The IPO drought on the New Zealand stock exchange is set to be broken by a cannabis company.
Rua Bioscience has registered its product disclosure statements as part of an initial public offering (IPO) to attract investors.
This is the first IPO since Napier Port's listing on the NZX in August last year.
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Rua Bioscience's entry into the NZX will see the company join competitor Cannasouth, which debuted on the exchange in June last year.
The Rua Bioscience offer will be for 40 million shares at 50 cents per share, accounting for a total 28.6 per cent stake in the company.
The company aims to raise $20 million through the IPO, giving the overall business an implied value of $70m.
The IPO will start with a priority offer of $15m in shares to brokerage firms on October 5, with a plan to list on the NZX main board on October 22.
Asked why the decision was made to list at this stage, company chair Trevor Burt said the team wanted to ensure it had the building blocks in place to offer something "credible, capable and realistic" before listing on the market.
The IPO also includes a priority offer of $5m for Tairāwhiti residents, existing shareholders in Waiapu Investments Limited and other people closely associated with the business.
Burt said it was important to give priority to the community that first invested in and supported the growth of Rua Bioscience into the business it is today.
"We're very conscious of our connection to that community as a company and that hasn't been lost," Burt said.
Rua Bioscience was one of the earliest movers in the local cannabis scene, founded in 2016 under the name Hikurangi Cannabis, then a subsidiary of Hikurangi Enterprises.
The company branched off into a standalone venture and changed its name to Rua Bioscience as part of a major rebrand in October last year.
The company first outlined its intention to list last month after receiving a Ministry of Health commercial licence to grow and supply cannabis-derived medicines from its specialist growing and production facilities on the East Coast.
Rua was one of the first medicinal cannabis companies to be licensed for commercial production, and plans to be exporting its first product, Ruatoria-grown pharmaceutical-grade dried cannabis flower, to Germany next year.
As things stand, Rua Bioscience remains in the pre-revenue phase and its financial statements indicate significant losses over the last two years.
For the period ending June 30, 2020, the Rua Bioscience recorded a loss of $2.90m, significantly more than the $1.97m loss recorded in 2019. Most of the company's funds are currently being diverted into research and development and operating expenses.
Despite these losses, the company increased its overall asset value from $11.1m in 2019 to $15.8m this year.
Overall debt is low, having been reduced from $93,000 in 2019 to $89,000 this year.
Burt stressed that the company was still in the pre-revenue stage and said that losses were still likely for the next two years as the company rolled out its strategy.
While there have been legislative changes, the cannabis market remains highly speculative and the disclosure documents outlined a number of risks investors should be aware of before putting their money into the business.
The company warns that its business model is focused on future revenue, which will be dependent on delivering high-quality pharmaceutical-grade products reliably and consistently. Any quality control issues could result in this objective being severely undermined.
The company also warned that its hope of future profits will depend on signing deals with distributors and wholesalers in a handful of markets (Germany, Australia and New Zealand), which all feature a number of competitors vying against each other.
Adding further complexity to the business and its objective of future profit is regulatory uncertainty, which could result in changes in laws either locally or abroad.
Despite these challenges, company chair Burt said it had a "doable strategy which sets out a clear pathway to revenue".
He said proceeds from the IPO will be used to fund the company's next stage of development and accelerate its growth strategy.
The plan is to use the money raised in sales and marketing for Germany and other target markets; expand cultivation activities; increase product capabilities at the Gisborne manufacturing facility; invest in further research; and also fund operational costs.
"Medicinal cannabis is a sunrise industry in New Zealand, but it is a proven sector around the world," Burt said.
"While medicinal cannabis has developed in other markets, we have had the opportunity to learn from the countries ahead of us, meaning New Zealand is in a very good position in a developing sector."
NZX addition welcomed
Investment banker Tim Preston, a principal at CM Partners, welcomed the addition of Rua Bioscience to the market.
Preston, who was previously involved in the 2019 market listing of Cannasouth, said additional options would be good for the overall market and attract more investors.
Thus far, there has been particularly high interest from smaller retail investors, with Preston pointing out that Cannasouth has about 20,000 individual backers.
"This shows that people aren't betting the farm on this space," Preston said.
As the first of its kind on the NZX, Cannasouth faced strong criticism from analysts who questioned the validity of the business, but Preston said the company had weathered the storm with its share price currently sitting at $1.06, up significantly from its 50c listing price.
Preston added that, while the offer was still speculative, the NZX offered a safer option for investors than the crowd-funding platforms which have become an important fundraising tool for cannabis companies.
"The stock exchange delivers far more transparency through regulations and continuous disclosure rules."