Isodiol International Inc. (CSE: ISOL/ OTCQB: ISOLF / Frankfurt: LB6A): Revenue Growth and Positive Earnings in Q3-FY2018

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1 Siddharth Rajeev, B.Tech, MBA, CFA Anthony de Ruijter, B.A. Econ March 21, 2018 Isodiol International Inc. (CSE: ISOL/ OTCQB: ISOLF / Frankfurt: LB6A): Revenue Growth and Positive Earnings in Q3-FY2018 Sector/Industry: Cannabis Market Data (as of March 21, 2018) Current Price C$1.33 Fair Value C$2.51 Rating* BUY Risk* 4 52 Week Range C$ C$2.14 Shares O/S 301,745,585 Market Cap C$ mm Current Yield N/A P/E (forward) N/A P/B 7.58x YoY Return % YoY TSXV 3.34% *See back of report for rating and risk definitions * All of the figures are in US$ unless otherwise specified. Highlights Isodiol International Inc. ( Isodiol, company ) reported 16.41% QoQ revenue growth in Q3-FY2018 (quarter ended December 31, 2018) to $5.89 million. Nine-month revenues increased to $13.7 million. We had expected revenues from acquisitions to accrue on a more expedited timeline. Management have advised that revenue recognition of the acquisitions will take place largely within Q4 and after the end of FY2018. Margins improved QoQ and YoY, and the company reported its first ever profitable quarter since going public last year. The company has secured a variety of agreements with leading entities, pertaining to manufacturing, distribution and marketing of Isodiol s products. At the end of Q3-FY2018, the company had $26.48 million in cash. Working capital and the current ratio were $30.77 million and 9.49x, respectively. The company has no debt. Isodiol s shares have risen by 14.7% to $1.33 per share, from $1.16 per share, at the time of our initiating report.

2 Page 2 Q3 revenues up 16.4% QOQ Isodiol reported positive revenue growth in Q3-FY2018, with Q3 revenues increasing by 16.41% QOQ. The company had reported only $52,197 in Q3-FY2017. FY2018 ninemonth revenues were $13.7 million versus FY2017 nine-month revenues of $0.25 million. Though this implies tremendous YOY sales growth over the nine-months, readers should note that Isodiol only stared recording significant revenues after ISO International LLC s acquisition in May The table below outlines the company s revenues and growth. STATEMENTS OF OPERATIONS (in C$) - YE Mar 31st Q QoQ Q QoQ Q Revenue 2,740, % 5,063, % 5,894,538 COGS 1,333, % 2,394, % 2,686,118 Gross Profit 1,407, % 2,668, % 3,208,420 Source: FRC, Financial Statements The notable increase in revenue is due to the company s growth in retail sales as Isodiol continues to expand its international footprint. Furthermore, the company undertook several major acquisitions during the quarter, which we discussed in detail during our initiating report. According to management, these acquisitions are cash-flowing entities with track records of sales and profitability. As a result, we believe that the acquisitions were accretive to the company s revenues and will continue to bolster revenue growth. The table below outlines acquisitions undertaken in the period (note that the CN Pharma acquisition has been updated to reflect a full 100% acquisition, outlined below): Acquisition Target Date of Acquistion Stock Paid Cash Paid Total Transaction Value Biosynthesis Pharma Group December 17, 2017 US$37,000,000 US$12,500,000 US$49,500,000 C3 Global Bioscience December 8, 2017 US$826, US$826, CN Pharma (25%) December 6, 2017 C$1,000,000 C$500,000 C$1,500,000 Be Trū Organics December 1, 2017 US$2,000,000 US$2,000,000 Bradley's Bioscience November 22, 2017 US$380,000 US$380,000 Source: Company Go forward strategy: Moving forward, we expect the company to continue its acquisitionled growth, in addition to establishing marketing and distribution agreements. Subsequent to the quarter, the company signed multiple agreements including: January 2, 2018: a non-binding agreement with an undisclosed licensed cannabis manufacturer based in California, allowing the company to produce its Pot-O-Coffee brands out of California. January 8, 2018: a licensing agreement with Level Brands Inc. (NYSE: LEVB), associated with business woman / celebrity Kathy Ireland. Isodiol will develop consumer products for Level Brand s business units, Kathy Ireland Health & Wellness and Ireland Men One. January 9, 2018: a distribution agreement between the company s Be Trū Organics and United Natural Foods Inc. (NASDAQ: UNFI). UNFI is the largest publiclytraded wholesale distributor to the natural, organic and specialty industry in the U.S. and Canada.

