MANAGEMENT’S DISCUSSION & ANALYSIS - Aphria · MANAGEMENT’S DISCUSSION & ANALYSIS...

APHRIAINC.MANAGEMENT’SDISCUSSION&ANALYSISFebruary28,2017

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MANAGEMENT’SDISCUSSION&ANALYSISThismanagementdiscussionandanalysis(“MD&A”)ofthefinancialconditionandresultsofoperationsofAphriaInc.,(the“Company”or“Aphria”),isforthethreeandninemonthsendedFebruary28,2017.Itissupplementalto,andshouldbereadinconjunctionwiththeCompany’sunauditedcondensedinterimconsolidatedfinancialstatementsandtheaccompanyingnotesforthethreeandninemonthsendedFebruary28,2017,aswellasthefinancialstatementsandMD&AfortheyearendedMay31,2016.TheCompany’sfinancialstatementsarepreparedinaccordancewithInternationalFinancialReportingStandards(“IFRS”).AllamountspresentedhereinarestatedinCanadiandollars,unlessotherwiseindicated.ThisMD&Ahas beenpreparedby reference to theMD&Adisclosure requirements establishedunderNational Instrument 51-102 “ContinuousDisclosureObligations”(“NI51-102”)oftheCanadianSecuritiesAdministrators.AdditionalinformationregardingAphriaInc.isavailableonourwebsiteatwww.aphria.comorthroughtheSEDARwebsiteatwww.sedar.com.InthisMD&A,referenceismadetocashcoststoproduce,“all-in”costofsales,adjustedgrossprofit,adjustedgrossmargin,EBITDAandEBITDApercentage,whicharenotmeasuresoffinancialperformanceunderIFRS.TheCompanycalculateseachasfollows:• “All-in”costofsalesofdriedcannabispergramisequaltocostofsalesofdriedcannabislessthenon-cashincrease(plusthenon-cash

decrease)inthefairvalue(“FV”)ofbiologicalassets,ifany,ofdriedcannabisdividedbygramequivalentsofcannabissoldinthequarter.Managementbelievesthismeasureprovidesusefulinformationasabenchmarkofthecompanyagainstitscompetitors.

• Cashcoststoproducedriedcannabispergramisequaltocostofsalesofdriedcannabislessthenon-cashincrease(plusthenon-cashdecrease) in the FV of biological assets, if any, amortization and packaging costs divided by gram equivalents sold in the quarter.Managementbelievesthismeasureprovidesusefulinformationasitremovesnon-cashandpostproductionexpensestiedtoourgrowingcostsandprovidesabenchmarkofCompanyagainstitscompetitors.

• Adjustedgrossprofitisequaltogrossprofitlessthenon-cashincrease(plusthenon-cashdecrease)intheFVofbiologicalassets,ifany.Managementbelievesthismeasureprovidesusefulinformationasitremovesfairvaluemetricstiedtoincreasingstocklevels(decreasingstocklevels)requiredbyIFRS.

• Adjustedgrossmarginisadjustedgrossprofitdividedbysales. Managementbelievesthismeasureprovidesuseful informationasitrepresentsthegrossprofitbasedontheCompany’scosttoproduceinventorysoldandremovesfairvaluemetricstiedtoincreasingstocklevels(decreasingstocklevels)requiredbyIFRS.

• EBITDAisnetincome(loss),plus(minus)incometaxexpense(recovery)plus(minus)financeexpense(income),plusamortization,plusshare-basedcompensation,plus(minus)non-cashFVadjustmentsrelatedtobiologicalassets,plusamortizationofnon-capitalassets,plusimpairmentofintangibleassets,plus(minus)loss(gain)onmarketablesecurities,plus(minus)loss(gain)onlong-terminvestmentsand certain one-timenon-operating expenses, as determinedbymanagement. Management believes thismeasure provides usefulinformationasitisacommonlyusedmeasureinthecapitalmarketsandasitisacloseproxyforrepeatablecashgeneratedbyoperations.

• EBITDApercentage isequaltoEBITDAdividedbyrevenue. Managementbelievesthismeasureprovidesuseful informationas it isacommonlyusedmeasureinthecapitalmarkets.Thismeasureisnotnecessarilycomparabletosimilarlytitledmeasuresusedbyothercompanies.

AllamountsinthisMD&AareexpressedinCanadiandollarsandwhereotherwiseindicated.ThisMD&AispreparedasofApril12,2017.

COMPANYOVERVIEWAphria Inc. is incorporated inOntario, theCompany’s common shares are listedunder the symbol “APH”on theToronto Stock Exchange (“TSX”) and under the symbol “APHQF” on the United States OTCQB Venture Marketexchange.PureNaturesWellness(PNW),awholly-ownedsubsidiaryoftheCompany, is licencedtoproduceandsellmedicalmarijuanaundertheprovisionsoftheAccesstoCannabisforMedicalPurposesRegulations(“ACMPR”).PNWreceivedits licence toproduceand sellmedicalmarijuanaonNovember26, 2014, followedby its licence to sell cannabisextractsonAugust18,2016.PNW’soperationsarebasedinLeamington,Ontario.TheLeamingtongreenhousefacilityprovidesAphriawiththeopportunitytobeascalablelowcostproducerofmedicalmarijuana.TheCompanyisfocusedonproducingandsellingmedicalmarijuanaanditsderivativesthroughatwo-prongedgrowthstrategy, includingbothretailsalesandwholesalechannels.RetailsalesareprimarilysoldthroughAphria’sonlinestoreaswellastelephoneorders.WholesaleshipmentsaresoldtootherACMPRLicencedProducers.

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INVESTORHIGHLIGHTS

Q3-2017 Q2-2017Revenue $5,118,516 $5,226,589Kilogramsequivalentssold 652.7 639.0Cashcosttoproducedriedcannabis/gram $1.73 $1.26“All-in”costofsalesofdriedcannabis/gram $2.23 $1.79Adjustedgrossmargin 70.0% 77.4%Cashandcashequivalentsonhand $84,351,132 $98,614,981Workingcapital $123,144,983 $102,438,357Capitalandintangibleassetexpenditures $23,419,877 $5,389,351

• Retail&wholesaleplatforms• Short-termcapacityupgradeto8,000kgs(annualized)productioncapabilityexpectedbeforetheendof

Q1-2018• Short-termcapacityupgradeto22,000kgs(annualized)productioncapabilityexpectedinnextyear• Mid-termcapacityupgradeto75,000kgs(annualized)productioncapabilityexpectedin18months• Long-termcapacityavailableviaadditional200-acrepropertyinLeamington,Ontario• Nocropfailuressinceinception• SixconsecutivequartersofEBITDAandfiveconsecutivequartersofnetincome,bothwithandwithoutIFRS

biologicalassetfairvalueadjustments• Strongexecutiveteam

o 20+yearsofPharmaexperienceo 35+yearsofgreenhousegrowingexperience

QUARTERLYHIGHLIGHTSIncreaseincapacityexpectationsDuringthequarter,theCompanyinitiatedeffortstocaptureandutilizemoreofeachindividualcannabisplantinitsprocess.Asaresultofthatinitiative,theCompanyisamendingitspreviouslyreportedcapacityexpectationsforitsexpansionprojects.TheCompanybelievesthatthecapacityafterfullcroprotationinPartIIwillincreasefrom7,000kgsto8,000kgsannualized,inPartIIIitwillincreasefrom21,000kgsto22,000kgsannualizedandinPartIVitwillincreasefrom70,000kgsto75,000kgsannualized.AphriapositiveearningsforthefifthconsecutivequarterTheCompanyreportedpositiveearningsforthequarterincludingnetincomebothwithandwithoutIFRSbiologicalasset fair value adjustments. Net income for the quarter was $4,950,250 with IFRS biological asset fair valueadjustmentsand$4,964,493withoutIFRSbiologicalassetfairvalueadjustments,respectively.Increaseincashcosttoproduceand“all-in”costofsalesofdriedcannabispergramDuringthequarter,our“all-in”costsofdriedcannabispergramincreasedfrom$1.79inthepriorquarterto$2.23inthe current quarter, representing a $0.44 increase. The increase largely related to abnormal winter weatherconditionsinLeamingtonbutalsoincludedcostsrelatedtopreparingforourPartIIexpansion.Thiswinter,theLeamingtonareaexperiencedunusualconditionsrelatedtotheamountofsunlightitreceived.Themostcommonmeasureoflightintensityisreferredtoaslumens.Duringthequarter,theLeamingtonareareceived

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approximately80%ofthehistorical three-yearaverageof lumensforthisperiod.Morespecifically, themonthofJanuarywas67%of the three-year lumenaverageand themonthof Februarywas76%of the three-year lumenaverage.Thisreducedlumenmeasuredirectlyledto(i)loweryieldsonindividualcannabisplantsduringthequarterwhichcauseda$0.20increaseinour“all-in”costsofdriedcannabispergram;and,(ii)increasedheatingandelectricalcosts,whichcauseda$0.14increaseinour“all-in”costsofdriedcannabispergram.

