Product Disclosure Statement - for an Offer of ordinary Shares in Cannasouth Limited - Sorted Smart Investor
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Product
Disclosure
Statement
for an Offer of ordinary Shares in
Cannasouth Limited
17 May 2019
This document gives you important information about
this investment to help you decide whether you want to
invest. There is other useful information about this Offer
on the Disclosure Register at https://disclose-register.
companiesoffice.govt.nz, offer number ‘OFR12639’.
Cannasouth Limited has prepared this document in
accordance with the Financial Markets Conduct Act 2013.
You can also seek advice from a financial adviser to help
you to make an investment decision.
NZX Sponsor
CANNASOUTH LIMITED PRODUCT DISCLOSURE STATEMENT
1. Key Information
Summary
What is this?
This is an Offer of ordinary Shares. Ordinary Shares in Cannasouth Limited
will give you a stake in the ownership of Cannasouth. You may receive a
return if dividends are paid, or Cannasouth increases in value and you are able
to sell your ordinary Shares at a higher price than you paid for them.
If Cannasouth runs into financial difficulties and is wound up, you will be paid only
after all creditors have been paid. You may lose some or all of your investment.
About Cannasouth Limited
Cannasouth Limited (“Cannasouth” and “the Company”) was incorporated on
21 August 2018. Cannasouth is a biopharmaceutical1 research and development
company based at the Waikato Innovation Park, Hamilton East, Hamilton. The
Company has been established to focus on the commercial development of the
medically beneficial attributes of cannabinoid2 compounds such as Cannabidiol3
(CBD), Tetrahydrocannabinol4 (THC) and associated chemical structures that are
produced by the cannabis plant.
Cannasouth’s business model and future revenues are dependent on the introduction of
legislation and regulations, including but not limited to the Medicinal Cannabis Scheme,
that will enable Cannasouth to implement its business plans as outlined in this Product
Disclosure Statement ("PDS”).
Cannasouth is further described in Section 2 - Cannasouth and what it does and
Section 7 - Cannasouth’s financial information.
1
Biopharmaceutical, also known as a biologic(al) medical product, or biologic, is any pharmaceutical drug product manufactured in, extracted from, or
semi-synthesised from biological sources.
2
Cannabinoids are the chemical compounds found in cannabis plants. The best known are CBD and THC.
3
Cannabidiol is a phytocannabinoid discovered in 1940 and is produced by the cannabis plant in varying levels relative to the cultivar.
Phytocannabinoids are cannabinoids that occur naturally in the cannabis plant.
4
Tetrahydrocannabinol is one of at least 110 cannabinoids identified in cannabis. THC is the principal psychoactive constituent of cannabis.
02
CANNASOUTH LIMITED PRODUCT DISCLOSURE STATEMENT
Purpose of this Offer
The purpose of the Offer is to raise not less than $5 million and not more than
$10 million of new capital through the issue of up to a maximum of 20 million new
ordinary fully paid Shares in Cannasouth ($10 million). The Offer will not proceed if
applications for a minimum of 10 million new Shares ($5 million) are not received.
The money raised under the offer will be applied as follows:
• advancing research and product initiatives;
• investigations into a site(s) for the construction of new scalable commercial
processing and research and cultivation facilities as regulations are developed and
such expansion becomes commercially viable;
• additional staffing;
• increasing working capital; and
• pay for the costs associated with the offer, and the listing of the ordinary Shares of
Cannasouth on the NZX Main Board.
03
CANNASOUTH LIMITED PRODUCT DISCLOSURE STATEMENT
Key terms of the Offer
Description of the equity securities Ordinary fully paid Shares.
Price NZ 50 cents per Share.
Intended date Offer opens 27 May 2019.
Intended date Priority Offer closes 7 June 2019.
Intended date General Offer closes 14 June 2019.
A minimum of 10,000,000 new Shares are being offered,
representing 10.86% of the total number of ordinary Shares on issue
immediately after the issue (assuming only 10,000,000 new Shares
Number or amount of the are issued).
equity securities being offered
A maximum of 20,000,000 new Shares are being offered, representing
19.6% of the total number of ordinary Shares on issue immediately after
the issue (assuming all 20,000,000 new Shares are issued).
The Offer consists of:
• The Priority Offer of up to $5 million, which is only open to those
investors who have been invited by Cannasouth to participate in
Structure of the Offer
the Priority Offer;
• The General Offer of up to $5 million, which is open to all investors
resident in New Zealand.
If any amount of the Priority Offer is not taken up by the relevant
Closing Date, Cannasouth may reallocate up to a corresponding
amount to the General Offer at its absolute discretion.
Liabilities, fees and charges
A subscriber for new Shares, with the exception of the payment of the
price for the new Shares, has no liability to make further payments or to
pay fees or charges relating to the new Shares.
How you can get your money out
Cannasouth intends to quote these Shares on the NZX Main Board. This means you may be able to
sell them on the NZX Main Board if there are interested buyers. You may get less than you invested.
The price will depend on the demand for the Shares.
04
CANNASOUTH LIMITED PRODUCT DISCLOSURE STATEMENT
Key drivers of returns
Cannasouth considers that the current and future aspects of its business that have, or
may have, the most impact on the financial performance of the business, and the key
strategies and plans for those aspects of the business, can be summarised as follows:
Aspects of Cannasouth’s
business that may impact on Key strategies and plans
financial performance
Ultimately the financial performance of the Cannasouth has developed and is
business will be driven by the Company’s implementing an extensive business plan
ability to generate sales revenues from and strategy based on a vertically integrated
the sale of its products or licence business model that as regulations are
technology that it develops through its developed will ultimately lead to the Company
research programmes. being able to generate sales revenues from
In the event that the Company is unable the sale of the products it develops and
to implement its business strategy and manufactures, or the technology it develops,
ultimately generate sales revenues and ultimately to generate profits from those
through the sale of its products or third- commercial operations.
