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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

SCHEDULE 14A

(Rule 14a-101)

INFORMATION REQUIRED IN PROXY STATEMENT

SCHEDULE 14A INFORMATION

Proxy Statement Pursuant to Section 14(a) of the

Securities Exchange Act of 1934

 

 

Filed by the Registrant  ☒                             Filed by a Party other than the Registrant   ☐

Check the appropriate box:

 

  Preliminary Proxy Statement
  Confidential, For Use of the Commission Only (as permitted by Rule 14a-6(e)(2))
  Definitive Proxy Statement
  Definitive Additional Materials
  Soliciting Material Pursuant to §240.14a-12

Torchlight Energy Resources, Inc.

(Name of Registrant as Specified In Its Charter)

 

(Name of Person(s) Filing Proxy Statement, if other than the Registrant)

Payment of Filing Fee (Check the appropriate box):

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  (1)  

Title of each class of securities to which transaction applies:

 

     

  (2)  

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  (3)  

Per unit price or other underlying value of transaction computed pursuant to Exchange Act Rule 0-11 (set forth the amount on which the filing fee is calculated and state how it was determined):

 

     

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Proposed maximum aggregate value of transaction:

 

     

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Total fee paid:

 

     

  Fee paid previously with preliminary materials.
  Check box if any part of the fee is offset as provided by Exchange Act Rule 0-11(a)(2) and identify the filing for which the offsetting fee was paid previously. Identify the previous filing by registration statement number, or the Form or Schedule and the date of its filing.
  (1)  

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Form, Schedule or Registration Statement No.:

 

     

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These materials are important and require your immediate attention. They require the stockholders of Torchlight Energy Resources, Inc. to make important decisions. If you are in doubt as to how to make such decisions, please contact your financial, legal or other professional advisor. If you have any questions, you may contact the proxy solicitation agent, D.F. King & Co., Inc., by telephone at 1 (800) 714-3305 (toll-free in North America) or 1 (212) 269-5550 (collect call outside North America), or by email at TRCH@dfking.com.

TORCHLIGHT ENERGY RESOURCES, INC.

5700 W. Plano Parkway, Suite 3600

Plano, Texas 75093

NOTICE OF SPECIAL MEETING OF STOCKHOLDERS

TO BE HELD JUNE 11, 2021

We hereby give notice that a Special Meeting of Stockholders of Torchlight Energy Resources, Inc. (“Torchlight”) will be held on June 11, 2021, at 9:00 a.m. Central Time (the “Special Meeting”). The purpose of the Special Meeting is to hold a vote of the stockholders of Torchlight regarding:

(1) the issuance of up to approximately 455,000,000 shares of Torchlight common stock, prior to effecting any reverse split of Torchlight’s common stock as contemplated herein, in connection with a proposed arrangement (the “Arrangement”) with Metamaterial Inc. (“Meta”), pursuant to which Torchlight will acquire Meta, in accordance with the requirements of the NASDAQ Stock Market LLC (the “Arrangement Proposal”);

(2) the adoption of an amendment to the Articles of Incorporation of Torchlight (the “Articles Amendment Proposal”), in the form attached hereto as Annex L, to increase the authorized shares of Torchlight’s (a) common stock from 150,000,000 shares to 1,000,000,000 shares and (b) preferred stock from 10,000,000 shares to 200,000,000 shares;

(3) the adoption of Amended and Restated Articles of Incorporation, in the form attached hereto as Annex M, in connection with the Arrangement, for the following purposes (the “Articles Amendment and Restatement Proposal”):

 

  (a)

to implement a reverse split of Torchlight’s common stock within a range from 1-for-2 to 1-for-20, with the exact ratio of the reverse stock split to be determined by the Board of Directors of Torchlight (the “Torchlight Board”); and

 

  (b)

to change the name of Torchlight to Meta Materials Inc.

(4) the approval of the postponement or adjournment of the Special Meeting to solicit additional proxies if there are not sufficient votes to approve the Arrangement Proposal and/or the Articles Amendment and Restatement Proposal, if deemed necessary or appropriate by the Torchlight Board (the “Adjournment Proposal”); and

(5) the approval, on a non-binding, advisory basis, of certain compensation that will or may become payable to Torchlight’s named executive officers that is based on or otherwise relates to the Arrangement (the “Advisory Proposal”).

Each of the Arrangement Proposal, the Articles Amendment Proposal and the Articles Amendment and Restatement Proposal will not be effected, and the Arrangement will not be completed, without the approval by the Torchlight stockholders of all such proposals. No other business may be transacted at the Special Meeting.

Due to the public health impact of the COVID-19 pandemic and to support the health and well-being of our employees and stockholders, the Special Meeting will be held in a virtual meeting format at www.virtualshareholdermeeting.com/TRCH2021.


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In addition to voting by submitting your proxy prior to the Special Meeting, you also will be able to vote your shares electronically during the Special Meeting. Further details regarding the virtual meeting are included in the accompanying proxy statement.

Under Nevada law, only stockholders of record on the record date, which is May 5, 2021, are entitled to notice of, and to vote at, the Special Meeting or any adjournment. It is important that your shares be represented at this meeting so that the presence of a quorum is assured.

The Torchlight Board has unanimously concluded that the Arrangement is in the best interests of Torchlight and its stockholders and has approved and authorized the Arrangement. The Torchlight Board unanimously recommends that the stockholders vote FOR (a) the Arrangement Proposal, (b) the Articles Amendment Proposal, (c) the Articles Amendment and Restatement Proposal, (d) the Adjournment Proposal and (e) the Advisory Proposal.

Your vote is important. Even if you plan to virtually attend the Special Meeting, please date and execute the enclosed proxy and return it promptly in the enclosed postage-paid envelope as soon as possible. If you attend the Special Meeting, you may revoke your proxy and vote your shares during the Special Meeting.

If you have any questions or need assistance in your consideration of the Arrangement or with the completion and delivery of your proxy, please contact Torchlight’s proxy solicitation agent, D.F. King & Co., Inc., by telephone at 1 (800) 714-3305 (toll-free in North America) or 1 (212) 269-5550 (collect call outside North America), or by email at TRCH@dfking.com.

IF YOU PLAN TO ATTEND:

To be admitted to the Special Meeting at www.virtualshareholdermeeting.com/TRCH2021 you must have your control number available and follow the instructions found on your proxy card or voting instruction form. You may vote during the Special Meeting by following the instructions available on the Special Meeting website during the Special Meeting. Please allow sufficient time before the Special Meeting to complete the online check-in process. Your vote is very important.

 

      By Order of the Board of Directors,
May 10, 2021          LOGO
      John A. Brda
      President, Chief Executive Officer and Director

 

Important Notice Regarding the Availability of Proxy Materials for the Special Meeting of Stockholders to be held June 11, 2021.

 

The proxy statement and form of proxy card are available at: ir.torchlightenergy.com

 


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TORCHLIGHT ENERGY RESOURCES, INC.

5700 W. Plano Parkway, Suite 3600

Plano, Texas 75093

PROXY STATEMENT

FOR THE

SPECIAL MEETING OF STOCKHOLDERS

To be held on June 11, 2021

Unless the context requires otherwise, references in this proxy statement to “Torchlight,” “TRCH,” “we,” “us” or “our” refers to Torchlight Energy Resources, Inc.

The Board of Directors of Torchlight (the “Torchlight Board”) is soliciting your proxy to vote at the Special Meeting to be held on June 11, 2021, at 9:00 a.m. Central Time, in a virtual online format by accessing www.virtualshareholdermeeting.com/TRCH2021 and at any adjournment thereof.

This proxy statement contains information relating to the Special Meeting, which will be held as a virtual meeting. Stockholders attending the Special Meeting will be afforded the same rights and opportunities to participate as they would at an in-person meeting. You will be able to attend and participate in the Special Meeting online via a live webcast by visiting www.virtualshareholdermeeting.com/TRCH2021. In addition to voting by submitting your proxy prior to the Special Meeting, you also will be able to vote your shares electronically during the Special Meeting.

The purpose of the Special Meeting is to hold a vote of Torchlight’s stockholders regarding the following proposals:

(1) to approve the issuance of up to approximately 455,000,000 shares of Torchlight common stock, prior to effecting any reverse split of Torchlight’s common stock as contemplated herein, in connection with a proposed arrangement (the “Arrangement”) with Metamaterial Inc. (“Meta”), pursuant to which Torchlight will acquire Meta, in accordance with the requirements set out under the NASDAQ Stock Market LLC (“NASDAQ”) (the “Arrangement Proposal”);

(2) the adoption of an amendment to the Articles of Incorporation of Torchlight (the “Articles Amendment Proposal”), in the form attached hereto as Annex L, to increase the authorized shares of Torchlight’s (a) common stock from 150,000,000 shares to 1,000,000,000 shares and (b) preferred stock from 10,000,000 shares to 200,000,000 shares;

(3) to adopt Amended and Restated Articles of Incorporation, in the form attached hereto as Annex M, in connection with the Arrangement, for the following primary purposes (the “Articles Amendment and Restatement Proposal”):

 

  (a)

to implement a reverse split of Torchlight’s common stock within a range from 1-for-2 to 1-for-20, with the exact ratio of the reverse stock split to be determined by the Torchlight Board; and

 

  (b)

to change the name of Torchlight to Meta Materials Inc.

(4) to approve the postponement or adjournment of the Special Meeting to solicit additional proxies if there are not sufficient votes to approve the Arrangement Proposal and/or Articles Amendment and Restatement Proposal, if deemed necessary or appropriate by the Torchlight Board (the “Adjournment Proposal”); and

(5) to approve, on a non-binding, advisory basis, certain compensation that will or may become payable to Torchlight’s named executive officers that is based on or otherwise relates to the Arrangement (the “Advisory Proposal”).

Each of the Arrangement Proposal, the Articles Amendment Proposal and the Articles Amendment and Restatement Proposal will not be effected, and the Arrangement will not be completed, without the approval by the Torchlight stockholders of all such proposals.


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The Torchlight Board unanimously recommends that the stockholders vote “FOR” the Arrangement Proposal, the Articles Amendment Proposal, the Articles Amendment and Restatement Proposal, the Adjournment Proposal and the Advisory Proposal.

Whether or not you expect to attend the Special Meeting, we urge you to vote your shares via proxy at your earliest convenience. This will ensure the presence of a quorum at the Special Meeting. Promptly voting your shares will save us the expenses and extra work of additional solicitation. Submitting your proxy now will not prevent you from voting your shares at the Special Meeting if you desire to do so, as your proxy is revocable at your option. Your vote is important, so please act today.

Information Concerning the Special Meeting

Mailing and Solicitation. Proxies are being solicited on behalf of the Torchlight Board. This proxy statement and accompanying form of proxy card will be sent on or about May 10, 2021 to stockholders entitled to vote at the Special Meeting. The cost of the solicitation of proxies will be paid by Torchlight. The solicitation is to be made primarily by mail but may be supplemented by telephone calls and personal solicitation by D.F. King or our officers and other employees.

Proxies. Whether or not you plan to attend the Special Meeting, we request that you promptly submit the enclosed proxy card and vote your shares pursuant to the voting instructions therein. A control number, located on the proxy card, is designed to verify your identity, allow you to vote your shares, and confirm that your voting instructions have been properly recorded.

If your shares are registered in the name of a bank, broker, or other nominee, follow the proxy instructions on the form you receive from the nominee. The availability of telephone and internet proxy will depend on the nominee’s proxy processes. Under the NASDAQ Listing Rules, brokers who hold shares in “street name” for customers are precluded from exercising voting discretion with respect to the approval of non-routine matters (so called “broker non-votes”) where the beneficial owner has not given voting instructions. With respect to the Arrangement Proposal, the Articles Amendment Proposal, the Articles Amendment and Restatement Proposal, the Adjournment Proposal and the Advisory Proposal, a broker is not entitled to vote shares of Torchlight common stock unless the beneficial owner has given instructions.

Revocation of Proxies. You may revoke your proxy at any time before a vote is taken by notifying our Secretary in writing at our address given above, by executing a new proxy bearing a later date or by submitting a new proxy by telephone or internet; or by virtually attending the Special Meeting and voting during the meeting.

Voting in Accordance with Instructions. The shares represented by your properly completed proxy will be voted in accordance with your instructions marked on it. If you properly sign, date, and deliver to us your proxy but you mark no instructions on it, the shares represented by your proxy will be voted for the Arrangement Proposal, the Articles Amendment Proposal, the Articles Amendment and Restatement Proposal, the Adjournment Proposal and the Advisory Proposal.

