Improper Transaction
The recently proposed acquisition of a controlling interest in a privately-held early stage dental care company (the “Dental Care Company”) was of such great concern that the Concerned Shareholders sought an injunction to prevent Dr. Bokhari and the Collaborating Directors from acting precipitously in advance of the Meeting and, on April 9, 2021, a court granted an order preventing FSD from entering into the proposed transaction and, more broadly, from taking any other actions outside of the ordinary course prior to the Meeting. In the summer of 2020, the Company considered an opportunity to acquire the Dental Care Company, which is developing treatments for periodontal disease, and rejected it for a number of reasons. Faced with a looming shareholder meeting and no material evidence of having advanced FSD’s business, Dr. Bokhari resurrected the transaction and signed a letter of intent on April 2, 2021 (the holiday of Good Friday), sought board approval of the proposed transactions on April 8, 2021 and intended to close the transaction on April 12, 2021. Although there was no evidence that the Dental Care Company had advanced its business model in any appreciable way, the proposed deal made the purchase of only a portion of the company substantially more expensive than the previously proposed price for acquiring the entire company.
Dr. Brennan, the Company’s Chief Medical Officer and the individual who completed the scientific diligence review of the Dental Care Company, has a material, indirect ownership interest in that company that is conveniently not disclosed in the Management Circular – notwithstanding that it is a substantially greater financial interest than the fully-disclosed minority interest of Mr. Durkacz in the Target (with which no transaction has been formally proposed) that is referred to repeatedly in the Management Circular. Unusually, the transaction featured a price protection mechanism for the sellers that would only work to increase the number of shares issued by FSD in the event of a decline in its share price, without a corresponding adjustment in FSD’s favour in the event that its share price increases.
The details of the proposed transaction were provided to Board members for consideration on less than 24 hours’ notice. Consistent with the timeline described above, the materials included had all been prepared within only a few days of the date of their delivery, with some marked as draft – far from evidence of a complete and careful evaluation of the possible transaction over many months as suggested by Management. Deliberation at the Board meeting was brief and the transaction was approved by Dr. Bokhari and the Collaborating Directors, with the intention that it would be concluded within days – prior to the Company’s obligation to mail the Management Circular. This would have allowed Dr. Bokhari and the Collaborating Directors to point to a material transaction as false evidence of their successful execution of their apparent strategy. The proposed acquisition was for a combination of a significant amount of cash and a large number of shares and was to be coupled with a private placement of a large number of Class B Shares to unidentified purchasers. As a director, Mr. Durkacz challenged the transaction’s merits, the Company’s evaluation process, the apparent conflicts of interest and, above all, the desire to rush the transaction to completion by a deadline that was without any purpose. Nonetheless, Dr. Bokhari and the Collaborating Directors approved the transaction.
The Concerned Shareholders raised this with the Court and, within a day, a judge determined that there were concerns that this transaction could result in irreparable harm to FSD and ordered that neither it, not any other transaction out of the ordinary course of business, be undertaken by FSD prior to the Meeting. Dr. Bokhari and the Collaborating directors promptly challenged the Court order. On April 16, 2021, the judge confirmed his earlier order, stating that Dr. Bokhari and the Collaborating Directors had sought to implement a material transaction that would fundamentally alter the playing field on which the Meeting would take place and that the transaction itself and the process under which it was approved raise serious questions about its bona fides. This is markedly different to the story that Dr. Bokhari and the Collaborating Directors tell in the Management Circular
– that Messrs. Durkacz and Saeed are unjustly impeding a bona fide corporate transaction that is clearly in the best interest of FSD and its shareholders. While all of this information has been part of a public court process, the Company has concealed the details from Shareholders and misrepresented the facts in the Management Circular. It is entirely likely that Dr. Bokhari will commence another frivolous legal claim against the Concerned Shareholders for attempting to reveal the truth of his actions. 