party licensing agreements, then such an The key strategies being implemented by the
occurrence would have a material adverse Company to achieve these objectives are to:
impact on the financial performance • secure the granting and maintaining of
of Cannasouth. all regulatory licences required to
undertake the business and commercial
operations of the Company. There are no
guarantees that all licences required to
undertake Cannasouth’s operations will
be granted in the first instance, or existing
licences renewed;
• develop a suite of proprietary research,
intellectual property, products and
delivery methods that fit within the
parameters of the New Zealand and
international regulatory frameworks;
• expand the skills and expertise available
to the Company by optimising the
composition of its board, advisory group,
consultants, university relationships and
new employees;
05
CANNASOUTH LIMITED PRODUCT DISCLOSURE STATEMENT
• construct new scalable commercial
facilities where crops can be cultivated,
researched and products manufactured as
regulation evolves;
• develop a trusted brand in the Company’s
research and products through strategic
marketing initiatives;
• develop sales channels for the
Company’s suite of products, both
domestically and internationally.
Until such time as the government enacts the
regulatory framework that will regulate the
medicinal cannabis industry in New Zealand,
the Company is not in a position to:
• determine with absolute certainty what
the parameters around the composition
of permitted products will be under the
new regulatory regime. Until such time as
this is known, the Company cannot finalise
its product range or predict potential
revenues that could be generated from the
different products the Company develops;
• finalise its development strategy in respect
of the construction of infrastructure
assets for the business. Accordingly, the
Company has not committed to acquire
any specific land and/or buildings for
development purposes as at the date of
this PDS.
During the period from the date of this Cannasouth has a detailed cashflow model
document to the period in which it is able to chart required capital and operational
to generate positive cashflow, the Company expenditure and is constantly monitoring
must preserve its working capital carefully adherence to that cashflow to ensure the
to ensure it can continue to pay its debts Company has adequate financial resources to
as they fall due in the ordinary course of undertake its commercial operations.
business, and to ensure that the value of its The Company’s scalable model also means
assets exceeds the value of its liabilities. capital for expansion and development can
In the event that the Company ran out of be committed as the economics justify it
financial resources to be able to continue and the regulatory framework and industry
to fund its commercial endeavours, then dynamics evolve.
such an occurrence would have a material Money raised from this Offer will also ensure
adverse impact on the financial performance Cannasouth is well capitalised to implement its
of Cannasouth. business plan and strategies referred to above.
06CANNASOUTH LIMITED PRODUCT DISCLOSURE STATEMENT
The financial success of Cannasouth will The Company has developed an extensive
be dependent on its ability to research and ongoing research and development
develop products and intellectual property programme. It will be conducting research
that can generate meaningful revenues and into areas such as extraction, purification,
margins for the business. drug delivery systems, drug discovery,
advanced plant breeding/genetics and
cultivation techniques incorporating
advanced tissue culture.
This should enable Cannasouth to develop
its own proprietary intellectual property
and branded products and through the
construction of leading-edge facilities,
produce them in the most efficient way
possible, thereby maximising profits
and margins.
Industry and sector regulatory constraints Cannasouth has established a working
could limit the commercial opportunities for relationship with the regulators and is playing
Cannasouth thereby significantly limiting the a leading role in the development of the
potential size of the addressable market. This New Zealand Medical Cannabis Council.
would have a major impact on the Company’s The Company believes it is essential for the
ability to generate revenues and profits. regulators and all industry participants to
work closely to ensure the medicinal cannabis
landscape provides a sustainable economic
framework to deliver optimum outcomes for
all participants and consumers across a wide
range of products.
Further information regarding the aspects of Cannasouth’s business that may impact on
the financial performance of the Company can be found on pages 25 to 26 of this PDS.
07CANNASOUTH LIMITED PRODUCT DISCLOSURE STATEMENT
Key risks affecting this investment
Investments in shares are risky. You should consider if the degree of uncertainty
about Cannasouth’s future performance and returns are suitable for you. The price
of these Shares should reflect the potential returns and the particular risks of these
Shares. Cannasouth considers that the most significant risk factors that could affect
the value of the Shares are:
Regulatory risk
Cannasouth’s business model and future prospects are reliant on regulatory changes
and the creation of the Medicinal Cannabis Scheme in New Zealand. The Misuse
of Drugs (Medicinal Cannabis) Amendment Bill was passed in December 2018 by
parliament which has resulted in a pathway forward as regards the Ministry of Health
designing appropriate regulations for the launch and commercialisation of the
New Zealand medicinal cannabis sector.
There is a risk that there will be delays in developing the new framework and/or the
medical conditions for which medicinal cannabis can be prescribed will be so narrow
as to not support profitability of multiple companies operating in the sector.
Cannasouth’s business model and future revenues are dependent on the
introduction of legislation and regulations, including but not limited to the Medicinal
Cannabis Scheme, which will enable Cannasouth to implement its business plans as
outlined in this PDS.
There is also a risk that the current or future New Zealand governments may
change, amend or alter their regulatory approach to medicinal cannabis laws and
any adverse changes could have a significant impact on Cannasouth’s business
model and future viability.
Licencing risk
Current New Zealand regulations only allow for the importation of selected approved
medicinal cannabis-based medicines and the cultivation and importation of cannabis
for research purposes.
Cannasouth has been awarded multiple licences to cultivate, extract, import and
purify medicinal cannabis and cannabinoids for research purposes. These licences are
for a 12-month period and are renewable annually provided the Company continues
to meet the necessary criteria.
Each import licence allows Cannasouth to import one consignment of cannabis
product, cannabis plant or seed (up to four different cultivars of plant or four different
cannabis products are allowed per licence). A separate licence to import is required
for each consignment.
The licences that have been secured by Cannasouth are issued subject to certain
conditions. Failure to comply could result in the revocation of these licences.
