of Canadian dollars, except share and per share amounts)

Tetra Bio-Pharma Inc.

The Company owns 26,900,000 common shares and 6,900,000 warrants at a cost of $19,057, with a fair value of $9,953 as at November 30, 2019.

National Access Cannabis (“NAC”)

During the quarter, the Company sold 8,594,505 common shares in NAC, for proceeds of $2,020 resulting in a loss of $3,395 (Note 27). The Company owns 2,750,000 common shares in NAC at a cost of $2,806, with a fair value of $536 as at November 30, 2019.

Aleafia Health Inc. (formerly Emblem Corp.) (“Aleafia”)

The Company owns 5,823,831 common shares in Aleafia at a cost of $10,000, with a fair value of $3,844 as at November 30, 2019.

Rapid Dose Therapeutics Inc. (“RDT”)

During the quarter, the Company sold 158,000 common shares in RDT, for proceeds of $89 resulting in a loss of $39 (Note 27). The Company owns 7,042,000 common shares, for a total cost of $5,281, with a fair value of $3,451 as at November 30, 2019.

Fire & Flower Inc.

During the quarter, the Company received a stock dividend of 307,529 shares with an allocated cost of $397. The Company owns 2,584,529 common shares, for a total cost of $3,813 with a fair value of $2,378 as at November 30, 2019.

High Tide Inc.

The Company owns 943,396 common shares and 6,000,000 warrants in High Tide Inc. at a cost of $450, with a fair value of $208 as at November 30, 2019. Each warrant is exercisable at $0.85 per warrant expiring April 18, 2021.

Althea Group Holdings Ltd. (“Althea”)

During the prior quarter, the Company reclassified the common shares held in Althea from equity investee to long-term (Note 12). During the period, the Company sold 38,500,000 common shares in Althea, for proceeds of $14,802 (Note 27). The Company owns 12,250,000 common shares of Althea at a cost of $2,348 AUD ($2,206 CAD) with a fair value of $4,777 AUD ($4,293 CAD) as at November 30, 2019.

Resolve Digital Health Inc. (“Resolve”)

The Company owns 2,200,026 common shares and 2,200,026 warrants in Resolve at a total cost of $1,000, with a fair value of $nil as at November 30, 2019. The Company determined the fair value of its investment based on its net realizable value. Each warrant is exercisable at $0.65 per warrant expiring December 1, 2021.

Green Acre Capital Fund I

The Company committed and invested $2,000 to Green Acre Capital Fund I. The Company determined the fair value of its investment, based on its proportionate share of net assets, to be $1,933 as at November 30, 2019. The Company has received $1,400 return of capital since its initial contribution.

Green Tank Holdings Corp. (“Green Tank”)

The Company owns 1,540,308 preferred shares in Green Tank for a total cost of $1,420 USD ($1,890 CAD), with a fair value of $1,000 USD ($1,329 CAD) as at November 30, 2019. The Company determined the fair value of its investment based on its net realizable value.

IBBZ Krankenhaus GmbH Klinik Hygiea (“Krankenhaus”)

The Company owns 25.1% of Krankenhaus, which is the owner and operator of Berlin-based Schöneberg Hospital, for €1,294 ($1,956 CAD). Through this investment, the Company is entitled to 5% of the net income (loss) for the years 2018 to 2021, and 10% of the net income (loss) for the period thereafter. The Company determined that the fair value of its investment, based on Krankenhaus’ most recent financing at the same price, is equal to its carrying value. The Company recognized a loss from the change in fair value of $(58) due to changes in the foreign exchange rate.

Greenwell Brands GmbH (“Greenwell”)

In September 2018, the Company entered into an investment and shareholder agreement with Greenwell for the purchase of 1,250 common shares, for a total cost of €100 ($152 CAD). The Company determined that the fair value of its investment, based on the most recent financing at the same price, is equal to its carrying value. The Company recognized a loss from the change in fair value of $(5) due to changes in the foreign exchange rate.

18 

Aphria Inc.

Notes to the Interim Condensed Consolidated Financial Statements

For the three months ended November 30, 2019 and November 30, 2018

(Unaudited - in thousands of Canadian dollars, except share and per share amounts)

HighArchy Ventures Ltd.

In October 2018, the Company entered into a subscription agreement with HighArchy Ventures Ltd. for the purchase of 1,999 Class A shares and 1,999 Class B shares, for a total cost of $9,995 and a fair value of $4,997. During the year, HighArchy Ventures Ltd. completed a share split of 10,000 to 1. The Company determined the fair value of its investment based on its net realizable value.

14. Promissory notes receivable

	May 31, 2019		Additions		Disposal/ Impairment		November 30, 2019
May 15, 2019 - $39,000 - 3%, due February 28, 2020	$	39,000	$	–	$	–	$	39,000
November 1, 2018 - $200 - interest free, due May 1, 2020		200		–		–		200
	$	39,200	$	–	$	–	$	39,200

15. Income taxes and deferred income taxes

A reconciliation of income taxes at the statutory rate with the reported taxes is as follows:

	For the six months ended November 30,
	2019			2018
Income before income taxes (recovery)	$	9,038		$	87,814
Statutory rate		26.5	%		26.5	%
Expected income tax expense at combined basic federal and provincial tax rate		2,395			23,271
Effect on income taxes of:
Foreign tax differential		53			(174	)
Permanent differences		295			1,055
Non-deductible share-based compensation and other expenses		3,246			2,717
Non-taxable portion of gains		(6,535	)		(15,035	)
Other		475			(104	)
Tax assets not recognized		597			134
	$	526		$	11,864
Income tax expense is comprised of:
Current	$	2,701		$	8,079
Future		(2,175	)		3,785
	$	526		$	11,864

The following table summarized the movement in deferred tax:

	Amount
Balance at May 31, 2018	$59,253
Future income tax recovery	(4,090)
Income tax recovery on share issuance costs	(3,426)
Acquired through business acquisition	35,896
Balance at May 31, 2019	$87,633
Future income tax recovery	(2,175)
Effect of foreign exchange	(352)
Balance at November 30, 2019	$85,106

19 

Aphria Inc.