Quorum and Voting Rights. The presence at the Special Meeting virtually or by proxy of a majority of the outstanding shares entitled to vote on the record date constitutes a quorum for purposes of voting on a particular matter and conducting business at the Special Meeting. Torchlight’s common stock is its only class of stock that is issued and outstanding. Each share of our common stock entitles its holder to one vote.

Required Vote. Assuming a quorum is present, the affirmative vote of a majority of the shares entitled to vote that are present at the Special Meeting virtually or represented by proxy is required for the approval of the Arrangement Proposal, the Adjournment Proposal (though no quorum is required for the Adjournment Proposal) and the Advisory Proposal. The Articles Amendment Proposal and the Articles Amendment and Restatement Proposal will be approved if a majority of the outstanding shares of Torchlight common stock vote for such proposals. Abstentions will be counted for purposes of determining the presence or absence of a quorum. A broker non-vote will be counted for purposes of establishing a quorum if the beneficial owner whose failure to


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provide voting instructions with respect to a particular proposal that has resulted in such broker non-vote has instructed such beneficial owner’s nominee how to vote with respect to at least one other proposal to be voted on at the Special Meeting. Otherwise, a broker non-vote does not count for purposes of establishing a quorum. Abstentions will not be counted as having voted either for or against any proposal contemplated at the Special Meeting, but will have the same effect as a vote against all of the proposals at the Special Meeting. Broker non-votes will not be counted as having voted either for or against any proposal contemplated at the Special Meeting, but will have the same effect as a vote against the Articles Amendment Proposal and the Articles Amendment and Restatement Proposal and will have no effect on the Arrangement Proposal, Adjournment Proposal or the Advisory Proposal.

Record Date. The close of business on May 5, 2021 has been fixed as the record date of the Special Meeting, and only stockholders of record at that time will be entitled to vote. As of May 5, 2021, there were 145,563,667 shares of our common stock issued and outstanding and entitled to vote at the Special Meeting. Only record holders and beneficial owners who held shares on the record date, or their duly authorized proxies, may attend the Special Meeting.

No Dissenters’ Rights. Under the Nevada Revised Statutes, stockholders are not entitled to dissenters’ rights with respect to the matters to be voted on at the Special Meeting.


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TABLE OF CONTENTS

 

     Page  

Information Contained in this Proxy Statement

     1  

Cautionary Note Regarding Forward-Looking Statements

     2  

Currency and Exchange Rates

     3  

Reporting Currencies and Accounting Principles

     3  

Glossary of Defined Terms

     4  

Questions and Answers

     26  

Questions and Answers in Connection with the Special Meeting

     26  

Questions and Answers in Connection with the Arrangement and Related Transactions

     30  

Summary of the Arrangement

     38  

Parties

     38  

Purpose and Description of the Arrangement

     39  

Background of the Arrangement

     41  

Fairness Opinion

     41  

Reasons for the Arrangement

     42  

Recommendation of the Torchlight Board

     42  

Principal Steps of the Arrangement

     42  

Required Stockholder Approval for the Arrangement

     44  

Voting and Support Agreement

     44  

Expenses of the Arrangement

     44  

Court Approval of the Arrangement

     44  

The Arrangement Agreement

     45  

Completion of the Arrangement

     45  

Non-Solicitation of Acquisition Proposals

     45  

Termination of the Arrangement Agreement

     46  

Interests of Certain Persons in the Arrangement

     46  

Risk Factors

     46  

Risk Factors

     47  

Risks Related to the Arrangement

     47  

Risks Related to the Meta Business (the Primary Business of the Combined Company)

     50  

Information About Meta

     57  

Business Description

     57  

Market Price of Common Stock and Dividends and Related Matters of Meta

     63  

Management’s Discussion & Analysis

     65  

Changes In and Disagreements with Accountants on Accounting and Financial Disclosure

     74  

Qualitative and Quantitative Disclosures About Market Risk

     75  

Statement of Meta Executive Compensation

     76  

Unaudited Pro Forma Financial Information

     88  

Balance Sheet and Statement of Operations

     90  

Notes

     93  

The Arrangement

     97  

Purpose and Description of the Arrangement

     97  

Principal Steps of the Arrangement

     99  

Voting and Support Agreements

     101  

Expenses of the Arrangement

     103  

Court Approval of the Arrangement

     103  

Background of the Arrangement

     104  

Reasons for the Arrangement

     109  

Recommendation of the Torchlight Board

     110  

 

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     Page  

Fairness Opinion

     110  

Unaudited Financial Forecasts

     118  

Differences in the Rights of Securityholders

     122  

Accounting Treatment of the Transaction

     122  

Federal Income Tax Consequences of the Transaction

     122  

Regulatory Approvals

     124  

Federal Securities Law Consequences; Resale Restrictions

     124  

Appraisal and Dissenters’ Rights

     125  

Interests of Certain Persons in the Arrangement

     127  

The Arrangement Agreement

     134  

Representations and Warranties

     134  

Torchlight Business Sale

     135  

Preferred Stock Dividend

     136  

Conduct of Business of Meta

     136  

Conduct of Business of Torchlight

     138  

Regulatory Approvals

     140  

Stock Exchange and Securities Laws Matters

     141  

Board of Directors and Officers

     142  

Conditions for Completion of the Arrangement

     142  

Notice and Cure

     145  

Additional Covenants Regarding Non-Solicitation

     145  

Termination of Arrangement Agreement

     149  

Termination Payment Amount

     150  

Supplementary Bridge Financing

     151  

Amendment of the Arrangement Agreement

     152  

Description of Exchangeable Shares, Series A Preferred Stock and Related Agreements

     153  

Exchangeable Shares

     153  

Voting and Exchange Trust Agreement

     157  

Support Agreement

     158  

Series A Preferred Stock

     161  

Proposal 1: Approval of the Issuance of the Consideration Shares

     165  

Proposal 2: Approval of the Amendment of Torchlight’s Amended Articles of Incorporation

     167  

Proposal 3: Approval of the Amendment and Restatement of Torchlight’s Amended Articles of Incorporation

     169  

Proposal 4: Approval of the Authority to Adjourn the Special Meeting

     173  

Proposal 5: Advisory Vote to Approve the Arrangement-Related Named Executive Officer Compensation

     174  

Meta Historical Financial Statements

     175  

Stockholder Proposals

     176  

Incorporation By Reference

     177  

Annexes

     A-1  

 

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INFORMATION CONTAINED IN THIS PROXY STATEMENT

The information contained in this proxy statement, unless otherwise indicated, is given as of May 5, 2021.

No person has been authorized to give any information or to make any representation in connection with the matters being considered herein on behalf of Torchlight other than those contained in this proxy statement and, if given or made, such information or representation should not be considered or relied upon as having been authorized. This proxy statement does not constitute an offer to sell, or a solicitation of an offer to acquire, any securities, or the solicitation of a proxy, by any person in any jurisdiction in which such an offer or solicitation is not authorized or permitted or in which the person making such offer or solicitation is not qualified to do so or to any person to whom it is unlawful to make such an offer or proxy solicitation. Neither the delivery of this proxy statement nor any distribution of securities referred to herein should, under any circumstances, create any implication that there has been no change in the information set forth herein since the date of this proxy statement.

Information contained in this proxy statement should not be construed as legal, tax or financial advice and Torchlight stockholders are urged to consult their own professional advisors in connection with the matters considered in this proxy statement.

THE ARRANGEMENT HAS NOT BEEN RECOMMENDED BY, OR APPROVED OR DISAPPROVED BY THE UNITED STATES SECURITIES AND EXCHANGE COMMISSION OR THE SECURITIES REGULATORY AUTHORITY OF ANY U.S. STATE NOR HAS ANY OF THEM PASSED UPON THE FAIRNESS OR MERITS OF THE ARRANGEMENT OR THE ACCURACY OR ADEQUACY OF THIS PROXY STATEMENT. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.

 

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CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS

This proxy statement, the documents to which we refer you in this proxy statement and information included in oral statements or other written statements made or to be made by us or on our behalf may include predictions, estimates and other information that are “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995, Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”) and Section 27A of the Securities Act of 1933, as amended (the “Securities Act”). These forward-looking statements do not directly or exclusively relate to historical facts, including, without limitation, statements relating to the completion of the Arrangement. Without limiting the generality of the foregoing, words such as “anticipate,” “believe,” “can,” “continue,” “could,” “estimate,” “expect,” “intend,” “may,” “plan,” “potential,” “predict,” “should,” “will,” “would,” or the negative or other variations thereof or comparable terminology are intended to identify forward-looking statements. Stockholders are cautioned that any forward-looking statements are not guarantees of future performance. These statements are based on the beliefs of the management of Torchlight or Meta, as the case may be, as well as the current expectations and assumptions, which such management believes to be reasonable, based on available information and involve a number of risks and uncertainties, all of which are difficult or impossible to predict accurately and many of which are beyond our control. As such, our actual results may differ significantly from those expressed in any forward-looking statements.

These risks and uncertainties include, but are not limited to, factors and matters described or incorporated by reference in this proxy statement and the following factors: (1) the ability of the Parties to consummate the Arrangement, (2) risks that the conditions to the closing of the Arrangement are not satisfied, including the risk that required approvals for the Arrangement from governmental authorities or the stockholders of both Torchlight and Meta are not obtained; (3) litigation relating to the Arrangement; (4) unexpected costs, charges or expenses resulting from the Arrangement; (5) risks that the proposed Arrangement disrupts the current plans and operations of Torchlight and Meta; (6) the ability to realize anticipated benefits from the Arrangement; (7) competition from larger and more established companies in the Combined Company’s markets; (8) the Combined Company’s ability to successfully grow following the closing of the Arrangement; (9) potential adverse reactions or changes to business relationships resulting from the completion of the Arrangement; (10) the availability and terms of the financing to be incurred in connection with the Arrangement; and (11) legislative, regulatory and economic developments, including changing business conditions in the industries in which Torchlight and Meta operate and the economy in general as well as financial performance and expectations of Torchlight and Meta’s existing and prospective customers. Additional factors that may affect the future results of the Combined Company are set forth in filings that Torchlight makes with the SEC from time to time, including its Annual Report on Form 10-K for the year ended December 31, 2020, which is available on the SEC’s website at www.sec.gov, as well as under the “Risk Factors” section of this proxy statement.

In light of the significant risks and uncertainties inherent in the forward-looking information included herein, the inclusion of such information should not be regarded as a representation by us or any other person that such results will be achieved, and readers are cautioned not to place undue reliance on such forward-looking information, which speak only as of the date hereof. Except as required by law, we undertake no obligation to revise the forward-looking statements contained herein to reflect events or circumstances after the date hereof or to reflect the occurrence of unanticipated events. For all of these reasons, Torchlight stockholders should not place undue reliance on forward-looking statements.

 

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CURRENCY AND EXCHANGE RATES

Unless otherwise indicated herein, references to “$”, “US$” or “United States dollars” are to United States dollars, and references to “CAD$” or “Canadian dollars” are to Canadian dollars.

The rate of exchange on May 5, 2021 as reported by the Bank of Canada for the conversion of Canadian dollars into United States dollars was CAD$1.00 equals US$0.8149 and for the conversion of United States dollars into Canadian dollars was US$1.00 equals CAD$1.2272.

The following table sets forth, for each of the periods indicated, the high, low and average spot rates for US$1.00 in terms of Canadian dollars, as reported by the Bank of Canada.

 

     Year ended
December 31,
2020

(CAD$)
     Year ended
December 31,
2019

(CAD$)
     Year ended
December 31,
2018

(CAD$)
 

High

     1.4496        1.3600        1.3642  

Low

     1.2718        1.2988        1.2288  

Average

     1.3415        1.3269        1.2957  

REPORTING CURRENCIES AND ACCOUNTING PRINCIPLES

The historical financial statements of Meta included in this proxy statement are prepared in accordance with IFRS and are reported in Canadian dollars. The pro forma unaudited condensed financial statements of the Combined Company included in this proxy statement are reported in United States dollars and have been prepared in accordance with GAAP.

 

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GLOSSARY OF DEFINED TERMS

In this proxy statement, unless otherwise defined herein or unless there is something in the subject matter inconsistent therewith, the following terms have the respective meanings set out below, words importing the singular number include the plural and vice versa and words importing any gender include all genders.