Theremaining$0.10pergramrelatedtoincrementallabourcostsasweaddedgreenhousestaffduringthequartersotheywouldbefullytrainedtoworkinourPartIIexpansion,themomenttheareaisapprovedbyHealthCanada.AswemovefromHealthCanada’sapprovaltouseourPart IIexpansiontowardthefirstsalefromthatarea,wewillcontinuetoincurincrementallabourcostsinourvaultandpackagingstaff.Theseincrementalcostswillbedirectlytiedtorevisedheadcountsasweproperlytrainstaffinadvanceofadditionalproductflowthatwillresultfromtheincreaseinourannualharvestfrom2,600kgsto8,000kgs.InvestmentinResolveDigitalHealthInc.OnDecember1,2016,Aphriapurchased4.8%oftheissuedandoutstandingcommonsharesofResolveDigitalHealthInc. (‘‘Resolve’’),aprivatecompany in theprocessofdevelopingadeliverysystemformedicalmarijuana,andanequivalentnumberofcommonsharepurchasewarrantsforgrossproceedsof$1,000,000.FollowingastocksplitinJanuary 2017, Aphria now owns 2,000,024 common shares and 2,000,024 common share purchase warrants ofResolve,exercisableat$0.65perwarrantatanytimeforaperiodexpiringfiveyearsfromthedateofissuance.InvestmentinTetraBio-PharmaInc.OnDecember6,2016,Aphriapurchased5,000,000commonsharesofTetraBio-Pharma Inc. (“TBP”), a companyengagedinpainmanagementresearch,atapriceof$0.20pershareforanaggregatepurchasepriceof$1,000,000,pursuanttoaprivateplacement.Aspartofthetransaction,Aphriareceived5,000,000warrants,eachforconversionintoonecommonshare,atapriceof$0.26perwarrantforaperiodofthreeyears.ThewarrantsaresubjecttoanacceleratedexpiryifTBP’ssharestradeabove$0.45for30consecutivetradingdaysatwhichtimethewarrantswillbecomesubjecttoa30-dayexpiryperiodifnotexercised.TheCompanysubsequentlyexercisedthewarrantsatacostof$1,300,000.TaskForceonCannabisLegalizationandRegulationissuesreporttoFederalGovernmentOn December 13, 2016, the Task Force on Cannabis Legalization and Regulation (the ‘‘Task Force’’), which wasestablishedbytheCanadianFederalGovernment toseek inputonthedesignofanewsystemto legalize,strictlyregulate and restrict access to marijuana, completed its review and published its report outlining itsrecommendations.ItisexpectedthattheCanadianFederalGovernmentwillintroduceforconsiderationlegislationforthelegalizationofmarijuanainthespringof2017.Aphriasecuressecondarysitewith200-acrepropertyacquisitionOnDecember14,2016,Aphriaenteredintoapurchaseandsaleagreementtoacquire200acresoffullyservicedvacantlandfor$6.24million.AsthelandacquiredisnotadjacenttotheCompany’sexistingoperations,theCompanywillrequireanewsitelicensefromHealthCanadafortheproperty.ThetransactionclosedonJanuary31,2017.

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AdditionalinvestmentinCopperstateFarmsInvestors,LLCinArizonaOnDecember20,2016, theCompanypaidanadditional$1.3MillionUSD ($1,747,188Cdn) foranadditional5%membershipinterestinCopperstateFarmsInvestors,LLC(“Copperstate”).Withthisinvestment,theCompanyowneda 5% membership interest in Copperstate Farms, LLC and a 10% membership interest in its parent company,CopperstateFarmsInvestors,LLC.AnadditionalinvestmentinCopperstatewasmadeonMarch27,2017(See‘RecentAnnouncementsintheUnitedStates’onPage7hereof).InvestmentinCanaboMedicalInc.OnDecember23,2016,Aphriapurchased6,000,000commonsharesofCanaboMedicalInc.(“Canabo”),theownerandoperatorofCannabinoidMedicalClinics,orCMClinics,Canada’slargestreferral-onlyclinicsformedicalcannabis,atapriceof$1.40percommonshareforanaggregatepriceof$8,400,000pursuanttoaprivateplacementsubjecttoamandatoryfour-monthholdingperiod.Followingthefinancing,Aphriaownedapproximately16.6%ofthetotalissuedandoutstandingcommonsharesofCanabo.DivestureofsharesinCannaRoyaltyCorp.OnDecember16,2016Aphriasold500,000commonsharesofCannaRoyaltyCorp.(“CR”),aCanadiancorporationwithmultipleinvestmentsinthecannabisspace,particularlyintheareasofintellectualproperty,deliverysystemsandextractionandprocessing technologies,atapriceof$2.97.Following the first sale,Aphria soldanadditional500,000 and 300,000 shares on December 28, 2016 and December 29, 2016 at a price of $2.48 and $2.72,respectively.Totalproceedsasaresultofthesaleof1,300,000shareswere$3,539,050,realizingagainof$1,908,746ondisposal.BoardApprovalReceivedforPartIVExpansionOn January16,2017, theCompanyannounced that itsBoardofDirectors (“theBoard”)approveda$137millioncapitalprojectinternallyidentifiedasPartIVexpansion.TheprojectwillincreaseAphria’scapacityundertheACMPRfrom300,000square feet to1,000,000square feetand isexpected to increase theCompany’sACMPRcompliantgrowingcapabilitiesfrom21,000kgsannuallyto70,000kgsannually.Theproject includes700,000squarefeetofstate-of-the-art Dutch style greenhouses, 200,000+ square feet of infrastructure, including four Level 9 vaults,automationforboththegreenhousesandprocessingareasandsecurityconsistentwithACMPRstandards.Aphriaanticipatescompletionofthisphaseoftheprojectwithin18monthsoftheannouncement,HealthCanadaapprovalswithin4monthsofcompletingtheexpansionandreachingfullcroprotationwithin4monthsafterHealthCanadaapproval.InvestmentinGreenAcresCapitalFundOn January 23, 2017, Aphria agreed to invest in Green Acres Capital Fund, a Canadian investment fund seekinginvestments in the legal marijuana sector in Canada, the United States and internationally. In relation to itsparticipation,Aphriacommitted$2,000,000totheexpected$30,000,000fundandasofthedateofthisMD&A,hasinvested$300,000.AdditionalinvestmentsinKalyteraTherapeutics,Inc.OnJanuary31,2017,Aphriasubscribedforanadditional2,222,000commonsharesofKalyteraforapurchasepriceof$999,900pursuanttoaprivateplacementwhichclosedonFebruary7,2017,subjecttofinalapprovaloftheTSXV.OnFebruary22,2017,Aphriapurchasedanadditional1,450,000commonsharesofKalyteraTherapeutics,Inc.inthesecondary market for a purchase price of $1,014,420. As a result of these transactions, Aphria has acquiredapproximately4.4%ofKalytera’sissuedandoutstandingcommonsharesforaggregatecostsof$3,014,320.

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ClosingofboughtdealfinancingOnFebruary24,2017,theCompanyannouncedtheclosingofitsboughtdealfinancing.Undertheboughtdeal,theCompanyraisedgrossproceedsof$57,500,000,andnetproceedsof$53,869,357afteraccountingforunderwriting,legalandothercostsandissued11,500,000commonshares.TheCompanyplanstouse80%oftheproceedsprimarilytofunditsPartIVexpansionandreservetheremainderforstrategicinvestments.ApprovalreceivedtograduatetoTorontoStockExchangeOnFebruary6,2017,AphriareceivedconditionalapprovalfromtheTSXtograduatefromtheTSXVentureExchangeandtolistitscommonsharesontheTSX.OnMarch21,2017,theCompanyannouncedthatitscommonsharesbegantradingontheTSXasoftheopenofthemarketonMarch22,2017.Thecommonsharescontinuetotradeunderthesymbol “APH”. In conjunctionwith listingon theTSX, the commonshareswere voluntarilydelisted from theTSXVentureExchangepriortothecommencementoftradingonMarch22,2017.FAIRVALUEMEASUREMENTS

Impactoffairvaluemetricsonbiologicalassetsandinventory

InaccordancewithIFRS,theCompanyisrequiredtorecorditsbiologicalassetsatfairvalue.Duringthemaingrowthphase,thecostofeachplantisaccumulatedonaweeklybasis.Thisoccursfromthedateofclippingfromamotherplantuptotheendofthetwelfthweekofgrowth.Fortheremainderofthegrowingperiod,thecostofeachplantcontinuestobeaccumulatedonaweeklybasisbutalsoincludesanallocationtorecognizetheeventualfairvalueoftheplant.Atthetimeofharvest,theaccumulatedcostofeachplantisbasedonthenumberofgramsharvestedandtheCompanyincreasesthecostvaluetoitsfullfairvaluelesscoststosell.