Notes to the Interim Condensed Consolidated Financial Statements

For the three months ended November 30, 2019 and November 30, 2018

(Unaudited - in thousands of Canadian dollars, except share and per share amounts)

The following table summarizes the components of deferred tax:

	November 30, 2019			May 31, 2019
Deferred tax assets
Non-capital loss carry forward	$	33,030		$	20,133
Share issuance and financing fees		8,148			9,689
Other		1,781			1,102
Deferred tax liabilities
Net book value in excess of undepreciated capital cost		(5,817	)		(2,751	)
Intangible assets in excess of tax costs		(99,179	)		(101,271	)
Unrealized gain		(7,998	)		(6,534	)
Biological assets and inventory in excess of tax costs		(15,071	)		(8,001	)
Net deferred tax liabilities	$	(85,106	)	$	(87,633	)

16. Bank indebtedness

The Company secured an operating line of credit in the amount of $1,000 which bears interest at the lender’s prime rate plus 75 basis points. As of the November 30, 2019, the Company has not drawn on the line of credit. The operating line of credit is secured by a first charge on the property at 265 Talbot St. West, Leamington, Ontario and a first ranking position on a general security agreement.

The Company’s subsidiary, CC Pharma, has two operating lines of credit for €3,500 each, which bear interest at Euro Over Night Index Average plus 2.5% and Euro Interbank Offered Rate plus 3.682%. As at November 30, 2019, a total of €1,669 ($2,443 CAD) was drawn down from the available credit of €7,000. The operating lines of credit are secured by a first charge on the inventory held by CC Pharma.

17. Long-term debt

	November 30, 2019			May 31, 2019
Credit facility - $80,000 - Canadian prime interest rate plus an applicable margin, 3-year term, with a 10-year amortization, repayable in blended monthly payments, due in November 2022	$	80,000		$	–
Term loan - $25,000 - Canadian Five Year Bond interest rate plus 2.73% with a minimum 4.50%, 5 year term, with a 15-year amortization, repayable in blended monthly payments, due in July 2023		18,737			24,022
Term loan - $25,000 - 3.95%, compounded monthly, 5 year term with a 15-year amortization, repayable in equal monthly instalments of $188 including interest, due in April 2022		22,671			23,352
Term loan - $1,250 - 3.99%, 5-year term, with a 10-year amortization, repayable in equal monthly instalments of $13 including interest, due in July 2021		888			946
Mortgage payable - $3,750 - 3.95%, 5-year term, with a 20-year amortization, repayable in equal monthly instalments of $23 including interest, due in July 2021		3,310			3,380
Vendor take-back mortgage - $2,850 - 6.75%, 5-year term, repayable in equal monthly instalments of $56 including interest, due in June 2021		1,008			1,305
Term loan - €5,000 - Euro Interbank Offered Rate + 1.79%, 5-year term, repayable in quarterly instalments of €250 plus interest, due in December 2023		6,222			7,169
Term loan - €5,000 - Euro Interbank Offered Rate + 2.68%, 5-year term, repayable in quarterly instalments of €250 plus interest, due in December 2023		6,222			7,169
		139,058			67,343
Deduct  - unamortized financing fees		(702	)		(116	)
- principal portion included in current liabilities		(6,167	)		(6,332	)
	$	132,189		$	60,895

20 

Aphria Inc.

Notes to the Interim Condensed Consolidated Financial Statements

For the three months ended November 30, 2019 and November 30, 2018

(Unaudited - in thousands of Canadian dollars, except share and per share amounts)

Total long-term debt repayments are as follows:

Next 12 months	$	6,167
2 years		12,054
3 years		79,802
4 years		5,941
5 years		4,628
Thereafter		30,466
Balance of obligation	$	139,058

The credit facility of $80,000 was entered into on November 29, 2019 by 51% owned subsidiary Aphria Diamond and is secured by a first charge on the property at 620 County Road 14, Leamington, Ontario, owned by Aphria Diamond, and a guarantee from Aphria Inc. Principal payments start on the credit facility in March 2021. The effective interest rate is 5.21%.

The term loan of $18,737 was entered into on July 27, 2018 and is secured by a first charge on the property at 223, 231, 239, 265, 269, 271 and 275 Talbot Street West, Leamington Ontario, a first position on a general security agreement, and an assignment of fire insurance to the lender. Principal payments started on the term loan in August 2018. The effective interest rate during the period was 4.68%.

The term loan of $22,671 was entered into on May 9, 2017 and is secured by a first charge on the property at 265 Talbot Street West, Leamington Ontario, a first position on a general security agreement, and an assignment of fire insurance to the lender. Principal payments started on the term loan in March 2018.

The term loan of $888 and mortgage payable of $3,310 were entered into on July 22, 2016 and are secured by a first charge on the property at 265 Talbot Street West, Leamington, Ontario and a first position on a general security agreement.