Conditions include requirements to keep proper records, a limit on the amount of raw
and processed material to be held at any time, and the use of the raw and processed
material for analytical and research, or other stated purposes only. None of the
08CANNASOUTH LIMITED PRODUCT DISCLOSURE STATEMENT
licences contain a right of renewal, applications will need to be made for renewals, or
new licences before their expiry. The procedures around the renewal process are still
being finalised by the regulators. There is a material risk that the Company may not be
able to renew one or more of the licences that it has been granted. This would impact
materially on the ability of the Company to carry out its business operations.
Uncertainty over the development of
the market and the ability to generate
meaningful revenues
The medicinal cannabis industry in New Zealand is in its infancy and the financial
success of Cannasouth will be dependent on the development of a sustainable
market for medicinal cannabis related products and Cannasouth’s ability to research
and develop medicinal cannabis products and brands to penetrate key markets in
New Zealand and internationally. To date, the Company has been funded through
contributions from its founders and by issuing new share capital to outside investors.
The extent of future revenues and/or profits (if any) are uncertain and cannot be
accurately predicted. Furthermore, it is likely that the Company will need to rely on
continued shareholder financial support until such time as it can generate sufficient
revenue and profitability to fund its business internally or can attract funding from
a range of other sources such as bank and debt facilities. Accordingly, Cannasouth
should be viewed as a speculative investment.
Further risks
This summary does not cover all of the risks of investing in Cannasouth Shares. You
should also read Section 8 of the PDS - Risks to Cannasouth’s business and plans and
the other places in the PDS that describe risk factors (for example, risks arising for
investors from the nature of the Shares).
Where you can find Cannasouth’s financial
information
The financial position and performance of Cannasouth are essential to an assessment
of this Offer. You should also read Section 7 of the PDS – Cannasouth’s Financial
Information. A full set of the financial statements for Cannasouth can also be found
on the Disclosure Register at https://disclose-register.companiesoffice.govt.nz, offer
number ‘OFR12639’.
09CANNASOUTH LIMITED PRODUCT DISCLOSURE STATEMENT
Contents
Section Subject Page
1. Key Information Summary 02
2. Cannasouth and what it does 13
3. Purpose of the Offer 40
4. Key dates and Offer process 41
5. Terms of the Offer 42
6. Key features of Shares 43
7. Cannasouth's financial information 45
8. Risks to Cannasouth's business and plans 50
9. Tax 55
10. Where you can find more information 55
11. How to apply 56
12. Contact information 58
13. Glossary of Terms 59
10CANNASOUTH LIMITED PRODUCT DISCLOSURE STATEMENT
Letter from the chairperson of
Cannasouth’s Board of Directors
Dear Investor,
On behalf of the Directors of Cannasouth Limited (Cannasouth or the Company), it
is my pleasure to introduce this Product Disclosure Statement (PDS) to you.
Cannasouth operates in the emerging medicinal cannabis sector in New Zealand
and is the first New Zealand medicinal cannabis company seeking to list on the New
Zealand Stock Exchange (NZX). The Company and its founders have been intimately
involved in the research and development of medicinal cannabis having worked
collaboratively over a number of years with the University of Waikato and with the
New Zealand government regulators.
As at the date of this PDS, during 2019 Cannasouth has successfully secured two
controlled drug import licences to import cannabis which have been utilised to
import dried flower for research and provide initial cultivars for its growing facility. A
separate import licence is required on each occasion Cannasouth wishes to import
cannabis product. Further import licences are expected to be obtained as and when
required.
The focus of Cannasouth is to conduct and advance further research into the
benefits of medicinal cannabis and to develop a range of medicinal cannabis related
products for distribution in New Zealand and globally. Our mission is to bring science
to our medicinal cannabis products.
The Company’s business will be well capitalised following the equity raising via this
Offer. Existing and new funds will be used to implement the strategic business plan
as articulated in this PDS.
The Board believes some of the highlights of an investment in Cannasouth include:
• a focus on delivering science based medicinal cannabis products from the
pristine, clean and green country of New Zealand;
• the development of a range of medicinal cannabis products both for
biopharmaceutical and over the counter (OTC) uses, including a wide range of
applications beyond pain relief and medicinal purposes, as regulations allow. For
example, including but not limited to, nutraceuticals, the health and wellness
sectors, fortification of foods and beverages, supplements, cosmetics, and
veterinary medicines;
• an experienced management team that has been researching and working in the
New Zealand medicinal cannabis and hemp sectors since 2002; and
• the ability to continue with Cannasouth’s research programmes pursuant to the
licences currently granted by the MOH.
There will always be risks associated with investing in an emerging sector where the
final landscape is still not clear and the Board urges potential investors to read this
PDS carefully, and in particular note the key risks which are identified in Section 8 –
Risks to Cannasouth's business and plans, and elsewhere in this PDS.
11CANNASOUTH LIMITED PRODUCT DISCLOSURE STATEMENT
Cannasouth has an experienced board of directors with the necessary expertise
and business experience to ensure there is a focus on the sound development of the
Company’s business plans. Whilst Cannasouth is currently a pre-revenue start-up
company, the Board’s objective is to ultimately grow and enhance shareholder wealth.
We look forward to welcoming you as a shareholder and joining us is in the
development of the medicinal cannabis industry in New Zealand.
Yours sincerely
Tony Ho
Chairperson
12CANNASOUTH LIMITED PRODUCT DISCLOSURE STATEMENT
2. Cannasouth
and what it does
Overview
Cannasouth is currently a pre-revenue loss-making business. For more information
please refer to Section 7 - Cannasouth’s Financial Information. A full set of the
financial statements for Cannasouth can also be found on the Disclosure Register at
https://disclose-register.companiesoffice.govt.nz, offer number ‘OFR12639’.
The diagram below illustrates the group structure of Cannasouth.
Cannasouth Group Structure
Cannasouth Limited
Parent Company
Issuing Entity
100%
Cannasouth Plant Research
New Zealand Limited
Cannasouth Limited was incorporated on 21 August 2018. Cannasouth Plant
Research New Zealand Limited was incorporated on 15 May 2017.
