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TerrAscend Corp.
Headnote
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.
December 6, 2019
IN THE MATTER OF THE SECURITIES LEGISLATION OF ONTARIO (the "Jurisdiction") AND IN THE MATTER OF THE PROCESS FOR EXEMPTIVE RELIEF APPLICATIONS IN MULTIPLE JURISDICTIONS AND IN THE MATTER OF TERRASCEND CORP. (the "Filer")
DECISION
Background
The principal regulator in the Jurisdiction has received an application from the Filer for a decision under the securities legislation of the Jurisdiction (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 unqualified 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 and Alberta.
Interpretation
Terms defined in National Instrument 14-101 Definitions and MI 11-102 have the same meaning if used in this decision, unless otherwise defined.
Representations
This decision is based on the following facts represented by the Filer:
1. The Filer was incorporated on February 18, 2014 pursuant to the Business Corporations Act (Ontario). The Filer's head office is located at 3610 Mavis Road, Mississauga, Ontario.
2. The Filer is a reporting issuer in the provinces of Ontario, British Columbia and Alberta.
3. The Filer's authorized share capital consists of an unlimited number of common shares (the Common Shares), an unlimited number of proportionate voting shares (the Proportionate Voting Shares) and an unlimited number of exchangeable shares (the Exchangeable Shares). Each Proportionate Voting Share is exchangeable into Common Shares on the basis of 1,000 Common Shares per Proportionate Voting Share. Each Exchangeable Share is exchangeable, upon the occurrence of certain stated events, into one Common Share. As at the close of business on November 13, 2019, 53,493,225 Common Shares, 75,416.981 Proportionate Voting Shares and 38,890,570 Exchangeable Shares were issued and outstanding.
4. The Common Shares are listed on the Canadian Securities Exchange under the trading symbol "TER" and in the United States on the OTCQX Best Market under the trading symbol "TRSSF". Neither the Proportionate Voting Shares nor the Exchangeable Shares are listed on any stock exchange.
5. On September 16, 2019, the Filer acquired all of the issued and outstanding equity interests of Ilera Healthcare LLC, Ilera Dispensing LLC, Ilera Security LLC, Ilera InvestCo I LLC, 235 Main Street Mercersburg LLC and IHC Real Estate GP, LLC (collectively, the Ilera Entities) in exchange for a combination of cash and Proportionate Voting Shares (the Transaction).
6. The Transaction was completed pursuant to a securities purchase and exchange agreement dated August 1, 2019 among the Filer (as parent), WDB Holding PA, Inc. (a wholly-owned indirect subsidiary of the Filer, as buyer), certain sellers of the Ilera Entities and Mr. Osagie Imasogie (as the sellers' agent).
7. None of the Ilera Entities are reporting issuers (or the equivalent) in any jurisdiction. Each of Ilera Healthcare LLC, Ilera Dispensing LLC, Ilera Security LLC, Ilera InvestCo I LLC and 235 Main Street Mercersburg LLC are incorporated under the laws of the State of Pennsylvania. IHC Real Estate GP, LLC is incorporated under the laws of the State of Delaware.
8. The Transaction constituted an "acquisition of related businesses" and a "significant acquisition" by the Filer under section 8.3 of National Instrument 51-102 Continuous Disclosure Obligations (NI 51-102), which triggered the requirement for the Filer to file a completed Form 51-102F4 Business Acquisition Report (BAR) within 75 days of the completion of the Transaction.
9. Pursuant to subsection 8.4(8) of NI 51-102, the Filer is permitted to present the financial statements of the Ilera Entities required to be included in the BAR on a combined basis, as for the periods covered, the Ilera Entities were under common control.
10. To comply with section 8.4 of NI 51-102, the Filer's BAR must include, among other things, audited annual financial statements of the Ilera Entities for the financial year ended December 31, 2018 (the 2018 Annual Financial Statements).
11. Under section 3.12 of NI 52-107, the 2018 Annual Financial Statements must be accompanied by an auditor's report that expresses an unqualified opinion.
12. The Filer understands that, as private entities, the Ilera Entities were not required to have, and did not have, the 2018 Annual Financial Statements audited.
13. Although the Filer has prepared the 2018 Annual Financial Statements to the best of its ability using information that is presently available from the Ilera Entities and their former management, the Filer's auditor has represented to the Filer that it is unable to obtain sufficient comfort with respect to the Ilera Entities to issue an unqualified audit opinion due to the lack of sufficient underlying information and the passage of time. In particular, the Filer's independent auditor was not present during the December 31, 2018 physical inventory observation and has been unable to satisfy itself by alternative means of the quantity of inventory at December 31, 2018.
14. The Filer expects the following item (the Qualified Matter) would result in a qualified opinion from the auditor in respect of the 2018 Annual Financial Statements:
Inventory: Supporting documentation and schedules required in order to validate the quantity of inventory, including growing crops, are not available as at December 31, 2018 and for the year then ended. As such, the Filer does not believe the Filer's independent auditor will be able to obtain sufficient comfort for the ending inventory balance and the related cost of goods sold. Since the Ilera Entities are unable to reproduce inventory quantities as of December 31, 2018, the independent auditor is unable to conduct sufficient alternative audit procedures to gain reasonable comfort that inventory balances at December 31, 2018 are free from material misstatement.
15. Apart from the requirement that the 2018 Annual Financial Statements be accompanied by an auditor's report that expresses an unqualified opinion, the Filer is otherwise able to prepare and file a BAR in accordance with NI 51-102 and NI 52-107.
16. To the knowledge of the Filer, after reasonable due diligence conducted on the Ilera Entities, and in the Filer's preparation of the 2018 Annual Financial Statements, the Filer believes that inventory is not materially misstated.
17. Except for the requirement to file a BAR within 75 days of the completion of the Transaction, the Filer is not in default of securities legislation in any jurisdiction.
18. The Filer anticipates that its auditor will be able to issue an unmodified opinion with respect to inventory for its year ended December 31, 2019.
Decision
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 unqualified opinion other than with respect to the Qualified Matter;
(b) unaudited annual financial statements of the Ilera Entities for the financial year ended December 31, 2017, in accordance with subsection 8.4(1) of NI 51-102;
(c) unaudited interim financial statements of the Ilera Entities for the six-month period ended June 30, 2019, and comparative period in the immediately preceding financial year; and
(d) an audited statement of assets acquired and liabilities assumed, without qualification, by the Filer as at the closing date of the Transaction.
"Cameron Mclnnis"
Chief Accountant
Ontario Securities Commission
23764615.13