The vendor take-back mortgage payable of $1,008 was entered into on June 30, 2016 in conjunction with the acquisition of the property at 265 Talbot Street West. The mortgage is secured by a second charge on the property at 265 Talbot Street West, Leamington, Ontario.

The Company acquired term loans initially up to €17,000 ($25,460 CAD) as part of the acquisition of CC Pharma (Note 10). As at November 30, 2019, the Company had amounts outstanding of €8,500 ($12,444 CAD). These term loans are secured against the distribution inventory held by CC Pharma.

18. Convertible debentures

	November 30, 2019			May 31, 2019
Opening balance	$	421,366		$	–
Principal amount issued		–			469,805
Fair value adjustment		(63,285	)		(48,439	)
Closing balance	$	358,081		$	421,366

The unsecured convertible debentures were entered into in April 2019, in the principal amount of $350,000 USD, are due in five years from issuance (the “Notes”). The Notes bear interest at a rate of 5.25% per annum, payable semi-annually in arrears on June 1 and December 1 of each year, beginning on December 1, 2019. The Notes are an unsecured obligation and ranked senior in right of payment to all indebtedness that is expressly subordinated in right of payment to the Notes. The Notes will rank equal in right of payment with all liabilities that are not subordinated. The Notes are effectively junior to any secured indebtedness to the extent of the value of the assets securing such indebtedness.

21 

Aphria Inc.

Notes to the Interim Condensed Consolidated Financial Statements

For the three months ended November 30, 2019 and November 30, 2018

(Unaudited - in thousands of Canadian dollars, except share and per share amounts)

Holders of the Notes may convert all or any portion of their Notes, in multiples of $1 USD principal amount, at their option at any time between December 1, 2023 to the maturity date. The initial conversion rate for the Notes will be 106.5644 common shares of Aphria per $1 USD principal amount of Notes, which will be settled in cash, common shares of Aphria or a combination thereof, at Aphria’s election. This is equivalent to an initial conversion price of approximately $9.38 per common share, subject to adjustments in certain events. In addition, holders of the Notes may convert all or any portion of their Notes, in multiples of $1 USD principal amount, at their option at any time preceding December 1, 2023, if:

(a) the last reported sales price of the common shares for at least 20 trading days during a period of 30 consecutive trading days immediately preceding fiscal quarter is greater than or equal to 130% of the conversion price on each applicable trading day;

(b) during the five business day period after any five consecutive trading day period (the “measurement period”) in which the trading price per $1 USD principal amount of the Notes for each trading day of the measurement period is less than 98% of the product of the last reported sale price of the Company’s common shares and the conversion rate on each such trading day;

(c) the Company call any or all of the Notes for redemption or;

(d) upon occurrence of specified corporate event.

The Company may not redeem the Notes prior to June 6, 2022, except upon the occurrence of certain changes in tax laws. On or after June 6, 2022, the Company may redeem for cash all or part of the Notes, at its option, if the last reported sale price of the Company’s common shares has been at least 130% of the conversion price then in effect for at least 20 trading days during any 30 consecutive trading day period ending on and including trading day immediately preceding the date won which the Company provide notice of redemption. The redemption of Notes will be equal to 100% of the principal amount plus accrued and unpaid interest to, but excluding, the redemption date.

19. Share capital

The Company is authorized to issue an unlimited number of common shares. As at November 30, 2019, the Company has issued 252,632,011 shares.

Common Shares	Number of shares			Amount
Balance at May 31, 2019		250,989,120		$	1,655,273
Options exercised		1,099,858			6,571
RSUs exercised		568,488			3,803
Warrants exercised		474,545			712
Shares cancelled		(500,000	)		(615	)
		252,632,011		$	1,665,744

a) Throughout the period, 1,099,858 shares were issued from the exercise of stock options with exercise prices ranging from $1.40 to $7.92 for a value of $6,571, including any cash consideration;

b) Throughout the period, 568,488 shares were issued in accordance with the restricted share unit plan to employees of the Company;

c) Throughout the period, 474,545 shares were issued from the exercise of warrants with exercise price of $1.50 for a value of $712, including any cash consideration; and,

d) During the period, the Company cancelled 500,000 common shares which were previously held and subject to various escrow agreements.

20. Warrants

The warrant details of the Company are as follows:

Type of warrant	Expiry date	Number of warrants		Weighted average price		Amount
Warrant	December 2, 2019		324,452		1.50		–
Warrant	September 26, 2021		200,000		3.14		360
Nuuvera warrant	February 14, 2020		1,293,803		20.30		976
			1,818,255	$	15.06	$	1,336

22 

Aphria Inc.

Notes to the Interim Condensed Consolidated Financial Statements

For the three months ended November 30, 2019 and November 30, 2018

(Unaudited - in thousands of Canadian dollars, except share and per share amounts)

	November 30, 2019					May 31, 2019
	Number of warrants			Weighted average price		Number of warrants			Weighted average price
Outstanding, beginning of the period		2,292,800		$	12.25		2,843,138		$10.52
Exercised during the period		(474,545	)		1.50		(550,335	)	3.29
Cancelled during the period		–			–		(3	)	1.75
Outstanding, end of the period		1,818,255		$	15.06		2,292,800		$12.25

In March 2018, the Company completed the acquisition of Nuuvera in which it reserved 1,345,866 common shares for issuance to the holders of certain common share purchase warrants of Nuuvera (“Nuuvera Warrants”). There were 3,795,450 Nuuvera Warrants, exercisable for Nuuvera shares at an exercise price of $7.20 per share, the Nuuvera shares would convert to 0.3546 Aphria shares and $0.62 cash.