Description of the Cannasouth group of companies
• Cannasouth Limited: This company is the parent company of the Cannasouth
Group. It is proposed that the Shares on issue in Cannasouth Limited are to be
quoted on the NZX Main Board. Cannasouth Limited does not undertake any
commercial trading operations in its own right. It does however own 100% of the
Shares on issue in Cannasouth Plant Research New Zealand Limited.
• Cannasouth Plant Research New Zealand Limited: This company carries out the
commercial activities referred to in the following overview.
13CANNASOUTH LIMITED PRODUCT DISCLOSURE STATEMENT
Nature of Cannasouth's
operations and main activities
Overview
Cannasouth is a biopharmaceutical, research and development company based at the
Waikato Innovation Park, Hamilton East, Hamilton. The Company has been established
to focus on the commercial development of the medicinally beneficial attributes of
cannabinoid compounds such as CBD, THC and associated chemical structures that
are produced by the cannabis plant.
Cannasouth Limited was incorporated in 2018 with the purpose of being the holding
company for its wholly owned operating subsidiary company – Cannasouth Plant
Research New Zealand Limited.
Cannasouth Plant Research New Zealand Limited was incorporated on 15 May 2017
and has undertaken all of the business activities of Cannasouth to date.
What is Cannasouth’s business model?
Cannasouth has a strategy to develop a vertically integrated business model which
seeks to expose Cannasouth to as many aspects of the medicinal cannabis business
as possible. Key attributes of the model comprise:
• securing rights to industry leading cannabis seeds and genetics through
strategic international relationships;
14CANNASOUTH LIMITED PRODUCT DISCLOSURE STATEMENT
• establishing world class research and development programmes in
conjunction with the University of Waikato, other leading research institutions,
PhD researchers, and Cannasouth’s scientific advisory group;
• continuing to scale its cultivation and research and development facilities as
the regulatory landscape evolves;
• securing and maintaining all regulatory licences to support the research and
development, cultivation, and ultimately sale of medicinal cannabis and other
cannabinoid products in New Zealand and internationally as regulations allow;
• developing cannabinoid products that can be incorporated into a wide range
of applications, beyond pain relief and medicinal purposes. For example,
including, but not limited to, nutraceuticals, the health and wellness sectors,
fortification of foods and beverages, supplements, cosmetics, and veterinary
medicines and supplements;
• securing rights to world leading product delivery systems to improve
consumption efficacy and usability of products, and ultimately developing its
own product delivery systems; and
• developing trusted relationships with the New Zealand government, regulators
and other key industry participants.
What has Cannasouth done to date?
Cannasouth’s founders, Mark Lucas and Nic Foreman, have undertaken a number of
important research projects. In 2016, they facilitated the University of Waikato being
granted one of the first New Zealand controlled drugs CBD and THC extraction,
fractionation5, manufacture and deal licences. During 2017, an AGMARDT6 funded
Masters thesis study was conducted within the areas of extraction and fractionation
of cannabinoid compounds.
Working with the University of Waikato, the current principals of Cannasouth
have overseen the extraction and isolation of some of New Zealand’s first CBD,
CBDA7, THC and other additional medicinal cannabinoid compounds. This Masters
fractionation research programme was leveraged off one of the first ever New
Zealand based cannabinoid Supercritical Fluid CO₂ extraction trials that Cannasouth
facilitated.
In early 2018, Cannasouth launched a Callaghan Innovation8 funded 3-year PhD
study focusing on Supercritical Fluid CO₂ extraction, short path molecular distillation
and fractionation and other associated areas of purification research. The Callaghan
5
Fractionation is a separation process in which a certain quantity of a mixture is divided during a phase transition into a number of smaller quantities
in which the composition varies according to a gradient. Fractions are collected based on differences in a specific property of the individual
components.
6
AGMARDT is an independent not-for-profit organisation that provides funding to encourage innovative ideas, foster research capability and develop
emerging leaders in the agricultural, horticultural and forestry sectors of New Zealand.
7
CBDA (Cannabidiolic acid) is a non-psychoactive cannabinoid and the acidic precursor to CBD.
8
Callaghan Innovation is a New Zealand Crown entity that partners ambitious businesses of all sizes, providing a range of innovation and research
and development (R&D) services and grants to suit each stage of growth.
15CANNASOUTH LIMITED PRODUCT DISCLOSURE STATEMENT
Fellowship Grant relates to Daniel Reason (refer research team profiles later in
this PDS). The grant commenced on 29 March 2018 and is for a three-year period
ending 31 March 2021. The Callaghan Innovation contribution over three years is
$90,999.75 (excl. GST) and includes a student stipend of $75,000, a travel allowance
of $2,666.70, and a University Host Fee of $13,333.05. Cannasouth has no spend
requirement in relation to this funding.
This PhD is being conducted within the Company’s Waikato Innovation Park research
laboratory facility and the University of Waikato research facilities.
Cannasouth has signed a Memorandum of Understanding (MOU) with Bedrocan
International, the largest medicinal cannabinoid supplier in the Netherlands. Bedrocan
has API (Active Pharmaceutical Ingredient) registration for their products and is a
Dutch Government approved and certified cannabinoid supplier in the Netherlands.
Cannasouth has received Ministry of Health (MOH) and Ministry for Primary
Industries (MPI) approval to facilitate the importation of a range of API dried
medicinal cannabis material from Bedrocan into New Zealand for incorporation
within the Company’s research study programmes. The first import of this material
was undertaken in February this year.
Under the MOU, Cannasouth and Bedrocan intend to cooperate on cannabinoid
research projects within the New Zealand setting.
Cannasouth has also established a close relationship with, and signed a
Non-Disclosure Agreement (NDA) and MOU with an internationally based cannabis
genetics partner to further underpin its Waikato-based plant genetic breeding and
research programmes.
