Cultivating Excellence - Aphria

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CultivatingExcellence2017ANNUAL REPORT

We invite youto read aboutour journey,commitment,and businessperformancein our 2017Annual Report.MESSAGE TO SHAREHOLDERS5MANAGEMENT TEAM6MANAGEMENT’S DISCUSSIONAND ANALYSISshapingthe futureOF MEDICAL CANNABIS11

Success has beendefined in many ways forward-thinking vision,superior strategy, flawlessexecution, transformativeinnovation, or balanced riskmanagement behaviour.expandingour rootsVIC NEUFELDChief Executive Officer MessageBut one key and most fundamental ingredientto any success story is the need for passionateleaders. It is people responsible for strategy buildingand executing on plans. It is people that bring thecommitted skills to work each and every day.It is people that successful companies build theirDNA around. The leadership at Aphria is reflectiveof all these attributes. From our humble and frugalbeginnings, when a mere handful of energetic andresourceful leaders came together, to the dynamicteam assembled today, I can say I am most proud ofthe Aphria team and what we have achieved together.Fiscal 2017 was a remarkable year measured inmany ways. Our success was shared across allfacets of our operations, from plant to patient.Solid patient growth, revenues growing fourfold,continued positive cash flows, record harvests,industry leading low cost producer, no crop failures,staying true to our core quality values, implemented“Seed to Sale Certification” patient guarantee, foursuccessful capital raises, a vision of ensuring capacitygrowth - the list is almost endless. But the realhighlight in 2017 is the growth of our bench strength.Adding leaders is clearly one of the key underlyingreasons that Aphria hit home runs in many metrics.The future has never looked brighter for Aphria.Our medical go-to-market strategies are delivering.Our unrelenting focus on improving growing yields.Our persistent attention on lowering our costs.Raising the quality bar in the industry. These arethings that separate Aphria from the rest.A keen focus on capital expenditures sets the stagefor tomorrow’s market growth. Product innovation, forboth medical and the eventual recreational markets,is proceeding as planned. Investments in certainstrategic areas remains on our radar.On behalf of my fellow Co-Founders, Cole Cacciavillaniand John Cervini, we thank all our stakeholders inbelieving in our vision and the Aphria story.We really do have “a good thing growing”.APHRIA ANNUAL REPORT 2017 MANAGEMENT’S DISCUSSION AND ANALYSIS5

ManagementTeamVic NeufeldPresident & Chief Executive OfficerCarl MertonChief Financial OfficerCole CacciavillaniCo-Chair & FounderJohn CerviniCo-Chair & FounderGary LeongChief Science OfficerVic Neufeld is the Presidentand Chief Executive Officer ofAphria. Mr. Neufeld is the formerCEO of Jamieson LaboratoriesCanada’s largest manufacturerand distributor of natural vitamins,minerals, concentrated foodsupplements, herbs andbotanical medicines.Carl Merton, Chief Financial Officer,has almost 25 years of financialand business expertise, including12 years at Big Four accountingfirms and 12 years in industry,of which 10 has been serving asChief Financial Officer of publiclylisted enterprises. Mr. Merton is aChartered Professional Accountant,Chartered Accountant and a Fellow,Chartered Business Valuator.Cole Cacciavillani, Aphria’sco-founder, is an industrialengineer with 35 years ofexperience in the agriculturaland greenhouse industry.Cole has accumulated expertiseof how to best utilize nature’slight and proprietary growingtechniques and technologiesto create competitive, safeand cost effective products.John Cervini, Aphria’s co-founder,comes from fourth generationgrowers in southwestern Ontariowith hydroponic agriculturalexperience. Together with his fatherand brother, Mr. Cervini helpedestablished Lakeside Produce, asa leader of North America salesand marketing companies sellingfresh produce from Canada tomultinational retailers throughoutNorth America.Gary Leong, Aphria’s Chief ScientificOfficer has a personal backgroundin quality assurance, quality control,quality system audits, internationaland domestic regulatory affairs andproduct research and development.Gary’s commitment to research andscientific knowledge of the medicalmarijuana industry allows us here atAphria to produce a cost effectiveand quality product.APHRIA ANNUAL REPORT 2017 MANAGEMENT’SMANAGEMENT TEAMDISCUSSION AND ANALYSIS7