21. Stock options

The Company adopted a stock option plan under which it is authorized to grant options to officers, directors, employees and consultants enabling them to acquire common shares of the Company. The maximum number of common shares reserved for issuance of stock options that can be granted under the plan is 10% of the issued and outstanding common shares of the Company. The options granted can be exercised for up to a maximum of 10 years and vest as determined by the Board of Directors. The exercise price of each option can not be less than the market price of the common shares on the date of grant.

The Company recognized a share-based compensation expense of $4,048 and $7,061 during the three and six months ended November 30, 2019 (2018 - $3,910 and $8,085). The total fair value of options granted during the period was $6,842 (2018 - $10,884).

	November 30, 2019					May 31, 2019
	Number of options			Weighted average price		Number of options			Weighted average price
Outstanding, beginning of the period		7,814,996		$	11.05		8,956,195		$7.60
Exercised during the period		(1,246,351	)		4.25		(3,164,174	)	4.05
Issued during the period		1,894,128			7.98		3,005,000		13.05
Cancelled during the period		(1,480,562	)		11.41		(982,025	)	8.27
Outstanding, end of the period		6,982,211		$	11.35		7,814,996		$11.05
Exercisable, end of the period		4,001,958		$	11.51		4,474,966		$9.54

In June 2019, the Company issued 350,000 stock options at an exercise price between $9.15 and $9.70 per share, exercisable for 5 years to officers of the Company. Nil vested immediately and the remainder vest over 3 years.

In August 2019, the Company issued 736,146 stock options at an exercise price of $9.13 per share, exercisable for 5 years to officers and employees of the Company. Nil vested immediately and the remainder vest over 3 years.

In October 2019, the Company issued 300,000 stock options at an exercise price of $6.63 per share, exercisable for 5 years to officers of the Company, all options vest immediately.

In November 2019, the Company issued 507,982 stock options at an exercise price of $9.13 per share, exercisable for 5 years to officers and employees of the Company. 150,000 vested immediately and the remainder vest over 3 years.

23 

Aphria Inc.

Notes to the Interim Condensed Consolidated Financial Statements

For the three months ended November 30, 2019 and November 30, 2018

(Unaudited - in thousands of Canadian dollars, except share and per share amounts)

The outstanding option details of the Company are as follows:

Expiry date	Weighted average exercise price		Number of options		Vested and exercisable
December 2019	$	5.25		300,000		–
January 2020	$	5.72		1,834		1,834
June 2020	$	5.44		50,000		50,000
July 2020	$	5.24		255,992		255,992
September 2020	$	0.85		185,000		185,000
October 2020	$	6.90		33,333		33,333
November 2020	$	9.05		20,000		20,000
December 2020	$	14.06		100,000		66,666
January 2021	$	21.70		10,000		6,666
January 2021	$	22.89		110,000		53,332
March 2021	$	14.39		20,000		13,333
March 2021	$	9.98		200,000		133,333
March 2021	$	12.39		50,000		33,333
April 2021	$	11.40		366,667		253,333
May 2021	$	20.19		908,500		575,164
June 2021	$	1.40		51,668		51,668
June 2021	$	11.78		50,000		33,333
July 2021	$	11.85		100,000		100,000
August 2021	$	1.64		65,000		65,000
September 2021	$	19.38		50,000		33,333
October 2022	$	6.90		74,000		74,000
July 2023	$	11.51		66,666		26,664
July 2023	$	11.85		384,664		157,996
September 2023	$	19.38		136,666		49,996
October 2023	$	19.70		46,666		19,998
February 2024	$	12.77		225,000		–
February 2024	$	13.31		1,000,000		1,000,000
April 2024	$	11.45		60,000		–
June 2024	$	9.15		300,000		–
June 2024	$	9.70		50,000		–
August 2024	$	9.13		643,922		–
October 2024	$	6.63		300,000		300,000
November 2024	$	6.26		507,982		150,000
July 2027	$	2.52		59,689		59,689
November 2027	$	6.29		39,792		39,792
March 2028	$	12.29		119,378		119,378
March 2028	$	14.38		39,792		39,792
Outstanding, end of the period	$	11.35		6,982,211		4,001,958

The Company used the Black-Scholes option pricing model to determine the fair value of options granted using the following assumptions: risk-free rate of 2.00-2.08% on the date of grant; expected life of 3 - 5 years; volatility of 70% based on comparable companies; forfeiture rate of 0%; dividend yield of nil; and, the exercise price of the respective option.

24 

Aphria Inc.

Notes to the Interim Condensed Consolidated Financial Statements

For the three months ended November 30, 2019 and November 30, 2018

(Unaudited - in thousands of Canadian dollars, except share and per share amounts)

22. Non-controlling interest

The following tables summarise the information relating to the Company’s subsidiaries, Aphria Diamond, CannInvest Africa Ltd., Verve Dynamics Incorporated (Pty) Ltd. (“Verve Dynamics”), Nuuvera Malta Ltd., Marigold Projects Jamaica Limited (“Marigold”), and ColCanna S.A.S. before intercompany eliminations.