 

“Acceptable Confidentiality Agreement”    means a confidentiality agreement between either Meta or Torchlight and a third party other than Torchlight or Meta, respectively: (a) that is entered into in accordance with the Arrangement Agreement; and (b) that contains confidentiality and standstill restrictions that are no less restrictive than those set out in the Confidentiality Agreement.
“ACOA”    has the meaning ascribed thereto under the heading “Information about Meta — Business Description — Overall Performance, Industry Trends and Economic Factors.”
“ACOA Contribution”    has the meaning ascribed thereto under the heading “Information about Meta — Business Description — Overall Performance, Industry Trends and Economic Factors.”
“Acquisition Proposal”    means, with respect to Meta, a Meta Acquisition Proposal, and, with respect to Torchlight, a Torchlight Acquisition Proposal.
“Additional Bridge Financing”    means a bridge loan of a minimum of $5,000,000 provided by Torchlight to Meta upon the closing of the Pre-Closing Financing, on substantially the same terms as the Bridge Notes, which was satisfied on February 22, 2021 pursuant to a $10,000,000 note issued by Meta to Torchlight.
“Alternative Acquisition Agreement”    has the meaning ascribed thereto under the heading “The Arrangement Agreement — Notification of Acquisition Proposal.”
“Ancillary Rights”    means the interest of a holder of Exchangeable Shares as a beneficiary of the trust created under the Voting and Exchange Trust Agreement.
“Arrangement”    means the arrangement under the provisions of the OBCA on the terms and conditions set out in the Arrangement Agreement and Plan of Arrangement, subject to any amendments or variations thereto made in accordance therewith or in accordance with the Arrangement Agreement or made at the direction of the Court in the Final Order.
“Arrangement Agreement”    means the Arrangement Agreement, dated December 14, 2020, by and among Torchlight, Callco, Canco and Meta, as amended by the Amendment to Arrangement Agreement, dated February 3, 2021, the Second Amendment to Arrangement Agreement, dated March 11, 2021, the Third Amendment to Arrangement Agreement, dated March 31, 2021, the Fourth Amendment to Arrangement Agreement, dated April 15, 2021, and the Fifth Amendment to Arrangement Agreement, dated May 2, 2021, substantially in the form attached as Annex B.
“Asset Sale Dividend”    means a Net Proceeds Dividend, a Holdback Dividend or a Spin-Off Dividend, as applicable.
“Asset Sale Expiration Date”    means the earlier to occur of (a) the date that is six months from the Effective Date or (b) December 31, 2021, or such later date as may be agreed between the Combined Company and the Series A Preferred Representative ..
“Asset Sale Transaction”    means one or more transactions consummated at any time prior to the Asset Sale Expiration Date pursuant to which Torchlight, the Combined Company or any of its affiliates sells, farms out or otherwise transfers to a third party some or all of the O&G Assets.

 

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“Authorization”    means any authorization, order, permit, approval, grant, license, registration, consent, right, notification, condition, franchise, privilege, certificate, judgment, writ, injunction, award, determination, direction, decision, decree, bylaw, rule or regulation, whether or not having the force of Law, and includes any environmental Permit.
“Automatic Exchange Right”    has the meaning ascribed thereto under the heading “Description of Exchangeable Shares, Series A Preferred Stock and Related Agreements — Automatic Exchange upon Liquidation of the Combined Company.”
“Bridge Loan”    has the meaning ascribed thereto under the heading “Information about Meta — Business Description — Overall Performance, Industry Trends and Economic Factors.
“Bridge Notes”    means the Unsecured Convertible Promissory Notes of Meta for the benefit of Torchlight, dated September 20, 2020 and December 16, 2020, having an aggregate principal amount of $1,000,000.
“Bylaws”    means the bylaws of Torchlight, as amended, and as currently in effect.
“Call Rights”    means collectively the rights of Callco or the Combined Company to purchase Exchangeable Shares pursuant to the Redemption Call Right and the Liquidation Call Right and the right of the Combined Company or Callco to purchase Exchangeable Shares pursuant to the Change of Law Call Right and the right of Callco or the Combined Company to purchase Exchangeable Shares pursuant to the Retraction Call Right.
“Callco”    means 2798831 Ontario Inc., an Ontario corporation.
“Canadian Resident”    means (a) a Person who is not a non-resident of Canada for the purposes of the Tax Act, or (b) a partnership that is a “Canadian partnership” for purposes of the Tax Act.
“Canco”    means Metamaterial Exchangeco Inc. (formerly named 2798832 Ontario Inc.), an Ontario corporation.
“Canco Insolvency Event”    means (a) the institution by Canco of any proceeding to be adjudicated, a bankrupt or insolvent or to be wound up, or the consent of Canco to the institution of bankruptcy, insolvency or winding-up proceedings against it, or (b) the filing of a petition, answer or consent seeking dissolution or winding-up under any bankruptcy, insolvency or analogous laws, including the Companies Creditors’ Arrangement Act (Canada) and the Bankruptcy and Insolvency Act (Canada), and the failure by Canco to contest in good faith any such proceedings commenced in respect of Canco within 30 days of becoming aware thereof, or the consent by Canco to the filing of any such petition or to the appointment of a receiver, or (c) the making by Canco of a general assignment for the benefit of creditors, or the admission in writing by Canco of its inability to pay its debts generally as they become due, or (d) Canco not being permitted, pursuant to solvency requirements of applicable law, to redeem any Retracted Shares.
“Certificate of Arrangement”    means the certificate of arrangement to be issued pursuant to subsection 183(2) of the OBCA.
“CGU”    has the meaning ascribed thereto under the heading “Information about Meta — Management’s Discussion and Analysis — Impairment of Non-Financial Assets.”
“Change in Recommendation”    means, with respect to Meta, a Meta Change in Recommendation and, with respect to Torchlight, a Torchlight Change in Recommendation.

 

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“Change of Law”    means any amendment to the Tax Act and other applicable provincial income tax laws that permits holders of Exchangeable Shares who are Canadian Residents to hold the Exchangeable Shares as capital property, and deal at arm’s length with the Combined Company and Canco (all for the purposes of the Tax Act and other applicable provincial income tax laws) to exchange their Exchangeable Shares for Combined Company Shares on a basis that will not require such holders to recognize any gain or loss or any actual or deemed dividend in respect of such exchange for the purposes of the Tax Act or applicable provincial income tax laws.
“Change of Law Call Right”    has the meaning ascribed thereto under the heading “Description of Exchangeable Shares, Series A Preferred Stock and Related Agreements — Change of Law Call Right.”
“Closing”    means the completion of the Arrangement.
“COC Severance Period”    has the meaning ascribed thereto under the heading “Information About Meta — Statement of Meta Executive Compensation.”
“Code”    has the meaning ascribed thereto under the heading “The Arrangement — Federal Tax Consequences of the Transaction.”
“Combined Company”    means the consolidated businesses of Torchlight and Meta following the Effective Time.
“Combined Company Business Costs”    means the costs, fees, expenses and other items referred to in clauses (c) through (h) of the definition of “Net Proceeds.”
“Combined Company Liquidation Event”    means (a) any determination by the board of directors of the Combined Company to institute voluntary liquidation, dissolution or winding-up proceedings with respect to the Combined Company or to effect any other distribution of assets of the Combined Company among its shareholders for the purpose of winding up its affairs; or (b) receipt by the Combined Company of notice of, or the Combined Company otherwise becoming aware of, any instituted claim, suit, petition or other proceedings with respect to the involuntary liquidation, dissolution or winding-up of the Combined Company or to effect any other distribution of assets of the Combined Company among its shareholders for the purpose of winding up its affairs, in each case where the Combined Company has failed to contest in good faith any such proceeding commenced in respect of the Combined Company within 30 days of becoming aware thereof.
“Combined Company Sale Representative”    means a member of the board of directors of the Combined Company who is appointed to serve as a Sale Representative in connection with any Asset Sale Transactions pursued by the Combined Company after the Effective Date.
“Combined Company Control Transaction”    means (a) any merger, amalgamation, arrangement, take-over bid or tender offer, material sale of shares or rights or interests therein or thereto or similar transactions involving the Combined Company that results in the holders of outstanding voting securities of the Combined Company immediately prior to such transaction directly or indirectly owning, or exercising control or direction over, voting securities representing less than 50% of the total voting power of all of the voting securities of the surviving entity outstanding immediately after such transaction; or (b) any sale or disposition of all or substantially all of the Combined Company’s assets; provided however that a Combined Company Control Transaction shall not refer to (x) an Asset Sale Transaction or (y) the reincorporation of the Combined Company under the laws of the state of Delaware.

 

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“Combined Company Shares”    means the shares of common stock of the Combined Company.
“Commitment Letter”    has the meaning ascribed thereto under the heading “Information about Meta — Business Description — Overall Performance, Industry Trends and Economic Factors.”
“Confidentiality Agreement”    means the confidentiality agreement between Meta and Torchlight dated September 4, 2020.
“Consideration”    means the Torchlight Share Consideration and the Exchangeable Share Consideration, as applicable.
“Consideration Shares”    means up to approximately 455,000,000 Torchlight Shares to be issued in connection with the Arrangement, prior to effecting any reverse split of Torchlight Shares as contemplated herein, which includes the Torchlight Shares that would be issuable upon conversion or exchange of Meta Securities that will become convertible into or exchangeable for Torchlight Shares in connection with the Arrangement and Torchlight Shares that would be issuable upon exchange of the Exchangeable Shares.
“Consulting Agreement”    has the meaning ascribed thereto under the heading “The Arrangement — Interests of Certain Persons in the Arrangement.”
“Contract”    means any contract, agreement, license, franchise, lease, arrangement, commitment, joint venture, partnership or other right or obligation (written or, to the extent enforceable, oral) to which a Party or any of its subsidiaries is a party or by which it or any of its subsidiaries is bound or to which any of their respective properties or assets is subject.
“Court”    means the Ontario Superior Court of Justice (Commercial List).
“CPM”    has the meaning ascribed thereto under the heading “Information about Meta — Business Description — Company Overview.”
“CPM Subco”    has the meaning ascribed thereto under the heading “Information about Meta — Business Description — Company Overview.”
“CSE”    means the Canadian National Stock Exchange (operating as the Canadian Securities Exchange).
“Current Market Price”    means, in respect of a Combined Company Share on any date, the quotient obtained by dividing (a) the aggregate of the Daily Value of Trades for each day during the period of 20 consecutive trading days ending three trading days before such date; by (b) the aggregate volume of the Combined Company Shares used to calculate such Daily Value of Trades.
“Daily Value of Trades”    means, in respect of the Combined Company Shares on any trading day, the product of (a) the Canadian Dollar Equivalent (as defined in the terms of the Exchangeable Shares) of the volume weighted average price of Torchlight Shares on NASDAQ (or, if the Combined Company Shares are not listed on NASDAQ, the volume weighted average price of Combined Company Shares on such other stock exchange or automated quotation system on which the Combined Company Shares are listed or quoted, as the case may be, as determined by the Combined Company for such purpose) on such date; and (b) the aggregate volume of the Combined Company Shares traded on such day on NASDAQ or such other stock exchange or automated quotation system and used to calculate such volume

 

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   weighted average price; provided that any such selections by the Combined Company shall be conclusive and binding.
“Depository”    means AST Trust Company (Canada) or such other person appointed by Meta and Torchlight (each acting reasonably), for the purpose of, among other things, exchanging certificates representing Meta Shares for the Consideration.
“D.F. King”    means D.F. King & Co., Inc.
“Dissent Notice”    has the meaning ascribed thereto under the heading “The Arrangement — Appraisal and Dissenters Rights.”
“Dissent Rights”    means the rights of dissent exercisable by of the Meta shareholders under Section 185 of the OBCA or as otherwise determined by the Court in the Interim Order in respect of the Meta Arrangement Resolution.
“Dissenting Shareholder”    means a Meta shareholder who has validly exercised Dissent Rights and has not withdrawn or been deemed to have withdrawn such exercise of Dissent Rights, but only in respect of the Meta Shares in respect of which Dissent Rights are validly exercised by such Meta shareholder.
“Dividend Amount”    means an amount equal to all declared and unpaid dividends on an Exchangeable Share held by a holder thereof on any dividend record date which occurred prior to the date of purchase, redemption or other acquisition of such share by Callco, Canco or the Combined Company from such holder.
“Dividend Declaration Date”    has the meaning ascribed thereto under the heading “Description of Exchangeable Shares, Series A Preferred Stock and Related Agreements — Dividends and Other Distributions.”
“Dodd-Frank Act”    means the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010.
“EBITDA”    means earnings before interest, taxes, depreciation and amortization.
“Effective Date”    means the effective date of the Arrangement as shown on the Certificate of Arrangement.
“Effective Time”    means 12:00 a.m. (Toronto time) on the Effective Date.
“Election Deadline”    means prior to 12:00 p.m. (Toronto time) on March 31, 2021, subject to any waiver or extension thereof by Meta in its discretion.
“Eligible Holder”    means a Meta shareholder who is (a) a Canadian Resident, and (b) not exempt from tax under Part I of the Tax Act (or, in the case of a partnership, none of the partners of which is exempt from tax under Part I of the Tax Act). Accordingly, an Eligible Holder does not include a Meta shareholder who holds their Meta Shares in a registered plan.
“Employee Plan”    means all benefit or compensation plans, programs, policies, practices, contracts, agreements or other arrangements, covering current or former employees, directors or consultants of a Party, including without limitation employment, consulting, deferred compensation, equity, benefit, bonus, incentive, pension, retirement, savings, stock purchase, profit sharing, stock option, stock appreciation, phantom stock, termination, change of control, life insurance, medical, health, welfare, hospital, dental, vision care, drug, sick leave, disability, and similar plans, programs, arrangements or practices, whether or not in writing and whether or not funded, in each case, which is sponsored, maintained or contributed to by a Party or any of

