Headnote Multilateral Instrument 11-102 Passport System and National Policy 11-203 Process for Exemptive Relief applications in Multiple Jurisdictions – Exemption from requirement in subsection 4.11(4) of National Instrument 52-107 Acceptable Accounting Principles and Auditing Standards (NI 52-107) to reconcile acquisition statements to the issuer’s GAAP – The issuer wants relief from the requirement to include in a reconciliation to IFRS in annual financial statements of the acquired business – The issuer will prepare pro forma financial statements as set out in section 8.7(9) of Companion Policy 51-102CP as it applies to financial years beginning on or after January 1, 2011 for all periods presented. Applicable Legislative Provisions
National Instrument 52-107 Acceptable Accounting Principles and Auditing Standard, s. 5.1
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
EPALS CORPORATION
(the Applicant)
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 of the principal regulator (the Legislation) exempting the Applicant from the requirement in subsection 4.11(4) of National Instrument 52-107 Acceptable Accounting Principles and Auditing Standards (NI 52-107) that it reconcile the financial statements of Carus Publishing Company (Carus) to be filed with the BAR (as defined below) to IFRS (as defined below, and such requested relief referred to herein as 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 (the Principal Regulator), and
(b) The Applicant has provided notice that pursuant to paragraph 4.7(1)(c) of Multilateral Instrument 11-102 Passport System (MI 11-102), the requested approval and relief under MI 11-102 is to be relied upon by the Applicant with respect to the equivalent provisions of the legislation of the local jurisdictions of the Provinces of British Columbia and Alberta.
Interpretation
Terms defined in National Instrument 14-101 Definitions, MI 11-102 and NI 52-107 have the same meanings if used in this decision, unless otherwise defined.
Representations
This decision is based on the following facts represented by the Applicant:
The Applicant is a corporation continued under the Business Applicants Act (Ontario) pursuant to articles of continuance dated July 26, 2011.
The head office of the Applicant is located in Herndon, Virginia and the registered office of the Applicant is located in Toronto, Ontario.
The Applicant is a reporting issuer in each of Ontario, British Columbia and Alberta.
The voting common shares of the Applicant are listed on the TSXV under the symbol “SLN”.
Pursuant to an agreement and plan of merger dated June 29, 2011, the Applicant acquired all of the issued and outstanding shares of common stock of ePals, Inc. (ePals) on July 26, 2011, which transaction constituted a reverse takeover within the meaning of National Instrument 51-102 Continuous Disclosure Obligations (the Reverse Takeover).
The annual financial statements of the Applicant (prior to giving effect to the Reverse Takeover) for the financial year ended December 31, 2010 have been prepared in accordance with generally accepted accounting principles in Canada.
The annual financial statements of ePals for the financial years ended December 31, 2010 and December 31, 2009 have been prepared in accordance with International Financial Reporting Standards (IFRS) and are included in the Applicant’s filing statement dated July 19, 2011 which is available for review under the Applicant’s SEDAR profile.
Carus Acquisition
Pursuant to an agreement and plan of merger dated November 29, 2011, the Applicant indirectly acquired all of the issued and outstanding shares of common stock of Carus in consideration for US$5 million in cash and US$10 million of restricted voting common shares of the Applicant on December 12, 2011 (the Carus Acquisition).
Under Part 8 of National Instrument 51-102 Continuous Disclosure Obligations (NI 51-102), the Applicant is required to file a business acquisition report (BAR) for any significant acquisitions that it completes. The applicant has determined that the Carus Acquisition is a significant acquisition and therefore it intends to file a BAR.
As required by Part 8 of NI 51-102, the BAR filed by the Applicant will contain (or incorporate by reference):
(a) the audited annual financial statements of the Applicant (prior to giving effect to the Reverse Takeover) for the financial year ended December 31, 2010 which have been prepared in accordance with generally accepted accounting principles in Canada.
(b) the audited consolidated annual financial statements of ePals for the financial years ended December 31, 2010 and December 31, 2009 which have been prepared in accordance IFRS;
(c) the unaudited consolidated interim financial report of the Applicant for the three and nine month periods ended September 30, 2011 and September 30, 2010 (the Applicant Interim Statements) which have been prepared in accordance IFRS;
(d) the audited consolidated financial statements of Carus for the year ended December 31, 2010 together with the unaudited consolidated financial statements of Carus for the year ended December 31, 2009 (the Carus Annual Statements) which have been prepared in accordance with United States generally accepted accounting principles (US GAAP);
(e) the unaudited interim consolidated financial statements of Carus for the nine month periods ended September 30, 2011 and September 30, 2010 (the Carus Interim Statements) which have been prepared in accordance with US GAAP; and
(f) pro forma financial statements of the Applicant (the Pro Forma Statements) which will reflect: (a) for the purposes of the pro forma consolidated statement of operations for the year ended December 31, 2010 and the nine month period ended September 30, 2011 and the pro forma balance sheet as of September 31, 2011 (all of which will be prepared in accordance with IFRS), the completion of the Carus Acquisition and the Reverse Takeover as if it had occurred as at the beginning of the Applicant's most recently completed financial year and carried through the most recent interim period; and (b) adjustments to conform the financial statements of Carus as described in (a) above from US GAAP to IFRS together with an explanation of such adjustments.
For financial years beginning before January 1, 2011, Section 4.11(4) of NI 52-107 requires that acquisition statements prepared using accounting principles that are different from the issuer's GAAP (in this case, the Carus Annual Statements) be reconciled to the issuer's GAAP, with further disclosure required in the notes to such financial statements (the Reconciliation Requirement).
Although Carus prepared the Carus Interim Statements using US GAAP, the Reconciliation Requirement does not apply to the Carus Interim Statements as they relate to a financial year beginning on or after January 1, 2011.
The Applicant's Interim Statements and the Pro Forma Statements will be prepared in accordance with IFRS. The Carus Interim Statements were prepared using US GAAP, however, the Reconciliation Requirement does not apply to them as they relate to a financial year beginning on or after January 1, 2011. Due to these facts, it is the Applicant's view that the reconciliation of the Carus Annual Statements to IFRS will not provide investors with any incremental or useful information.
The cost of preparing a reconciliation of the Carus Annual Statements to IFRS, and the time required to prepare such a reconciliation, would outweigh any benefit that investors may get from such reconciled financial statements.
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:
(a) the Pro Forma Statements are prepared as set out in section 8.7(9) of Companion Policy 51-102CP as it applies to financial years beginning on or after January 1, 2011 for all periods presented; and
(b) the BAR otherwise complies with the requirements of Form 51-102F4.
DATED this 24th day of January, 2012.
“Cameron McInnis”
Cameron McInnis
Chief Accountant
Ontario Securities Commission