Non-controlling interest as at November 30, 2019:

	Aphria Diamond			CannInvest Africa Ltd.			Verve Dynamics			Nuuvera Malta Ltd.			Marigold			ColCanna S.A.S.			November 30, 2019
Current assets	$	88,794		$	21		$	255		$	1,404		$	872		$	1,621		$	92,967
Non-current assets		205,116			1,343			19,257			1,732			7,027			116,446			350,921
Current liabilities		(8,910	)		–			(6,066	)		(693	)		–			(112	)		(15,781	)
Non-current liabilities		(268,224	)		(1,362	)		(1,325	)		(3,944	)		(1,107	)		(8,168	)		(284,130	)
Net assets		16,776			2			12,121			(1,501	)		6,792			109,787			143,977
Non-controlling interest %		49	%		50	%		70	%		10	%		5	%		10	%
Non-controlling interest	$	8,220		$	1		$	8,485		$	(150	)	$	340		$	10,979		$	27,875

Non-controlling interest as at May 31, 2019:

	Aphria Diamond			CannInvest Africa Ltd.			Verve Dynamics			Nuuvera Malta Ltd.			Marigold			ColCanna S.A.S.			May 31, 2019
Current assets	$	2,598		$	2		$	185		$	1,813		$	441		$	5,078		$	10,117
Non-current assets		171,314			–			14,635			741			7,872			112,953			307,515
Current liabilities		(5,743	)		(3	)		(2,155	)		(178	)		(16	)		(78	)		(8,173	)
Non-current liabilities		(150,892	)		(9	)		–			(3,196	)		(1,654	)		(9,638	)		(165,389	)
Net assets		17,277			(10	)		12,665			(820	)		6,643			108,315			144,070
Non-controlling interest %		49	%		50	%		70	%		10	%		5	%		10	%
Non-controlling interest	$	8,466		$	(5	)	$	8,866		$	(82	)	$	332		$	10,832		$	28,409

Non-controlling interest for the six months ended November 30, 2019:

	Aphria Diamond			CannInvest Africa Ltd.			Verve Dynamics			Nuuvera Malta Ltd.			Marigold			ColCanna S.A.S.			November 30, 2019
Revenue	$	–		$	–		$	–		$	42		$	31		$	–		$	73
Total expenses (recovery)		502			(12	)		544			720			(126	)		(1,473	)		155
Net comprehensive income (loss)		(502	)		12			(544	)		(678	)		157			1,473			(82	)
Non-controlling interest %		49	%		50	%		70	%		10	%		5	%		10	%
	$	(246	)	$	6		$	(381	)	$	(68	)	$	8		$	147		$	(534	)

Non-controlling interest for the six months ended November 30, 2018:

	Aphria Diamond			CannInvest Africa Ltd.			Verve Dynamics			Nuuvera Malta Ltd.			Marigold			ColCanna S.A.S.			November 30, 2018
Revenue	$	–		$	–		$	–		$	141		$	–		$	2		$	143
Total expenses (recovery)		657		$	7		$	–			514			358			257			1,793
Net comprehensive income (loss)		(657	)		(7	)		–			(373	)		(358	)		(255	)		(1,650	)
Non-controlling interest %		49	%		50	%		70	%		10	%		5	%		10	%
	$	(322	)	$	(4	)	$	–		$	(37	)	$	(18	)	$	(26	)	$	(407	)

25 

Aphria Inc.

Notes to the Interim Condensed Consolidated Financial Statements

For the three months ended November 30, 2019 and November 30, 2018

(Unaudited - in thousands of Canadian dollars, except share and per share amounts)

23. General and administrative expenses

	For the three months ended November 30,				For the six months ended November 30,
	2019		2018		2019		2018
Executive compensation	$	2,410	$	846		4,247	$	1,681
Consulting fees		4,140		1,427		7,905		2,358
Office and general		2,394		4,752		6,601		6,191
Professional fees		1,421		485		3,933		2,047
Salaries and wages		7,329		3,019		13,611		6,111
Insurance		2,700		908		5,195		1,276
Travel and accommodation		1,328		689		2,369		1,160
Rent		354		150		520		303
	$	22,076	$	12,276	$	44,381	$	21,127

24. Share-based compensation

Share-based compensation is comprised of:

	For the three months ended November 30,						For the six months ended November 30,
	2019			2018			2019			2018
Amounts charged to share-based payment reserve in respect of share-based compensation	$	4,048		$	3,910		$	7,061		$	8,085
Deferred share units issued in the period		286			32			586			225
Deferred share units revalued in the period		(343	)		(1,368	)		(342	)		386
Restricted share units issued in the period		3,785			–			4,650			–
Restricted share units revalued in the period		(213	)		–			564			–
	$	7,563		$	2,574		$	12,519		$	8,696

During the period, the Company issued 81,214 deferred share units to directors of the Company under the terms of the Company’s Omnibus Long-Term Incentive Plan.

During the period, the Company issued 1,010,375 restricted share units to employees, consultants and officers under the terms of the Company’s Omnibus Long-Term Incentive Plan. 32,158 vested immediately and the remaining vest over two years. Also included in share-based compensation is an accrual for RSU’s approved but not yet issued for $1,463.

During the period, the Company issued 807,982 stock options to officers and employees of the Company, under the terms of the Company’s Omnibus Long-Term Incentive Plan.

As at November 30, 2019, the Company had 173,172 deferred share units and 652,166 restricted share units outstanding of which, 90,342 deferred share units and 112,158 restricted share units were vested.

26 

Aphria Inc.

