In the Matter of Wesana Health Holdings Inc., 2022 CanLII 324

January 7, 2022

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

WESANA HEALTH HOLDINGS INC. (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 of the principal regulator (the Legislation) for an order under Section 13.1 of National Instrument 51-102 Continuous Disclosure Obligations (NI 51-102) exempting the Filer from the requirement to include the Omitted APS Financial Statements (defined below) within the business acquisition report (the BAR) to be filed by the Filer in connection with the Acquisitions (defined below) pursuant to subsections 8.4(1) and (3) of NI 51-102, provided that the BAR otherwise complies with the requirements of Form 51-102F4 Business Acquisition Report (Form 51-102F4) and NI 51-102 (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 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 the Provinces of British Columbia, Alberta, Saskatchewan, Manitoba, Newfoundland and Labrador, New Brunswick, Nova Scotia and Prince Edward Island.

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 in this decision.

Representations

This decision is based on the following facts represented by the Filer:

1. The Filer is a corporation organized under the Business Corporations Act (British Columbia).

2. The Filer's head office is located in Chicago, Illinois. The Filer has a member of management that is located in the Jurisdiction.

3. The Filer is a reporting issuer in the Provinces of Ontario and British Columbia and is not in default of the securities legislation of any jurisdiction of Canada. The Filer filed a preliminary base shelf prospectus dated September 15, 2021 in the Provinces of Ontario, British Columbia, Alberta, Saskatchewan, Manitoba, Newfoundland and Labrador, New Brunswick, Nova Scotia and Prince Edward Island.

4. The Subordinate Voting Shares of the Filer are listed and posted for trading on the Canadian Securities Exchange under the symbol “WESA” and the OTCQB Venture Market under the symbol “WSNAF”.

5. The Filer is a “venture issuer” as defined in NI 51-102 and prepares its financial statements in accordance with International Financial Reporting Standards (IFRS) pursuant to National Instrument 52-107 Acceptable Accounting Principles and Auditing Standards.

6. On September 8, 2021, the Filer completed the acquisition (the PsyTech Acquisition) of Psychedelitech Inc. (PsyTech), an entity organized under the laws of Ontario. The PsyTech Acquisition was completed by way of a three-cornered amalgamation between PsyTech, the Filer and 2849635 Ontario Inc., a newly created wholly-owned subsidiary of the Filer, pursuant to which PsyTech and 2849635 Ontario Inc. amalgamated to continue as “Wesana Solutions Inc.” and the Filer issued shares to the shareholders of PsyTech in exchange for their common shares of PsyTech.

7. Separate to its transaction with the Filer, prior to the time of negotiation and completion of the PsyTech Acquisition, PsyTech had negotiated the principal terms of the acquisition of Advanced Psychiatric Management LLC (APM), an entity organized under the laws of Delaware, on an arm’s-length basis. APM was a newly created wholly-owned subsidiary of Advanced Psychiatric Solutions, Ltd. (APS), an entity organized under the laws of Illinois. APS is an operator of two mental health clinics located in Illinois. APS is owned by a medical doctor. Shortly after completion by the Filer of the PsyTech Acquisition, the acquisition of APM was also completed on September 8, 2021 (the APM Acquisition, and together with the PsyTech Acquisition, the Acquisitions). Instead of PsyTech acquiring APM, such acquisition was accomplished by having Wesana Health Clinics Corp., a newly created wholly-owned subsidiary of the Filer, as a substituted purchaser, purchase the equity in APM from APS. Other than the financial information as set out below and other than certain limited disaggregated financial information related thereto, the Filer does not possess nor have access to, and is not entitled to obtain access to, financial information in respect of APS for any period prior to the APM Acquisition.