 

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   its affiliates, or to which a Party or any of its affiliates is obligated to contribute, or with respect to which a Party or any of its affiliates has any liability, direct or indirect, contingent or otherwise, other than benefit plans established pursuant to statute.
“Encumbrances”    has the meaning ascribed thereto in the Arrangement Agreement.
“Exchange Act”    means the Securities Exchange Act of 1934, as amended, and the rules and regulations promulgated thereunder from time to time.
“Exchange Ratio”   

means the number of Torchlight Shares that a Meta shareholder will receive at the Effective Time in exchange for each one (1) Meta Share held, determined as follows:

 

A = B/C

 

where

 

A = the number of Torchlight Shares to be received in exchange for each one (1) Meta Share, rounded to three decimal places;

 

B = the Meta shareholders’ proportionate share of the total pro forma number of Torchlight Shares to be outstanding upon completion of the Arrangement, which for greater certainty will be equal to 75% of the total pro forma number of outstanding Torchlight Shares upon completion of the Arrangement (including any Torchlight Shares issued by Torchlight pursuant to the Working Capital Financing, which are intended to be 100% dilutive to Torchlight stockholders, but excluding any Torchlight Shares issued by Torchlight pursuant to the Pre-Closing Financing, which are intended to be proportionally dilutive to each party at 75% to Meta shareholders and 25% to Torchlight stockholders), subject to further adjustment upward for any other Torchlight Shares issued or issuable prior to the Effective Time that are intended to be 100% dilutive to Torchlight stockholders; and

 

C = the number of Meta Shares outstanding immediately prior to the Effective Time.

“Exchange Right”    has the meaning ascribed thereto under the heading “Description of Exchangeable Shares, Series A Preferred Stock and Related Agreements — Exchange Upon Canco Insolvency Event.”
“Exchangeable Elected Shares”    means Meta Shares (other than Meta Shares held by Torchlight or an affiliate) that the holder thereof shall have elected, in accordance with the Plan of Arrangement in a duly completed Letter of Transmittal deposited with the Transfer Agent no later than the Election Deadline, to transfer to Canco under the Arrangement for the Exchangeable Share Consideration.
“Exchange Time”    has the meaning ascribed thereto in the Plan of Arrangement.
“Exchangeable Share Voting Event”    has the meaning ascribed thereto under the heading “Description of Exchangeable Shares, Series A Preferred Stock and Related Agreements — Redemption of Exchangeable Shares and Redemption Call Rights.”
“Exchangeable Shares”    means the shares of Canco which are exchangeable for Torchlight Shares.

 

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“Exchangeable Share Consideration”    means the consideration in the form of Exchangeable Shares, together with ancillary rights, elected for each Meta Share by a Meta shareholder (other than a Dissenting Shareholder) pursuant to the Plan of Arrangement, which shall be that number of Exchangeable Shares equal to the Exchange Ratio for each Meta Share held immediately prior to the Effective Time.
“Exempt Exchange Share Voting Event”    has the meaning ascribed thereto under the heading “Description of Exchangeable Shares, Series A Preferred Stock and Related Agreements — Redemption of Exchangeable Shares and Redemption Call Rights.”
“Fairness Opinion”    means the fairness opinion rendered by Roth to the Torchlight Board on December 13, 2020 as to the fairness of the Arrangement, from a financial perspective, to the Torchlight stockholders.
“Final Order”    means an order of the Court granted pursuant to Section 182(5) of the OBCA, in form and substance acceptable to each of the Parties, each acting reasonably, approving the Arrangement after a hearing upon the procedural and substantive fairness of the terms and conditions of the Arrangement, as such order may be affirmed, amended, modified, supplemented or varied by the Court (with the consent of the Parties, each acting reasonably) at any time prior to the Effective Date or, if appealed, as affirmed or amended (provided, however, that any such amendment is acceptable to the Parties, each acting reasonably) on appeal, unless such appeal is withdrawn, abandoned or denied.
“Fundamental Transaction”    means, at any time while the Series A Preferred Stock is outstanding, (a) the Combined Company, directly or indirectly, in one or more related transactions effects any merger or consolidation of the Combined Company with or into another Person, (b) the Combined Company, directly or indirectly, effects any sale, lease, license, assignment, transfer, conveyance or other disposition of all or substantially all of its assets in one or a series of related transactions, (c) any direct or indirect purchase offer, tender offer or exchange offer (whether by the Combined Company or another Person) is completed pursuant to which holders of the Combined Company Shares are permitted to sell, tender or exchange their shares for other securities, cash or property and has been accepted by the holders of 50% or more of the outstanding Combined Company Shares, (d) the Combined Company, directly or indirectly, in one or more related transactions effects any reclassification, reorganization or recapitalization of the Combined Company Shares or any compulsory share exchange pursuant to which the Combined Company Shares are effectively converted into or exchanged for cash or property, or (e) the Combined Company, directly or indirectly, in one or more related transactions consummates a stock or share purchase agreement or other business combination (including, without limitation, a reorganization, recapitalization, spin-off or scheme of arrangement) with another Person whereby such other Person acquires more than 50% of the outstanding Combined Company Shares (not including any Combined Company Shares held by the other Person or other Persons making or party to, or associated or affiliated with the other Persons making or party to, such stock or share purchase agreement or other business combination); provided, that in each of the foregoing transactions or series of transactions, each shall only be deemed a Fundamental Transaction if such other Person acquires more than 50% of voting securities of the Combined

 

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   Company or its successors’ (or the ultimate parent entity following a reorganization) voting securities, or all or substantially all of the Combined Company’s assets.
“FVTPL”    has the meaning ascribed thereto under the heading “Information about Meta — Management’s Discussion and Analysis — Financial Instruments.”
“GAAS”    means the United States Generally Accepted Auditing Standards (GAAS) as issued by the Auditing Standards Board, a division of the American Institute of Certified Public Accountants.
“GAAP”    means United States Generally Accepted Accounting Principles as in effect from time to time and which meet the standards established by the Public Company Accounting Oversight Board (United States).
“Governmental Entity”    means (a) any multinational or supranational body or organization, nation, government, state, province, country, territory, municipality, administrative, judicial or regulatory authority, agency, board, body, bureau, commission, instrumentality, court or tribunal or any political subdivision thereof, or any central bank (or similar monetary or regulatory authority) thereof, any taxing authority, any ministry or department or agency of any of the foregoing, (b) any self-regulatory organization or securities exchange, including the CSE and NASDAQ, (c) any entity exercising executive, legislative, judicial, regulatory or administrative functions of or pertaining to government; and (d) any corporation or other entity owned or controlled, through stock or capital ownership or otherwise, by any of such entities or other bodies pursuant to the foregoing.
“HOE”    has the meaning ascribed thereto under the heading “Information about Meta — Business Description — Holography Technology.”
“Holdback Amount”    means an amount equal to 10% of the Net Proceeds from each Asset Sale Transaction, which will be withheld by the Combined Company to cover any potential post-closing liabilities that maybe incurred by the Combined Company in respect of such Asset Sale Transaction.
“Holdback Dividend”    means a dividend of any remaining Holdback Amount in respect of any Asset Sale Transaction payable to the holders of Series A Preferred Stock, after deduction of all amounts with respect to which the Combined Company is entitled to indemnification with respect to such Asset Sale Transaction in accordance with the Series A Certificate of Designation.
“HUD”    has the meaning ascribed thereto under the heading “Information about Meta — Business Description — Holography Technology.”
“IFRS”    means the International Financial Reporting Standards as issued by the International Accounting Standards Board.
“Initial Bridge Note”    means the eight percent (8%) Unsecured Convertible Promissory Note of Meta for the benefit of Torchlight dated September 20, 2020 with a principal amount of $500,000.
“Interim Order”    means an order of the Court in form and substance acceptable to each of the Parties, acting reasonably, providing for, among other things, the calling and holding of the Meta Meeting, as the same may be amended by the Court with the consent of the Parties, each acting reasonably.

 

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“Intervening Event”    means, with respect to Meta, a Meta Intervening Event, and with respect to Torchlight, a Torchlight Intervening Event.
“Intervening Event Matching Period”    has the meaning ascribed thereto under the heading “The Arrangement Agreement — Right to Match.”
“IRS”    has the meaning ascribed thereto under the heading “The Arrangement — Federal Tax Consequences of the Transaction.”
“Intervening Event Notice”    has the meaning ascribed thereto under the heading “The Arrangement Agreement — Right to Match.”
“Key Regulatory Approvals”    means those rulings, consents, orders, exemptions, Permits, Authorizations and other approvals of Governmental Entities, necessary to proceed with the transactions contemplated by the Arrangement Agreement and the Plan of Arrangement.
“Law” or “Laws”    means, with respect to any Person, any and all applicable law (statutory, common, civil or otherwise), constitution, treaty, convention, ordinance, code, rule, regulation, order, injunction, judgment, decree, ruling or other similar requirement, whether domestic or foreign, enacted, adopted, promulgated or applied by a Governmental Entity that is binding upon or applicable to such Person or its business, property or securities, and to the extent that they have the force of law, policies, guidelines, notices and protocols of any Governmental Entity, as amended.
“Letter of Transmittal”    means the letter of transmittal and election form to be sent by Meta to the Meta shareholders in connection with the Arrangement.
“Liquidation Amount”    means an amount per share equal to the Current Market Price of a Torchlight Share on the last business day prior to the Liquidation Date plus the Dividend Amount.
“Liquidation Call Right”    has the meaning ascribed thereto under the heading “Description of Exchangeable Shares, Series A Preferred Stock and Related Agreements — Distribution on Liquidation and Liquidation Call Right.”
“Liquidation Date”    means the effective date of the liquidation, dissolution or winding-up of Canco or any other distribution of the assets of Canco among its shareholders for the purpose of winding up its affairs.
“Lock-Up Agreement”    means the certain lock-up agreements, substantially in the form attached as Annex I, entered or to be entered into by certain Meta Supporting Shareholders, where such parties have agreed, among other things, to lock-up and not sell, transfer or otherwise dispose of their Meta Shares.
“Matching Party”    has the meaning ascribed thereto under the heading “The Arrangement Agreement — Right to Match.”
“Matching Period”    has the meaning ascribed thereto under the heading “The Arrangement Agreement — Right to Match.”
“Material Adverse Effect”    means a Meta Material Adverse Effect or a Torchlight Material Adverse Effect, as applicable.
“Material Contract”   

means any Contract of the following for a Party:

 

(a) any management, employment, severance, retention, transaction bonus, change in control, material consulting, relocation, repatriation or expatriation agreement or other similar Contract;

 

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(b) any Contract with any distributor, reseller or sales representative with an annual value in excess of $100,000;

 

(c) any Contract with any manufacturer, vendor, or other Person for the supply of materials or performance of services by such third party to the Party in relation to the manufacture of the Party’s products or product candidates with an annual value in excess of $100,000;

 

(d) any agreement or plan, including, without limitation, any stock option plan, stock appreciation right plan or stock purchase plan, any of the benefits of which will be increased, or the vesting of benefits of which will be accelerated, by the occurrence of any of the transactions contemplated by the Arrangement Agreement;

 

(e) any Contract incorporating or relating to any guaranty, any sharing of liabilities or any indemnity not entered into in the ordinary course of business, including any indemnification agreements between a Party and any of its officers or directors;

