Multilateral Instrument 11-102 Passport System and National Policy 11-203 Process for Exemptive Relief Applications in Multiple Jurisdictions – exemption granted from requirement to provide certain historical financial statements of a business indirectly acquired by the Filer as a result of an acquisition in a BAR – it is impracticable to prepare financial statements – Filer granted relief to include alternative financial information disclosure for a significant acquisition.
Applicable Legislative Provisions
National Instrument 51-102 Continuous Disclosure Obligations, ss. 8.4, 13.1.
February 16, 2017
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
CRESCITA THERAPEUTICS INC.
The principal regulator in the Jurisdiction has received an application from the Filer (the Application) for a decision under the securities legislation of the Jurisdiction of the principal regulator (the Legislation) for relief (the Exemption Sought) pursuant to Part 13 of National Instrument 51-102 Continuous Disclosure Obligations (NI 51-102), from the requirement to provide certain historical financial statements of a business indirectly acquired by the Filer as a result of an acquisition in a business acquisition report (BAR) required to be filed by the Filer under Part 8 of NI 51-102 and Item 3 of Form 51-102F4 Business Acquisition Report in connection with the Filer’s acquisition (the Acquisition) of 100% of the share capital of INTEGA Skin Sciences Inc. (Intega) on September 1, 2016 (the Acquisition Date).
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 section 4.7(1) of Multilateral Instrument 11-102 Passport System (MI 11-102) is intended to be relied upon in each of British Columbia, Alberta, Saskatchewan, Manitoba, Québec, 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 is a corporation governed by the Ontario Business Corporations Act. Its head office is located at 7560 Airport Road, Unit 10, Mississauga, Ontario L4T 4H4.
2. The Filer was formed on March 1, 2016 pursuant to a reorganization of Nuvo Research Inc. into two publically traded companies, Nuvo Pharmaceuticals Inc., a commercial healthcare company, and the Filer, a drug development company.
3. The Filer is a reporting issuer under the securities legislation in each of the provinces of Canada. Other than its failure to file a BAR in connection with the Acquisition in accordance with Part 8 of NI 51-102 (for which the Filer has been noted in default), the Filer is not in default of any requirements under the securities legislation of any of these jurisdictions of Canada. The Filer’s common shares are listed on the Toronto Stock Exchange under the symbol “CTX.”
4. The Filer’s year end is December 31 and its auditor is Ernst & Young LLP (EY).
5. Intega is a corporation governed by the Business Corporations Act (Quebec). Its principal office is located at 2805 Place Louis-R-Renaud, Laval, Quebec H7V 0A3. Intega is a “private issuer” as defined in Section 2.4 of National Instrument 45-106 – Prospectus Exemptions. Its financial year end is December 31.
6. Intega is a skincare company that specializes in the research, development, production, marketing and distribution of non-prescription skin care products for the treatment and care of skin diseases and their symptoms.
7. Intega was founded in 2013 and commenced commercial operations in 2015. Prior to January 22, 2016, Intega’s business consisted primarily of planning and preparation for the sale and marketing of skin care products in Canada for ISDIN S.A., a Barcelona-based international laboratory specialized in innovative solutions for major dermatological needs and pathologies. Sales of certain of those products in Canada began in June 2016.
8. On January 22, 2016, Intega acquired three products – Laboratoire Dr. Renaud (LDR), Pro-Derm, and Premiology (LDR, Pro-Derm and Premiology collectively, the Products) – and certain other assets (together with the Products, the Acquired Assets) from Valeant Canada Limited (Valeant Canada) and Valeant Canada LP (VCLP), two wholly-owned subsidiaries of Valeant Pharmaceuticals International, Inc. (Valeant).