Under this arrangement, the counterparty (whose identity cannot be disclosed due
to commercial confidentiality) will provide Cannasouth with access to overseas
developed medicinal cannabis varieties for use in its production and research
development programmes. The first shipment of imported seeds has now arrived at
Cannasouth’s growing facility.
The Company has developed a highly flexible and adaptable business model which is
designed to scale rapidly with any increases in demand while keeping initial overheads
and production costs as low as possible. High-efficiency raw flower cultivation
systems are being designed by Cannasouth using premium genetics to achieve the
lowest possible production costs while ensuring the highest possible quality. This is
likely to include greenhouse, indoor and broad acre cultivation techniques, however,
until such time as the government enacts the regulatory framework that will regulate
the medicinal cannabis industry in New Zealand, the Company is not in a position
to finalise its development strategy in respect to the construction of infrastructure
assets for the business. Accordingly, the Company has not committed to acquire any
specific land and/or buildings for development purposes as at the date of this PDS.
Cannasouth was granted a licence by the MOH in 2018 to deal in controlled drugs
which enables it to research medicinal cannabis from its own laboratory facilities.
In February 2019, the Company was also granted a licence to cultivate a prohibited
plant. This allows Cannasouth to propagate a large variety of cultivars at its new
cultivation facility in Hamilton East, including high THC and CBD plants. Cannasouth
has completed the construction of the cannabis cultivation facility which has been
16CANNASOUTH LIMITED PRODUCT DISCLOSURE STATEMENT
licenced by the Ministry of Health (MOH) to cultivate prohibited plants. The facility
will operate under the MOH approved access, plant handling and comprehensive high
security protocols.
As at the date of this PDS, Cannasouth has successfully secured two controlled drug
import licences to import cannabis, and as mentioned previously, these have been
utilised to import dried flower for research and provide initial cultivars for its
growing facility.
A separate import licence is required on each occasion when Cannasouth wishes to
import cannabis product. Further import licences are expected to be obtained as and
when required.
For more information on licensing, see pages 24 and 25.
Cannasouth is currently a loss-making venture.
Summary of Capital Raising
Initiatives and Commercial Milestones
Since the date of the incorporation of Cannasouth and prior to the date of this Offer,
Cannasouth has undertaken two external capital raising initiatives, the details of
which are as follows:
• in August 2018, Cannasouth undertook its first external capital raising where
it raised $1.2 million at a pre-investment valuation of $5 million from several
“wholesale investors” (as that term is defined in the Financial Markets Conduct
Act); and
• in October 2018, Cannasouth undertook its second external capital raising,
where it raised $2.5 million at a pre-investment valuation of $18 million from
approximately 38 “wholesale investors” (as that term is defined in the Financial
Markets Conduct Act).
Since the first capital raising and the second capital raising, and the date of this
Offer, there have been a significant number of commercial and qualitative milestones
achieved by the Company, together with the passing of critical legislative enactments,
which have assisted to drive an appreciation in the Company’s valuation. In addition,
the fact that Cannasouth is proposing to have its Shares listed on the NZX Main
Board also lends itself to an increase in valuation as shares in public companies are
generally valued higher than shares in private companies given the greater share
liquidity, transparency, governance and regulatory oversight afforded to listed
companies. The table below summarises some of the more significant developments
that have occurred since May 2017:
17CANNASOUTH LIMITED PRODUCT DISCLOSURE STATEMENT
Date Milestone
May 2017 Cannasouth Plant Research New Zealand Limited Incorporated
July 2017 MOU signed with Bedrocan (Netherlands)
Purification of CBD/THC compounds completed at the
August 2017
University of Waikato
Emeritus Professor Alistair Wilkins appointed to the
August 2017
Cannasouth Advisory Group
February 2018 Masters Study completed
Callaghan Innovation funding approved for - PhD study - Cannasouth
April 2018 in-house, SP Distillation, CO2 Extraction, Purification, Degradation study
- THC-CBD compounds
April 2018 PhD research programme begins
July 2018 MOU signed with a European seed supplier
August 2018 Cannasouth Limited incorporated
Cannasouth acquires 100% of the Shares on issue in Cannasouth Plant
August 2018
Research New Zealand Limited
First external round of capital raised. $1.2 million raised at a pre-
investment valuation of $5 million from several “wholesale investors”
(as that term is defined in the Financial Markets Conduct Act). The
August 2018
issue price for these Shares was $5.00 per Share, which equates to an
effective issue price of 8.6 cents per share post the share subdivision
referred to below
August 2018 Cultivation facility construction begins
Licence to “Deal in Controlled Drugs” received from the MOH for
September 2018
Cannasouth's Innovation Park laboratory
September 2018 Cannasouth's Innovation Park laboratory fit-out begins
September 2018 Tony Ho appointed as Chairman of Cannasouth Board
Cannasouth undertakes a subdivision of its Share capital, whereby
October 2018 its existing Share capital of 1,240,000 Shares are subdivided into
72,000,000 Shares
October 2018 Conor English appointed to the Cannasouth Board
October 2018 Rob Braithwaite appointed as Cannasouth's CFO
Second external round of capital raised. $2.5 million raised at a pre-
investment valuation of $18 million from approximately 38 “wholesale
October 2018
investors” (as that term is defined in the Financial Markets Conduct
Act). The issue price for these Shares was 25 cents per Share
Misuse of Drugs (Medicinal Cannabis) Amendment Bill passes through
December 2018
parliament and becomes law
Licence to “Import Controlled Drugs” received from the MOH (Active
January 2019
Pharmaceutical Ingredient Raw Cannabis Flower)
18CANNASOUTH LIMITED PRODUCT DISCLOSURE STATEMENT
January 2019 Brenda van Zyl appointed as Business Development Manager
January 2019 Zach Sufrin appointed to the Cannasouth Advisory Group
February 2019 Professor Brett Langley appointed to the Cannasouth Advisory Group
February 2019 Cultivation facility and site audit completed
Licence to “Cultivate a Prohibited Plant” received from the MOH
February 2019
including high THC cannabis cultivars
Funding application submitted to Callaghan Innovation for Neuropathic
March 2019 Pain/Drug Discovery, Tissue Culture and Drug Delivery Systems
research programmes
Licence to “Import Controlled Drugs” received from the MOH
March 2019
(Cannabis Seeds)
March 2019 Dr Sameek Singh appointed as Research & Development Chemist
Philip Squire appointed as Quality Assurance/Research
April 2019
Development Manager
Callaghan Innovation funding approved for the University of Waikato
April 2019
Master's study Tissue Culture research programme
Major laboratory equipment begins full commissioning and testing
April 2019
phases at Cannasouth's Innovation Park laboratory
May 2019 Cultivation activities begin at cultivation facility
Proposed capital raising pursuant to this PDS whereby the Company will
seek to raise up to $10 million from members of the public and selected
May/June 2019
third party investors. The proposed issue price for these Shares is 50
cents per Share
June 2019 Proposed quotation of the Company's Shares on the NZX Main Board
19CANNASOUTH LIMITED PRODUCT DISCLOSURE STATEMENT
Key Strengths of Cannasouth
• Emerging and exciting business sector: Internationally, the legalisation and
development of the medicinal cannabis markets are evolving rapidly. The
attributes of various compounds produced by the cannabis plant have enabled
the establishment of completely new market sectors encompassing the medicinal,
health, nutraceutical, cosmetics and animal husbandry industries. This, combined
with recent favourable changes in New Zealand’s legislative environment, provides
Cannasouth with an exciting backdrop to undertake leading-edge research
into cannabis compounds and development of a range of proprietary genetics,
medicinal and retail products.