8. Given that it was newly created for purposes of the transaction, prior to the completion of the APM Acquisition, APM did not have any assets or operations. In connection with the APM Acquisition, (i) APS transferred to APM its non-medical assets, such as furniture, equipment, computer hardware, real estate leases and other contractual entitlements, and (ii) APM entered into a 30-year management services agreement with APS to furnish all non-medical administrative and management services to APS in exchange for a fair market value management fee (which is expected to capture the economics of the arrangement). As a result, APM became the exclusive manager of the two mental health clinics operated by APS. The acquisition of APM and entry into of a long-term management services agreement by APM with APS, rather than the acquisition of APS (which continued to be owned by the same medical doctor as prior to the transaction), was undertaken to comply with certain Illinois state laws which restrict the corporate practice of medicine and require medical practitioners to own entities that have clinical operations. APM also has a succession agreement with APS and a medical advisory agreement with the current medical doctor shareholder of APS which gives APM the right to designate the successor shareholder of APS in the event of certain succession events so that the outstanding equity in APS is owned by a successor shareholder appointed by APM. As a result of such controls that are in place, under IFRS, post-acquisition the financial statements of both APM and APS are consolidated into the financial statements of the Filer.

9. The Acquisitions were completed on September 8, 2021. The total purchase price for the PsyTech Acquisition, subject to final adjustments, was approximately US$23.84 million and for the APM Acquisition, subject to final adjustments, was approximately US$1.86 million.

10. Individually, the PsyTech Acquisition is a significant acquisition for the Filer under the optional investment test as described in paragraph 8.3(4)(b) of NI 51-102 as modified by paragraph 8.3(3)(b) of NI 51-102, as the Filer determined that the consolidated investments of the Filer in the PsyTech Acquisition as of the acquisition date equaled approximately 168% of the consolidated assets of the Filer based on the most recently completed interim period of the Filer prior to the completion of the PsyTech Acquisition, being the interim period ended June 30, 2021.

11. While PsyTech, on the one hand, and APS and APM, on the other hand, were arm’s length businesses, the definitive acquisition agreement for the PsyTech Acquisition included a closing condition for the benefit of the Filer that all conditions precedent to the completion of the APM Acquisition needed to have been satisfied. As a result, the Acquisitions are considered an “acquisition of related businesses” pursuant to Section 8.1 of NI 51-102 and together constitute a “significant acquisition” of the Filer for the purposes of NI 51-102. The Filer was therefore required to file a BAR within 75 days of the completion of the Acquisitions pursuant to Section 8.2 of NI 51-102.

12. Pursuant to Section 8.4 of NI 51-102, the BAR for the Acquisitions must include the following for each business or related business that is acquired:

(a) audited financial statements (i.e., a statement of financial position, a statement of comprehensive income, a statement of changes in equity and a statement of cash flows) for the most recently completed financial year of the business acquired (the Audited Requirements);

(b) unaudited financial statements for the financial year immediately preceding the most recently completed financial year of the business acquired; and

(c) unaudited financial statements for the interim period that started the day after the date of the statement of financial position prepared under the Audited Requirements and ended before the acquisition date of the business acquired and for a comparable period in the preceding financial year of the business acquired,

(collectively, the BAR Financial Statement Requirements).

13. Subsection 8.4(8) of NI 51-102 provides that if a reporting issuer is required to include financial statements for more than one business because the significant acquisition involves an acquisition of related businesses, the financial statements must be presented separately for each business, except for the periods during which the businesses have been under common control or management, in which case the reporting issuer may present the financial statements of the businesses on a combined basis.

14. As a result, absent the Exemption Sought, the BAR to be filed in connection with the Acquisitions must include, in addition to required financial statements relating to PsyTech, the following financial statements in respect of the APM Acquisition:

(a) annual financial statements of APS, comprising the statements of financial position as at December 31, 2020 and 2019, the statements of comprehensive income, changes in equity and cash flows for the years then ended, together with notes to such financial statements and an audit report in respect of the year ended December 31, 2020, and

(b) an unaudited interim financial report for APS for the three and six month periods ended June 30, 2021 and 2020 (collectively, the Omitted APS Financial Statements).

15. The Filer submitted that the APM Acquisition is immaterial relative to the Filer as a whole, including in the context of the combined operations of the Filer upon completion of the Acquisitions, as demonstrated below.

16. Firstly, the APM Acquisition is immaterial relative to the consolidated assets of the Filer as at June 30, 2021 given that

(a) the assets of APS based on the most recently completed interim period of APS prior to the completion of the APM Acquisition, being the interim period ended June 30, 2021, equaled approximately 7% of the consolidated assets of the Filer based on the most recently completed interim period of the Filer prior to the completion of the APM Acquisition, being the interim period ended June 30, 2021, and

(b) the consolidated investments of the Filer in the APM Acquisition as of the acquisition date equaled approximately 13% of the consolidated assets of the Filer based on the most recently completed interim period of the Filer prior to the completion of the APM Acquisition, being the interim period ended June 30, 2021.

