iAnthus Capital Holdings, Inc.
National Policy 11-203 Process for Exemptive Relief Applications in Multiple Jurisdictions – Issuer granted relief from the requirement in National Instrument 52-107 Acceptable Accounting Principles and Auditing Standards that acquisition statements required by securities legislation to be audited must be accompanied by an auditor’s report that expresses an unqualified opinion – Issuer made a significant acquisition, but underlying information needed to support an unqualified auditor’s opinion on the acquisition statements is not available – Issuer can otherwise comply with the acquisition statement requirements for a business acquisition report and the business acquisition report will contain sufficient alternative information about the acquisition.
Applicable Legislative Provisions
National Instrument 52-107 Acceptable Accounting Principles and Auditing Standards, ss. 3.12(2) and 5.1.
IN THE MATTER OF
THE SECURITIES LEGISLATION OF
IN THE MATTER OF
THE PROCESS FOR
EXEMPTIVE RELIEF APPLICATIONS
IN MULTIPLE JURISDICTIONS
IN THE MATTER OF
IANTHUS CAPITAL HOLDINGS, INC.
The principal regulator in the Jurisdiction has received an application from the Filer for a decision under the securities legislation of the Jurisdiction of the principal regulator (the “Legislation”) exempting the Filer from the requirement in subsection 3.12(2) of National Instrument 52-107 Acceptable Accounting Principles and Auditing Standards (“NI 52-107”) that an auditor’s report accompanying audited acquisition statements must express an unmodified opinion (the “Exemption Sought”).
Under the Process for Exemptive Relief Applications in Multiple Jurisdictions (for a passport application):
(a) the Ontario Securities Commission is the principal regulator for this application; and
(b) the Filer has provided notice that subsection 4.7(1) of Multilateral Instrument 11-102 Passport System (“MI 11-102”) is intended to be relied upon in British Columbia, Alberta, Saskatchewan, Manitoba, New Brunswick, Nova Scotia, Prince Edward Island and Newfoundland and Labrador.
Terms defined in National Instrument 14-101 Definitions and MI 11-102 have the same meaning if used in this decision, unless otherwise defined.
This decision is based on the following facts represented by the Filer:
1. The Filer was incorporated on November 15, 2013 pursuant to the Business Corporations Act (British Columbia) (the “BCBCA”).
2. The Filer’s head office is located at Suite 414, 420 Lexington Avenue, New York, New York, 10170. The Filer’s principal place of business in Canada and its management are located at Suite 2740, 22 Adelaide Street West, Toronto, Ontario, M5H 4E3.
3. The Filer is a reporting issuer in the provinces of Ontario, British Columbia, Alberta, Saskatchewan, Manitoba, New Brunswick, Nova Scotia, Prince Edward Island and Newfoundland and Labrador. Except for the failure to file the business acquisition report (the “BAR”) for the Transaction (as defined below), the Filer is not in default of securities legislation in any jurisdiction in which it is a reporting issuer.
4. The Filer’s authorized share capital consists of an unlimited number of common shares (the “Common Shares”) and an unlimited number of Class A convertible restricted voting shares (the “Class A Shares”). As at July 3, 2019, 156,041,678 Common Shares and 15,528,928 Class A Shares were issued and outstanding.
5. The Filer’s Common Shares are listed on the Canadian Securities Exchange (the “CSE”) under the trading symbol “IAN” and on the OTCQX Best Market (the “OTCQX”) under the trading symbol “ITHUF”. The Class A Shares are not listed on any stock exchange.
6. MPX Bioceutical Corporation (“MPX”) was incorporated on April 2, 1974 pursuant to the Business Corporations Act (Ontario) and was continued into British Columbia on January 15, 2019. Prior to the completion of the Transaction (as defined below), MPX was a reporting issuer in the provinces of British Columbia, Alberta and Ontario, and its common shares (the “MPX Shares”) were listed on the CSE under the trading symbol “MPX” and on the OTCQX under the trading symbol “MPXEF”.
7. On February 5, 2019, the Filer acquired all of the issued and outstanding MPX Shares pursuant to a statutory plan of arrangement under the BCBCA in accordance with the terms of an arrangement agreement dated October 18, 2018, as amended by an amending agreement dated January 31, 2019 (the “Transaction”). Pursuant to the Transaction, each MPX Share was acquired in exchange for 0.1673 of a Common Share and 0.1 of a common share in the capital of MPX International Corporation (“MPX International”), a newly formed company that holds all of the non-U.S. businesses (the “MPX International Assets”) of MPX.