• Early mover advantage: Cannasouth has been an early mover in New Zealand in
the area of medicinal cannabis research. The Company conducted one of New
Zealand’s first Supercritical Fluid CO2 Cannabinoid paste extractions which was
undertaken with funding from Callaghan Innovation.
The Cannasouth founders also facilitated the University of Waikato being granted
one of the first New Zealand licences to “Deal in Controlled Drugs” (No 2016/
D538) including CBD and THC for research and analytical purposes only. This
enabled the completion of an AGMARDT funded Master’s thesis studying the
extraction and fractionation of cannabinoids from locally grown industrial hemp.
This set the platform for the purification of some of New Zealand’s first CBD and
CBDA isolate compounds sourced from a New Zealand based plant genetics
cultivation, research and breeding programme.
20CANNASOUTH LIMITED PRODUCT DISCLOSURE STATEMENT
• Cannasouth has secured critical government licences. Cannasouth received one
of the first licences of its kind to be granted in New Zealand in 2018 to a non-
academic institution from the MOH to research medicinal cannabis. The license, to
deal in a controlled drug, also enables the Company to apply to import cannabis
product for research. Cannasouth was also granted a licence to cultivate a
prohibited plant in February 2019 following the completion of a research focused
cultivation facility in Hamilton East. This enables Cannasouth to propagate a large
variety of cultivars, including high THC and CBD plants.
The Company has received two MOH import licences and an MPI bio-security
permit to import cannabis product. These licences have been utilised to import
dried flower for research and provide initial cultivars for its growing facility. A
separate import licence is required on each occasion when Cannasouth wishes to
import cannabis product. Further import licences are expected to be obtained as
and when required.
The granting of these aforementioned licences represents major milestones for
the Company.
The licences are issued subject to certain conditions. Failure to comply could
result in the revocation of these licences. The conditions include requirements
to: keep proper records, adhere to a limit on the amount of raw and processed
material to be held at any time, and the use of the raw and processed material for
analysis and research, or other stated purposes only. None of the licences contain
a right of renewal, applications will need to be made for renewals or new licences
before their expiry. The procedures around the renewal process are still being
finalised by the regulators.
• Established relationship with government regulators: Cannasouth’s founding
shareholders have established a working relationship with the MOH over 15
years, within the areas of scientific research of industrial hemp and more recently
medicinal cannabinoids. This relationship has prospered due to an alignment
between the regulators and the Company’s founders around a focus on the
establishment of robust research programmes and outcomes.
The government regulators are supportive of rigorous research that enables
empirically based standards and milestones to be established. From conducting
some of the earliest industrial hemp trials in New Zealand in 2002, gaining
specialist industrial hemp plant breeding licences, to working with the MOH to
receive with their research partners some of the first-ever licences granted in the
country for researching medicinal cannabis. The founders of Cannasouth have
been at the cutting edge of licensing in the sector.
• Focused on research-based value added applications: Cannasouth is developing
a full vertically integrated business model from research and cultivation through
to compounding and delivery system development. This model is underpinned by
a clear focus on targeted research enabling a genuine unique selling proposition.
Cannasouth is already operating a sophisticated extraction and refinement
laboratory from its premises at the Waikato Innovation Park.
The current range of cannabinoid compound products on the market is steadily
growing as the worldwide market for cannabinoids continues to expand.
Crystalline isolates, full spectrum oil tinctures, creams, oral sprays, patches, melts,
21CANNASOUTH LIMITED PRODUCT DISCLOSURE STATEMENT
capsules, suppositories, and gels are examples of product lines Cannasouth will
be targeting.
Cannabinoid delivery system technologies, bioavailability and the science
that underpins this is a key area of Cannasouth’s focus. Nano-formulation, lipo
encapsulation and nebulisation of cannabinoids shows that there is clear potential for
improved formulations and delivery methods that will increase the bioavailability of
cannabinoids while decreasing the production of undesirable metabolites.
The Cannasouth research team, led by Nic Foreman, supported by Emeritus
Professor Alistair Wilkins and the Company’s Advisory Group will continue to
build capacity and expertise with the addition of suitable research staff and
research programmes involving academics as the industry develops and expands.
