Seprotech Systems Incorporated -- s. 144
Headnote
Section 144 -- application for variation of cease trade order -- Filer cease traded due to failure to file with the Commission annual financial statements -- Filer has applied for a variation of the cease trade order to permit the Filer to proceed with the completion of a term loan facility -- partial revocation granted subject to conditions.
Applicable Legislative Provisions
Securities Act, R.S.O. 1990, c. S.5, as am., ss. 127, 144.
IN THE MATTER OF
THE SECURITIES ACT,
R.S.O. 1990, CHAPTER S.5, AS AMENDED
(the ACT)
AND
IN THE MATTER OF
SEPROTECH SYSTEMS INCORPORATED
ORDER
(Section 144)
WHEREAS the securities of Seprotech Systems Incorporated (the Filer) are subject to a temporary cease trade order made by the Director dated February 24, 2011 under paragraph 2 of subsection 127(1) and subsection 127(5) of the Act and a further cease trade order issued by the Director on March 8, 2011 pursuant to subsection 127(1) of the Act (together, the Cease Trade Order) directing that trading in the securities of the Filer cease until the Cease Trade Order is revoked;
AND WHEREAS the Filer has applied to the Ontario Securities Commission (the Commission) pursuant to section 144(1) of the Act for a partial revocation of the Cease Trade Order;
AND WHEREAS the Filer has represented to the Commission that:
1. The Filer is a corporation that was incorporated pursuant to the Business Corporations Act (Canada) on September 5, 1985.
2. The Filer's registered and head office is located at 2378 Holly Lane, Ottawa, Ontario K1V 7P1.
3. The Filer is a reporting issuer in Ontario, British Columbia, Alberta and Manitoba.
4. The authorized capital of the Filer consists of an unlimited number of common shares. As at February 28, 2011, 51,321,926 common shares were issued and outstanding. The common shares are listed for trading on the TSX Venture Exchange.
5. Other than the common shares, the Filer has outstanding debt of $600,000 owing to the Unity Savings and Credit Union and other syndicate lenders, and 4,692,500 outstanding stock options under the Filer's employee stock option plan.
6. The Cease Trade Order was issued as a result of the Filer's failure to file its audited annual financial statements, annual management's discussion and analysis (MD&A), and certification of annual filings for the fiscal year ended August 31, 2010, and its unaudited interim financial statements for the quarter ended November 30, 2010 (the Unfiled Documents).
7. The Unfiled Documents were not filed in a timely manner due to management's discovery of the over-billing of a significant customer, which resulted in a need to restate interim unaudited financial statements for the quarters ended November 30, 2009, February 28, 2010 and May 31, 2010. Resolution of the over-billing amount has been resolved with the customer, and the appropriate restatement of the interim financial statements is currently being prepared.
8. In addition to the Unfiled Documents, the Filer has completed and expects to file shortly unaudited restated quarterly financial statements and MD&A and related certifications of annual filings for the quarters ended November 30, 2009, February 28, 2010 and May 31, 2010 (together with the Unfiled Documents, the Unfiled Continuous Disclosure). The Filer also expects to complete the audit of financial statements for the fiscal year ended August 31, 2010, and to file audited financial statements and MD&A and related certifications of annual filings by April 30, 2011. Draft unaudited financial statements for the quarter ended November 30, 2010 have been prepared, and will be filed shortly after completion of the above-mentioned audit.
9. The Filer is also subject to cease trade orders issued by the securities regulators in the Province of British Columbia for failure to file required filings under applicable securities laws (the Other Cease Trade Order).
10. The Filer is adequately staffed to complete the necessary financial disclosure within the time frame indicated, and provision has been made for temporary additional support if required in order to meet the filing targets.
11. The Filer is seeking to complete a lending arrangement with its current institutional lenders located in Ontario to establish a term loan facility in the amount of $400,000, maturing May 31, 2011 (the Term Loan Facility).
12. As has been reported in the Filer's regulatory filings, the Filer has a significant working capital deficit, and needs to be recapitalized. The working capital need has been acerbated by the Company's need to resolve the above-mentioned over-billing issue with a significant customer, the Department of National Defence (Canada) (DND). Resolution of the issue was achieved by means of applying a credit to work in process under an existing contract (as extended), but with accelerated delivery.
13. The proceeds of the Term Loan Facility will be used as follows:
a)
Completion of DND contract -
$300,000
b)
Legal & Audit Fees -
$60,000
c)
Preparation of new DND contract bid -
$40,000
Total:
$400,000
14. Following completion of the DND contract, and repayment of the amounts that were over-billed by way of credits on invoices for work in process, the Filer expects to have sufficient ongoing resources to conduct normal business operations.
15. In addition, the Filer intends to propose to its trade creditors a debenture for debt swap which will be the subject of a separate application for a partial revocation order.
16. The need to apply credit to the significant customer's invoices and to accelerate delivery to the significant customer reduced the Filer's working capital to such an extent that it will not be able to complete the contract without additional financial assistance. The contract is required to be completed by March 31, 2011.
17. Other than the failure to file the Unfiled Continuous Disclosure, the Filer is not in default of any of the requirements of the Act or the rules and regulations made pursuant thereto.
18. After the completion of the Term Loan Facility, the filer intends to file the Unfiled Continuous Disclosure, pay all outstanding fees and apply to the applicable securities regulator to have the Cease Trade Order and the Other Cease Trade Order fully revoked.
19. The Filer's SEDAR and SEDI profiles are up to date.
AND UPON considering the application and the recommendations of staff of the Commission;
AND UPON the Director being satisfied that to do so would not be prejudicial to the public interest;
IT IS ORDERED, pursuant to section 144 of the Act, that the Ontario Cease Trade Order is partially revoked solely to permit trades in securities of the Filer (including for greater certainty, acts in furtherance of trades in securities of the Filer) that are necessary for and are in connection with the Term Loan Facility, provided that, prior to the completion of the Term Loan Facility:
a) each potential lender will
i) receives a copy of the Cease Trade Order;
ii) receives a copy of this order; and
iii) receives written notice from the Filer, and receive written notice from the Filer, and acknowledge that all of the Filer's securities, including the securities issued in connection with the term loan facility will remain subject to the Cease Trade Order until it is revoked, and that the granting of this partial revocation order does not guarantee the issuance of a full revocation order in the future; and
b) the Filer undertakes to make available copies of the written acknowledgements to staff of the Commission on request; and
c) this Order will terminate on the earlier of:
i) completion of the Term Loan Facility; and
ii) 30 days from the date hereof.
DATED at Toronto this 30th day of March, 2011.