9. The Acquired Assets consisted primarily of all trademarks and intellectual property related to the Products, employees, certain contracts and the lease for a production facility (the Production Facility) located in Laval, Quebec, where a number of other products marketed and sold by Valeant and certain of its subsidiaries were manufactured. The acquisition of the Acquired Assets was structured as an acquisition of all of the outstanding shares of Valeant Groupe Cosméderme Inc. (Cosméderme), formerly a wholly-owned subsidiary of Valeant Canada, as well as the acquisition of certain assets from VCLP. However, as described below, a number of assets that were historically owned by Valeant’s other subsidiaries were transferred to Cosméderme immediately prior to the Acquisition as part of the pre-closing transactions.
10. During the course of the negotiations for the Acquisition, the Filer, along with its legal advisors and EY, analyzed whether the Acquisition would constitute a significant acquisition under Part 8 of NI 51-102 and, if so, the financial statements that would be required to be included in the BAR.
11. As a result of that analysis, the Filer decided to treat the Acquisition as a significant acquisition and concluded that the BAR would be required to include the following financial statements (the Required Financial Statements):
(a) the following annual financial statements of Intega (the Intega Annual Financial Statements):
(i) an audited statement of financial position, statement of income and comprehensive income, statement of changes in equity and statement of cash flows as at and for the year ended December 31, 2015; and
(ii) an unaudited statement of financial position, statement of income and comprehensive income, statement of changes in equity and statement of cash flows as at and for the year ended December 31, 2014.
(b) an unaudited statement of financial position, statement of income and comprehensive income, statement of changes in equity and statement of cash flows of Intega as at and for the six month periods ended June 30, 2016 and June 30, 2015 (the Intega Interim Financial Statements).
(c) the following pro forma financial statements of the Filer (the Required Pro Forma Financial Statements):
(i) a pro forma statement of financial position of the Filer as at the date of the Filer’s most recent statement of financial position filed that gives effect, as if the Acquisition has taken place as at the date of the pro forma statement of financial position, to the Acquisition;
(ii) a pro forma income statement of the Filer that gives effect to the Acquisition as if it had taken place on January 1, 2015 for
(A) the year ended December 31, 2015; and
(B) the six month period ended June 30, 2016; and
(iii) pro forma earnings per share based on the foregoing pro forma financial statements.
12. Since the acquisition of the Acquired Assets by Intega on January 22, 2016 would not be reflected in the Intega Annual Financial Statements, the Filer, together with its legal advisors and EY, considered whether any separate financial statements for the indirect acquisition of the Acquired Assets would be required to be included in the BAR in light of the guidance provided in Section 8.7(8) of Companion Policy 51-102CP – Continuous Disclosure Obligations (51-102CP).
13. As a result of that analysis, the Filer concluded that the Acquired Assets, on their own, would likely meet one or more of the significance tests under Part 8 of NI 51-102 when applied to the Filer. Accordingly, the Filer concluded that separate carve-out financial statements for the Acquired Assets would be required (the Carve-Out Financial Statements).
14. Following completion of the Acquisition, representatives of the Filer and EY discussed certain historical accounting records of Valeant and its affiliates that were relevant to the Acquired Assets and engaged in a number of discussions with Valeant regarding the Acquired Assets. As a result of those discussions, the Filer determined that preparing the Carve-Out Financial Statements in accordance with the requirements under Section 8.4 of NI 51-102 or the alternative financial statements as contemplated by Section 8.6(5) of 51-102CP (the Abbreviated Financial Statements) would be impracticable, primarily for the following reasons:
(a) Valeant prepares audited annual consolidated financial statements that include its subsidiaries, and no stand-alone financial statements exist for the Acquired Assets or Cosméderme. Valeant does not maintain the distinct and separate accounts that would be necessary to prepare the Carve-Out Financial Statements for the Acquired Assets. The operations of the Acquired Assets are not attributable to any one legal entity, segment or reporting unit within Valeant’s operating structure.