Seed-to-SaleCertifiedSeed-to-Sale Certified isn’t a new system we put in place. From theday we started growing and producing medical cannabis products,Aphria has adopted a strict quality management program whichincludes 509 steps. In fact, most of the quality processes we putinto place were adopted from the highly restricted and regulatedpharmaceutical industry and go above and beyond cannabisindustry regulations mandated by Health Canada:STATE-OF-THE-ART FACILITY:Located in Leamington, Ontario, our facility sets the gold standardfor the cannabis industry. Our greenhouse is powered by sunlightto provide optimal and natural growing conditions.TIGHTLY CONTROLLED GROWING PROCESSES:From water sampling and nutrient profiling to integrated pestmanagement systems and in-depth record keeping, we track andcontrol every step of the growing process.QUALITY PRODUCTION AND PROCEDURES:We apply strict harvesting, drying, blending and extractingprocedures to ensure that our patients receive consistentlyhigh-quality products with every order. Every cannabis productwe produce undergoes extensive testing by our experiencedin-house scientists and third-party laboratories test for potencylevels as well as impurities such as microbiological contaminants,heavy metals, pesticides and aflatoxins.ESTABLISHED SUPPLY CHAIN:Our products are only as good as our supply chain. We inspect andtest all our raw materials and they are only used if they too meetour exacting quality standards. We also regularly conduct site visitsand audits of our key suppliers to ensure that they meet our strictrequirements for quality, consistency and safety.STANDARD PRACTICES AND TRAINING:Each step involved in the cultivation and production of our medicalcannabis follows clearly defined Standard Operating Procedures. Weprovide regular reports to Health Canada and go over and above whatis required by the regulations.We firmly believe that patients deserve the cleanest and safestmedicine possible to meet their health needs. Our Seed-to-SaleCertified quality promise is our commitment to ensuring that everyAphria product we produce is clean and safe, 100% of the time.No exceptions.APHRIA ANNUAL REPORT 2017 MANAGEMENT’S DISCUSSION AND ANALYSIS9

Management’sDiscussion & AnalysisThis management discussion and analysis (“MD&A”) of the financial condition and results of operations of AphriaInc., (the “Company” or “Aphria”), is for the three and twelve months ended May 31, 2017. It is supplemental to, andshould be read in conjunction with the Company’s audited consolidated financial statements and the accompanyingnotes for year ended May 31, 2017, as well as the financial statements and MD&A for the year ended May 31, 2016.The Company’s financial statements are prepared in accordance with International Financial Reporting Standards(“IFRS”). All amounts presented herein are stated in Canadian dollars, unless otherwise indicated.This MD&A has been prepared by reference to the MD&A disclosure requirements established under NationalInstrument 51-102 “Continuous Disclosure Obligations” (“NI 51-102”) of the Canadian Securities Administrators.Additional information regarding Aphria Inc. is available on our website at www.aphria.com or through the SEDARwebsite at www.sedar.com.In this MD&A, reference is made to “all-in” cost of sales, cash costs to produce, adjusted gross profit, adjusted grossmargin and EBITDA, which are not measures of financial performance under IFRS. The Company calculates eachas follows: “ All-in” cost of sales of dried cannabis per gram is equal to cost of sales of dried cannabis less the non-cash increase(plus the non-cash decrease) in the fair value (“FV”) of biological assets, if any, of dried cannabis plus (minus)increase (decrease) in plant inventory divided by gram equivalents of cannabis sold in the quarter. Managementbelieves this measure provides useful information as a benchmark of the Company against its competitors. ash costs to produce dried cannabis per gram is equal to cost of sales of dried cannabis less the non-cash increaseC(plus the non-cash decrease) in the FV of biological assets, if any, amortization and packaging costs plus (minus)increase (decrease) in plant inventory divided by gram equivalents of cannabis sold in the quarter. Managementbelieves this measure provides useful information as it removes non-cash and post production expenses tied to ourgrowing costs and provides a benchmark of the Company against its competitors. djusted gross profit is equal to gross profit less the non-cash increase (plus the non-cash decrease) in the FV ofAbiological assets, if any. Management believes this measure provides useful information as it removes fair valuemetrics tied to increasing stock levels (decreasing stock levels) required by IFRS. djusted gross margin is adjusted gross profit divided by revenue. Management believes this measure providesAuseful information as it represents the gross profit based on the Company’s cost to produce inventory sold andremoves fair value metrics tied to increasing stock levels (decreasing stock levels) required by IFRS. BITDA is net income(loss), plus (minus) income tax expense (recovery) plus (minus) finance expense (income),Eplus amortization, plus share-based compensation, plus (minus) non-cash FV adjustments related to biologicalassets, plus amortization of non-capital assets, plus impairment of intangible assets, plus (minus) loss (gain) onmarketable securities, plus (minus) loss (profit) from equity accounted investee, plus (minus) EBITDA profit (loss)from equity accounted investee, plus (minus) loss (gain) on long-term investments and certain one-time nonoperating expenses, as determined by management. Management believes this measure provides useful informationas it is a commonly used measure in the capital markets and as it is a close proxy for repeatable cash generated byoperations.These measures are not necessarily comparable to similarly titled measures used by other companies.All amounts in this MD&A are expressed in Canadian dollars and where otherwise indicated.This MD&A is prepared as of July 11, 2017.APHRIA ANNUAL REPORT 2017 MANAGEMENT’S DISCUSSION AND ANALYSIS11