 

(f) any Contract imposing any restriction on the right or ability of the Party or that would by the terms of the Contract would impose any restriction on the right or ability of the Party: (i) to compete with any other Person; (ii) to acquire any product or other asset or any services from any other Person; (iii) to solicit, hire or retain any Person as a director, an officer or other employee, a consultant or an independent contractor; (iv) to develop, sell, supply, distribute, offer, support or service any product or any technology or other asset to or for any other Person; (v) to perform services for any other Person; or (vi) to transact business with any other Person;

 

(g) any Contract currently in force relating to the disposition or acquisition of assets not in the ordinary course of business or any ownership interest in any corporation, partnership, joint venture or other business enterprise;

 

(h) any mortgages, indentures, loans or credit agreements, security agreements or other agreements or instruments relating to the borrowing of money or extension of credit;

 

(i) any joint marketing or development agreement;

 

(j) any Contract that provides for: (i) any right of first refusal, right of first negotiation, right of first notification or similar right with respect to any securities or assets of the Party; (ii) any “no shop” provision or similar exclusivity provision with respect to any securities or assets of the Party; or (iii) contains most favored nation pricing provisions with any third party or any requirements or minimum purchase obligations of the Party;

 

(k) any Contract that contemplates or involves the payment or delivery of cash or other consideration in an amount or having a value in excess of $100,000 or more in the aggregate, or contemplates or involves the performance of services having a value in excess of $100,000 in the aggregate other than any arrangement or agreement expressly contemplated or provided for under the Arrangement Agreement;

 

(l) any Contract that does not allow the Party to terminate the Contract for convenience with no more than sixty (60) days prior notice to the other party and without the payment of any rebate, chargeback, penalty or other

 

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amount to such third party in connection with any such termination in an amount or having a value in excess of $100,000 in the aggregate; or

 

(m) that is a “material contract” (with respect to Torchlight, as such term is defined in Item 601(b)(10) of Regulation S-K of the SEC, and with respect to Meta, within the meaning of National Instrument 51-102).

“Meta”    means Metamaterial Inc., an Ontario corporation.
“Meta Acquisition Proposal”    means, other than the transactions contemplated by the Arrangement Agreement, any offer, proposal or inquiry from any Person or group of Persons acting jointly or in concert, whether or not in writing and whether or not delivered to Meta, after the date hereof relating to: (a) any acquisition or purchase, direct or indirect, of: (i) the assets of Meta and/or one or more of its subsidiaries that, individually or in the aggregate, constitute 20% or more of the consolidated assets of Meta and its subsidiaries, taken as a whole, or which contribute 20% or more of the consolidated revenue of the Meta and its subsidiaries, taken as a whole (or any lease, long-term supply, hedging arrangement, joint venture, strategic alliance, partnership or other transaction having the same economic effect as a sale of such assets), or (ii) beneficial ownership of 20% or more of the issued and outstanding voting or equity securities of Meta or any one or more of its subsidiaries that, individually or in the aggregate, contribute 20% or more of the consolidated revenues or constitute 20% or more of the consolidated assets of Meta and its subsidiaries, taken as a whole; (b) any take-over bid, tender offer or exchange offer that, if consummated, would result in such Person or group of Persons beneficially owning 20% or more of the issued and outstanding voting or equity securities of any class of voting or equity securities of Meta or any of its; (c) any plan of arrangement, merger, amalgamation, consolidation, share subsidiaries exchange, business combination, reorganization, recapitalization, liquidation, dissolution or other similar transaction involving Meta or any of its subsidiaries; in all cases, whether in a single transaction or in a series of related transactions; (d) any direct or indirect sale of assets (or any alliance, joint venture, earn-in right, option to acquire, lease, license or other arrangement having a similar economic effect as a sale) by Meta and/or one or more of its subsidiaries, which assets represent 20% or more of the consolidated assets of Meta and its subsidiaries measured by fair market value, or contribute 20% or more of the consolidated revenue of Meta and its subsidiaries, taken as a whole; or (e) any other transaction, the consummation of which prevents, or materially delays, impedes or interferes with, the transactions contemplated by the Arrangement Agreement.
“Meta Arrangement Resolution”    means the special resolution of the holders of Meta Securities approving the Plan of Arrangement, which is to be considered at the Meta Meeting.
“Meta Board”    means the Board of Directors of Meta.
“Meta Board Recommendation”    means a statement that the Meta Board has received the a fairness opinion and has unanimously determined, after receiving legal and financial advice: (a) that the Arrangement is fair to the Meta securityholders; (b) the Arrangement and the entering into of the Arrangement Agreement is in the best interests of Meta; and (c) that the Meta Board recommends that the Meta securityholders vote in favor of the Arrangement Resolution.

 

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“Meta Change in Recommendation”    occurs or is made when, (a) the Meta Board or any committee of the Meta Board fails to unanimously recommend or withdraws, amends, modifies or qualifies, publicly proposes or states its intention to do so, or fails to publicly reaffirm (without qualification) within five business days (and in any case prior to the Meta Meeting) after having been requested in writing by Torchlight to do so, its recommendation that the holders of Meta Securities vote in favor of the Meta Arrangement Resolution, or (b) the Meta Board or any committee of the Meta Board takes no position or a neutral position with respect to a Meta Acquisition Proposal for more than five business days after a Meta Acquisition Proposal is made or publicly announced, or (c) the Meta Board or any committee of the Meta Board resolves or publicly proposes to take any of the foregoing actions.
“Meta DSU”    means a deferred share unit of Meta.
“Meta DSU Plan”    has the meaning ascribed thereto under the heading “Information About Meta — Statement of Meta Executive Compensation.”
“Meta Intervening Event”    means a material event or circumstance that was not known or reasonably foreseeable to the Meta Board prior to the execution of the Arrangement Agreement (or if known, the consequences of which were not known or reasonably foreseeable), which event or circumstance, or any material consequence thereof, becomes known to the Meta Board prior to the receipt of the Meta Securityholder Approval that does not relate to (a) a Meta Acquisition Proposal, (b) Torchlight or its subsidiaries (including any Torchlight Material Adverse Effect), (c) any actions taken pursuant to the Arrangement Agreement or (d) any changes in the price of Torchlight Shares or Meta Shares.
“Meta Material Adverse Effect”    means any effect, fact, change, event, occurrence or circumstance that is, or would reasonably be expected to be, material and adverse to the business, condition (financial or otherwise), properties, assets (tangible or intangible), liabilities (whether absolute, accrued, conditional or otherwise), capital, operations or results of operations of Meta and its subsidiaries, taken as a whole, other than any effect arising from, relating to or resulting from, as applicable: (a) the global economy, political conditions (including the outbreak of war or any acts of terrorism), international trade or securities, financial or credit markets in general, natural disasters or other acts of God; (b) the smart materials and photonics industry in general, (c) any generally applicable change in applicable Law (other than orders, judgments, claims or decrees against Meta or any of its subsidiaries), or accounting standards or the enforcement or interpretation thereof; (d) a change in the market trading price or trading volume of Meta Shares (it being understood that the underlying cause of any such change may be taken into consideration when determining whether a Meta Material Adverse Effect has occurred, unless otherwise excepted under this definition); (e) the announcement of the Arrangement Agreement, including the impact thereof on the relationships, contractual or otherwise, on Meta or its subsidiaries with customers, suppliers, business partners, regulators, vendors, Governmental Entities or other third Persons; (f) any action taken or refrained from being taken by Meta or its subsidiaries in connection with the Arrangement, to the extent Torchlight has expressly consented to, approved or requested such action in writing following the date of the Arrangement and (g) any disease outbreaks, pandemics or

 

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   epidemics or other related condition including COVID-19; provided, however, that (h) in the event that Meta and its subsidiaries, taken as a whole, are materially and disproportionately affected by an effect described in clause (a), (b), (c) or (d) above relative to other participants in the industries in which Meta and its subsidiaries operate, the extent (and only the extent) of such effect, relative to such other participants, on Meta or any of its subsidiaries, taken as a whole, may be taken into account in determining whether there has been a Meta Material Adverse Effect; and (i) references in certain sections of the Arrangement Agreement to dollar amounts are not intended to be, and shall not be deemed to be, illustrative or interpretive for the purposes of determining whether a “Meta Material Adverse Effect” has occurred
“Meta Meeting”    means the annual general and special meeting of securityholders of Meta held on March 12, 2021, at which Meta received the votes required to secure Meta Securityholder Approval.
“Meta Named Executive Officer”    has the meaning ascribed thereto under the heading “Information About Meta — Statement of Meta Executive Compensation.”
“Meta Option”    means options exercisable to acquire Meta Shares granted under Meta’s amended and restated stock option plan, whether or not vested.
“Meta Option Plan”    has the meaning ascribed thereto under the heading “Information About Meta — Statement of Meta Executive Compensation.”
“Meta Securities”    means the issued and outstanding Meta Shares, Meta Options, Meta Warrants, and Meta DSUs.
“Meta Securityholder Approval”    means (a) not less than 662/3% of the votes cast by holders of Meta Shares present virtually or represented by proxy and entitled to vote at the Meta Meeting, and (b) not less than 662/3% of the votes cast by the holders of Meta Shares, and the holders of Meta Options, Meta Warrants and Meta DSUs, on an as-converted to Meta Shares basis, voting together as a single class, present virtually or represented by proxy at and entitled to vote at the Meta Meeting.
“Meta Subject Securities”    has the meaning ascribed thereto under the heading “The Arrangement — Voting and Support Agreement.”
“Meta Superior Proposal”    means any unsolicited bona fide written Meta Acquisition Proposal from a Person who is an arm’s length third party to acquire not less than all of the outstanding Meta Shares or all or substantially all of the assets of Meta on a consolidated basis that: (a) complies with applicable securities laws and did not result from or involve a breach of Article 7 of the Arrangement Agreement; (b) is capable of being completed without undue delay, taking into account, all financial, legal, regulatory and other aspects of such proposal and the Person making such proposal; (c) is not subject, either by the terms of such Meta Acquisition Proposal or by virtue of any applicable Law, or rule or requirement of any stock exchange, to any requirement that the approval of the shareholders of the Person making the Meta Acquisition Proposal be obtained; (d) if any consideration is cash, is not subject to any financing contingency or condition; (e) is not subject to any due diligence or access condition; (f) is not subject, either by the terms of such Meta Acquisition Proposal or by virtue of any applicable Law, to any Authorization of a Governmental Entity; (g) does not provide for the payment of any break, termination or other fees or expenses to the other party in the event that Meta completes the Arrangemet or any similar other

 

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   transaction with Torchlight or any of its affiliates agreed prior to any termination of this Agreement and (h) that the Meta Board determines, in its good faith judgment, after receiving the advice of its outside legal and financial advisors and after taking into account all the terms and conditions of the Meta Acquisition Proposal, including all legal, financial, regulatory and other aspects of such Meta Acquisition Proposal and the party making such Meta Acquisition Proposal, (i) would, if consummated in accordance with its terms, but without assuming away the risk of non-completion, result in a transaction which is more favorable, from a financial point of view, to the Meta shareholders than the Arrangement (including any amendments to the terms and conditions of the Arrangement proposed by Torchlight pursuant to the Arrangement Agreement) and (ii) the failure to recommend such Meta Acquisition Proposal to the Meta shareholders would be contrary to the fiduciary duties of the Meta Board;
“Meta Shares”    means the issued and outstanding common shares of Meta immediately prior to the Effective Time.
“Meta Supporting Shareholders”    means, collectively, those senior officers and directors of Meta who have entered into Voting and Support Agreements.
“Meta Warrants”    means the common share purchase warrants of Meta.
“MTI”    has the meaning ascribed thereto under the heading “Information about Meta — Business Description — Company Overview.”
“MTI USA”    has the meaning ascribed thereto under the heading “Information about Meta — Business Description — Company Overview.”
“NASDAQ”    means the NASDAQ Capital Market.
“Net Proceeds”   

means, with respect to an Asset Sale Transaction, aggregate amount (without duplication) equal to the sum of: (a) all consideration actually received by Torchlight, the Combined Company or its affiliates as consideration from a third party in exchange for taking title to the O&G Assets and consummation of an Asset Sale Transaction, plus (b) the amount of cash remaining from Working Capital Financing prior to the Closing of the Arrangement, after the payment of transaction costs and expenses incurred by Torchlight or its affiliates in connection with the Arrangement, and certain other liabilities of Torchlight that are accrued prior the Closing of the Arrangement, less (c) all out-of-pocket costs and expenses incurred by Torchlight, the Combined Company or its affiliates to third parties for the negotiation, entry into and consummation of the Arrangement (solely to the extent unpaid as of the Closing of the Arrangement) and such Asset Sale Transaction, less (d) any applicable sales, income and other taxes incurred by the Combined Company or its affiliates in respect of the performance of the Combined Company’s obligations under or otherwise in connection with an Asset Sale Transaction, payment of the Asset Sale Dividends or the O&G Assets, less (e) any liabilities of the Combined Company actually incurred in connection with any Asset Sale Transaction or the O&G Assets, less (f) any payments to holders of debt securities of Torchlight that are outstanding immediately prior to the Arrangement and are not converted into equity prior to or in connection with the Arrangement, less (g) any change of control, severance, compensation or other payments to any employee, officer or other service provider triggered in connection with the Arrangement (solely to the extent unpaid as of the Closing of the Arrangement), less (h) any amount paid or due and payable with respect to

 

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the Straz Debt, which is no longer applicable as all of Torchlight’s debt has been settled as of the date of this proxy statement. Amounts placed in escrow, earnout or contingent or other post-Closing payments, including milestone or royalty payments, in connection with an Asset Sale Transaction will not be considered Net Proceeds unless (and only to the extent that) such amounts are actually received by Torchlight or the Combined Company.

