Item
1.01. Entry into a Material Definitive Agreement.
On
December 14, 2020, Torchlight Energy Resources, Inc. (Torchlight) and its newly formed subsidiaries, 2798832 Ontario
Inc. (Canco) and 2798831 Ontario Inc., both Ontario corporations, entered into an Arrangement Agreement (the Agreement)
with Metamaterial Inc., an Ontario corporation headquartered in Nova Scotia, Canada (Metamaterial). Under the Agreement,
Canco is to acquire all of the outstanding common shares of Metamaterial by way of a statutory plan of arrangement under the Business
Corporations Act (Ontario)(the Arrangement), on and subject to the terms and conditions of the Agreement.
The
Agreement provides that the Metamaterial shareholders may elect to receive either shares of Torchlight common stock or shares
of the capital stock of Canco (the Exchangeable Shares) in exchange for such holders Metamaterial common
shares, in each case based on an exchange ratio (the Exchange Ratio) to be determined based on the number of Metamaterial
common shares and shares of Torchlight common stock outstanding as of immediately prior to the effective time of the Arrangement
(the Effective Time). After the Effective Time, each Exchangeable Share will be exchangeable by the holder for one
share of Torchlight common stock (subject to customary adjustments for stock splits or other reorganizations). In addition, Torchlight
may require all outstanding Exchangeable Shares to be exchanged upon the occurrence of certain events and at any time following
the seventh anniversary of the closing of the Arrangement. While outstanding, holders of Exchangeable Shares will be entitled
to cast votes on matters for which holders of Torchlight common stock are entitled to vote, and will be entitled to receive dividends
economically equivalent to the dividends declared by Torchlight with respect to its common stock. Eligibility to receive Exchangeable
Shares will be subject to certain Canadian residency restrictions and tax statuses.
The
Agreement additionally makes provision for the conversion or amendment of other outstanding Metamaterial securities, including
options, deferred share units and warrants, such that they will be exercisable for shares of Torchlight common stock, in each
case with adjustments based on the Exchange Ratio.
Immediately
following the Effective Time, based on the Exchange Ratio, the former shareholders of Metamaterial are anticipated to own approximately
75% of the economic and voting interest of the combined company, with current Torchlight stockholders holding the remaining 25%
economic and voting interest. Following the Effective Time, the combined companys board of directors will be comprised
of seven directors, with five of such directors to be nominees of Metamaterial, one to be jointly nominated by Metamaterial and
Torchlight and one director to be a nominee of Torchlight, subject to the reasonable approval of Metamaterial. Additionally, the
current management of Torchlight will resign and be replaced by George Palikaras as Chief Executive Officer and Kenneth Rice as
Chief Financial Officer.
Under
the Agreement, Torchlight will also submit to its stockholders a proposal to amend Torchlights articles of incorporation
to effect a reverse split to regain and maintain compliance with the listing standards of the NASDAQ Stock Market LLC (the Reverse
Split).
Following
the Reverse Split, and prior to the Effective Time, Torchlight will declare and issue a dividend, on a one-for-one basis, of shares
of preferred stock to the holders of its common stock. Following the Effective Time, the holders of preferred stock will be entitled
to a dividend based on the net proceeds of the sale of any assets that are used or held for use in Torchlights oil and
gas exploration business (the O&G Assets), subject to certain holdbacks. Such asset sales must occur prior to
the earlier of (i) December 31, 2021 or (ii) the date which is six months from the closing of the Arrangement (the Sale
Expiration Date). Following the Sale Expiration Date, subject to certain conditions, the combined company will effect a
spin-off of any remaining O&G Assets with the preferred stockholders to receive their pro rata equity interest in the spin-off
entity.
The
transaction has been unanimously approved by the board of directors of Metamaterial, and shareholders representing 48.06% of
Metamaterials common shares have entered into voting and support agreements in connection with the transaction a form
of which is filed here as Exhibit 10.1. The transaction has also been unanimously approved by the board of directors of
Torchlight, and shareholders representing 16.53% of Torchlights common stock have entered into voting and support
agreements in connection with the transaction.
