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CordovaCann Corp.

LVRLF / Other OTC / $0.2707

CDVA /CSE / $0.335

April 14, 2021

 

Business Overview

 

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CordovaCann Corp. (the Company) is building a vertically integrated cannabis products business in a growing number of Canadian and U.S. markets.

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The Company, which holds exclusive rights to own and operate retail stores under the Star Buds brand throughout Canada, has six Canadian retail stores and nine more under development. Management is targeting 75 or more Star Buds stores over the next three years, with compelling projected economics.

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The Company also owns a cultivation facility in Oregon and a manufacturing facility in Washington, each with expansion opportunities.

 

 

The Cannabis Industry in North America

 

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Canada legalized recreational cannabis use in 2018, and sales during the first 12 months were $907M CAD. Sales have continued to escalate, and the market could reach $3 billion CAD by 2022.

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In the U.S., the Controlled Substances Act of 1970 prohibits use and possession of cannabis for any purpose, and cannabis over 0.3% THC is classified as a Schedule I substance deemed to have high potential for abuse. Many state laws, however, conflict with federal law. Seventeen states have approved distribution and recreational use of cannabis, and many others have decriminalized its use. Federal law preempts conflicting state and local laws, but enforcement of the federal prohibition against recreational cannabis does not appear to have a high priority. Polls show that a large majority of Americans favor legalizing recreational cannabis, and there have been proposals to loosen the federal prohibition.

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Morningstar has estimated that the U.S. market for state-legal recreational cannabis exceeded $10 billion as of September 2020 and that annual growth could average nearly 25% through 2030.

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Washington State legalized recreational use of cannabis in 2012, and Oregon followed in 2014. Those two states generated recreational cannabis sales in 2020 of approximately $3.1 billion, which represented a year-to-year increase of nearly 40%. Pricing in those states dropped sharply in 2017 and 2018, reflecting an oversupply of low-quality outdoor flower, but prices have since rebounded strongly as retailers had some difficulty in sourcing high-quality flower.

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Larger retail chains have competitive advantages in terms of name recognition, buying power, and economies of scale. Vertical integration can enhance margins and reduce operational risks. A great number of existing retail outlets are mom and pop businesses, offering opportunity for the chains to make acquisitions.

 

 

The CordovaCann Property Portfolio

 

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Ontario - A 60.5% joint venture with the retail operator is focusing on secondary and tertiary markets. Four stores are open, and two others (Angus and Wasaga Beach) are scheduled to open by mid-year 2021. The stores operate under the Star Buds name.

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Manitoba - A 51.0%-owned joint venture is focusing on underserved parts of metro areas and operating its stores under the Star Buds brand. One store (Winnipeg) is open, and two others are expected to open around mid-year 2021.

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Alberta - Plans to own 100% of all stores and to operate them under the Star Buds Cannabis Co. brand. The first store is open (Town of Canmore), and four others (Newcastle, Westlink, Bowness, and Westlawn) are in development for opening in the next six months. The expansion strategy is to focus on markets that are under served. In early 2021, the Alberta Liquor and Gaming Commission approved the Company for up to 64 retail stores.

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British Columbia - Plans to own 100% of all stores and to operate them under the Star Buds brand. There is one store in development (Kelowna) and a strategy to convert medical stores to recreational stores.

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Oregon - An established cultivation operation in Calackamas (16 miles SE of Portland). The Company is building out 10,000 square feet of indoor and greenhouse grow space on six acres, as well as studying the buildout of a manufacturing facility to enable production of crude, distillates, concentrates, and select edibles. The Oregon Liquor Control Commission has transferred the cultivation license to the Company, and a manufacturing license is pending. Management is planning annual cultivation capacity of more than 3,400 pounds of premium flowers and more than 3,000 liters of distillates.