3 Page 3 January 12, 2018: a binding supply agreement with Namaste Technologies Inc. (CSE: N), allowing Isodiol to supply products to Namaste to be sold through their e- commerce platform. January 26, 2018: a licensing agreement with Livecare Health Canada Inc. ( Livecare ) allowing Isodiol to license Livecare s proprietary telehealth platform. This agreement allows Isodiol to access patients on Livecare s network and market its product offerings as alternative health solutions. February 15, 2018: a definitive agreement to acquire all the equity interest of Canadian National Pharma Group Inc. ( CN Pharma ). This amends the previous binding agreement for a 25% interest in CN Pharma, dated December 6, Isodiol agreed to purchase 100% of the equity for total consideration of $6 million to be paid in shares, based on the closing price on February 14, This amends the previous terms of $500,000 in cash and $1 million in stock for 25% equity ownership. February 22, 2018: a distribution agreement between the company s Be Trū Organics and Threshold Enterprises. Threshold enterprises is one of California s largest manufacturers and distributors of nutritional supplements and natural health products. March 12, 2018: due diligence on the Biosynthesis Pharmaceutical Group completed- acquisition anticipated to close in a few weeks. March 19, 2019: partnership agreement with the Kawacatoose First Nation, a Canadian Indigenous Group, to cultivate CBD on their land. Kawacatoose will provide up to 3,000 acres of arable land for the cultivation of industrial hemp derivation and manufacturing of CBD. Furthermore, Isodiol will advise the Kawacatoose First Nation in the development of an Indigenous Peoples Co-op with neighboring bands to realize economic benefit from the cultivation and extraction of CBD. In addition to the above, the company has also become particularly active in marketing of its ISO Sport line of products. The ISO Sport product line features offerings that incorporate CBD, and are tailored towards pain relief and nutritional supplementation. The company has employed a heavy marketing strategy, having appointed brand ambassadorships to major Winter Olympics Athletes, partnering with a major European Mixed Martial Arts organization, and having an affiliated spokesperson present on the benefits of CBD at the most recent Super Bowl. We believe that this aggressive marketing strategy will increase demand for the ISO Sport line, and expect inaugural sales of the product line to impact revenue in the final quarter of the company s financial year. Revenue Forecasts: We have adjusted revenue forecasts to reflect the company s expected revenue recognition from entities acquired to date. Management have advised that revenue recognition of the company s acquisitions will take place largely within Q4 and after the end of FY2018. Our updated long-term forecasts are shown below:

4 Page 4 STATEMENTS OF OPERATIONS (in C$) - YE Mar 31st 2017E* 2018E 2019E 2020E 2021E 2022E 2023E 2024E 2025E 2026E Revenue 8,139,558 20,772,092 54,602,856 80,016, ,026, ,116, ,797, ,917, ,944, ,804,301 COGS 4,824,545 9,437,770 27,301,428 40,008,292 64,013,267 87,058, ,398, ,958, ,472, ,402,150 Gross Profit 3,315,013 11,334,322 27,301,428 40,008,292 64,013,267 87,058, ,398, ,958, ,472, ,402,150 EXPENSES SG&A 2,159,892 10,033,125 13,650,714 20,004,146 32,006,634 43,529,022 59,199,469 75,479,323 96,236, ,701,075 Shipping Costs 513, , , , ,580 1,183,989 1,509,586 1,924,723 2,454,022 Share-based Compensation 1,934,344 1,092,057 1,600,332 2,560,531 3,482,322 4,735,958 6,038,346 7,698,891 9,816,086 Research & Development 66, , , , , , , , , ,467 EBITDA 1,088,241 (1,256,969) 12,170,180 17,882,496 28,678,673 39,042,458 53,139,177 67,784,029 86,457, ,268,501 Depreciation 29,367 Amortization 67, , , , , , , , ,962 EBIT 1,058,874 (1,324,571) 11,995,291 17,542,585 28,206,744 38,464,914 52,477,143 67,054,401 85,674, ,441,539 Financing Costs 40,837 2, EBT 1,018,037 (1,326,776) 11,995,291 17,542,585 28,206,744 38,464,914 52,477,143 67,054,401 85,674, ,441,539 Non-Recurring Expenses 368,440 9,217,504 Taxes 4,561,072 7,333,753 10,000,878 13,644,057 17,434,144 22,275,264 28,454,800 Net Profit (Loss) 649,597 (10,544,280) 11,995,291 12,981,513 20,872,991 28,464,037 38,833,086 49,620,257 63,398,827 80,986,739 Source: FRC Readers may refer to our initiating report for our previous assumptions. We have updated our forecasts to include the following key assumption: Revenue recognition of acquisitions undertaken in FY2018 will be realized later than we initially forecasted. As a result, revenue growth has been shifted out further into the future. Positive Net Earnings in Q3 Margins were higher than our expectations. Gross margins increased QoQ to 54.43% compared to 52.71% in the previous quarter. For the nine months ended, the company s gross margin was 54.63%. Source: FRC, Financial Statements SG&A expenses (excluding stock-based compensation) were $2.82 million for Q3-FY2018, representing an SG&A margin of 47.8%. For the nine months ended, SG&A expenses amounted to $6.66 million, representing an SG&A margin of 48.56%. The company s SG&A margin was relatively flat on a QoQ basis. According to the company, the main reason behind the high SG&A margin was due to expenses related to growing the company, including consulting fees, share-based compensation and salaries. We believe that these expenses may continue to be high so long as Isodiol continues to experience out-sized growth. This is due to the need for the company to expand its management team, create brand awareness and develop its product offering. Isodiol reported EBITDA of $0.2 million, and net income of $0.16 million (EPS: $0.00) for