17. Secondly, apart from the immateriality of the APM Acquisition relative to the consolidated assets of the Filer as at June 30, 2021, the APM Acquisition is immaterial relative to the PsyTech Acquisition. The consideration paid or payable by the Filer pursuant to the APM Acquisition represents approximately 7% of the total consideration paid or payable by the Filer in connection with the Acquisitions whereas the consideration paid or payable by the Filer pursuant to the PsyTech Acquisition represents approximately 93% of the total consideration paid or payable by the Filer in connection with the Acquisitions.

18. Additionally, the Filer submitted that, in making the investment decision to acquire APM, audited historical financial statements were not relied upon by the Filer. Accordingly, the Filer submitted that the historical financial statements in respect of the APM Acquisition are not material to an investment decision made by an investor in respect of the Filer’s shares. This is based in part on the fact that APS, and the two mental health clinics that it has historically operated, have been operated (and the resulting financial statements would reflect) as a sole medical practitioner’s clinical operation.

19. As at June 30, 2021 and December 31, 2020, to the Filer’s knowledge based on information it has received, APS respectively had an aggregate of approximately US$1.03 million and approximately US$0.96 million in assets, against aggregate liabilities as of such dates of approximately US$0.84 million and approximately US$0.86 million. These assets were principally the non-medical assets transferred by APS to APM pursuant to the APM Acquisition, such as furniture, equipment, computer hardware, real estate leases and other contractual entitlements, and separately a shareholder loan receivable from the medical doctor shareholder of APS that was forgiven by APS in connection with completion of the APM Acquisition. The total consideration paid or payable by the Filer pursuant to the APM Acquisition is approximately US$1.86 million, subject to final adjustments and measured in accordance with IFRS. The majority of this purchase price will be allocated to goodwill, which the Filer believes is representative of the medical/technical expertise and other human resources secured as a result of the APM Acquisition, as further described below.

20. Additionally, during the six-month period ended June 30, 2021 and the year ended December 31, 2020, to the Filer’s knowledge based on information it has received, APS respectively had net income of US$87,139 and US$6,509. This is reflective of the fact that as a sole practitioner operated business, substantially all of the revenue generated was offset by such medical practitioner’s compensation. Similarly, the Filer submitted that statements of changes in equity and cash flows that would be included in the Omitted APS Financial Statements would not present meaningful information to an investor given that the overall benefit of the operations of APS were for a single medical doctor that was utilizing such operations as his principal source of income.

21. As additional support, in making the investment decision to enter into and complete the APM Acquisition, historical financial statements were not relied upon by PsyTech as a part of its due diligence processes (nor by the Filer as the substituted purchaser, as described above) and will not be reflective of how the operations of APM and APS will be consolidated into the financial statements of the Filer. As a part of it due diligence processes, PsyTech was focused on the existing share of APS’ operations in its operating market and the potential to increase such share of its operating market by putting in place more refined operating procedures and systems and the extent to which APS’ human resources had the necessary skills to (i) effectively assist with improving APS’ operations and increase market share after completion of the APM Acquisition, and (ii) otherwise contribute to other aspects of PsyTech’s business, such as scaling the mental health clinics segment of its business by way of further acquisitions and/or buildouts.

22. But for the Omitted APS Financial Statements, the Filer is able to satisfy the BAR Financial Statement Requirements in respect of the Acquisitions and otherwise satisfy the requirements to prepare the BAR in accordance with the requirements of Form 51-102F4 and NI 51-102.

23. Each of the financial statements referred to in paragraph 22 above were prepared in accordance with IFRS.

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 with respect to the BAR provided that the Filer includes in the BAR the following financial statements required to be filed by the Filer in connection with the Acquisitions:

• the audited financial statements of PsyTech for the financial year ended December 31, 2020 and as at and for the period ended December 31, 2019, together with the notes thereto and the auditor’s report thereon; and

• the unaudited condensed interim consolidated financial statements of PsyTech for the three and six month periods ended June 30, 2021, together with the notes thereto.

‘Lina Creta’

Lina Creta, Manager Corporate Finance Branch

OSC File#: 2021/0686