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Washington - On February 26, 2021, a Company subsidiary completed the acquisition of Washington-based Extraction Technologies, LLC, a manufacturer of cannabis derivative products. The acquisition included a 10,900 sq. ft. manufacturing building in Bremerton, processing equipment, and contracts with tolling and white label customers in Washington. Distillate production could reach 5,000 liters or more per year, and a buildout is planned to produce select edibles. These products are planned to be sold throughout Washington on both a white label and branded basis.

 

 

Expansion Plans

 

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Management believes that the Company has an opportunity to open 75+ Star Buds Cannabis Co. stores in Canada over the next three years, primarily targeting secondary and tertiary markets that do not have intense competition. Acquisitions will likely play a role. The Company is also interested in expanding its store chain into additional U.S. markets through internal growth and/or acquisitions.

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The first five stores are profitable, and they are together on track to generate more than $10 million CAD in annualized revenue with gross margins of 35%. These results are despite the limitations resulting from COVID lockdowns. Management expects that the average store will generate $2.5 million CAD, with gross, EBITDA, and net margins of 35%, 18%, and 13%, respectively. The first five stores turned profitable in their first month. Buildout capex and inventory should run $150-250K CAD per store, with a potential payback in well under one year.

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The growing Cordova retail presence in Canada opens up opportunities for U.S. brands to expand their geographic reach. Acquisition of a Canadian manufacturing license would allow Cordova to white label manufacture U.S. brands for distribution in Canada.

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As a white label manufacturer in Washington State, the Company plans to assist the best brands to lower their production costs and accelerate their entry into new markets. This capability could give many West Coast niche brands with strong followings an opportunity to quickly expand their geographic reach. The Oregon cultivation assets should assist the Company in controlling its manufacturing costs.

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On March 22, 2021, the Company announced that it had entered into a non-binding letter of intent to purchase 51% of WoW Industries, LLC (WoW), a Washington-based cultivator of cannabis flower and manufacturer of cannabis derivative products for distribution in Washington. WoW produces various cannabis strains sold under the LuvIT Farms brand, and it manufactures derivative products sold under the Altus Concentrates brand. It has a Tier II production facility and 8,000 square foot manufacturing facility on a 15-acre property. Cordova plans to expand both the cultivation canopy and the manufacturing capacity.

 

Consideration for the purchase would be 777,500 common shares and $60,000 USD, both payable on the closing date. Management expects to close the transaction on or before June 1, subject to certain closing conditions.

 

 

Officers, Advisors, & Board of Directors

 

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Thomas (Taz) M. Turner, Jr., CEO and Director, has 20 years of experience in investment and capital markets. He founded NYC-based Southshore Capital Partners, LP (long/short global equity hedge fund) in 2009, and he previously held positions at hedge funds and private equity funds where he specialized in technology and consumer investments. He is a University of Virginia graduate.

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Ashish Kapoor, CFO, has spent more than 20 years as a financial professional. He spent 10 years at Macquarie Capital Markets Canada Ltd., where he was responsible for the Canadian telecom, media, entertainment, and technology investment banking and principal investing group.

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Joe Anto, Senior Advisor since February 2020, is former CEO of a 550-store retail chain in the SW U.S. and has extensive experience in finance, investing, M&A, and operations.

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Brian Ruden, Special Advisor since April 2020, is the Founder and CEO of Star Buds Inc., a large chain of cannabis retail stores in the U.S. Star Buds Inc. also has a portfolio of branded cannabis products that includes Kaviar concentrates and Star Bars Edibles. Mr. Ruden was previously a Colorado-based tax attorney.

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Ben Higham, Board Member since April 2020, is a Founder and board member of Starbuds International, Inc. He practiced corporate law in both Canada and the U.S.

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Dale Rasmussen, Board Member since May 2020, is an executive and consultant to several growth companies, as well as a former board member of several others.

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Jakob Ripshtein, Board Member since April 2020, is former President of Aphria Inc. (APHA/NasdaqGS), a large Canadian-based company that cultivates, processes, produces, markets, distributes, and sells medical cannabis. Mr. Ripshtein was also former CFO of Diageo North America, and President of Diageo Canada.