• Experienced, focused and committed founders and board: Cannasouth's founders
are experienced and knowledgeable in the production and cultivation of medicinal
cannabis. They have been trialing and growing industrial hemp since 2002
and have held general hemp growing licences as well as more specialised plant
breeding licences which have enabled the importation of off-schedule hemp
cultivars which are not generally allowed within New Zealand. This valuable real
world experience has positioned Cannasouth at the leading edge of the medicinal
cannabis sector in New Zealand.
The Company also has attracted the services of two highly qualified and
respected independent directors – Tony Ho (Chairman) and Conor English. Both
bring relevant industry experience and governance skills to Cannasouth which will
ensure ongoing rigour and oversight as the Company successfully transitions to a
listed public company.
Acquisitions and Dispositions
On 24 August 2018, Cannasouth Limited acquired 100% of the Shares (“Sale
Shares”) on issue in Cannasouth Plant Research New Zealand Limited from:
• Mark Lucas (Director of Cannasouth), as to 485 Shares for a total aggregate
consideration of $1.00;
• Nic Foreman (Director of Cannasouth), as to 485 Shares for a total aggregate
consideration of $1.00; and
• Merran Davis, as to 30 Shares, for a total aggregate consideration of $1.00.
22CANNASOUTH LIMITED PRODUCT DISCLOSURE STATEMENT
Business Industry and Sector
Global cannabis industry and trends
The global medicinal cannabis industry is developing rapidly as more countries move
to allow legal access to products. Research is looking to provide increasing evidence
on the efficacy of cannabinoids in treating a range of different conditions.
More than 20 countries have now legalised medicinal cannabis access or are
exploring legislation changes to allow it. The medicinal use of cannabis is now
legalised in Canada and Uruguay, 33 States in the US (despite still being illegal at
a federal level). A policy of limited enforcement applies in countries such as the
Netherlands and Spain.
The World Health Organisation’s (WHO) Expert Committee on Drug Dependence
(ECDD) is recommending that cannabis be removed from the ‘most dangerous’
category of the 1961 Single Convention on Narcotic Drugs. If the recommendations
are adopted, it will likely see a further loosening of regulations around the world by
national drug agencies that take their lead from the 1961 Convention.
The recommendations are for THC to be put into the lowest category, Schedule I and
CBD and preparations containing less than 0.2 per cent THC, to be de-scheduled
completely. Pharmaceutical products containing THC will be downgraded to
Schedule III of the Convention.
23CANNASOUTH LIMITED PRODUCT DISCLOSURE STATEMENT
Key drivers of the global industry include:
• changing community attitudes towards the use of medicinal cannabis
and cannabis derived products;
• increased research which is highlighting the potential benefits and efficacy of
different cannabinoid products for a number of illnesses and afflictions; and
• an allure for many governments of the potential tax revenues that
could be generated from a liberalisation of the industry and its regulation.
The Current Regulatory
Environment in New Zealand
After the 2017 New Zealand elections, the newly elected Labour led coalition
government announced that it would introduce legislation to make medicinal
cannabis available for people with terminal illnesses or chronic pain. The first stage
was to introduce the Misuse of Drugs (Medicinal Cannabis) Amendment Bill which
was passed into law in December 2018. This Bill incorporated an exception and a
statutory defence for terminally ill people including those in palliative care to possess
and use illicit cannabis and to possess a cannabis utensil.
The second stage is to develop the Medicinal Cannabis Scheme to enable the setting
of standards that products manufactured, imported, and supplied under licence must
meet.
The MOH is currently leading work to develop the scheme that will enable the
domestic commercial cultivation and manufacture of medicinal cannabis. The scheme
has three main elements:
• a licensing regime;
• introduction of standards for the quality of medicinal cannabis products and
all stages of production; and
• establishment of a medicinal cannabis agency.
Enabling domestic cultivation and manufacture is expected to make quality medicinal
cannabis products more readily available. This will remove a barrier for patients accessing
medicinal cannabis, as health practitioners will be able to prescribe these products with
confidence. The timeline for developing new regulations is no later than one year from
the passing of the Misuse of Drugs (Medicinal Cannabis) Amendment Bill.
Cannasouth has been granted the following licences:
• Licence to Cultivate a Prohibited Plant: this licence allows Cannasouth to:
• grow cannabis;
• harvest cannabis;
• dry cannabis;
• store cannabis;
• possess cannabis and its seed; and
24CANNASOUTH LIMITED PRODUCT DISCLOSURE STATEMENT
• supply cannabis plant material to an approved licensed facility.
• Licence to Deal in Controlled Drugs: this licence allows Cannasouth to:
• possess cannabis, or a cannabis product;
• store cannabis, or a cannabis product;
• extract/process cannabis; and
• manufacture products from cannabis, cannabis extracts (for scientific
research only).
The kinds of dealing authorised by this licence are: Supply – Manufacture
(for scientific research only).
• Licences to Import Controlled Drugs: each import licence allows Cannasouth
to import one consignment of cannabis product, cannabis plant or seed (up to
four different cultivars of plant or four different cannabis products are allowed
per licence). A separate licence to import is required for each consignment.
As at the date of this PDS, Cannasouth has successfully secured two controlled
drug import licences to import cannabis which have been utilised to import dried
flower for research and to provide initial cultivars for its growing facility.
Cannasouth is working towards gaining a licence to manufacture medicines which
will give it the ability to produce medicines when the regulatory framework has been
completed and permits this activity. It is expected that the minimum quality standard
for cannabis-based medicines will either be GMP (Good Manufacturing Practice)
or GPP (Good Production Practices). Gaining the full suite of licences will mean
Cannasouth will be well positioned to develop medicines and transition its research
operations to production and sale of medicines once the regulatory framework to
allow this activity has been finalised.
It is likely that once manufacturing regulations have been finalised, organisations will
need to apply for yet to be developed licences to produce cannabis-based medicines
under the new Medicinal Cannabis Scheme and will likely need to demonstrate that
they have the required technical and financial ability to operate in the sector.
Current New Zealand regulations only allow for the importation of selected approved
medicinal cannabis-based medicines and the cultivation and importation of cannabis
for research purposes.