Notes to the Interim Condensed Consolidated Financial Statements

For the three months ended November 30, 2019 and November 30, 2018

(Unaudited - in thousands of Canadian dollars, except share and per share amounts)

25. Finance Income (expense), net

Finance income (expense), net is comprised of:

	For the three months ended November 30,						For the six months ended November 30,
	2019			2018			2019			2018
Interest income	$	2,744		$	5,603		$	6,640		$	7,095
Interest expense		(7,750	)		(748	)		(16,903	)		(1,181	)
	$	(5,006	)	$	4,855		$	(10,263	)	$	5,914

26. Non-operating income

Non-operating income is comprised of:

	For the three months ended November 30,						For the six months ended November 30,
	2019			2018			2019			2018
Non-operating income (loss):
Foreign exchange gain (loss)	$	286		$	(194	)	$	(8,396	)	$	(253	)
Gain (loss) on marketable securities		(253	)		57			(338	)		(110	)
Gain from equity investees		–			46,896			–			58,739
Deferred gain on sale of intellectual property		–			107			–			340
Unrealized gain (loss) on convertible notes		(8,094	)		2,567			(6,939	)		2,862
Gain (loss) on long-term investments		(36,449	)		30,503			(22,741	)		53,203
Unrealized gain on convertible debentures		49,078			–			63,285			–
Unrealized loss on financial liabilities		–			(560	)		–			(975	)
	$	4,568		$	79,376		$	24,871		$	113,806

During the prior quarter, the Company ceased accounting for its investment in Althea from equity accounting to fair value through profit and loss, and recognized a gain of $24,255 in gain on long-term investments.

27. Gain (loss) on long-term investments

Gain (loss) on long-term investments for the three and six months ended November 30, 2019 is comprised of:

Investment	Proceeds		Opening fair value / cost		Gain (loss) on disposal			Change in fair value			Total
Level 1 on fair value hierarchy
Althea Group Holdings Ltd.	$	14,802	$	7,105	$	7,697		$	–		$	7,697
National Access Cannabis Corp.		2,021		5,415		(3,394	)		–			(3,394	)
Rapid Dose Therapeutics Inc.		89		128		(39	)		–			(39	)
Long-term investments (Note 13)		–		–		–			(27,005	)		(27,005	)
Six months ended    November 30, 2019	$	16,912	$	12,648	$	4,264		$	(27,005	)	$	(22,741	)
Less transactions in previous quarter:
August 31, 2019		528		121		407			13,301			13,708
Three months ended    November 30, 2019	$	16,384	$	12,527	$	3,857		$	(40,306	)	$	(36,449	)

27 

Aphria Inc.

Notes to the Interim Condensed Consolidated Financial Statements

For the three months ended November 30, 2019 and November 30, 2018

(Unaudited - in thousands of Canadian dollars, except share and per share amounts)

28. Earnings per share

The calculation of earnings per share for the three months ended November 30, 2019 was based on the net income (loss) of $(7,929) (2018 - $54,774) and a weighted average number of common shares outstanding of 251,833,217 (2018 - 244,873,891) calculated as follows: 

	2019			2018
Basic earnings (loss) per share:
Net income (loss) for the period	$	(7,929	)	$	54,774
Average number of common shares outstanding during the period		251,833,217			244,873,891
Earnings (loss) per share - basic	$	(0.03	)	$	0.22

	2019			2018
Diluted earnings (loss) per share:
Net income (loss) for the period	$	(7,929	)	$	54,774
Average number of common shares outstanding during the period		251,833,217			244,873,891
"In the money" warrants outstanding during the period		–			1,109,499
"In the money" options outstanding during the period		–			3,319,792
		251,833,217			249,303,182
Earnings (loss) per share - diluted	$	(0.03	)	$	0.22

 The calculation of earnings per share for the six months ended November 30, 2019 was based on the net income (loss) of $8,512 (2018 - $75,950) and a weighted average number of common shares outstanding of 251,468,984 (2018 - 235,166,745) calculated as follows:

	2019		2018
Basic earnings (loss) per share:
Net income (loss) for the period	$	8,512	$	75,950
Average number of common shares outstanding during the period		251,468,984		235,166,745
Earnings (loss) per share - basic	$	0.03	$	0.32

	2019		2018
Diluted earnings (loss) per share:
Net income (loss) for the period	$	8,512	$	75,950
Average number of common shares outstanding during the period		251,468,984		235,166,745
"In the money" warrants outstanding during the period		579,056		1,096,145
"In the money" options outstanding during the period		379,737		3,154,602
		252,427,777		239,417,492
Earnings (loss) per share - diluted	$	0.03	$	0.32

28 

Aphria Inc.

Notes to the Interim Condensed Consolidated Financial Statements

For the three months ended November 30, 2019 and November 30, 2018

(Unaudited - in thousands of Canadian dollars, except share and per share amounts)

29. Change in non-cash working capital

Change in non-cash working capital is comprised of:

	For the six months ended November 30,
	2019			2018
Decrease (increase) in accounts receivable	$	(35,207	)	$	(9,850	)
Decrease (increase) in other current assets		(3,567	)		(14,210	)
Decrease (increase) in inventory, net of fair value adjustment		(38,195	)		(10,885	)
Decrease (increase) in biological assets, net of fair value adjustment		(11,530	)		(4,875	)
Increase (decrease) in accounts payable and accrued liabilities		36,612			14,386
Increase (decrease) in income taxes payable		(542	)		4,041
Increase (decrease) in deferred revenue		107			23,406
	$	(52,322	)	$	2,013

30. Financial risk management and financial instruments

Financial instruments

The Company has classified its cash and cash equivalents, marketable securities, long-term investments, and convertible notes receivable as FVTPL, accounts receivable, prepaids and other current assets and promissory notes receivable as amortized cost, and bank indebtedness, accounts payable and accrued liabilities, long-term debt, lease liabilities and convertible debentures as FVTPL or amortized cost.