“Net Proceeds Dividend”    means a dividend of Net Proceeds payable to the holders of Series A Preferred Stock in respect of any Asset Sale Transaction.
“NS Holdco”    has the meaning ascribed thereto under the heading “Information About Meta — Statement of Meta Executive Compensation.”
“O&G Assets”    means any assets that are used or held for use in Torchlight’s oil and gas exploration business.
“OBCA”    means the Business Corporations Act (Ontario), as amended.
“Ordinary Course”    means, with respect to an action taken by a Person, that such action is consistent with the past practices (in terms of nature, scope and magnitude) of such Person and is taken in the ordinary course of the normal day-to-day operations of the business of such Person.
“Other Party”    has the meaning ascribed thereto under the heading “The Arrangement Agreement — Additional Covenants Regarding Non-Solicitation.”
“Outside Date”    means June 18, 2021 or such later date as may be agreed to in writing by the Parties.
“Palikaras Employment Agreement”    has the meaning ascribed thereto under the heading “Information About Meta — Statement of Meta Executive Compensation.”
“Palikaras Target Bonus”    has the meaning ascribed thereto under the heading “Information About Meta — Statement of Meta Executive Compensation.”
“Parties”    means, collectively, Torchlight, Meta, Canco and Callco, and “Party” means any one of them.
“Permit”    means any license, permit, certificate, consent, order, grant, approval, agreement, classification, restriction, registration or other authorization of, from or required by any Governmental Entity.
“Person”    includes any individual, firm, partnership, limited partnership, limited liability partnership, joint venture, venture capital fund, limited liability company, unlimited liability company, association, trust, trustee, executor, administrator, legal personal representative, estate, body corporate, corporation, company, unincorporated association or organization, Governmental Entity, syndicate or other entity, whether or not having legal status.
“Plan of Arrangement”    means the plan of arrangement of Meta, substantially in the form attached as Annex B, and any amendments or variations thereto made from time to time in accordance with the Arrangement Agreement, the plan of arrangement or upon the direction of the Court in the Final Order with the consent of the Parties, each acting reasonably.
“Pre-Closing Financing”    means a transaction or series of transactions in which Torchlight issues Torchlight Shares (or securities convertible into or exercisable for Torchlight Shares) primarily for capital raising purposes where Torchlight has raised gross proceeds of at least $10,000,000 in the aggregate, less the

 

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   principal amounts of the Bridge Notes. Torchlight Shares issued in connection with the Pre-Closing Financing are intended to be proportionally dilutive at 75% to Meta shareholders and 25% to Torchlight stockholders, and will be excluded from the number of Torchlight Shares outstanding for purposes of calculating the Exchange Ratio. Upon closing the Pre-Closing Financing, which occurred on February 10, 2021 through the Torchlight Offering, Torchlight loaned $10,000,000 of the net proceeds to Meta via, and in satisfaction of, the Additional Bridge Financing.
“Pre-Effective Date Period”    means the period from the date of the Arrangement Agreement until the earlier of the Effective Time and the time that the Arrangement Agreement is terminated in accordance with its terms.
“Proposal Party”    has the meaning ascribed thereto under the heading “The Arrangement Agreement — Additional Covenants Regarding Non-Solicitation.”
“Receiving Board”    has the meaning ascribed thereto under the heading “The Arrangement Agreement — Right to Match.”
“Receiving Party”    has the meaning ascribed thereto under the heading “The Arrangement Agreement — Right to Match.”
“Record Date”   

means the close of business on May 5, 2021.

“Redemption Call Right”    has the meaning ascribed thereto under the heading “Description of Exchangeable Shares, Series A Preferred Stock and Related Agreements — Redemption of Exchangeable Shares and Redemption Call Rights.
“Registered Shareholder”    means a registered holder of Meta Shares whose name and address are recorded in Meta’s shareholders’ register maintained by AST Trust Company (Canada).
“Remaining Assets”    means (a) any O&G Assets that have not been sold, farmed out or otherwise transferred by the Combined Company or its subsidiaries to a third party, or are not otherwise subject to an Asset Sale Transaction as of the Asset Sale Expiration Date and (b) any cash referred to in clause (b) of the definition of “Net Proceeds” that is remaining as of the Asset Sale Expiration Date, less any amounts necessary to pay the reasonable out-of-pocket costs and expenses incurred by the Combined Company in connection with the Spin-Off Dividend.
“Replacement Option”    means an option to acquire Torchlight Shares to be issued by Torchlight in consideration for the cancellation of the Meta Options.
“Representatives”    means, collectively, in respect of a Person, its subsidiaries and its affiliates and its and their officers, directors, employees, consultants, advisors, agents or other representatives (including financial, legal or other advisors).
“Resulting Issuer”    has the meaning ascribed thereto under the heading “Information about Meta — Business Description — Company Overview.”
“Retraction Call Right”    has the meaning ascribed thereto under the heading “Description of Exchangeable Shares, Series A Preferred Stock and Related Agreements — Retraction of Exchangeable Shares and Retraction Call Right.”
“Retraction Date”    means the business day on which Canco will redeem the Retracted Shares.
“Retraction Price”    means an amount per share equal to the Current Market Price of a Combined Company Share on the last business day prior to the Retraction Date plus the Dividend Amount, which shall be satisfied in full by Canco delivering or causing to be delivered one Torchlight Share for each

 

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   Exchangeable Share presented and surrendered together with, on the designated payment date therefor, the Dividend Amount.
“Retraction Request”    means a duly executed statement accompanying the presentation and surrender of the certificate or certificates representing the Exchangeable Shares which the holder desires to have Canco redeem, together with such other documents and instruments as may be required to effect a transfer of Exchangeable Shares under the OBCA and the Articles of Canco and such additional documents, instruments and payments as the transfer agent and Canco may reasonably require to effect a retraction.
“Retracted Shares”    means the Exchangeable Shares that the holder desires to have redeemed by Canco.
“Rice Employment Agreement”    has the meaning ascribed thereto under the heading “Information About Meta — Statement of Meta Executive Compensation.”
“Roth”    means Roth Capital Partners, LLC, financial advisor to Torchlight.
“RRRF”    has the meaning ascribed thereto under the heading “Business Description — Overall Performance, Industry Trends and Economic Factors.”
“RTO”    has the meaning ascribed thereto under the heading “Information about Meta — Business Description — Company Overview.”
“Sale Representatives”    means, together, the Series A Preferred Representative and the Combined Company Sale Representative.
“SEC”    means the United States Securities and Exchange Commission.
“Secured Debenture Financing”    has the meaning ascribed thereto under the heading “Information about Meta — Business Description — Overall Performance, Industry Trends and Economic Factors.
“Secured Debt Financing”    has the meaning ascribed thereto under the heading “Information about Meta — Business Description — Overall Performance, Industry Trends and Economic Factors.”
“Securities Act”    means the Securities Act of 1933, as amended, and the rules and regulations promulgated thereunder from time to time.
“Securities Authority”    means all securities regulatory authorities, including the applicable securities commission or similar regulatory authorities in each of the provinces and territories of Canada, the SEC, the CSE, and NASDAQ, that are applicable to Meta or Torchlight, as the case may be.
“Series A Certificate of Designation”    means the Certificate of Designation of Preferences, Rights and Limitations of the Series A Non-Voting Preferred Stock of Torchlight, in the form attached as Annex H.
“Series A Preferred End Date”    means the later of (a) the payment of all Asset Sale Dividends in respect of all Asset Sale Transactions consummated prior to the Asset Sale Expiration Date or (b) the payment of all Spin-Off Dividends, or immediately prior to the consummation of a Fundamental Transaction or the liquidation, dissolution or winding-up of the Combined Company.
“Series A Preferred Record Date”    means a date which is to be determined by the Torchlight Board prior to Closing which serves as the date to determine the Torchlight stockholders who will receive a dividend of Series A Preferred Stock.
“Series A Preferred Representative”    means an individual who is appointed to serve as a representative of the holders of Series A Preferred Stock in connection with any Asset Sale

 

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   Transactions pursued by the Combined Company after the Effective Date, the calculation of the Net Proceeds therefrom, indemnification matters, the Spin-Off Dividend, and related matters.
“Series A Preferred Stock”    means the Series A Non-Voting Preferred Stock of Torchlight.
“Severance Period”    has the meaning ascribed thereto under the heading “Information About Meta — Statement of Meta Executive Compensation.”
“SNR”    has the meaning ascribed thereto under the heading “Information about Meta — Business Description — Wireless Sensing Technology.”
“SOW”    has the meaning ascribed thereto under the heading “Information about Meta — Business Description — Overall Performance, Industry Trends and Economic Factors.”
“Special Meeting”    means the special meeting of the stockholders of Torchlight to be held on June 11, 2021.
“Special Voting Share”    means the special voting share in the capital of Torchlight having substantially the rights, privileges, restrictions and conditions described in the Voting and Exchange Trust Agreement and the Special Voting Share Certificate of Designation.
“Special Voting Share Certificate of Designation”    means the Certificate of Designation of Preferences, Rights and Limitations of the Special Voting Share, substantially in the form attached as Annex G.
“Spin-Off Cost Reserve Amount”    means $500,000 of the Working Capital Financing, which will be allocated by the Combined Company to pay costs, fees and expenses incurred by the Combined Company in connection with any Spin-Off Dividend. If any Spin-Off Cost Reserve Amount is remaining after the payment of such costs, fees and expenses, such remaining amount will be included in the Remaining Assets.
“Spin-Off Dividend”    means a pro rata dividend of equity in a spin-off entity to which the Combined Company will transfer any Remaining Assets, which may become payable to the holders of Series A Preferred Stock after the Asset Sale Expiration Date (subject to certain conditions and limitations).
“Straz Debt”    means the senior secured debt of Torchlight held by The David A. Straz, Jr. Foundation and by The David A. Straz, Jr. Irrevocable Trust DTD 11/11/1986, all of which has been settled as of the date of this proxy statement.
“Superior Proposal”    means, with respect to Meta, a Meta Superior Proposal, and, with respect to Torchlight, a Torchlight Superior Proposal.
“Superior Proposal Notice”    has the meaning ascribed thereto under the heading “The Arrangement Agreement — Right to Match.”
“Superior Proposal Notice Period”    has the meaning ascribed thereto under the heading “The Arrangement Agreement — Right to Match.
“Support Agreement”    means an agreement to be made among Torchlight, Callco and Canco in connection with the Plan of Arrangement, in the form attached as Annex F.
“Tax Act”    means the Income Tax Act (Canada) and the regulations made thereunder, as now in effect and as they may be promulgated or amended from time to time.