AsatFebruary28,2017,theCompany’sharvestedcannabisandcannabisoil,asdetailedinNote7,andbiologicalassets,asdetailedinNote8ofitsfinancialstatements,areasfollows:

February28,2017 November30,2016Harvestedcannabis–atcost $801,639 $843,808Harvestedcannabis–fairvalueincrement 924,068 956,224Cannabisoil–atcost 387,845 517,342Cannabisoil–fairvalueincrement 298,090 357,968Biologicalassets–atcost 574,256 533,402Biologicalassets–fairvalueincrement 77,791 --Cannabisproducts–atfairvalue $3,063,689 $3,208,744

Inanefforttoincreasetransparency,theCompany’sbiologicalassetsarecarriedatfairvalueincrementsof$0.50,$1.00,$1.50and$2.01pergramforweeks13,14,15and16,respectively.Harvestedcannabisandcannabisoilarecarriedatfairvaluesof$3.75pergramand$0.625permL,respectively.Theindividualcomponentsoffairvaluesareasfollows:

February28,2017 November30,2016Harvestedcannabis–atcost–pergram $1.74 $1.76Harvestedcannabis–fairvalueincrement–pergram 2.01 1.99Cannabisoil–atcost–permL 0.35 0.37Cannabisoil–fairvalueincrement–permL 0.28 0.26

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COSTPERGRAM

Calculationof“all-in”costsofsalesofdriedcannabispergram

TheCompanycalculates“all-in”costofsalesofdriedcannabispergramasfollows:

Threemonthsended February28, November30,“All-in”costofsalesofdriedcannabispergram 2017 2016 Costofsalesforthequarter $1,550,447 $1,105,581Add(Less):Costofaccessories (26,778) --Cannabisoilconversioncosts (50,468) (38,190)NeteffectofFVchangeinbiologicalassets (14,243) 74,268CostofsalesofdriedcannabisexcludingIFRSadjustments $1,458,958 $1,141,659

Gramsequivalentssoldduringthequarter 652,472 638,999

“All-in”costofsalesofdriedcannabispergram $2.23 $1.79

Duringthequarter,our“all-in”costsofdriedcannabispergramincreasedfrom$1.79inthepriorquarterto$2.23inthe current quarter, representing a $0.44 increase. The increase largely related to abnormal winter weatherconditionsinLeamingtonbutalsoincludedcostsrelatedtopreparingforourPartIIexpansion.

Thiswinter,theLeamingtonareaexperiencedunusualconditionsrelatedtotheamountofsunlightitreceived.Themostcommonmeasureoflightintensityisreferredtoaslumens.Duringthequarter,theLeamingtonareareceivedapproximately80%ofthehistorical three-yearaverageof lumensforthisperiod.Morespecifically, themonthofJanuarywas67%of the three-year lumenaverageand themonthof Februarywas76%of the three-year lumenaverage.Thisreducedlumenmeasuredirectlyledto(i)loweryieldsonindividualcannabisplantsduringthequarterwhichcauseda$0.20increaseinour“all-in”costsofdriedcannabispergram;and,(ii)increasedheatingandelectricalcosts,whichcauseda$0.14increaseinour“all-in”costsofdriedcannabispergram.

Theremaining$0.10pergramrelatedtoincrementallabourcostsasweaddedgreenhousestaffduringthequartersotheywouldbefullytrainedtoworkinourPartIIexpansion,themomenttheareaisapprovedbyHealthCanada.AswemovefromHealthCanada’sapprovaltouseourPart IIexpansiontowardthefirstsalefromthatarea,wewillcontinuetoincurincrementallabourcostsinourvaultandpackagingstaff.Theseincrementalcostswillbedirectlytiedtorevisedheadcountsasweproperlytrainstaffinadvanceofadditionalproductflowthatwillresultfromtheincreaseinourannualharvestfrom2,600kgsto8,000kgs.

Calculationofcashcoststoproducedriedcannabispergram

TheCompanycalculatescashcoststoproducedriedcannabispergramasfollows:

Threemonthsended February28, November30,Cashcoststoproducedriedcannabispergram 2017 2016 CostofsalesofdriedcannabisexcludingIFRSadjustments $1,458,958 $1,141,659Amortization (236,175) (228,324)Packagingcosts (91,411) (111,357)Cashcoststoproducedriedcannabis $1,131,372 $801,978

Gramequivalentssoldinthequarter 652,742 638,999

Cashcoststoproducepergram $1.73 $1.26

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INDUSTRYTRENDSANDRISKSTheCompany’soverallperformanceandresultsofoperationsaresubjecttoanumberofrisksanduncertainties.Theeconomic,industryandriskfactorsdiscussedinourAnnualReport,eachinrespectoftheyearendedMay31,2016andinourShortFormProspectus,datedNovember24,2016andFebruary17,2017,remainsubstantiallyunchangedinrespectofthethreemonthsendedFebruary28,2017.However,certainadditionalrisksareoutlinedbelow,andthemostsignificantrisksfromourpreviousdisclosurearereportedforreferencepurposes.RecentAnnouncementsintheUnitedStates

On March 27, 2017, the Company announced that it had made an additional investment of US$3 million inCopperstate.TheinvestmentincreasedAphria’sequityownershipinCopperstatefrom10%to18.5%onanon-dilutedbasis.Aspreviouslydisclosed,Copperstate’swholly-ownedsubsidiary,CopperstateFarms,LLC,isaUS-basedlicensedproducerandsellerofmedicalcannabisundertheArizonaMedicalMarijuanaAct.

OnApril4,2017,theCompanyannouncedthelaunchofitsUSexpansionstrategythroughastrategicleadinvestmentinanentitytoberenamedLibertyHealthSciencesInc.(“Liberty”)thatwilloperateintheUnitedStatesunderthebrand“AphriaUSA”. Inconnectionwiththe investment,Libertywillacquireallorsubstantiallyallof theassetsofChestnutHillTreeFarmLLC,alicensedholderandauthorizeddispensingorganizationoflow-THCmedicalcannabistopatientsinneedintheStateofFlorida.WhiletheinitialinvestmentrelatestotheStateofFlorida,theintentionofAphria’sUSexpansionstrategyistotargetkeystatesthathaveapprovedthemedicaluseofmarijuanaandmeettheCompany’sstringentinvestmentcriteria.

Inlightoftheserecentannouncements,theBoardhasundertakentoconsider,evaluate,assessandprovideadditionaldisclosureonanyriskstheremaybetoinvestorsasaresultofcertaininvestmentsinentitiesinvolvedwithmedicalmarijuanaintheUnitedStates.OutlinedbelowisasummaryofcertainrisksthattheBoardhasidentifiedasbeingappropriatetohighlighttoinvestorsatthistime.Theseriskswillcontinuetobeconsidered,evaluated,reassessed,monitoredandanalyzedonanon-goingbasisandwillbesupplemented,amendedandcommunicatedtoinvestorsasnecessaryoradvisableintheCompany’sfuturepublicdisclosure.

Whilemarijuanais legal inmanyUSstatejurisdictions, itcontinuestobeacontrolledsubstanceundertheUnitedStatesfederalControlledSubstancesAct

UnlikeinCanadawhichhasfederallegislationuniformlygoverningthecultivation,distribution,saleandpossessionofmedicalmarijuanaundertheAccesstoCannabisforMedicalPurposesRegulations,investorsarecautionedthatintheUnitedStates,marijuanaislargelyregulatedatthestatelevel.TotheCompany’sknowledge,therearetodateatotalof28states,plustheDistrictofColumbia,thathavelegalizedmarijuanainsomeform,includingArizonaandFloridaas noted above in connection with the investments in Copperstate and Liberty. Notwithstanding the permissiveregulatoryenvironmentofmedicalmarijuanaatthestatelevel,marijuanacontinuestobecategorizedasacontrolledsubstanceundertheControlledSubstancesAct(the“CSA”)intheUnitedStatesandassuch,maybeinviolationoffederallawintheUnitedStates.

TheUnitedStatesCongresshaspassedappropriationsbillseachofthelastthreeyearsthathavenotappropriatedfundsforprosecutionofmarijuanaoffensesofindividualswhoareincompliancewithstatemedicalmarijuanalaws.American courts have construed these appropriations bills to prevent the federal government from prosecutingindividualswhenthoseindividualscomplywithstatelaw.However,becausethisconductcontinuestoviolatefederallaw,AmericancourtshaveobservedthatshouldCongressatanytimechoosetoappropriatefundstofullyprosecutetheCSA,any individualorbusiness—eventhosethathavefullycompliedwithstate law—couldbeprosecutedforviolations of federal law. And if Congress restores funding, the governmentwill have the authority to prosecuteindividualsforviolationsofthelawbeforeitlackedfundingundertheCSA’sfive-yearstatuteoflimitations.

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Violationsof any federal laws and regulations could result in significant fines, penalties, administrative sanctions,convictions or settlements arising from civil proceedings conducted by either the federal government or privatecitizens,orcriminalcharges,includingbutnotlimitedtodisgorgementofprofits,cessationofbusinessactivitiesordivestiture.ThiscouldhaveamaterialadverseeffectontheCompany,includingitsreputationandabilitytoconductbusiness,itsholding(directlyorindirectly)ofmedicalmarijuanalicensesintheUnitedStates,thelistingofitssecuritiesonvariousstockexchanges,itsfinancialposition,operatingresults,profitabilityorliquidityorthemarketpriceofitspubliclytradedshares. Inaddition, it isdifficult fortheCompanytoestimatethetimeorresourcesthatwouldbeneededfortheinvestigationofanysuchmattersoritsfinalresolutionbecause,inpart,thetimeandresourcesthatmaybeneededaredependentonthenatureandextentofanyinformationrequestedbytheapplicableauthoritiesinvolved,andsuchtimeorresourcescouldbesubstantial.