 

 

Financials

 

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Income Statement (6 months through 12/31/20 vs. 12/31/19) (Canadian dollars)

 

Revenue: 4,278,669 vs. 0

Gross profit: 1,501,398 vs. 0

Expenses: 2,004,314 vs. 1,365,269

Operating income (loss): (502,916) vs. (1,365,269)

Non-operating income (expense): (593,661) vs. (600,925)

Net income (loss): (1,093,242) vs. (1,966,194)

Earnings (loss) per basic common share: (0.01) vs. (0.05)

Weighted average common shares: 73,303,913 vs. 40,786,228

Net income (loss) from continuing ops attributable to Cordova: (1,383,621) vs. (1,956,013)

 

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Balance Sheet (12/31/20) (Canadian dollars)

 

Cash & equivalents: 746,360

Total current assets: 1,454,913

Property, plant & equipment: 5,066,830

Total assets: 16,837,119

Current liabilities: 6,306,505

Equity attributable to Cordova shareholders: 6,030,547

Non-controlling interest: 1,501,429

Total equity: 7,531,976

Number of common shares outstanding (12/31/20): 83,973,353

Number of options outstanding (12/31/20): 7,050,000 at prices from $0.28 to $0.60

Number of warrants outstanding (12/31/20): 15,899,500 at a weighted av. price of $0.39

 

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In the first two months of 2021, the five Cordova retail stores in Canada generated revenues of $1,726,926, with a gross margin of 35.7%. All five stores were profitable.

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On February 19, 2021, the Company closed a non-brokered private placement for 6,117,718 common shares at a price of $0.32 CAD per share, proceeds of where were received in the form of $1,380,400 CAD in cash and $596,570 CAD in settlement of outstanding debt and fees.

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Consideration for the February 2021 purchase of Extraction Technologies, Inc. was 3,000,000 common shares on the closing date and up to 4,000,000 additional shares if the business generates $1,000,000 USD or more in EBITDA over a 12-month period ending on the 15-month anniversary of the closing date of the transaction.

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On April 8, 2020, the Company acquired certain tangible assets and intellectual property from Star Buds International Inc. Consideration was 33,500,000 common shares at $0.17 CAD per share, promissory notes in the amount of $683,771 CAD, and $55,000 assumption of liabilities.

 

 

Valuation Considerations

 

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The Cordova target markets are large and growing very rapidly. The Company has very aggressive expansion plans.

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Retail competition in certain areas is intense, but Cordova favors secondary and tertiary markets that are much less developed. The early Cordova stores attained profitability in their first month of operation.

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The officers, directors, and advisors are highly experienced executives. The CEO of U.S.-based Starbuds is a special advisor to the Company, and the former President of Aphria Inc. is a Board member.

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Conflicting federal and state law relating to recreational sales of cannabis remain an uncertainty. Positive considerations include polls that indicate that a large majority of the U.S. population favors legalization of recreational cannabis, the growing contribution by the industry to state tax revenues, and an increasing number of people employed in the cannabis business.

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With management targeting 75 or more Star Buds stores over the next three years, as well as other growth initiatives, the Company is likely to require additional capital.

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Cannabis stocks, as measured by the ETFMG Alternative Harvest ETF, have nearly doubled over the past year. Many have trailing P/E ratios above 30. With its experienced management, property portfolio, and growth prospects, Cordova sports a value proposition that should be evident to investors seeking early stage industry players.

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The ongoing impact from COVID-19 remains an uncertainty. In addition, the Cordova website and SEC filings detail various other risks and matters, and these are hereby incorporated by reference.

 

 

Contact

 

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Executive offices: 217 Queen Street West, Suite 401, Toronto, ON M5V OR2. Phone 416.523.3350.

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Websites: www.cordovacann.com and www.starbuds.co

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Investor contact: Taz Turner at 917.843.2169 or taz@cordovacann.com

 

 

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