5 Page 5 the quarter ended December 31, 2017, versus -$0.54 million and -$7.48 million (EPS: - $0.04), respectively, for the quarter ended September 30, The company s profitable quarter is a rare occurrence in the cannabis industry at the current stage, and reflects commercial viability of Isodiol s products. However, we believe that Isodiol will not report significantly greater levels of net profit until management have addressed the SG&A expenses, which continue to offset the company s impressive gross margin. Our EPS estimate for FY2018 is -$0.03 per share (normalized EPS of -$0.004 per share). Our previous estimate was -$0.008 per share. The higher normalized EPS was because of our higher margin estimates, partially offset by lower revenues. Cash Flows Free cash flows ( FCF ) were -$18.48 million in the first nine months of FY2018. This is in line with the company s status as a growth stage company. Balance Sheet Source: FRC, Financial Statements At the end of Q3-FY2018, the company had $26.48 million in cash. Working capital and the current ratio were $30.77 million and 9.49x, respectively. The company has no debt outstanding. Stock Options and Warrants Valuation and Rating The company currently has million options (weighted average exercise price of $0.23), and million warrants (weighted average exercise price of $0.95) outstanding. All the options and million warrants are currently in-the-money. The company has the potential to raise $41.88 million if all the in-the-money options and warrants are exercised. The average of our DCF and comparables valuation dropped from $2.59 to $2.51 per share as we pushed out our revenue forecasts. We are maintaining our BUY rating.

6 Page 6 Risks We believe the company is exposed to the following risks (list is non-exhaustive): The company operates in an industry that is highly regulated and subject to material change from governmental intervention. Details of operating performance of the recently acquired companies are yet to be disclosed. Exchange rate risk. Access to capital and share dilution. We are maintaining our risk rating of 4 (Speculative).

7 Page 7 Appendix STATEMENTS OF OPERATIONS (in C$) - YE Mar 31st 2017E* 2018E 2019E Revenue 8,139,558 20,772,092 54,602,856 COGS 4,824,545 9,437,770 27,301,428 Gross Profit 3,315,013 11,334,322 27,301,428 EXPENSES SG&A 2,159,892 10,033,125 13,650,714 Shipping Costs 513, ,014 Share-based Compensation 1,934,344 1,092,057 Research & Development 66, , ,462 EBITDA 1,088,241 (1,256,969) 12,170,180 Depreciation 29,367 Amortization 67, ,889 EBIT 1,058,874 (1,324,571) 11,995,291 Financing Costs 40,837 2,205 - EBT 1,018,037 (1,326,776) 11,995,291 Non-Recurring Expenses 368,440 9,217,504 Taxes Net Profit (Loss) 649,597 (10,544,280) 11,995,291 *indicates year in which Isodiol operated as a private entity.

8 Page 8 BALANCE SHEET (in C$) - YE Mar 31st E 2019E ASSETS CURRENT Cash and Cash Equiv. 718,648 37,677,086 37,769,672 A/R 150,579 3,375,465 5,460,286 Inventory 430,915 2,044,850 2,730,143 Due from Related Parties 1,280,994 1,280,994 Prepaid Expenses 59, ,448 1,019,196 Total Current Assets 1,359,439 45,153,843 48,260,291 Investment 860,955 1,640,214 1,640,214 Furniture and Equipment 59, ,446 1,699,557 Intellectual Property 671, ,206 Product Development 1,084,554 1,084,554 Leasehold Improvements 252, ,255 Goodwill 9,735,112 77,610,112 Level Brands Licensing Agreement 2,000,000 5,000,000 Acquisition Deposits 3,941,672 3,941,672 Total Assets 2,279,725 65,353, ,159,860 LIABILITIES CURRENT A/P 125,328 1,001,386 7,241,984 Deferred Revenue 140, ,980 Due to Related Parties 319, ,930 Loans Payable 250,000 - Acquisition Commitment 2,470,761 2,470,761 Total Current Liabilities 375,328 3,932,445 10,401,656 Total Liabilities 375,328 3,932,445 10,401,656 SHAREHOLDERS EQUITY Share Capital 14,336,816 82,018, ,268,767 Reserves 1,443,654 3,822,442 4,914,499 Accumulated Deficit -13,876,073-24,420,353-12,425,061 Total shareholders equity (deficiency) 1,904,397 61,420, ,758,205 Total Liabilities and Shareholders Equity 2,279,725 65,353, ,159,860