Dilution of Shareholder Interests Through Unnecessary and Ill-Timed Share Issuances
Since the Concerned Shareholders’ requisition on January 4, 2021 for a shareholder meeting (the “
Requisition”), the Company has issued a staggering number of Class B Shares – a number equal to approximately 88% of the Class B Shares outstanding on that date. It has done this at a time when the Share price has been close to its all- time lows. This action has diluted Shareholder interests and further depressed Share prices.
First, under an at-the-market offering of its Class B Shares adopted by the Company in July 2020 (the “
2020 ATM Offering”), the Company has issued over 7,412,574 Class B Shares since the Requisition, with 99.2% of these Shares being issued between February 1 and 10, 2021. The Shares that eight trading-day period were issued at a weighted average price of US$2.69 per Share, which can be compared to the average price of US$3.83 at which the Class B Shares were trading in the eight trading-day period following the launch of the 2020 ATM Offering.
Promptly following the exhaustion of the 2020 ATM Offering, Dr. Bokhari called a Board meeting on a mere three hours’ notice to adopt a new at-the-market offering (the “
2021 ATM Offering”) authorizing a further issuance of US$20,000,000 Class B Shares. From February 11, 2021 to March 12, 2021, the Company issued 7,247,288 Class B Shares under the 2021 ATM Offering, at a weighted average issue price of US$2.51 per Share, an even lower price than that received for the 2020 ATM Offering issuances. Following March 12, 2021, the Company continued to issue shares at historically low prices.
These recent Share issuances depart from any semblance of normal and appropriate governance process. These Share issuances are coming at a time when the trading price of the Class B Shares is at a low point and the Company’s cavalier financing practices are harming all Shareholders by diluting their ownership interests and further depressing the Share price.
On April 1, 2021, the Company filed a preliminary base shelf prospectus to provide for the issuance of up to US$100 million more Class B Shares. If Dr. Bokhari and the Collaborating Directors are elected at the Meeting, Shareholders should reasonably anticipate further questionable Share issuances.
Concerns Regarding Management Actions
The points made in the Original Circular remain unaltered and have been compounded by new issues. Dr. Bokhari and the Collaborating Directors have:
-
failed to address the dramatic loss of Shareholder value, with the Class B Shares trading over 97% lower than when Dr. Bokhari was appointed Interim Chief Executive Officer;
- failed to effectively implement the Company’s business plan to become a pharmaceutical and biotechnology company;
- massively diluted Shareholder interests by issuing almost 17 million Class B Shares at low prices, increasing the number outstanding by approximately 88% in just two months;
- awarded over $5.7 million of bonus Share compensation to Dr. Bokhari in February 2021 for services yet to be provided and close to $1 million in Shares and/or cash to the Collaborating Directors (Stephen Buyer, Robert Ciaruffoli, James Datin, Gerald Goldberg and Larry Kaiser), the latter amount being almost twice the previous year’s compensation;
- become subject to a court order preventing FSD from undertaking both a specific transaction in which there was a conflict of interest and, more generally, any other transaction outside of the ordinary course of business prior to the Meeting;
- attempted to delay and manipulate the Meeting;
- repeatedly failed to disclose material information to Shareholders, such as the April 9, 2021 Court order, the resignation of Randell Mack, the newly-hired President of FSD BioSciences, Inc., less than one month following the announcement of his appointment, and the consistent failure to achieve previously announced operational goals;
- continued to waste the Company’s funds with frivolous legal claims against the Concerned Shareholders on behalf of both the Company and Dr. Bokhari personally;
- caused FSD to reimburse Dr. Bokhari’s privately owned and controlled company for over $1.4 million
of expenses in 2020, with limited transparency or explanation; and
- taken retaliatory actions against Concerned Shareholders that have unnecessarily exposed FSD to liability.
We are asking Shareholders to vote with the Concerned Shareholders at the Meeting to replace Dr. Bokhari, Stephen Buyer, Robert Ciaruffoli, James Datin, Gerald Goldberg and Larry Kaiser with a new board comprised of five highly-qualified individuals who are strongly motivated to restore FSD. These nominees are Anthony Durkacz, Zeeshan Saeed, Nitin Kaushal, Larry Latowski and Fernando Cugliari. Further details about these nominees are included below under “
Election of Directors – Concerned Shareholders’ Nominees.”