The
consummation of the Arrangement is subject to certain closing conditions, including without limitation the requirement that (i)
prior to the Effective Time, Torchlight raise gross proceeds of at least $10 million through the issuance of common stock or securities
convertible into or exercisable for common stock, less the aggregate principal amount of and accrued interest on certain loans
Torchlight has made to Metamaterial, and (ii) all debt of Torchlight is converted into shares of its common stock or repaid in
full, provided that if the senior secured debt held by The David A. Straz, Jr. Foundation and by The David A. Straz, Jr. Irrevocable
Trust DTD 11/11/1986, has not been so converted or repaid, then prior to the Effective Time, the terms of such debt will have
been modified such that the debtholders sole recourse in respect thereof will be against the O&G Assets. Other closing
conditions include without limitation the receipt of all required approvals from the shareholders of each of Torchlight and Metamaterial
and from the Ontario Superior Court of Justice (Commercial List), and all other required regulatory approvals, as well as other
customary closing conditions, including the absence of a material adverse effect with respect to either Metamaterial or Torchlight.
The
transaction is expected to close in the first half of 2021 and is to be implemented by way of an arrangement under the Business
Corporations Act (Ontario). The Agreement provides for customary representations, warranties and covenants, including covenants
of each party to (i) subject to certain exceptions, carry on its business in the ordinary course of business consistent with past
practice during the period between the execution of the Agreement and the Effective Time and (ii) not solicit any alternate
transactions or, subject to certain exceptions, to engage in any discussions or negotiations with respect thereto. Subject to
certain terms and conditions, the Agreement may be terminated by either party after March 31, 2021, and if the Agreement is terminated
prior to that date by either party as a result of obtaining a superior proposal from a third party, such terminating party is
required to pay a termination fee of $2,000,000.
Under
the Agreement, Torchlight has also agreed to loan Metamaterial $500,000 no later than five days following execution of the Agreement,
in exchange for an unsecured promissory note in substantially the same form as the 8% Unsecured Convertible Promissory Note that
evidences Torchlights loan to Metamaterial of $500,000 on September 20, 2020. Upon closing, these two bridge loans, including
the aggregate principal and unpaid interest, are to be included in, and credited against, the $10 million pre-closing financing
described above, with such notes to be deemed cancelled and paid in full.
As
previously disclosed in Torchlights current report on Form 8-K filed on September 23, 2020, McCabe Petroleum Corporation,
a company owned by Torchlights chairman Gregory McCabe, loaned Torchlight $1,500,000 on September 18, 2020, evidenced by
a 6% Secured Convertible Promissory, of which $500,000 was deposited into an escrow account. Under the terms of the note, this
$500,000 has been released from escrow to Torchlight, and will be used for the bridge loan described above.
The
description above of the Agreement is qualified in its entirety by reference to the terms of the Agreement, a copy of which is
filed as Exhibit 2.1 hereto and is incorporated herein by reference.
The
Agreement has been included to provide investors and security holders with information regarding its terms. It is not intended
to provide any other factual information about Torchlight, Metamaterial or their respective subsidiaries and affiliates.
The Agreement contains representations and warranties by Torchlight and Metamaterial made solely for the benefit of the parties.
The assertions embodied in those representations and warranties are subject to qualifications and limitations agreed to by the
respective parties in negotiating the terms of the Agreement, including information in confidential disclosure letters delivered
by each party in connection with the signing of the Agreement. Moreover, certain representations and warranties in the Agreement
were made as of a specified date, may be subject to a contractual standard of materiality different from what might be viewed
as material to investors, or may have been used for the purpose of allocating risk between Torchlight and Metamaterial, rather
than establishing matters as facts. Accordingly, the representations and warranties in the Agreement should not be relied
on by any persons as characterizations of the actual state of facts about Torchlight or Metamaterial at the time they were made
or otherwise. In addition, information concerning the subject matter of the representations and warranties may change after the
date of the Agreement, which subsequent information may or may not be fully reflected in Torchlights or Metamaterials
public disclosures.