9 Page 9 STATEMENTS OF CASH FLOWS (in C$) - YE Mar 31st E 2019E OPERATING ACTIVITIES Net Profit for the Year 649,597-10,544,280 11,995,291 Adjusted for items not involving cash: Shares issued for services 536,454 Shares issued as acquisitions costs 7,659,847 Share-based Payments 1,934,344 1,092,057 Amortization 29,367 67, ,889 Unrealized Loss on Investment 87,574 Loss on Exchange Rate - 92,010 Related Party 368,440 Funds From Operations 1,134, ,043 13,262,237 Change in working capital A/R - 298,417-3,224,886-2,084,821 Prepaids - 256, , ,748 Inventory - 129,040-1,613, ,293 A/P 416, ,058 6,240,598 Deferred Revenue 654, , ,612 Temporary Investments - 570,604 Related Parties - 419, ,064 - NET CASH USED IN OPERATING ACTIVITIES 531,098-5,937,653 16,717,586 INVESTING ACTIVITIES Capital Assets -107, ,716-1,000,000 Level Brands Share Issue -2,000,000-3,000,000 IP and Product Development -443,859-1,084,554 Others -12,582,825-67,875,000 Investments -61, ,259 NET CASH USED IN INVESTING ACTIVITIES -612,951-17,329,354-71,875,000 FINANCING ACTIVITIES Proceeds from Common Shares 58,022,104 52,250,000 Obligation to Issue Shares 0 Shares Issued to Level Brands 2,000,000 3,000,000 Cash Received Upon Acquisitions 453,341 Related Parties Proceeds (repayment) from the issuance of Loans Payable 190, ,000 NET CASH FROM FINANCING ACTIVITIES 190,000 60,225,445 55,250,000 Foreign Exchange / Others INCREASE IN CASH FOR THE PERIOD 108,147 36,958,438 92,586 CASH, BEGINNING OF THE PERIOD 0 718,648 37,677,086 CASH, END OF THE PERIOD 108,147 37,677,086 37,769,672

10 Page 10 Fundamental Research Corp. Equity Rating Scale: Buy Annual expected rate of return exceeds 12% or the expected return is commensurate with risk Hold Annual expected rate of return is between 5% and 12% Sell Annual expected rate of return is below 5% or the expected return is not commensurate with risk Suspended or Rating N/A Coverage and ratings suspended until more information can be obtained from the company regarding recent events. Fundamental Research Corp. Risk Rating Scale: 1 (Low Risk) - The company operates in an industry where it has a strong position (for example a monopoly, high market share etc.) or operates in a regulated industry. The future outlook is stable or positive for the industry. The company generates positive free cash flow and has a history of profitability. The capital structure is conservative with little or no debt. 2 (Below Average Risk) - The company operates in an industry where the fundamentals and outlook are positive. The industry and company are relatively less sensitive to systematic risk than companies with a Risk Rating of 3. The company has a history of profitability and has demonstrated its ability to generate positive free cash flows (though current free cash flow may be negative due to capital investment). The company s capital structure is conservative with little to modest use of debt. 3 (Average Risk) - The company operates in an industry that has average sensitivity to systematic risk. The industry may be cyclical. Profits and cash flow are sensitive to economic factors although the company has demonstrated its ability to generate positive earnings and cash flow. Debt use is in line with industry averages, and coverage ratios are sufficient. 4 (Speculative) - The company has little or no history of generating earnings or cash flow. Debt use is higher. These companies may be in start-up mode or in a turnaround situation. These companies should be considered speculative. 5 (Highly Speculative) - The company has no history of generating earnings or cash flow. They may operate in a new industry with new, and unproven products. Products may be at the development stage, testing, or seeking regulatory approval. These companies may run into liquidity issues, and may rely on external funding. These stocks are considered highly speculative. Disclaimers and Disclosure The opinions expressed in this report are the true opinions of the analyst about this company and industry. Any forward looking statements are our best estimates and opinions based upon information that is publicly available and that we believe to be correct, but we have not independently verified with respect to truth or correctness. There is no guarantee that our forecasts will materialize. Actual results will likely vary. The analyst and Fundamental Research Corp. 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