Theapproach to theenforcementofmarijuana lawsmaybesubject tochangeormaynotproceedaspreviouslyoutlined

As a result of the conflicting views between state legislatures and the federal government regardingmarijuana,investmentsinmarijuanabusinessesintheUnitedStatesaresubjecttoinconsistentlegislationandregulation.Theresponse to this inconsistency was addressed in August 2013 when then Deputy Attorney General, James Cole,authoredamemorandum(the“ColeMemorandum”)addressedtoallUnitedStatesdistrictattorneysacknowledgingthatnotwithstandingthedesignationofmarijuanaasacontrolledsubstanceatthefederallevelintheUnitedStates,severalUSstateshaveenactedlawsrelatingtomarijuanaformedicalpurposes.

The Cole Memorandum outlined certain priorities for the Department of Justice relating to the prosecution ofmarijuanaoffenses.Inparticular,theColeMemorandumnotedthatinjurisdictionsthathaveenactedlawslegalizingmarijuanainsomeformandthathavealsoimplementedstrongandeffectiveregulatoryandenforcementsystemstocontrol thecultivation,distribution,saleandpossessionofmarijuana,conduct incompliancewiththose lawsandregulationsislesslikelytobeapriorityatthefederallevel.Notably,however,theDepartmentofJusticehasneverprovided specific guidelines for what regulatory and enforcement systems it deems sufficient under the ColeMemorandumstandard.

Inlightoflimitedinvestigativeandprosecutorialresources,theColeMemorandumconcludedthattheDepartmentof Justice should be focused on addressing only themost significant threats related tomarijuana. States wheremedicalmarijuanahadbeenlegalizedwerenotcharacterizedasahighpriority.InMarchofthisyear,newlyappointedAttorney General Jeff Sessions again noted limited federal resources and acknowledged that much of the ColeMemorandumhadmerit,althoughhedisagreedthatithadbeenimplementedeffectivelyandhasnotcommittedtoutilizingtheColeMemorandumframeworkgoingforward.

TheBoardhasinformeditsdecisiontoauthorizeandapprovetheinvestmentsinCopperstateandLibertybasedontheguidelinesoutlinedintheColeMemorandumandbelievesthattheriskoffederalprosecutionandenforcementiscurrentlyunlikely.However,unlessanduntiltheColeMemorandumismemorializedinfederallegislation,therecan be no assurance that the federal government will not seek to prosecute cases involving medical marijuanabusinessesthatareotherwisecompliantwithstatelaw.

SuchpotentialproceedingscouldinvolvesignificantrestrictionsbeingimposedupontheCompanyorthirdparties,while diverting the attention of key executives. Such proceedings could have a material adverse effect on theCompany’sbusiness,revenues,operatingresultsandfinancialconditionaswellastheCompany’sreputation,evenifsuchproceedingswereconcludedsuccessfullyinfavouroftheCompany.

TheCompany’sinvestmentsintheUnitedStatesaresubjecttoapplicableanti-moneylaunderinglawsandregulations

TheCompanyissubjecttoavarietyoflawsandregulationsdomesticallyandintheUnitedStatesthatinvolvemoneylaundering,financialrecordkeepingandproceedsofcrime,includingtheCurrencyandForeignTransactionsReportingActof1970 (commonlyknownastheBankSecrecyAct),asamendedbyTitle IIIof theUnitingandStrengtheningAmericabyProvidingAppropriateToolsRequiredtoInterceptandObstructTerrorismActof2001(USAPATRIOTAct),

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theProceeds of Crime (Money Laundering) and Terrorist Financing Act (Canada), as amended and the rules andregulationsthereunder,theCriminalCode(Canada)andanyrelatedorsimilarrules,regulationsorguidelines,issued,administeredorenforcedbygovernmentalauthoritiesintheUnitedStatesandCanada.

In February 2014, the Financial Crimes Enforcement Network (“FCEN”) of the Treasury Department issued amemorandumprovidinginstructionstobanksseekingtoprovideservicestomarijuana-relatedbusinesses.TheFCENMemo states that in some circumstances, it is permissible for banks to provide services to marijuana-relatedbusinesseswithoutriskingprosecutionforviolationof federalmoney laundering laws. It referstosupplementaryguidance that Deputy AttorneyGeneral Cole issued to federal prosecutors relating to the prosecution ofmoneylaundering offenses predicated onmarijuana-related violations of the CSA. It is unclear at this timewhether thecurrentadministrationwillfollowtheguidelinesoftheFCENMemo.

IntheeventthatanyoftheCompany’sinvestments,oranyproceedsthereof,anydividendsordistributionstherefrom,oranyprofitsorrevenuesaccruingfromsuchinvestmentsintheUnitedStateswerefoundtobeinviolationofmoneylaunderinglegislationorotherwise,suchtransactionsmaybeviewedasproceedsofcrimeunderoneormoreofthestatutesnotedaboveoranyotherapplicablelegislation.ThiscouldrestrictorotherwisejeopardizetheabilityoftheCompanytodeclareorpaydividends,effectotherdistributionsorsubsequentlyrepatriatesuchfundsbacktoCanada.Furthermore,whiletheCompanyhasnocurrentintentiontodeclareorpaydividendsonitsCommonSharesintheforeseeablefuture,intheeventthatadeterminationwasmadethattheinvestmentsinCopperstateorLiberty(oranyfutureinvestmentsintheUnitedStates)couldreasonablybeshowntoconstituteproceedsofcrime,theCompanymaydecideorberequiredtosuspenddeclaringorpayingdividendswithoutadvancenoticeandforan indefiniteperiodoftime.

TheCompany’sinvestmentsintheUnitedStatesmaybesubjecttoheightenedscrutiny

Forthereasonssetforthabove,theCompany’sexistinginvestmentsintheUnitedStates,andanyfutureinvestments,maybecomethesubjectofheightenedscrutinybyregulators,stockexchangesandotherauthoritiesinCanada.Asaresult,theCompanymaybesubjecttosignificantdirectandindirectinteractionwithpublicofficials.TherecanbenoassurancethatthisheightenedscrutinywillnotinturnleadtotheimpositionofcertainrestrictionsontheCompany’sabilitytoinvestintheUnitedStatesoranyotherjurisdiction.

Governmentpolicy changesorpublicopinionmayalso result in a significant influenceover the regulationof themarijuanaindustryinCanada,theUnitedStatesorelsewhere.Anegativeshiftinthepublic’sperceptionofmedicalmarijuanaintheUnitedStatesoranyotherapplicablejurisdictioncouldaffectfuturelegislationorregulation.Amongother things, such a shift could cause state jurisdictions to abandon initiatives or proposals to legalize medicalmarijuana,therebylimitingthenumberofnewstatejurisdictionsintowhichtheCompanycouldexpand.AnyinabilitytofullyimplementtheCompany’sexpansionstrategymayhaveamaterialadverseeffectontheCompany’sbusiness,financialconditionandresultsofoperations.

RiskFactorsRelatedtoExpansion

Certain contemplated capital expenditures previously publicly disclosed by the Company, including, withoutlimitation,PartIIExpansion,PartIIIExpansionandPartIVExpansion,willrequireHealthCanadaapproval.Thereisnoguarantee that Health Canada will approve the contemplated expansions in a timely fashion, nor is there anyguaranteethattheexpansionwillbecompletedinitscurrentlyproposedform,ifatall.ThefailureoftheCompanytosuccessfullyexecuteitsexpansionstrategy(includingreceivingtheexpectedHealthCanadaapprovalsinatimelyfashion)couldadverselyaffectthebusiness,financial conditionandresultsofoperationsoftheCompany.RelianceontheLicenceAphria’sabilitytogrow,storeandsellmedicalmarijuanainCanadaisdependentonmaintainingitslicencewithHealthCanada.Failuretocomplywiththerequirementsofthe licenceoranyfailuretomaintainits licencewouldhavea