COMPANY OVERVIEWAphria Inc. is continued in Ontario, the Company’s common shares are listed under the symbol “APH”on the Toronto Stock Exchange (“TSX”) and under the symbol “APHQF” on the United States OTCQBVenture Market exchange.Pure Natures Wellness (PNW), a wholly-owned subsidiary of the Company, is licenced to produce andsell medical marijuana under the provisions of the Access to Cannabis for Medical Purposes Regulations(“ACMPR”). PNW received its licence to produce and sell medical marijuana on November 26, 2014,followed by its licence to sell cannabis extracts on August 18, 2016. PNW’s operations are based inLeamington, Ontario. The Leamington greenhouse facility provides Aphria with the opportunity to be ascalable low cost producer of medical marijuana.The Company is focused on producing and selling medical marijuana and its derivatives through atwo-pronged growth strategy, including both retail sales and wholesale channels. Retail sales are primarilysold through Aphria’s online store as well as telephone orders. Wholesale shipments are sold to otherACMPR Licenced Producers.APHRIA ANNUAL REPORT 2017 MANAGEMENT’S DISCUSSION AND ANALYSIS13

INVESTOR HIGHLIGHTSQUARTERLY HIGHLIGHTSQ4-2017RevenueKilograms equivalents sold 5,717,866738.3Q3-2017 5,118,516652.7Cash cost to produce dried cannabis / gram– Aphria’s definition 1.11 1.73Cash cost to produce dried cannabis / gram– Using competitors’ definition 0.79 1.42“All-in” cost of sales of dried cannabis / gram 1.67 2.23Adjusted gross margin85.7%70.0%EBITDA 2,826,667 1,005,073Cash and cash equivalents & marketable securities 167,257,202 122,029,195Working capital 169,051,562 123,144,983Capital and intangible asset expenditures 31,955,214 23,419,877 Retail & wholesale platformsINCREASE IN CAPACITY EXPECTATIONSThe Company continues to refine and improve its industry leading greenhouse agricultural growing practices,combined with unique engineering changes embedded in both fully funded Part III and Part IV expansions,presently underway. Management believes that once full crop rotation has been attained after Part IVexpansion is complete, annualized capacity will exceed 100,000 kilograms. Supporting management’s revisedcapacity projections are recent yield improvements resulting from the introduction of new lighting strategies,growing techniques and leveraging other “unique to greenhouse” strengths.As a result of the above, the Company amended its previously reported capacity expectations for its expansionprojects. The Company believes that the capacity after full crop rotation in Part II will increase from 8,000 kgsto 9,000 kgs annualized, in Part III it will increase from 22,000 kgs to 30,000 kgs annualized and in Part IV itwill increase from 75,000 kgs to 100,000 kgs annualized.HEALTH CANADA APPROVAL RECEIVED FOR PART II EXPANSIONOn May 15, 2017, the Company announced that Health Canada approved a license amendment that providesAphria with additional production space of 57,000 square feet, as part of its Part II expansion at its facilityin Leamington, Ontario. The announcement indicated that this would more than triple Aphria’s productioncapacity of medical cannabis from 2,600 kgs annually to 8,000 kgs annually. The 8,000 kgs annual capacitywas subsequent increased to 9,000 kgs annually as discussed in the preceding paragraph. The first cropcultivated and produced at the Part II expansion will be available for sale in the middle of August.Upgraded to 9,000 kgs (annualized) production capability with first sale expected in late August 2017Short-term capacity upgrade to 30,000 kgs (annualized) production capability expected in next yearAPHRIA REPORTS SEVENTH CONSECUTIVE QUARTER OF POSITIVE EBITDAThe Company reported EBITDA of 2,826,667 for the quarter and 6,082,546 for the year.Mid-term capacity upgrade to 100,000 kgs (annualized) production capability expected in 18 monthsLong-term capacity available via additional 200-acre property in Leamington, OntarioNo crop failures since inceptionSeven consecutive quarters of EBITDAIMPROVEMENT IN CASH COST TO PRODUCE AND “ALL-IN” COST OF SALES OF DRIED CANNABIS PER GRAMDuring the quarter, our “all-in” costs of dried cannabis per gram decreased from 2.23 in the prior quarter to 1.67 in the current quarter, representing a 0.56 decrease or a 25.1% decrease, and cash cost to produceper gram decreased from 1.73 to 1.11, representing a decrease of 0.62 or a 35.8% decrease. Thedecrease related to improved growing techniques and better cooperation from Mother Nature.Four bought deals closed during the year, raising over 204,000,000 in share capitalStrong executive team 20 years of Pharma experience35 years of greenhouse growing experienceINVESTMENT IN SECURECOM MOBILE INC.On November 23, 2016, Aphria invested 200,000 in SecureCom Mobile Inc. (“SecureCom”) via anunsecured convertible debenture. The debenture bore interest at 12% and was convertible into equityat 0.05 per share, and included the right to a warrant for each share of equity on conversion, priced at 0.08. On March 31, 2017, the Company exercised its conversion rights under the debenture and received4,000,000 shares and 4,000,000 warrants priced at 0.08. Concurrently, the Company exercised its warrantsat a cost of 320,000 and received an additional 4,000,000 shares. As a result of these transactions, Aphriaowns 8,000,000 shares in SecureCom at a cost of 520,000.INVESTMENT IN DFMMJ INVESTMENTS, LTD.On April 5, 2017, the Company announced it would invest 25 million into DFMMJ Investments, Ltd.(“DFMMJ”), which would acquire all or substantially all of the assets of Chestnut Hill Tree Farm LLC, throughits subsidiary DFMMJ Investments, LLC, and subsequently amalgamate into a subsidiary of SecureCom MobileInc., a public company listed on the Canadian Securities Exchange, as part of a business combination (theAPHRIA ANNUAL REPORT 2017 MANAGEMENT’S DISCUSSION AND ANALYSIS15