 

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“Tax Returns”    means all domestic and foreign federal, provincial, territorial, municipal and local returns, reports, declarations, disclosures, elections, notices, filings, forms, statements, information statements and other documents (whether in tangible, electronic or other form) and including any amendments, schedules, attachments, supplements, appendices and exhibits thereto, made, prepared, filed or required to be made, prepared or filed by Law in respect of Taxes.
“Taxes”    means any and all domestic and foreign federal, provincial, provincial, municipal, territorial and local taxes, assessments and other governmental charges, duties, fees, levies, impositions and liabilities imposed by any Governmental Entity (whether payable directly or by withholding and whether or not requiring the filing of a Tax Return), including without limitation pension plan contributions, tax instalment payments, unemployment insurance contributions and employment insurance contributions, disability, severance, social security, workers’ compensation and deductions at source, including taxes based on or measured by gross receipts, income, profits, sales, capital, use, and occupation, and including goods and services, value added, ad valorem, sales, capital gains, capital stock, windfall profits, premium, transfer, franchise, stamp, license, non-resident withholding, customs, payroll, recapture, employment, excise and property duties and taxes, together with all estimated taxes, deficiency assessments, interest, penalties, fines and additions to tax imposed with respect to such amounts, and shall include any liability for such amounts as a result of (a) being a transferee or successor or member of a combined, consolidated, unitary or affiliated group, or (b) a contractual obligation to indemnify any Person or other entity.
“Termination Payment”    means an amount equal to $2 million.
“Torchlight Acquisition Proposal”    means, other than the transactions contemplated by the Arrangement Agreement, any offer, proposal or inquiry from any Person or group of Persons acting jointly or in concert, whether or not in writing and whether or not delivered to Torchlight, after the date hereof relating to: (a) any acquisition or purchase, direct or indirect, of: (i) the assets of Torchlight and/or one or more of its subsidiaries that, individually or in the aggregate, constitute 20% or more of the consolidated assets of Torchlight and its subsidiaries, taken as a whole, or which contribute 20% or more of the consolidated revenue of Torchlight and its subsidiaries, taken as a whole (or any lease, long-term supply, hedging arrangement, joint venture, strategic alliance, partnership or other transaction having the same economic effect as a sale of such assets), or (b) beneficial ownership of 20% or more of the issued and outstanding voting or equity securities of Torchlight or any one or more of its subsidiaries that, individually or in the aggregate, contribute 20% or more of the consolidated revenues or constitute 20% or more of the consolidated assets of Torchlight and its subsidiaries, taken as a whole; (c) any take-over bid, tender offer or
   exchange offer that, if consummated, would result in such Person or group of Persons beneficially owning 20% or more of the issued and outstanding voting or equity securities of any class of voting or equity securities of Torchlight or any of its subsidiaries; (d) any plan of arrangement, merger, amalgamation, consolidation, share exchange, business combination, reorganization, recapitalization, liquidation, dissolution or other similar transaction involving Torchlight or any of its subsidiaries; in all cases, whether in a single transaction or in a series of

 

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   related transactions; (e) any direct or indirect sale of assets (or any alliance, joint venture, earn-in right, option to acquire, lease, license or other arrangement having a similar economic effect as a sale) by Torchlight and/or one or more of its subsidiaries, which assets represent 20% or more of the consolidated assets of Torchlight and its subsidiaries measured by fair market value, or contribute 20% or more of the consolidated revenue or operating income of Torchlight; or (f) any other transaction, the consummation of which prevents, or materially delays, impedes or interferes with, the transactions contemplated by the Arrangement Agreement.
“Torchlight Board”    means the Board of Directors of Torchlight.
“Torchlight Board Recommendation”    means a statement of the Torchlight Board that it has unanimously determined, after receiving financial and legal advice, that (a) the Arrangement is fair and reasonable to the Torchlight stockholders, (b) the Arrangement is in the best interests of Torchlight and (c) the Torchlight Board unanimously recommends that the Torchlight stockholders vote in favor of the matters presented at the Special Meeting.
“Torchlight Intervening Event”    means a material event or circumstance that was not known or reasonably foreseeable to the Torchlight Board prior to the execution of the Arrangement Agreement (or if known, the consequences of which were not known or reasonably foreseeable), which event or circumstance, or any material consequence thereof, becomes known to the Torchlight Board prior to the receipt of the Torchlight Stockholder Approval that does not relate to (a) a Torchlight Acquisition Proposal, (b) Meta or its subsidiaries (including any Meta Material Adverse Effect), (c) any actions taken pursuant to the Arrangement Agreement or (d) any changes in the price of Torchlight Shares or Meta Shares.
“Torchlight Material Adverse Effect”    means any effect, fact, change, event, occurrence or circumstance that is, or would reasonably be expected to be, material and adverse to the business, condition (financial or otherwise), properties, assets (tangible or intangible), liabilities (whether absolute, accrued, conditional or otherwise), capital, operations or results of operations of Torchlight and its subsidiaries, taken as a whole, other than any effect arising from, relating to or resulting from, as applicable: (a) the global economy, political conditions (including the outbreak of war or any acts of terrorism), international trade or securities, financial or credit markets in general, natural disasters or other acts of God; (b) the oil and natural gas exploration and production industry in general, (c) any generally applicable change in applicable Law (other than orders, judgments, claims or decrees against Torchlight or any of its subsidiaries), or accounting standards or the enforcement or interpretation thereof; (d) a change in the market trading price or trading volume of Torchlight Shares (it being understood that the underlying cause of any such change may be taken into consideration when determining whether a Torchlight Material Adverse Effect has occurred, unless otherwise excepted under this definition); (e) the announcement of the Arrangement Agreement, including the impact thereof on the relationships, contractual or otherwise, on Torchlight or its subsidiaries with customers, suppliers, business partners, regulators, vendors, Governmental Entities or other third Persons; (f) any action taken or refrained from being taken by Torchlight or its subsidiaries in connection with the Arrangement Agreement, to the extent Meta has expressly consented to, approved or

 

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   requested such action in writing following the date of the Arrangement Agreement; and (g) any disease outbreaks, pandemics or epidemics or other related condition including COVID-19; provided, however, that (x) in the event that Torchlight and its subsidiaries, taken as a whole, are materially and disproportionately affected by an effect described in clause (a), (b), (c) or (d) above relative to other participants in the industries in which Torchlight and its subsidiaries operate, the extent (and only the extent) of such effect, relative to such other participants, on Torchlight or any of its subsidiaries, taken as a whole, may be taken into account in determining whether there has been a Torchlight Material Adverse Effect; and (y) references in certain sections of the Arrangement Agreement to dollar amounts are not intended to be, and shall not be deemed to be, illustrative or interpretive for the purposes of determining whether a “Torchlight Material Adverse Effect” has occurred.
“Torchlight Named Executive Officer”    means John A. Brda, Torchlight’s President and Chief Executive Officer, and Roger Wurtele, Torchlight’s Chief Financial Officer.
“Torchlight Offering”    means the underwritten public offering of 23,000,000 Torchlight Shares, announced on February 8, 2021 and closed on February 10, 2021, in which Torchlight raised gross proceeds of $27,600,000 (before deducting the underwriting discount and offering expenses payable by Torchlight). Of the gross proceeds raised in the Torchlight Offering, $5,000,000 constituted the Working Capital Financing, and the remaining $22,600,000 constituted the Pre-Closing Financing.
“Torchlight Share Consideration”    means the consideration in the form of Combined Company Shares elected or deemed to be elected for each Meta Share by a Meta shareholder (other than a Dissenting Shareholder) pursuant to the Plan of Arrangement, which shall be that number of Combined Company Shares equal to the Exchange Ratio for each Meta Share held immediately prior to the Effective Time.
“Torchlight Shares”    means the common stock of Torchlight.
“Torchlight Stockholder Approval”    means the approval of the matters voted on at the Special Meeting by the Torchlight stockholders in accordance with the requirements of applicable Law.
“Torchlight Superior Proposal”    means any unsolicited bona fide written Torchlight Acquisition Proposal from a Person who is an arm’s length third party to acquire not less than all of the outstanding Torchlight Shares or all or substantially all of the assets of the Torchlight on a consolidated basis that: (a) complies with applicable securities laws and did not result from or involve a breach of Article 7 of the Arrangement Agreement; (b) is capable of being completed without undue delay, taking into account, all financial, legal, regulatory and other aspects of such proposal and the Person making such proposal; (c) is not subject, either by the terms of such Torchlight Acquisition Proposal or by virtue of any applicable Law, or rule or requirement of any stock exchange, to any requirement that the approval of the shareholders of the Person making the Torchlight Acquisition Proposal be obtained; (d) if any consideration is cash, is not subject to any financing contingency or condition; (e) is not subject to any due diligence or access condition; (f) is not subject, either by the terms of such Torchlight Acquisition Proposal or by virtue of any applicable Law, to any Authorization of a Governmental Entity; (g) does not provide for the payment of any break, termination or other fees or expenses to the other party in the event that Torchlight

 

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   completes the Arrangement or any similar other transaction with Meta or any of its affiliates agreed prior to any termination of this Agreement and (h) that the Torchlight Board determines, in its good faith judgment, after receiving the advice of its outside legal and financial advisors and after taking into account all the terms and conditions of the Torchlight Acquisition Proposal, including all legal, financial, regulatory and other aspects of such Torchlight Acquisition Proposal and the party making such Torchlight Acquisition Proposal, would, if consummated in accordance with its terms, but without assuming away the risk of non-completion, result in a transaction which is more favorable, from a financial point of view, to the Torchlight stockholders than the Arrangement (including any amendments to the terms and conditions of the Arrangement proposed by Meta pursuant to the Arrangement Agreement), and the failure to recommend such Torchlight Acquisition Proposal to the Torchlight stockholders would be contrary to the fiduciary duties of the Torchlight Board.
“Torchlight Subject Securities”    has the meaning ascribed thereto under the heading “The Arrangement — Torchlight Voting and Support Agreement.
“Torchlight Supporting Stockholders”    means, collectively, all of the senior officers and directors of Torchlight who have entered into Voting and Support Agreements.
“Transfer Agent”    means AST Trust Company (Canada).
“Trustee”    means the trustee chosen by the Combined Company to act as trustee under the Voting and Exchange Trust Agreement, and any successor trustee appointed under the Voting and Exchange Trust Agreement.
“Voting and Exchange Trust Agreement”    means an agreement to be made among Torchlight, Canco and the AST Trust Company (Canada) or such other person as may be appointed by Meta and Torchlight (each acting reasonably), as trustee, in connection with the Plan of Arrangement, substantially in the form set out on Annex E.
“Voting and Support Agreements”    means the agreement that the Meta Supporting Shareholders and Torchlight Supporting Stockholders have entered into that, among other things, requires such directors and officers to vote their shares in favor of the Arrangement and associated matters, substantially in the form set out on Annex C with respect to the Meta Supporting Shareholders and Annex D with respect to Torchlight Supporting Stockholders.
“Working Capital Financing”    means a transaction or series of transactions in which the Torchlight issues Torchlight Shares (or securities convertible into or exercisable for Torchlight Shares) primarily for capital raising purposes in addition to the Pre-Closing Financing, up to $5,000,000. Torchlight Shares issued in such Working Capital Financing will be taken into account in the calculation of the Exchange Ratio, such that the Consideration Shares to be received by the holders of Meta Shares will not be diluted by any Torchlight Shares issued in connection with such Working Capital Financing.
“Written Objection”    has the meaning ascribed thereto under the heading “The Arrangement — Appraisal and Dissenters Rights.”

 

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QUESTIONS AND ANSWERS ABOUT PROXY MATERIALS AND VOTING

Questions and Answers in Connection with the Special Meeting

Why am I receiving this proxy statement and proxy card?

You are receiving this proxy statement and proxy card because you were a stockholder of record, or beneficial stockholder, of Torchlight at the close of business on May 5, 2021 and are entitled to vote at the Special Meeting. This proxy statement describes issues on which Torchlight would like you, as a stockholder, to vote. It provides information on these issues so that you can make an informed decision. You do not need to virtually attend the Special Meeting to vote your Torchlight Shares.

When you sign the proxy card, you appoint John A. Brda, Chief Executive Officer of Torchlight and Roger N. Wurtele, Chief Financial Officer of Torchlight, as your representatives at the Special Meeting. As your representatives, they will cast your votes at the Special Meeting as you have instructed on your proxy card. With proxy voting, your Torchlight Shares will be voted whether or not you attend the Special Meeting. Even if you plan to attend the Special Meeting, it is a good idea to complete, sign and return your proxy card in advance of the Special Meeting such that your votes are cast if you become unable to attend.

Who is soliciting my proxy?

Your proxy is being solicited by senior management of Torchlight. This proxy statement is furnished in connection with that solicitation. While it is anticipated that solicitation of proxies for the Special Meeting will be made primarily by mail, proxies may be solicited personally or by telephone by the directors and regular employees of Torchlight at nominal cost paid by Torchlight. In addition, Torchlight has engaged D.F. King as proxy solicitation agent in connection with the Meeting.