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materialadverseimpactonthebusiness,financialconditionandoperatingresultsofAphria.AlthoughAphriabelievesitwillmeettherequirementsoftheACMPRforextensionofthelicence,therecanbenoguaranteethatHealthCanadawillextendorrenewthelicenceor,ifitisextendedorrenewed,thatitwillbeextendedorrenewedonthesameorsimilar terms. ShouldHealthCanadanotextendor renewthe licenceorshould it renewthe licenceondifferentterms,thebusiness,financialconditionandresultsoftheoperationofAphriawouldbemateriallyadverselyaffected.LegislativeorRegulatoryReformThecommercialmedicalmarijuanaindustryisanewindustryandtheCompanyanticipatesthatsuchregulationswillbe subject tochangeas theFederalGovernmentmonitors LicencedProducers inaction. Aphria’soperationsaresubject to a variety of laws, regulations, guidelines and policies relating to the manufacture, import, export,management,packaging/labelling,advertising, sale, transportation, storageanddisposalofmedicalmarijuanabutalso including laws and regulations relating to drugs, controlled substances, health and safety, the conduct ofoperationsandtheprotectionoftheenvironment.Whiletotheknowledgeofmanagement,Aphriaiscurrentlyincompliancewithallsuchlaws,anychangestosuchlaws,regulations,guidelinesandpoliciesduetomattersbeyondthecontrolofAphriamaycauseadverseeffectstoitsoperations.HistoryofLossesTheCompanyincurredlossesinpriorperiods.Aphriamaynotbeabletoachieveormaintainprofitabilityandmaycontinue to incur significant losses in the future. In addition, Aphria expects to continue to increase operatingexpensesasitimplementsinitiativestocontinuetogrowitsbusiness.IfAphria’srevenuesdonotincreasetooffsettheseexpectedincreasesincostsandoperatingexpenses,Aphriawillnotbeprofitable.ChangestoReimbursementAllowancesforVeteransOnNovember22,2016,theMinisterofVeteransAffairsannouncedthatVeteransAffairsCanada(‘‘VAC’’)willissuenew rules related to the reimbursement of medical cannabis for veterans. The new rules limit the amount ofreimbursementtoveteransintwoways.First,theamountofmedicalmarijuanathatcanbereimbursedisexpectedtobelimitedto3.0gramsperday(perveteran),suchchangetobeeffectiveasofMay21,2017.Second,effectiveNovember22,2016,thepricepergramreimbursementwaslimitedto$8.50pergram.TheCompanyunderstandsthatthenewrulesmayallowindividualveteranstoreceivereimbursementformorethan3.0gramsaday,onacasebycasebasis,subjecttospecificconditions,whichasofthedatehereofhaveyettobefullydelineated.Accordingly,theCompanyhas not yet been able to fullymodel the impact that theproposedVAC changesmayhaveon theCompany’srevenuestream.ItisalsounclearhowmanyveteranpatientsofAphria,ifany,maymeetthecasebycaseexemptionreferencedherein.InvestorsarecautionedthattheVACchangesmayhaveamaterialeffectonAphria’sbusinessintheeventthattheCompanyisunabletosecureoffsettingrevenuestreams,itsveteranpatientsdonotqualifyforanexemptionoriffurtheramendmentstotheVACchangesareannounced.CompetitionOnOctober19,2015,theLiberalPartyofCanada(“Party”)obtainedamajoritygovernmentinCanada.ThePartyhascommittedtothe legalizationofrecreationalcannabis inCanada,thoughnomodelforthisregulatorychangehasbeenpubliclydisclosedortimelineforimplementationputforward.Thisregulatorychangemaynotbeimplementedatall. The introductionofa recreationalmodel forcannabisproductionanddistributionmay impact themedicalmarijuanamarket.TheimpactofthispotentialdevelopmentmaybenegativefortheCompanyandcouldresultinincreased levelsof competition in its existingmedicalmarket and/or theentryofnewcompetitors in theoverallcannabismarketinwhichtheCompanyoperates.There is potential that theCompanywill face intense competition fromother companies, someofwhich canbeexpected to have longer operating histories and more financial resources and manufacturing and marketing

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experiencethantheCompany.Increasedcompetitionbylargerandbetterfinancedcompetitorscouldmateriallyandadverselyaffectthebusiness,financialconditionandresultsofoperationsoftheCompany.Thegovernmenthasonlyissuedtodatealimitednumberoflicenses,undertheACMPR,toproduceandsellmedicalmarijuana.Thereare,however,severalhundredapplicantsforlicenses.Thenumberoflicensesgrantedcouldhavean impacton theoperationsof theCompany. Becauseof theearly stageof the industry inwhich theCompanyoperates,theCompanyexpectstofaceadditionalcompetitionfromnewentrants.AccordingtoHealthCanadatherearecurrently41LicensedProducers.IfthenumberofusersofmedicalmarijuanainCanadaincreases,thedemandforproductswillincreaseandtheCompanyexpectsthatcompetitionwillbecomemoreintense,ascurrentandfuturecompetitorsbegintoofferanincreasingnumberofdiversifiedproducts.Toremaincompetitive,theCompanywillrequire a continued level of investment in research and development,marketing, sales and client support. TheCompanymay not have sufficient resources tomaintain research and development, marketing, sales and clientsupporteffortsonacompetitivebasiswhichcouldmateriallyandadverselyaffectthebusiness,financialconditionandresultsofoperationsoftheCompany.

RESULTSOFOPERATIONS

Revenue

RevenueforthethreemonthsendedFebruary28,2017was$5,118,516versus$2,679,898 inthesameperiodof2016and$5,226,589inthesecondquarteroffiscal2017.Theincreaseinrevenuefromthesameperiodintheprioryearwaslargelyrelatedtothecontinuedgrowthofpatientsoffsetbyadecreaseintheaveragesellingpricepergramequivalentfrom$8.31to$7.85.Thedecreaseinrevenueduringthequarterfromthepriorquarterwaslargelyrelatedto:

• Decreaseintheaveragesellingpricepergramequivalentsoldtoveterans,causedbytheimplementationofan$8.50pergrampricecap,byVeteransAffairsCanada.

Thesefactorswereoffsetbythefollowing:

• Continuedaccelerationofpatientonboarding,includingsalesof166,705gramequivalentstopatientson-boardedinthequarter;

• Continuedgrowthofsalestoexistingpatients,includingsalesof486,037gramequivalentstopatientson-boardedpriortothequarter;and,

• Increaseinthepercentageofcannabisoilsold,atahigheraveragepricethandriedcannabis,to25.6%from10%inthepriorquarter.

RevenuefortheninemonthsendedFebruary28,2017was$14,720,617versus$5,657,613inthesameperiodof2016.Thereasonfortheincreaseinsalesinthenine-monthperiodisconsistentwiththereasonsfortheincreaseinsales in the three-month period of the prior year above, being continued acceleration of patient onboarding,continuedgrowthofsalestoexistingpatients,introductionforsaleofcannabisoils,offsetbyloweraveragepricingpergramtoveteransandpatientchurn.GrossprofitandgrossmarginThegrossprofitforthethreemonthsendedFebruary28,2017was$3,568,069,comparedto$1,883,225inthesameperiodintheprioryear.Theincreaseingrossprofitfromtheprioryearisconsistentwiththemuchlargerpatientbaseovertheprioryearoffsetagainstincreasedproductioncostspergramequivalentoverthesamequarterintheprioryearandbythedecreaseinaveragesellingpricepergramequivalent.

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The gross profit for the ninemonths ended February 28, 2017was $11,471,222, compared to a gross profit of$3,871,034inthesameperiodoftheprioryear.Due to the rapid volume of growth in the Company over the past 12months, as a result of continued patientacquisitions,managementbelievesmoreappropriatecomparisonsofgrossprofitandgrossmarginarebetweenthethreemonthsendedFebruary28,2017andthethreemonthsendedNovember30,2016.Thegrossprofit for the threemonthsendedFebruary28,2017decreased$552,939 to$3,568,069, compared to$4,121,008inthepriorquarter,asshownbelow:

Threemonthsended February28,2017 November30,2016Revenue $5,118,516 $5,226,589 Costofsales Costofgoodssold 1,300,029 951,525Amortization 236,175 228,324NeteffectofFVchangeinbiologicalassets 14,243 (74,268) 1,550,447 1,105,581 Grossprofit $3,568,069 $4,121,008Grossmargin 69.7% 78.8%

Costofsalescurrentlyconsistofthreemaincategories:(i)costofgoodssold;(ii)amortizationand,(iii)neteffectofFVchangeinbiologicalassets.

(i)Costofgoodssoldincludethedirectcostofmaterialsandlabourrelatedtothemedicalcannabissold.Thiswould include growing, cultivation and harvesting costs, stringent quality assurance and quality control,cannabisoilprocessingcosts,aswellaspackagingand labelling. AllmedicalcannabisshippedandsoldbyAphriahasbeengrownandproducedbytheCompany.(ii)Amortizationincludesamortizationofproductionequipmentandleaseholdimprovementsutilizedintheproductionofmedicalcannabis.

(iii)NeteffectofFVchangeinbiologicalassetsispartoftheCompany’scostofsalesduetoIFRSstandardsrelating toagricultureandbiologicalassets (i.e. livingplantsoranimals). This line itemrepresents theneteffectofthenon-cashfairvalueadjustmentofbiologicalassets(medicalcannabis)producedandsoldintheperiod.Inanefforttoincreasetransparency,managementdeemsitnecessarytodisclosethatinventoryofHarvested cannabis (Note 7 – Interim consolidated financial statements period ended February 28, 2017)consistsofdriedflowerandcannabisoil,allofwhichiscarriedatavalueof$3.75pergram(cannabisoil iscarriedat$0.625/mL,6mLofcannabisoilisequivalentto1gramofdriedproduct).