The carrying values of accounts receivable, prepaids and other current assets, bank indebtedness and accounts payable and accrued liabilities approximate their fair values due to their short periods to maturity.

The Company’s long-term debt of $27,877 is subject to fixed interest rates. The Company’s long-term debt is valued based on discounting the future cash outflows associated with the long-term debt. The discount rate is based on the incremental premium above market rates for Government of Canada securities of similar duration. In each period thereafter, the incremental premium is held constant while the Government of Canada security is based on the then current market value to derive the discount rate. The fair value of the Company’s long-term debt in repayment as at November 30, 2019 was $27,286.

Fair value hierarchy

Financial instruments recorded at fair value are classified using a fair value hierarchy that reflects the significance of inputs used in making the measurements. Cash and cash equivalents are Level 1. The hierarchy is summarized as follows:

Level 1	quoted prices (unadjusted) in active markets for identical assets and liabilities
Level 2	inputs that are observable for the asset or liability, either directly (prices) or indirectly (derived from prices) from observable market data
Level 3	inputs for assets and liabilities not based upon observable market data

29 

Aphria Inc.

Notes to the Interim Condensed Consolidated Financial Statements

For the three months ended November 30, 2019 and November 30, 2018

(Unaudited - in thousands of Canadian dollars, except share and per share amounts)

	Level 1			Level 2		Level 3			November 30, 2019
Financial assets at FVTPL
Cash and cash equivalents	$	497,694		$	–	$	–		$	497,694
Convertible notes receivable		–			–		25,291			25,291
Long-term investments		24,663			–		10,314			34,977
Financial liabilities at FVTPL
Bank indebtedness		(5,849	)		–		–			(5,849	)
Convertible debentures		–			–		(358,081	)		(358,081	)
Outstanding, end of the period	$	516,508		$	–	$	(322,476	)	$	194,032

	Level 1		Level 2		Level 3			May 31, 2019
Financial assets at FVTPL
Cash and cash equivalents	$	550,797	$	–	$	–		$550,797
Marketable securities		20,199		–		–		20,199
Convertible notes receivable		–		–		32,230		32,230
Long-term investments		41,803		–		23,119		64,922
Financial liabilities at FVTPL
Convertible debentures		–		–		(421,366	)	(421,366)
Outstanding, end of the year	$	612,799	$	–	$	(366,017	)	$246,782

The following table presents the changes in level 3 items for the three and six months ended November 30, 2019:

	Unlisted equity securities			Trading derivatives			Converible debentures			Total
Closing balance May 31, 2019	$	23,119		$	32,230		$	(421,366	)	$(366,017)
Unrealized gain (loss) on fair value		(12,805	)		(6,939	)		63,285		43,541
Closing balance November 30, 2019	$	10,314		$	25,291		$	(358,081	)	$(322,476)

Financial risk management

The Company has exposure to the following risks from its use of financial instruments: credit; liquidity; currency rate; and, interest rate price.

(a) Credit risk

The maximum credit exposure at November 30, 2019 is the carrying amount of cash and cash equivalents, accounts receivable, prepaids and other current assets, promissory notes receivable and convertible notes receivable. All cash and cash equivalents are placed with major financial institutions.

	Total		0-30 days			31-60 days			61-90 days			90+ days
Trade receivables	$	60,695	$	53,668		$	3,060		$	1,956		$	2,011
				89	%		5	%		3	%		3	%

(b) Liquidity risk

As at November 30, 2019, the Company’s financial liabilities consist of bank indebtedness and accounts payable and accrued liabilities, which have contractual maturity dates within one-year, long-term debt, and convertible debentures which has contractual maturities over the next five years. The Company manages its liquidity risk by reviewing its capital requirements on an ongoing basis. Based on the Company’s working capital position at November 30, 2019, management regards liquidity risk to be low.

30 

Aphria Inc.

Notes to the Interim Condensed Consolidated Financial Statements

For the three months ended November 30, 2019 and November 30, 2018

(Unaudited - in thousands of Canadian dollars, except share and per share amounts)

(c) Currency rate risk

As at November 30, 2019, a portion of the Company’s financial assets and liabilities held in United States Dollars (“USD”) and Euros consist of cash and cash equivalents, convertible notes receivable, and long-term investments. The Company’s objective in managing its foreign currency risk is to minimize its net exposure to foreign currency cash flows by transacting, to the greatest extent possible, with third parties in the functional currency. The Company is exposed to currency rate risk in other comprehensive income, relating to foreign subsidiaries which operate in a foreign currency. The Company does not currently use foreign exchange contracts to hedge its exposure of its foreign currency cash flows as management has determined that this risk is not significant at this point in time.

The Company is exposed to unrealized foreign exchange risk through its cash and cash equivalents. As at November 30, 2019, approximately $298,000 USD ($396,000 CAD) of the Company’s cash and cash equivalents was in United States dollars. A 1% change in the foreign exchange rate would result in an unrealized gain or loss of approximately $4,000.

(d) Interest rate price risk

The Company manages interest rate risk by restricting the type of investments and varying the terms of maturity and issuers of marketable securities. Varying the terms to maturity reduces the sensitivity of the portfolio to the impact of interest rate fluctuations.