8. Following the completion of the Transaction, the MPX Shares were delisted from both the CSE and the OTCQX. Pursuant to the Transaction, MPX amalgamated with a wholly-owned subsidiary of the Filer to form MPX Bioceutical ULC (“MPX ULC”). On March 8, 2019, the Ontario Securities Commission ordered that MPX ULC had ceased to be a reporting issuer in the provinces of British Columbia, Alberta and Ontario.
9. MPX International is a reporting issuer in the provinces of British Columbia, Alberta and Ontario and its common shares are listed on the CSE under the trading symbol “MPXI”. Following the completion of the Transaction, MPX International holds all of the MPX International Assets. MPX International is not affiliated with the Filer or with MPX ULC.
10. The Transaction constituted a “significant acquisition” by the Filer pursuant to section 8.3 of National Instrument 51-102 Continuous Disclosure Obligations (“NI 51-102”). Accordingly, pursuant to section 8.4 of NI 51-102, the Filer was required to file the BAR within 75 days of the completion of the Transaction. Accordingly, the BAR was required to be filed by April 22, 2019. The Filer was noted in default for its failure to file the BAR on April 23, 2019.
11. To comply with section 8.4 of NI 51-102, the Filer’s BAR must include, among other things, audited annual financial statements of MPX, less the MPX International Assets (the “Acquired MPX Business”) for the financial year ended March 31, 2018 (the “2018 Annual Financial Statements”).
12. Pursuant to section 3.12 of NI 52-107, acquisition statements that are required by securities legislation to be audited must be accompanied by an auditor’s report that expresses an unmodified opinion.
13. Separate financial statements of the Acquired MPX Business have never been prepared by MPX’s management and MPX historically prepared its financial statements on a consolidated basis with MPX and all of its subsidiaries.
14. Although the Filer has prepared the 2018 Annual Financial Statements to the best of its knowledge using information that is presently available from MPX and its former management, the Filer’s auditor has represented to the Filer that it is unable to obtain sufficient comfort with respect to the Acquired MPX Business due to the lack of sufficient underlying information and the passage of time. The Filer’s auditor was not present during the relevant periods to conduct a physical observation of the inventory and the biological assets and has been unable to satisfy itself by alternative means of the quantities of inventory and biological assets held as at March 31, 2018.
15. The Filer expects the following items will result in a modified opinion from the auditor in respect of the 2018 Annual Financial Statements:
(a) Biological Assets: Supporting documentation and schedules required in order to validate the quantity of the biological assets and the key inputs used for the valuation of biological assets are not available for the year ended March 31, 2018. The Filer also noted issues with the historic biological asset valuation models for the period ended March 31, 2018. Despite best efforts, the Filer’s auditor will not be able to obtain sufficient comfort to verify the key inputs to the historic biological asset valuation models;
(b) Inventory: Supporting documentation and schedules required in order to validate the costing and quantity of inventory are not available for and as of the year ended March 31, 2018. The Filer has also noted challenges in reconciling the inventory schedules to the accounting records and obtaining a complete population to provide to the Filer’s auditor for testing; and
(c) Cost of Sales and Fair Value Gains and Losses: Because inventory impacts the determination of cost of sales and biological assets impact the determination of fair value gains and losses on the statement of profit and loss, the Filer’s auditor cannot perform sufficient audit procedures on these items (collectively, the “Modified Matters”).
16. Apart from the requirement to provide an unmodified audit opinion on the 2018 Annual Financial Statements, the Filer is otherwise able to prepare and file the BAR in accordance with NI 51-102 and NI 52-107.
17. The Filer anticipates that its auditor will be able to issue an unmodified opinion with respect to inventory and biological assets for its year ended December 31, 2019.
The principal regulator is satisfied that the decision meets the test set out in the Legislation for the principal regulator to make the decision.
The decision of the principal regulator under the Legislation is that the Exemption Sought is granted provided that the Filer includes the following financial information in the BAR for the Transaction:
(a) the 2018 Annual Financial Statements accompanied by an auditor’s report that expresses an unmodified opinion other than with respect to the Modified Matters;
(b) an audited statement of assets acquired and liabilities assumed, without qualification, by the Filer as at the closing date of the Transaction;
(c) unaudited annual financial statements of the Acquired MPX Business for the financial year ended March 31, 2017, in accordance with subsection 8.4(1) of NI 51-102; and
(d) unaudited interim financial statements of the Acquired MPX Business for the nine-month period ended December 31, 2018, and comparative period in the immediately preceding financial year.
DATED at Toronto on this 10th day of July, 2019.“Cameron McInnis”
Ontario Securities Commission