Theincreaseincostofgoodssoldisprimarilyattributabletoincreasedunabsorbedoverheadcostsinthequarter,which represent period costs as described above. The incremental unabsorbed overhead costs were primarily afunctionofdecreasedproductionyieldsinthegreenhouseasaresultoflessnaturalsunlight,measuredbylumens,inthequarter.Thedecreaseingrossmarginwasattributabletoalesserfairvalueadjustmentforchangeinbiologicalassetsinthequartercomparedtolastquarter,increasingcostofgoodssoldinthequarterby$348,504.Inthethirdquarter,thecostofsalesasapercentageofsaleswas30.3%comparedto21.2%inthesecondquarter.

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Managementbelievesthattheuseofnon-cashIFRSadjustmentsincalculatinggrossprofitandgrossmargincanbeconfusingduetothelargevalueofnon-cashfairvaluemetricsrequired.Accordingly,managementbelievestheuseofanadjustedgrossprofitandadjustedgrossmarginprovidesabetterrepresentationofperformancebyexcludingnon-cashfairvaluemetricsrequiredbyIFRS.Adjustedgrossprofitandadjustedgrossmarginarenon-GAAPfinancialmeasuresthatdonothaveanystandardizedmeaningprescribedbyIFRSandmaynotbecomparabletosimilarmeasurespresentedbyothercompanies.Thegrossprofit has been adjusted from IFRS by adding the non-cash change in biological assets of $14,243 and removing$520,574inthethreeandninemonthsrespectively.ThefollowingistheCompany’sadjustedgrossprofitandadjustedgrossmarginascomparedtoIFRSforthequarter: Threemonthsended Threemonthsended February28,2017 February28,2017 IFRS Adjustments AdjustedRevenue $5,118,516 $-- $5,118,516 Costofsales Costofgoodssold 1,300,029 -- 1,300,029Amortization 236,175 -- 236,175NeteffectofFVchangeinbiologicalassets 14,243 (14,243) -- 1,550,447 1,536,204

Grossprofit $3,568,069 $3,582,312

Grossmargin 69.7% 70.0%ThefollowingistheCompany’sadjustedgrossprofitandadjustedgrossmarginascomparedtoIFRSfortheninemonthsendedFebruary28,2017:

Ninemonthsended Ninemonthsended February28,2017 February28,2017 IFRS Adjustments AdjustedRevenue $14,720,617 $-- $14,720,617

Costofsales Costofgoodssold 3,052,262 -- 3,052,262Amortization 717,707 -- 717,707NeteffectofFVchangeinbiologicalassets (520,574) 520,574 -- 3,249,395 (520,574) 3,769,969

Grossprofit $11,471,222 $10,950,648

Grossmargin 77.9% 74.4%

Selling,generalandadministrativeSelling,generalandadministrativeexpensesarecomprisedofgeneralandadministrative,share-basedcompensation,selling,marketingandpromotion,amortizationandresearchanddevelopment.Thesecostsincreasedby$6,233,381to$8,200,368from$1,966,987inthesamequarterintheprioryearandincreased$9,875,002to$14,829,311from$4,954,309inthenine-monthperiodoftheprioryear.

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Selling,generalandadministrativecosts

ThreemonthsendedFebruary, NinemonthsendedFebruary, 2017 2016 2017 2016

Generalandadministrative $1,230,626 $711,153 $3,414,936 $1,641,987Share-basedcompensation 1,255,976 145,748 1,710,565 405,079Selling,marketingandpromotion 1,854,577 907,287 5,054,417 2,488,537Amortization 263,055 123,644 715,295 198,300Researchanddevelopment 96,134 79,155 434,098 220,406Impairmentofintangibleasset 3,500,000 -- 3,500,000 -- $8,200,368 $1,966,987 $14,829,311 $4,954,309

Generalandadministrativecosts

ThreemonthsendedFebruary, NinemonthsendedFebruary, 2017 2016 2017 2016

Executivecompensation $202,831 $201,634 $619,755 $456,129Consultingfees 52,899 7,026 132,311 34,313Officeandgeneral 397,468 202,186 1,105,853 426,243Professionalfees 151,170 128,577 391,034 264,158Salariesandwages 301,100 118,110 788,680 269,579Travelandaccommodation 100,909 43,842 319,954 159,204Rent 24,249 9,778 57,349 32,361 $1,230,626 $711,153 $3,414,936 $1,641,987

Theincreaseingeneralandadministrativecostsduringthequarterwaslargelyrelatedtoanincreasein:

• Salariesandwagesandofficeandgeneralasaresultofincreasedactivitywithinthebusinessoverthesameperiodintheprioryear;

• Consulting fees, predominantly associated with various negotiations, investor relations and reviews ofcurrentandpotentialbusinessrelationshipsnecessarytosustaingrowthoftheCompany,and

• Professionalfees,predominantlycomprisedoflegalcosts,associatedwithvariousnegotiationsandreviewsofcurrentandpotentialbusinessrelationshipsnecessarytosustaingrowthoftheCompany,includingourrecentlistingontheTSX.

Theincreaseingeneralandadministrativecostsduringthenine-monthperiodwaslargelyrelatedtothesamefactorsasinthethree-monthperiod.Share-basedcompensationTheCompanyrecognizedshare-basedcompensationexpenseof$1,255,976forthethreemonthsendedFebruary28,2016 compared to $145,748 for the prior year. Share-based compensation was valued using the Black-Scholesvaluationmodelandrepresentsanon-cashexpense.Theincreaseinshare-basedcompensationisconsistentwiththeincreaseinstockoptionsissuedduringtherespectiveperiod,545,000inthecurrentperiodcomparedto195,000inthesameperiodoftheprioryear,ofthestockoptionsgranted inthequarteronly151,500werevested inthequarter.Inadditiontostockoptions,duringthequarter,theCompanyissued37,500commonshares,pricedat$4.96persharetoathird-partyconsultantoftheCompanyinexchangeforservicestobeprovided.

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FortheninemonthsendedFebruary28,2017,theCompanyincurredshare-basedcompensationof$1,710,565asopposedto$405,079,includingtheexpensesrelatedtothesharesforservicesdescribedinthethree-monthperiod.2,113,000optionsweregrantedduring thenine-monthperiodended February28, 2017, asopposed to515,000optionsinthecomparableperiodoftheprioryear.Oftheoptionsgrantedinthenine-monthperiodendedFebruary28,2017,only641,500vestedinthatnine-monthperiod.Selling,marketingandpromotioncostsFor the threemonthsendedFebruary28,2017, theCompany incurredselling,marketingandpromotioncostsof$1,854,577,or36.2%ofrevenueversus$907,287or33.9%ofrevenueinthecomparablepriorperiod.Thesecostsrelatedtopatientacquisitionandongoingpatientmaintenance,theCompany’scallcentreoperations,shippingcosts,marketingdepartment,aswellasthedevelopmentofpromotionalandinformationmaterials.Theincreaseisdirectlycorrelatedwiththeincreaseinpatientandsalesvolumesoverthecomparableperiod.For theninemonths ended February 28, 2017, theCompany incurred selling,marketing andpromotion costs of$5,054,417or34.3%ofrevenue,asopposedto$2,488,537or44.0%ofrevenue,inthecomparablepriorperiod.Theincreaseincostsinthenine-monthperiodisconsistentwiththeincreaseinthethree-monthperiod.AmortizationThe Company incurred non-production related amortization charges of $263,055 for the three months endedFebruary28,2017comparedto$123,644forthesameperiodintheprioryear.Theincreaseinamortizationchargesarearesultofthecapitalexpendituresmadeduringthepriorandcurrentyear,thelargestofwhichrelatestotheacquisitionsofCannWayPharmaceuticalsLtd.andlandandgreenhousespurchasedfromCacciavillaniandF.M.FarmsLtd.TheCompanyincurredamortizationchargesof$715,295fortheninemonthsendedFebruary28,2017comparedto$198,300forthesameperiod inthepreviousyear.The increaseforthenine-monthperiod isconsistentwiththeincreaseforthethree-monthperiod.ResearchanddevelopmentResearch and development costs of $96,134were expensed during the threemonths ended February 28, 2017compared to $79,155 in same period last year. These relate to costs associated with process validation of theCompany’s internal chemistry andmicro biology labs, as well as researching different aspects of genetics. TheCompanyisalsoexperimentingwithdifferentgrowingmethodsandmethodsofextractionofcannabisoilsandrelatedderivativesforfuturecommercialization.FortheninemonthsendedFebruary28,2017,theCompanyincurredresearchanddevelopmentcostsof$434,098asopposedto$220,406inthecomparablepriorperiod.Theincreaseincostsprimarilyrelatesto:

• Validationoflaboratory• Developmentofprocessesandmethodsassociatedwithextraction• Phenotypingofgenetics

ImpairmentofIntangibleAssetsTheCompanyincurredanon-cashexpenseof$3,500,000relatingtotheimpairmentofitsCannWaybrandintangibleasset. The Company recorded the impairment for the CannWay brand following the changes to reimbursementallowancesforveterans,includingan$8.50pergramcaponreimbursementandalimittoindividualpatientusageof3.0gramsperday,effectiveMay24,2017.