(b) Valeant provided corporate level support (including administrative support functions such as accounting, tax, legal and human resources) and shared resources and services (such as centralized accounts payable and accounts receivable processing, collection, customer service, information technology and research and development) to multiple product lines organized in multiple legal entities. As a result, selling, general and administrative expenses (including rent, personnel, insurance, IT services and support, employee related expenses, product and material testing, quality assurance, promotional and advertising expenses audit, tax, etc.) are not specifically identifiable to specific product lines, including the Products, or individual entities, including Cosméderme. In addition, Cosméderme, Valeant Canada and VCLP incurred costs to support various other product lines (such as distribution, customer service, accounting, office expenses, utilities, etc.) and those expenses and costs are not specifically identifiable to individual product lines, including the Products, or individual entities, including Cosméderme. Allocations of those expenses and costs to the Acquired Assets would entail numerous assumptions, a number of which would be highly arbitrary.
(c) Prior to the Acquisition, Cosméderme manufactured numerous additional products for VCLP and Valeant Pharmaceuticals North America, LLC which were not part of the Acquired Assets. Cosméderme’s indirect operating costs related to these manufacturing activities are not specifically identifiable to any individual products that it manufactured, including the Products. Allocations of those indirect costs to the Acquired Assets would entail numerous assumptions, a number of which would be highly arbitrary.
(d) Due to the complimentary nature of Valeant’s product lines, many of its customers purchased products across multiple product lines, and many of its suppliers provided materials, products and services across multiple product lines. Valeant and their systems did not maintain separate order forms and/or invoices for certain transactions related to the Products. As a result, receivables and payables records and their related payments from customers and payments to vendors are commingled between the Products and other product lines within the Valeant group. Also, since such documents can relate to more than one product line, services, costs and liabilities (such as accrued marketing/cooperative advertising) related to such orders require an allocation to the Acquired Assets which would be highly arbitrary. While identification of receivables and payables by product line would require a review of invoice and line item detail for each period presented, any attempt to construct cash flow statements for the Acquired Assets would entail numerous assumptions with respect to opening cash balances and sources and uses of cash for financing and operational purposes that would be highly arbitrary.
15. Following the Acquisition, the Filer expects to integrate the Acquired Assets (and the other assets of Intega) into its existing organization structure, which will have a different cost structure than that of Valeant Canada.
16. In lieu of the Carve-Out Financial Statements, the Filer proposes to include in the BAR an audited statement of financial position, statement of income and comprehensive income, statement of changes in equity and statement of cash flows as at and for the eight months ended August 31, 2016 (collectively, the 2016 Audited Intega Financial Statements).
17. The Filer believes that the 2016 Audited Intega Financial Statements provide investors with most reliable and relevant financial information regarding the Acquired Assets, given that they would cover most of the current financial year, would reflect the Acquired Assets from the acquisition date of January 22, 2016 and would be subject to an external audit.
18. If the 2016 Audited Intega Financial Statements are included in the BAR, the Filer does not believe that it would provide any incremental benefit to the Filer’s shareholders to also include the Intega Interim Financial Statements, given that they would be unaudited and would be entirely reflected in the 2016 Audited Intega Financial Statements. For greater certainty, the BAR would still include the Intega Annual Financial Statements described in paragraph 11.
19. If the 2016 Audited Intega Financial Statements are included in the BAR in lieu of the Carve-Out Financial Statements, it will not be possible to prepare the Required Pro Forma Financial Statements in accordance with Section 8.4 of NI 51-102. Accordingly, in lieu of the Required Pro Forma Financial Statements, the Filer proposes to include the following pro forma financial statements (the Alternative Pro Forma Financial Statements):
(a) a pro forma income statement of the Filer that gives effect to the Acquisition as if it had taken place on January 1, 2016 for the nine month period ended September 30, 2016; and
(b) pro forma earnings per share based on the foregoing pro forma financial statements.
20. In light of the guidance provided in Section 8.7(2) of 51-102CP, the Filer does not need to include a pro forma statement of financial position in addition to the Alternative Pro Forma Financial Statements listed above as the Filer’s statement of financial position as of September 30, 2016 will reflect the Acquisition and the Acquired Assets.
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 in the BAR the Intega Annual Financial Statements, the 2016 Audited Intega Financial Statements and the Alternative Pro Forma Financial Statements.
Deputy Director, Corporate Finance
Ontario Securities Commission