Current and Future Key Aspects of Business
The current and future aspects of Cannasouth’s business that have, or may have, the
most impact on the financial performance of the business are:
• The ability of Cannasouth to generate sales revenues: ultimately the financial
performance of the business will be driven by the Company’s ability to
generate sales revenues from the sale of its products or licence technology it
develops through its research programmes.
In the event that the Company is unable to implement its business strategy
and ultimately generate sales revenues through the sale of its products or
third-party licensing agreements, then such an occurrence would have a
25CANNASOUTH LIMITED PRODUCT DISCLOSURE STATEMENT
material adverse impact on the financial performance of the Company.
• The ability of Cannasouth to manage its capital resources until such time as
it generates positive cashflow: during the period from the date of this PDS to
the period in which it is able to generate positive cashflow, Cannasouth must
preserve its working capital carefully to ensure it is able to continue to pay its
debts as they fall due in the ordinary course of business and to ensure that the
value of its assets exceeds the value of its liabilities.
In the event that Cannasouth ran out of financial resources to be able to
continue to fund its commercial endeavours, then such an occurrence would
have a material adverse impact on the financial performance of the Company.
Key Strategies and Plans for
Key Aspects of the Business
Cannasouth has developed the following key strategies and plans for the above
aspects of the business:
Revenue Generation
The Company has developed and is implementing an extensive business plan and
strategy to develop a business model that will ultimately lead to the Company being
able to generate sales revenues from the sale of the products it manufactures, or the
licencing of technology it develops through its research programmes, and ultimately
to generate profits from those commercial operations.
The key strategies being implemented by Cannasouth to achieve these objectives are:
• secure the granting and maintaining of all regulatory licences required to
undertake the commercial operations of the Company’s business. There are
no guarantees that all licences required to undertake Cannasouth’s operations
will be granted in the first instance, or existing licences renewed;
• develop a suite of products and delivery methods that fit within the
parameters of the New Zealand and international regulatory frameworks;
• construct new commercial facilities as regulation evolves where products
can be cultivated, researched and manufactured with a special focus on
production price point and environmental sustainability, including reduced
energy and water use;
• develop a trusted brand in the Company’s products through strategic
marketing initiatives; and
• develop sales channels for the Company’s suite of products.
Until such time as the government enacts the regulatory framework that will regulate
the medicinal cannabis industry in New Zealand, the Company is not in a position to:
• determine with absolute certainty what the parameters around the
composition of permitted products will be under the new regulatory regime.
Until such time as this is known, the Company cannot finalise its product
26CANNASOUTH LIMITED PRODUCT DISCLOSURE STATEMENT
range nor predict potential revenues that could be generated from the
different products the Company develops; or
• finalise its development strategy in respect to the construction of
infrastructure assets for the business. Accordingly, the Company has not
committed to acquire any specific land and/or buildings for development
purposes as at the date of this PDS.
Management of Capital Resources
The Board has developed an extensive cashflow model to chart the required capital and
operational expenditures to be incurred by Cannasouth in achieving its commercial
objectives and is constantly monitoring adherence to that cashflow to ensure the
Company has adequate financial resources to undertake its commercial operations.
Cannasouth’s scalable model means capital for expansion and development can be
committed as the economics justify it and the regulatory framework and industry
landscape develops. This will ensure that capital resources are allocated to deliver the
best possible return on investment.
ISO Systems, Certification and Sustainability
Cannasouth is dedicated to operating to the highest possible standards throughout
its operations. Part of this commitment is undertaking the process of achieving
ISO Certification9 initially in three key areas of the business - Quality Management
Systems, Environmental Management Systems, and Occupational Health and Safety.
These systems are currently being built with an expected third-party audit to be
completed by the fourth quarter of 2019.
Cannasouth is aligning its Integrated Management System to conform with the
requirements of International Standard ISO 9001:2015. ISO 9001 is an important
certification that can help increase sales and customer confidence and certifies that
a company can accommodate its production levels while meeting specific regulatory
requirements and standards.
The certification is important to many customers searching for vendors, as it verifies
that an organisation is continuously improving its quality management systems to
increase customer satisfaction and compliance. This certification can be particularly
useful for potential export partners as it enables them to evaluate a company’s
management processes by recognised international standards.
Cannasouth’s quality principles are to:
• manufacture and supply medicinal cannabinoid products suitable for their
intended purpose, perform as represented and conform to all specified
regulatory requirements;
• communicate the requirements of its Integrated Management System to
9
ISO Certification is a seal of approval from a 3rd party body that a company runs to one of the internationally recognised ISO management systems.
27CANNASOUTH LIMITED PRODUCT DISCLOSURE STATEMENT
interested parties; and
• involve employees in continuous improvement of the Company’s Integrated
Management System.
Cannasouth is aligning its Health & Safety systems to the International Standard
ISO 45001:2018 Health & Safety Management System. Cannasouth’s commitment
to Health & Safety is based on the fundamental right for all staff to be safe in
the Company’s workplace and a commitment to zero harm. The Health & Safety
System is integral to Cannasouth’s business. It is the Company’s policy to make
every reasonably practicable effort in areas of accident/incident prevention, injury
protection and promotion of the health, safety and welfare of all workers.
Cannasouth is focused on operating to the highest environmental standards.
Overseas companies producing cannabis-based medicines and products are coming
under increased scrutiny for their environmental production practices.
Cannasouth will seek to employ the most energy efficient cultivation techniques and
production processes available and will use its reasonable endeavors to reduce its
carbon and environmental footprint in all areas of the business where practicable.
In some cases, this may require increased initial capital cost with these upfront costs
being recovered through reductions in energy use over time.
Cannasouth will employ organic growing techniques wherever it is commercially
viable to do so. The planned ISO 14001:2015 Environmental Management System
overlay will help ensure the business operates to the highest standards. Environmental
sustainability is a core tenet of the business.
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