(e) Capital management

The Company’s objectives when managing its capital are to safeguard its ability to continue as a going concern, to meet its capital expenditures for its continued operations, and to maintain a flexible capital structure which optimizes the cost of capital within a framework of acceptable risk. The Company manages its capital structure and adjusts it in light of changes in economic conditions and the risk characteristics of the underlying assets. To maintain or adjust its capital structure, the Company may issue new shares, issue new debt, or acquire or dispose of assets. The Company is not subject to externally imposed capital requirements.

Management reviews its capital management approach on an ongoing basis and believes that this approach, given the relative size of the Company, is reasonable. There have been no changes to the Company’s capital management approach in the year. The Company considers its cash and cash equivalents and marketable securities as capital.

31. Commitments and contingencies

The Company has a lease for rental office space from December 2018 to November 30, 2028. The Company has committed purchase orders outstanding at November 30, 2019 related to capital asset expansion of $56,392, all of which are expected to be paid within the next year. Minimum payments payable over the next five years are as follows:

Years ending November 30,
2020	$	57,694
2021		1,219
2022		972
2023		801
2024		846
Thereafter		1,525
	$	63,057

From time to time, the Company and/or its subsidiaries may become defendants in legal actions arising out of the ordinary course and conduct of its business.

31 

Aphria Inc.

Notes to the Interim Condensed Consolidated Financial Statements

For the three months ended November 30, 2019 and November 30, 2018

(Unaudited - in thousands of Canadian dollars, except share and per share amounts)

As of November 30, 2019, the Company was served statements of claims in class action lawsuits against the Company and certain of its officers and former officers. These claims relate to alleged misconduct in connection with the Company’s acquisitions of LATAM Holdings Inc. (“LATAM”) and Nuuvera Inc., and the Company’s June 2018 securities offering. At the present time, the representative claimants have been identified and selected in both the U.S. and Canada. The U.S. claims include alleged violations of Section 10(b) of the Exchange Act, Rule 10b-5 under the Exchange Act and Section 20(a) of the Exchange Act. The Canadian claims include alleged statutory and common law misrepresentation and oppression. The Company intends to vigorously defend itself in each of these actions. With respect to the cases commenced in the United States, the Company is self-insured for the costs associated with any award or damages arising from such actions and has entered into indemnity agreements with each of the directors and officers and, subject to certain exemptions, will cover any costs incurred by them in connection with any of the class action claims. With respect to the cases commenced in Canada, the Company’s insurance policies may not be sufficient to cover any judgments against the Company. As at November 30, 2019, the Company has not recorded any uninsured amount related to this contingency.

On December 9, 2019, the Company was served with a statement of claim commenced by Emblem Cannabis Corporation (“Emblem”) recently acquired by Aleafia Health Inc. in respect of a supply agreement whereby the Company would provide Emblem with certain cannabis product over a period of five years pursuant to the terms of the supply agreement. Emblem has terminated this supply agreement on the basis of, among other things, alleged failure by the Company to provide the requisite cannabis product pursuant to the terms of the supply agreement. The Company intends to vigorously defend itself against such claim. As at November 30, 2019, the Company has not recorded any uninsured amount related to this contingency.

32. Segment reporting

Information reported to the Chief Operating Decision Maker (“CODM”) for the purpose of resource allocation and assessment of segment performance focuses on the nature of the operations. The Company operates in three segments. 1) cannabis operations, which encompasses the production, distribution and sale of both medical and adult-use cannabis, 2) distribution operations, which encompasses the purchase and resale of products to customers. The distribution operations are carried out through the Company’s wholly owned subsidiaries ABP, FL Group and CC Pharma, and 3) businesses under development which encompass operations in which the Company has not received final licensing or has not commenced commercial sales from operations. Factors considered in determining the operating segments include the Company’s business activities, the management structure directly accountable to the CODM, availability of discrete financial information and strategic priorities within the organizational structure.

Segment net:

	For the three months ended November 30,				For the six months ended November 30,
	2019		2018		2019		2018
Cannabis operations	$	33,984	$	20,373	$	64,769	$	33,622
Distribution operations		86,442		1,146		181,769		1,146
Business under development		174		149		174		192
Total		120,600		21,668		246,712		34,960

Segment income before income taxes: 

	For the three months ended November 30,						For the six months ended November 30,
	2019			2018			2019			2018
Cannabis operations	$	(4,039	)	$	67,728		$	18,446		$	96,981
Distribution operations		(3,246	)		(480	)		(1,385	)		(639	)
Business under development		(2,716	)		(4,572	)		(8,023	)		(8,528	)
Total		(10,001	)		62,676			9,038			87,814

32 

Aphria Inc.

Notes to the Interim Condensed Consolidated Financial Statements

For the three months ended November 30, 2019 and November 30, 2018

(Unaudited - in thousands of Canadian dollars, except share and per share amounts)

Geographic net revenue:

	For the three months ended November 30,				For the six months ended November 30,
	2019		2018		2019		2018
North America	$	33,984	$	20,424	$	64,769	$	33,673
Europe		85,146		98		178,851		141
Latin America		1,470		1,146		3,092		1,146
Total		120,600		21,668		246,712		34,960

Geographic capital assets:

	November 30, 2019		May 31, 2019
North America	$	515,535	$	471,391
Europe		32,578		25,817
Latin America		7,478		3,758
Africa		7,372		2,932
Total		562,963		503,898

Major customers are defined as customers that each individually account for greater than 10% of the Company’s annual revenues and greater than 10% of accounts receivable. For the three months ended November 30, 2019, the Company did not have a customer that accounted for greater than 10% of the Company’s revenue (2018 - nil).

33