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Non-operatingitemsDuring the three months ended February 28, 2017, the Company earned non-operating income of $9,582,549consistingof$216,667ofconsultingrevenue,representingtheforgivenessofourpromissorynotepayableinArizona,$65,431 foreign exchange gain, $406,213 of finance income, net, $13,930 of gain on marketable securities,$8,880,308ofgainonlong-terminvestments,ofwhich$1,908,746representedarealizedgain,comparedtonon-operatingincomeof$87,482intheprioryear,consistingof$86,808offinanceincome,and$674relatedtoagainonsaleofcapitalassets.FortheninemonthsendedFebruary28,2017,theCompanyearnednon-operatingincomeof$10,149,286consistingof$216,667ofconsultingrevenue,$65,431foreignexchangegain,$698,484offinanceincome,net,$11,367relatedtoagainonthesaleofcapitalassets,$9,143,407ofgainonlong-terminvestments,ofwhich$2,171,845representedarealizedgain,comparedtonon-operatingincomeof$179,072intheprioryear,consistingof$171,947offinanceincome,and$7,125relatedtoagainonsaleofcapitalassets.Netincome(loss)Thenet incomeforthethreemonthsendedFebruary28,2017was$4,950,250or$0.04pershareasopposedto$3,720or$0.00pershareinthesameperiodoftheprioryear.ThenetincomefortheninemonthsendedFebruary28,2017was$6,791,197or$0.07pershareasopposedtoanetlossinthesameperiodoftheprioryearof$904,203or$0.02pershare.NetincomewithoutIFRSbiologicalassetfairvalueadjustmentsandnetincomewithIFRSbiologicalassetfairvalueadjustmentsarenon-GAAPfinancialmeasuresthatdonothaveanystandardizedmeaningprescribedby IFRSandmaynotbecomparabletosimilarmeasurespresentedbyothercompanies.ThenetincomewithoutthefairvalueadjustmenthasbeenadjustedfromIFRSbyaddingthenon-cashchangeinbiologicalassetsof$14,243andremoving$520,574inthethreeandninemonthsrespectively.ThenetincomewiththefairvalueadjustmentisequivalenttonetincomeasreportedunderIFRS.

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EBITDA

EBITDAisanon-GAAPfinancialmeasurethatdoesnothaveanystandardizedmeaningprescribedbyIFRSandmaynotbecomparabletosimilarmeasurespresentedbyothercompanies.TheCompanycalculatesEBITDAasnetincome(loss) plus (minus) finance income, net plus amortization, plus impairment of intangible asset, plus share-basedcompensation,plus(minus)non-cashfairvalue(“FV”)adjustmentsrelatedtobiologicalassets,plusamortizationofnon-capitalassets,plus(minus)loss(gain)onsaleofcapitalassets,plusallowanceforbaddebts,plus(minus)loss(gain)oninvestmentsallasfollows: ThreemonthsendedFebruary NinemonthsendedFebruary 2017 2016 2017 2016Netincome(loss) $4,950,250 $3,720 $6,791,197 $(904,203)Financeincome,net (406,213) (86,808) (698,484) (171,947)Amortization 499,230 244,290 1,433,002 541,205Impairmentofintangibleasset 3,500,000 -- 3,500,000 --Share-basedcompensation 1,255,976 145,748 1,710,565 405,079Non-cashFVadjustmentsinbiologicalassets 14,243 84,823 (520,574) 42,033Amortizationofnon-capitalassets 16,360 19,845 63,501 134,755Gainonsaleofcapitalassets -- (674) (11,367) (7,125)Allowanceforbaddebts 69,465 12,406 145,376 12,406Sub-total $9,899,311 $423,350 $12,413,216 $52,203Gainondisposalofmarketablesecurities (13,930) -- (13,930) --Gainonlong-terminvestments (8,880,308) -- (9,143,407) --EBITDA $1,005,073 $423,350 $3,255,879 $52,203

LIQUIDITYANDCAPITALRESOURCESCash flow from operations for the nine months improved by $6,580,229 from cash flow used in operations of$1,335,041inthenine-monthperiodoftheprioryeartocashflowgeneratedfromoperationsof$5,245,188inthecurrentnine-monthperiod.Theimprovementincashflowgeneratedfromoperationsisprimarilyaresultofa:

• Increasedprofitabilityfortheperiodstemmingfromincreasedsalesvolume;and,• Increasedaccountspayableandaccruedliabilities,whichprimarilyrelatedtounpaidcapitalexpendituresat

theendoftheperiod.Thesefactorswerepartiallyoffsetby:

• Increasedinventory,wheretheincreaseisprimarilymadeupofanincreaseintheamountofcannabisoilinstorage;

• Increasedproductioncostspergram;and,• Increaseinotherreceivables,wheretheincreaseisprimarilymadeupofanincreaseinexpected

governmentremittancesreceivablerelatedtoourcapitalexpansions.

Cashresources/workingcapitalrequirements

TheCompanyconstantlymonitorsandmanagesitscashflowstoassesstheliquiditynecessarytofundoperations.AsatFebruary28,2017,Aphriamaintained$84,351,132ofcashandcashequivalentsonhand,comparedto$16,472,664atMay31,2016and$12,053,547atFebruary28,2016.Cashandcashequivalentsonhandincreased$67,878,468inthenine-monthperiodandincreased$72,297,585fromFebruary28,2016.WorkingcapitalprovidesfundsfortheCompanytomeetitsoperationalandcapitalrequirements.AsatFebruary28,2017, the Company maintained working capital of $123,144,982. Management expects the Company to have

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adequatefundsavailableonhandtomeettheCompany’splannedgrowthandexpansionoffacilitiesoverthenext24months.Capitalandintangibleassetexpenditures

ForthethreemonthsendedFebruary28,2017,theCompanyinvested$23,419,877incapitalandintangibleassets,ofwhich$233,820areconsideredmaintenanceCAPEXandtheremainder$23,186,057growthCAPEX,relatedtothepropertyacquisitionsandCompany’sPartIIExpansionandPartIIIExpansion.FortheninemonthsendedFebruary28,2017,theCompanyinvested$35,879,436incapitalandintangibleassets,ofwhich$547,844areconsideredmaintenanceCAPEXandtheremainder,$35,331,592growthCAPEXrelatedtotheCompany’sPartIIExpansionandPartIIIExpansion.FinancialcovenantsTheCompanymetitsfinancialcovenantsatalltimessincetheyhavecomeintoeffect.TheCompanybelievesthatithassufficientoperatingroomwithrespecttoitsfinancialcovenantsforthenextfiscalyearanddoesnotanticipatebeinginbreachofanyofitsfinancialcovenantsduringthisperiod.Contractualobligationsandoff-balancesheetfinancingDuringtheyear,theCompanyterminatedits leasecommitmentforrentalofgreenhouseandwarehousespaceinconjunctionwiththepurchaseofthe265TalbotSt.Westproperty. TheCompanycontinuesto leaseofficespacefromarelatedparty,theleasecommitmentendsDecember31,2018withtheoptiontorenewfortwoadditionalfiveyearterms,andtheCompanycontinuestoleaseofficepaceinTorontofor$4,500permonthuntilSeptember2017.The Company has a lease commitments until September 2019 and August 2020 for motor vehicles. Minimumpaymentspayableoverthenextfiveyearsareasfollows: Paymentsduebyperiod Total Lessthan1year 1–3years 4–5years After5yearsOutstandingcapitalrelatedcommitments $12,946,773 $4,736,454 $8,210,319 $-- $--Operatingleases 91,472 64,212 27,260 -- --Motorvehicleleases 90,244 28,912 53,166 8,166 --Total $13,128,489 $4,829,578 $8,290,745 $8,166 $--

ExceptasdisclosedelsewhereinthisMD&A,therehavebeennomaterialchangeswithrespecttothecontractualobligationsoftheCompanyduringtheyear.Aphriadoesnotmaintainanyoff-balancesheetfinancing.WiththeinvestmentbytheCompanyinMassRootsInc.,TBPandResolveDigitalHealthInc.warrants,theCompanymaintainsadeferredgainof$1,725,000off-balancesheet,asmandatedbyIFRS.`

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SharecapitalAphriahasthefollowingsecuritiesissuedandoutstanding,asatFebruary28,2017:

Presentlyoutstanding

Exercisable

Exercisable&in-the-money*

Fullydiluted

Commonstock 124,074,220 124,074,220Warrants -- 3,775,873 3,775,873 3,775,873Stockoptions -- 4,333,287 4,333,287 6,266,500Fullydiluted 134,116,593