“Business Combination”). As part of the series of transactions, Aphria agreed to license its Aphria Know-HowSystem to DFMMJ. The funds, when combined with an additional 35 million raised in a brokered privateplacement led by Clarus Securities Inc., would be used for the launch of its US expansion strategy in an entityto be renamed Liberty Health Sciences Inc. (“Liberty”) that will operate in the United States under the brand“Aphria USA”. Also as part of the transaction, Aphria has agreed, to license its medical brand to DFMMJ,in exchange for a perpetual 3% royalty on all sales of cannabis and related products. Once the businesscombination is completed in July, the Company will own approximately 37.6% of the issued and outstandingcommon shares of Liberty.CLOSING OF MAY BOUGHT DEAL AND DEBT FINANCINGSOn May 9, 2017, the Company closed a bought deal financing and a separate debt financing, raising in excessof 105,000,000. The bought deal financing resulted in the Company issuing 13,269,252 common sharesat a purchase price of 6.50 per share for 81,322,498, net of cash issuance costs. The debt financingraised 25,000,000 in a five-year term loan, with a 15-year amortization, bearing interest at 3.95%. Thedebt financing is secured by a first charge on the Company’s real estate holdings, a first position on a generalsecurity agreement, certain cash security and an assignment of fire insurance to the lender. As a result ofthe financings, the Company’s Part IV expansion project is now fully funded. In addition, the Company raisedfunds to support its working capital needs after completion of the expansion project and raised funds forpossible strategic investment.ANNUAL HIGHLIGHTSACQUISITION OF CACCIAVILLANI AND F.M. FARMS LTD PROPERTYOn June 30, 2016, the Company closed the Purchase Agreement to acquire 9 acres of greenhouses, situatedon 36 acres of property, known as 265 Talbot Street West, in Leamington, Ontario. The purchase price forthe land and greenhouses was 6,100,000 and was considered a non-arm’s length transaction because thevendor is a director and officer of the Company. 3,250,000 of the purchase price was payable in cash onclosing, and the remainder will be paid as a vendor take-back mortgage, bearing interest at 6.75% per annum,with a 5-year term and amortization. The Company maintains a right of first refusal to acquire an additionalacre of property, known as 243 Talbot Street West, in Leamington, Ontario. The vendor maintains a put optionon the same property valued at 1,000,000, subject to annual inflationary adjustments equal to the increasesin the Consumer Price Index, which put option can only be exercised upon certain operating metricsbeing achieved.CLOSING OF AUGUST BOUGHT DEAL FINANCINGOn August 18, 2016, the Company announced the closing of its bought deal financing. Under thebought deal, the Company raised gross proceeds of 34,500,000, and net proceeds of approximately 32,000,000 after accounting for underwriting, legal and other costs and issued 17,250,000 commonshares. The Company plans to use the proceeds primarily to fund future expansion.APPROVAL OF SUPPLEMENTAL OIL SALES LICENSEOn August 17, 2016, the Company received an amendment to its licence to produce and sell medicalcannabis. At the time, the Company currently had capacity to produce approximately 12,000 60 mL bottlesof cannabis oil per month

Cultivating Excellence 2017 ANNUAL REPORT. shaping the future OF MEDICAL CANNABIS We invite you to read about our journey, commitment, and business performance in our 2017 Annual Report. MESSAGE TO SHAREHOLDERS 5 MANAGEMENT TEAM 6 MANAGEMENT’S DISCUSSION 11 AND ANALYSIS.

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