The Company’s Future
If elected at the Meeting, the Concerned Shareholders’ Nominees hope to restore FSD by:
- renewed focus on acquiring biotechnology assets focused on legal medical cannabis and/or legal psychedelics to increase the Company’s drug development pipeline and reduce reliance on a single compound;
- auditing the Company’s current Phase 2 Clinical Trial to determine its current viability and better understand the risks and costs so that appropriate budgets can be created and followed and to determine whether it should be continued;
- implementing a strong financial and corporate governance framework so that directors and management are restricted in granting compensation to themselves at levels higher than industry standards;
- implementing audits of prior compensation and expenses incurred by the Company; and
- developing a robust investor relations function to better communicate FSD’s value to the investment community.
Conclusion
The Management Circular describes the Concerned Shareholders, on the one hand, and Dr. Bokhari and the Collaborating Directors, on the other hand, as having dramatically different visions for the Company’s future. That is perhaps the one matter on which all parties can agree.
The Concerned Shareholders believe that Dr. Bokhari and the Collaborating Directors are destroying Shareholder value. Since early 2019, Dr. Bokhari has attempted to refocus the Company as an early-stage pharmaceutical and biotechnology venture. Not only has he failed to achieve any of the stated goals, he has aggressively rejected any questioning of his performance. In fact, that is at the core of the issues raised by the Concerned Shareholders in this circular.
Messrs. Durkacz and Saeed challenged Dr. Bokhari’s judgment on a possible transaction. Given the Company’s dire circumstances and need for change, they felt the opportunity merited more consideration. This could have been easily addressed through an ordinary, objective evaluation process. Instead, their concerns were rejected by Dr. Bokhari and their efforts to seek broader engagement on the matter by the Board were frustrated. In this context, it was clear to the Concerned Shareholders that, while Dr. Bokhari and the Collaborating Directors were happy to continue extracting exorbitant sums from the Company as personal compensation, the will and means for implementing the actions needed to turn FSD around were lacking.
The Concerned Shareholders have sought to hold a long-overdue shareholder meeting to allow the shareholders to determine the Company’s future path. Over the past few months, Dr. Bokhari and the Collaborating Directors have made extraordinary efforts to delay and manipulate the outcome of the Meeting. They have issued an extraordinary number of Shares and have awarded themselves excessive and unearned compensation. To bolster their claims of success in advancing the Company’s strategy, they have attempted to hastily undertake ill- conceived transactions in which at least one member of senior management involved in the evaluation process has a personal economic interest.
The Management Circular provides disingenuous explanations of the Board’s actions and strategically omits facts that are inconsistent with these tales. This misleading disclosure is coupled with the Company’s failure to disclose many material matters to Shareholders in the ordinary course, such as the fact that a judge issued an order to prevent Dr. Bokhari and the Collaborating Directors from undertaking any transactions prior to the Meeting.
In reading this Circular and the Management Circular, Shareholders will perceive two different characterizations of events and, rightly, may wonder which description should guide their decisions on how to vote their Shares. What is incontrovertible is that not once but twice since the Concerned Shareholders commenced this process, at their personal expense, courts have intervened to support their requests. Such intervention happens only where there is a perception that to not take such action might harm the interests of Shareholders. Shareholders should consider this as well as the lack of disclosure around material events that has been used to obscure the conduct of Dr. Bokhari and the Collaborating Directors, as well as the consequences of their actions.
At their own expense, the Concerned Shareholders have taken the actions needed to compel the Company to hold the Meeting in a fair and timely fashion. In the ordinary course, such actions should not be necessary. But in this case, the Concerned Shareholders have also been required to act to prevent actions that would have irreparably harmed FSD prior to the Meeting. If the Management Nominees are elected, it should be anticipated that such conduct will continue unchecked.
The Concerned Shareholders ask that you vote your Shares using the
GOLD proxy or
GOLD VIF to support change and help to Restore FSD.