*BasedonclosingpriceonFebruary28,2017of$6.75pershareQUARTERLYRESULTS

Thefollowingtablesetsoutcertainunauditedfinancial informationforeachoftheeightfiscalquartersuptoandincluding the thirdquarterof fiscal 2017,endedFebruary28,2017. The informationhasbeenderived from theCompany’sunauditedconsolidatedfinancialstatements,whichinmanagement’sopinion,havebeenpreparedonabasisconsistentwiththeauditedconsolidatedfinancialstatementsfiledintheCompany’s2016AnnualReportandincludealladjustmentsnecessaryforafairpresentationofthe informationpresented. Pastperformance isnotaguaranteeoffutureperformanceandthisinformationisnotnecessarilyindicativeofresultsforanyfutureperiod. May/16 Aug/16 Nov/16 Feb/17Revenue $2,776,316 $4,375,512 $5,226,589 $5,118,516Netincome 1,302,164 895,269 945,678 4,950,250Incomepershare-basic 0.02 0.01 0.01 0.04Incomepershare–fullydiluted 0.02 0.01 0.01 0.04 May/15 Aug/15 Nov/15 Feb/16Revenue $499,890 $950,740 $2,026,975 $2,679,898Netincome(loss) (481,380) (476,825) (431,098) 3,720Losspershare-basic (0.01) (0.01) (0.00) 0.00Losspershare–fullydiluted (0.01) (0.01) (0.00) 0.00RELATEDPARTYBALANCESANDTRANSACTIONS

Priortogoingpublic,theCompanyfundedoperationsthroughthesupportofrelatedparties.Sincegoingpublic,theCompanyhascontinuedtoleveragethepurchasingpoweroftheserelatedpartiesforcertainofitsgrowingrelatedexpenditures.TheCompanyowed$niltorelatedpartiesasatFebruary28,2017(2015-$nil).Theseamountsweredueupondemandandarenon-interestbearing.ThesepartiesarerelatedastheyarecorporationsthatarecontrolledbycertainofficersanddirectorsoftheCompany(Mr.ColeCacciavillaniandMr.JohnCervini).TheCompanytransactswithrelatedpartiesinthenormalcourseofbusiness.Throughtheserelatedparties,Aphriacanleveragethepurchasingpowerforgrowingrelatedcommoditiesandlabour,whichprovidestheCompanywithbetterratesthanifAphriawassourcingtheseonitsown.Thesetransactionsaremeasuredattheirexchangeamounts.DuringthethreemonthsendedFebruary28,2017,relatedpartycorporationschargedorincurredexpendituresonbehalfoftheCompanytotaling$83,195(2016-$236,544),whichwereoraretobereimbursed, includingrentof$8,178(2016-$58,210).

Page½20

DuringtheninemonthsendedFebruary28,2017,relatedpartycorporationschargedorincurredexpendituresonbehalfoftheCompanytotaling$350,141(2016-$885,269),whichwereoraretobereimbursed,includingrentof$41,211(2016-$135,383).SUBSEQUENTEVENTSOnMarch9,2016,theCompanysold500,000sharesheldinCanaboMedicalInc.fornetproceedsofapproximately$340,000, which were subject to a mandatory 4-month holding period, expiring April 23, 2017. The Companypurchased500,000sharesonMarch13,2017foranaggregatepurchasepriceof$370,700.OnMarch18,2016,theCompanyrevisedaconsultingagreementpursuanttowhichtheCompanyissued112,500commonsharesintoanescrowaccountinexchangeforfutureservicestobeprovidedbyagreenhouseconsultant.The shares are to be released by the escrow agent upon successful completion of certain time-based andperformance-basedmilestonesbytheconsultant.IntheeventthatthemilestonesarenotachievedbyApril30,2018,theescrowedshareswillbereturnedtotheCompanytobecancelled.OnMarch20, 2017, theCompanyexercised its 5,000,000warrantsheld in TetraBio-Pharma Inc. (“TBP”) for theaggregatepriceof$1,300,000.TheproceedsfromthewarrantexercisearetobeusedtoadvancetheclinicaltrialsbeingdevelopedinPhytoPainPharmsInc.,asubsidiaryofTBP.OnMarch22,2017,theCompany‘scommonsharesbegantradingontheTSX.TheCommonSharescontinuetotradeunderthesymbol“APH”.InconjunctionwithlistingontheTSX,thecommonshareswerevoluntarilydelistedfromtheTSX-VentureExchange.On March 27, 2017, the Company entered into a subscription agreement with Copperstate to purchase 6,000additionalmembershipunitsfor$3,000,000(USD).OnMarch 30, 2017, the Company exercised its 500,000 warrants held inMassRoots for the aggregate price of$450,000USD.OnApril4,2017,theCompanyannounceditwillinvest$25millionintoDFMMJInvestmentLtd.,anewspecialpurposeprivatecompanywhichwillacquireallorsubstantiallyalloftheassetsofChestnutHillTreeFarmLLCandsubsequentlyamalgamateintoasubsidiaryofSecureComMobileInc.,apubliccompanylistedontheCanadianSecuritiesExchange,aspartofabusinesscombination(the"BusinessCombination").Thefunds,whencombinedwithanadditional$35milliontoberaisedinabrokeredprivateplacementledbyClarusSecuritiesInc.,willbeusedforthelaunchofitsUSexpansionstrategyinanentitytoberenamedLibertyHealthSciencesInc.thatwilloperateintheUnitedStatesunderthebrand"AphriaUSA".Oncethetransactioniscompleted,theCompanywillownapproximately37.6%oftheissuedandoutstandingcommonsharesofLiberty.Aspartofthetransaction,Aphriahasagreed,uponcompletionoftheBusinessCombination,tolicenceitsmedicalbrandtoLiberty,inexchangeforaperpetual3%royaltyonallsalesofmarijuanaandrelatedproducts.Further,Aphriahasagreed,uponcompletionoftheBusinessCombination,tolicenceitsgreenhousegrowingintellectualpropertysystemtoLibertyinexchangeforadditionalcommonsharesinLiberty.INTERNALCONTROLSOVERFINANCIALREPORTINGTheChiefExecutiveOfficerandChiefFinancialOfficer,inaccordancewithNationalInstrument52-109(“NI52-109”),havebothcertifiedthattheyhavereviewedthefinancialreportandthisMD&A(the“Filings”)andthat,basedontheirknowledgehavingexercisedreasonablediligence,(a)theFilingsdonotcontainanyuntruestatementofamaterialfactoromittostateamaterialfactrequiredtobestatedorthatisnecessarytomakeastatementnotmisleadinginlightof thecircumstancesunderwhich itwasmadewithrespecttotheperiodcoveredbythefilings;and(b) thefinancial report togetherwith the other financial information included in the Filings fairly present in allmaterialrespects the financial condition, financialperformanceandcash flowsof the issuer,asof thedateofand for theperiodspresentedintheFilings.

Page½21

AphriaInc.isapubliclytradedcorporation,incorporatedinCanada,withitsheadofficelocatedat5300CommerceCourtWest,199BayStreet,Toronto,Ontario.TheCompany’scommonsharesarelistedontheTSX,underthetradingsymbol“APH”.InvestorsshouldbeawarethatinherentlimitationsontheabilityofcertifyingofficersofanissuertodesignandimplementonacosteffectivebasisDisclosureControlsandProceduresandInternalControlsoverFinancialReportingasdefinedinNI52-109inthefirstfinancialperiodfollowingtheissuerbecominganon-ventureissuerinthecircumstancesdescribedins.5.5ofNI52-109mayresultinadditionalriskstothequality,reliability,transparencyandtimelinessofinterimandannualfilingsandotherreportsprovidedundersecuritieslegislation. This MD&A contains forward-looking statements within the meaning of applicable securities legislation with regards to expected financialperformance,strategyandbusinessconditions.Weusewordssuchas“forecast”,“future”,“should”,“could”,“enable”,“potential”,“contemplate”,“believe”,“anticipate”,“estimate”,“plan”,“expect”,“intend”,“may”,“project”,“will”,“would”andsimilarexpressionsare intendedto identifyforward-lookingstatements,althoughnotallforward-lookingstatementscontaintheseidentifyingwords.Thesestatementsreflectmanagement’scurrentbeliefswithrespecttofutureeventsandarebasedoninformationcurrentlyavailabletomanagement.Forward-lookingstatementsinvolvesignificantknownandunknownrisksanduncertainties.Many factorscouldcauseactual results,performanceorachievement tobemateriallydifferentfromanyfutureforward-lookingstatements.Factorsthatmaycausesuchdifferencesinclude,butarenotlimitedto,generaleconomicandmarketconditions,investmentperformance,financialmarkets,legislativeandregulatorychanges,technologicaldevelopments,catastrophiceventsand other business risks. These forward-looking statements are as of the date of thisMD&A and the Company andmanagement assume noobligationtoupdateorrevisethemtoreflectneweventsorcircumstancesexceptasrequiredbysecuritieslaws.TheCompanyandmanagementcautionreadersnottoplaceunduerelianceonanyforward-lookingstatements,whichspeakonlyasofthedatemade.Someofthespecificforward-lookingstatementsinthisMD&Ainclude,butarenotlimitedto,statementswithrespecttothefollowing:

• theintendedexpansionoftheCompany’sfacilitiesandreceiptofapprovalfromHealthCanadatocompletesuchexpansion;• theexpectedcosttoproduceagramofdriedcannabis;• theexpectedcosttoprocessingcannabisoil;and• theanticipatedfuturegrossmarginsoftheCompany’soperations.• TheCompany’sinvestmentsintheUnitedStates,thecharacterizationandconsequencesofthoseinvestmentsunderFederalLaw,and

theframeworkfortheenforcementofmedicalmarijuanaandmarijuana-relatedoffensesintheUnitedStates

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