If you have questions or need assistance completing your form of proxy or voting instruction form, please contact the Torchlight’s proxy solicitation agent, D.F. King, by telephone at 1 (800) 714-3305 (toll-free in North America) or 1 (212) 269-5550 (collect call outside North America), or by email at TRCH@dfking.com.

When is the Record Date for the Special Meeting?

The Torchlight Board has fixed May 5, 2021 as the Record Date for the Special Meeting. Only holders of Torchlight Shares as of the close of business on that date will be entitled to vote at the Special Meeting.

How many Torchlight Shares are outstanding?

As of the Record Date, 145,563,667 Torchlight Shares were issued and outstanding.

How many votes do I get?

Each Torchlight Share is entitled to one vote. Dissenters’ rights are not applicable to any of the matters being voted upon.

How do I attend the Special Meeting?

The Special Meeting will be held on June 11, 2021, at 9:00 a.m. Central Time in a virtual format online by accessing www.virtualshareholdermeeting.com/TRCH2021, where you will be able to listen to the meeting live and vote online. To attend, vote and be deemed present in person at the virtual meeting, you will need to log on to the virtual meeting website at www.virtualshareholdermeeting.com/TRCH2021 and enter the 16-digit control number included on your proxy card or voting instruction form. Because the Special Meeting is completely virtual and being conducted via live webcast, stockholders will not be able to attend the meeting in person.

 

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The meeting webcast will begin promptly at 9:00 a.m., Central Time. We encourage you to access the meeting prior to the start time. Online check-in will begin at 8:45 a.m., Central Time, and you should allow ample time for the check-in procedures. Whether or not you plan to attend the virtual Special Meeting, we encourage you to vote and submit your proxy in advance of the meeting by one of the methods described in this proxy statement. You may also vote online and examine our stockholder list during the Special Meeting by following instructions provided on the meeting website, which may be accessed using the above web address and the 16-digit control number included on your proxy card or voting instruction form, during the Special Meeting.

What proposals will be voted on at the Special Meeting?

Torchlight stockholders will vote on the following proposals:

 

  1.

to authorize the issuance of the Consideration Shares in connection with the Arrangement (the “Arrangement Proposal”);

 

  2.

to amend the Articles of Incorporation of Torchlight in the form attached hereto as Annex L (the “Articles Amendment Proposal”);

 

  3.

to amend and restate the Articles of Incorporation of Torchlight in the form attached hereto as Annex M (the “Articles Amendment and Restatement Proposal”);

 

  4.

to approve the postponement or adjournment of the Special Meeting to solicit additional proxies if there are not sufficient votes to approve the Arrangement Proposal and/or Articles Amendment and Restatement Proposal (the “Adjournment Proposal”); and

 

  5.

to approve, on a non-binding, advisory basis, certain compensation that will or may become payable to the Torchlight Named Executive Officers that is based on or otherwise relates to the Arrangement (the “Advisory Proposal”).

Each of the Arrangement Proposal, the Articles Amendment Proposal and the Articles Amendment and Restatement Proposal will not be effected, and the Arrangement will not be completed, without the approval by the Torchlight stockholders of all such proposals.

The Torchlight Board unanimously recommends that you vote “FOR” the Arrangement Proposal, the Articles Amendment Proposal, the Articles Amendment and Restatement Proposal, the Adjournment Proposal and the Advisory Proposal.

How do I vote?

Torchlight stockholders of record and beneficial owners of Torchlight Shares on the Record Date may vote their Torchlight Shares by submitting a proxy or may vote virtually online at the Special Meeting by following the instructions provided on the proxy card or voting instruction form received. Torchlight recommends that Torchlight stockholders entitled to vote submit a proxy prior to the Special Meeting even if they plan to attend the virtual Special Meeting.

Torchlight stockholders are encouraged to submit a proxy promptly. Each valid proxy received in time will be voted at the Special Meeting according to the choice specified, if any. Executed but uninstructed proxies (i.e., proxies that are properly signed, dated and returned but are not marked to tell the proxies how to vote) will be voted in accordance with the recommendations of the Torchlight Board.

Record Holders

Torchlight stockholders of record may vote in one of the following ways:

 

   

Internet: Torchlight stockholders of record may submit their proxy over the internet at www.proxyvote.com. Internet voting is available 24 hours a day and will be accessible until 10:59 p.m., Central Time, on June 10, 2021. Stockholders will be given an opportunity to confirm that their voting instructions have been properly recorded. Torchlight stockholders who submit a proxy this way need not send in their proxy card.

 

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Telephone: Torchlight stockholders of record may submit their proxy by calling 1-800-690-6903. Telephone voting is available 24 hours a day and will be accessible until 10:59 p.m., Central Time, on June 10, 2021. Easy-to-follow voice prompts will guide stockholders through the voting and allow them to confirm that their instructions have been properly recorded. Torchlight stockholders who submit a proxy this way need not send in their proxy card.

 

   

Mail: Torchlight stockholders of record may submit their proxy by properly completing, signing, dating and mailing their proxy card or voting instruction form in the self-addressed, stamped envelope (if mailed in the United States) included with this proxy statement. Torchlight stockholders who vote this way should mail the proxy card early enough so that it is received prior to the closing of the polls at the Special Meeting.

 

   

Online During the Virtual Meeting: Torchlight stockholders of record may attend the virtual Special Meeting by entering his, her or its unique 16-digit control number and vote online; attendance at the virtual Special Meeting will not, however, in and of itself constitute a vote or a revocation of a prior proxy.

Beneficial Owners

Torchlight stockholders who hold their Torchlight Shares beneficially in “street name” and wish to submit a proxy must provide instructions to the bank, broker or other nominee that holds their shares of record as to how to vote their shares with respect to the Torchlight stock issuance proposal. Most beneficial owners will have a choice of voting before the Special Meeting by proxy over the internet, by telephone or by using a voting instruction form. Each beneficial owner of Torchlight common stock should refer to the voting instruction form received to see what options are available and how to use them. Torchlight stockholders who hold their shares of Torchlight common stock beneficially and wish to vote virtually at the Special Meeting may do so by attending the Special Meeting, entering his, her or its unique 16-digit control number and voting their shares electronically; however attendance at the virtual Special Meeting will not, in and of itself, constitute a vote or a revocation of a prior proxy. If you are a beneficial owner but did not receive a 16-digit control number with your voting instruction form, contact the bank, broker or other nominee that holds your shares of record.

What if I change my mind after I return my proxy?

You may revoke your proxy and change your vote at any time before the polls close at the Special Meeting. You may do this by notifying our President in writing at the address of Torchlight given above; by executing a new proxy bearing a later date or by submitting a new proxy by telephone or internet; or by attending the Special Meeting and voting virtually.

How many votes do you need to hold the Special Meeting?

To conduct the Special Meeting, Torchlight must have a quorum, which means that a majority of the outstanding Torchlight Shares as of the Record Date that are entitled to vote at the Special Meeting must be virtually present or represented at the Special Meeting. Torchlight Shares are the only type of security entitled to vote at the Special Meeting. Based on 145,563,667 Torchlight Shares outstanding as of the Record Date, 72,781,834 Torchlight Shares must be present at the Special Meeting, virtually or by proxy, for there to be a quorum. Your Torchlight Shares will be counted as present at the Special Meeting if you submit a properly executed proxy card (even if you do not provide voting instructions), or virtually attend the Special Meeting and vote.

What if I abstain from voting?

Abstentions with respect to a proposal at the Special Meeting are counted for the purposes of establishing a quorum. A properly executed proxy card marked “ABSTAIN” with respect to a proposal at the Special Meeting will have the same effect as voting “AGAINST” that proposal.

 

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What effect does a broker non-vote have?

Brokers and other intermediaries, holding Torchlight Shares in street name for their customers, are generally required to vote the Torchlight Shares in the manner directed by their customers. If their customers do not give any direction, brokers may vote the Torchlight Shares on routine matters, but not on non-routine matters. The Arrangement Proposal, the Articles Amendment Proposal, the Articles Amendment and Restatement Proposal, the Adjournment Proposal and the Advisory Proposal are non-routine matters. Consequently, if customers do not give any direction, brokers will not be permitted to vote such Torchlight Shares at the Special Meeting in relation to such proposals.

The absence of a vote on a non-routine matter is referred to as a broker non-vote. Any Torchlight Shares represented at the Special Meeting but not voted with respect to the Arrangement Proposal, the Articles Amendment Proposal, the Articles Amendment and Restatement Proposal, the Adjournment Proposal or the Advisory Proposal will have the same effect as a vote “AGAINST” the Articles Amendment Proposal and the Articles Amendment and Restatement Proposal but will have no effect in relation to the Arrangement Proposal, the Adjournment Proposal or the Advisory Proposal.

How many votes are needed to approve the proposals?

Assuming a quorum, the Arrangement Proposal, the Adjournment Proposal and the Advisory Proposal will be approved if a majority of the Torchlight Shares that are eligible to vote that are present at the Special Meeting votes “FOR” each proposal (though no quorum is required for the approval of the Adjournment Proposal). The Articles Amendment Proposal and the Articles Amendment and Restatement Proposal will be approved if a majority of the Torchlight Shares votes “FOR” such proposals. A properly executed proxy card marked “ABSTAIN” with respect to all proposals planned to be voted on at the Special Meeting will have the same effect as voting “AGAINST” such proposals. We encourage you to vote “FOR” the Arrangement Proposal, the Articles Amendment Proposal, the Articles Amendment and Restatement Proposal, the Adjournment Proposal and the Advisory Proposal.

Will my Torchlight Shares be voted if I do not sign and return my proxy card?

If your Torchlight Shares are held through a brokerage account, your brokerage firm, cannot vote your Torchlight Shares at the Special Meeting unless you provide directions as to how to vote your Torchlight Shares, because all of the matters to be voted on at the Special Meeting are non-routine matters. See “What effect does a broker non-vote have?” above for a discussion of the consequences if you fail to provide your brokerage firm with instructions as to how to vote your Torchlight Shares.

If your Torchlight Shares are registered in your name, and you do not complete your proxy card over the Internet or sign and return your proxy card, your Torchlight Shares will not be voted at the Special Meeting unless you virtually attend the Special Meeting and vote your Torchlight Shares.

Where can I find the voting results of the Special Meeting?

Torchlight will publish the final results in a Current Report on Form 8-K with the SEC within four (4) business days following the Special Meeting.

Who will pay for the costs of soliciting proxies?

Torchlight will bear the cost of soliciting proxies. In an effort to have as large a representation at the Special Meeting as possible, Torchlight’s directors, officers and employees may solicit proxies by telephone or in person in certain circumstances. These individuals will receive no additional compensation for their services other than their regular salaries. Torchlight has retained D.F. King as its proxy solicitation agent to assist in the solicitation of proxies and may also retain other persons as it deems necessary to aid in the solicitation of proxies with respect to the Special Meeting. Torchlight and D.F. King entered into an engagement agreement with customary terms and conditions, which provides that the proxy solicitation agent will be paid a base fee of $10,000 subject

 

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to additional fees and out-of-pocket expenses. Upon request, Torchlight will reimburse brokers, dealers, banks, voting trustees and their nominees who are holders of record of Torchlight Shares on the Record Date for the reasonable expenses incurred for mailing copies of the proxy materials to the beneficial owners of such Torchlight Shares.

What materials accompany or are attached to this proxy statement?

The following materials accompany or are attached to this proxy statement:

 

ANNEX A

   Form of Proxy Card

ANNEX B

   Arrangement Agreement and Plan of Arrangement

ANNEX C

   Form of Meta Voting and Support Agreement

ANNEX D

   Form of Torchlight Voting and Support Agreement

ANNEX E

   Form of Voting and Exchange Trust Agreement

ANNEX F

   Form of Support Agreement

ANNEX G

   Special Voting Share Certificate of Designation

ANNEX H

   Series A Certificate of Designation

ANNEX I

   Form of Lock-Up Agreement

ANNEX J

   Roth Fairness Opinion

ANNEX K

   Comparable Companies and Comparable Transactions

ANNEX L

   Amendment to the Articles of Incorporation of Torchlight

ANNEX M

   Amended and Restated Articles of Incorporation of Torchlight

ANNEX N

   Meta Historical Financial Statements

Questions and Answers in Connection with the Arrangement and Related Transactions

What is the Arrangement between Torchlight and Meta?

The Arrangement is in substance a reverse takeover of Torchlight by Meta, in order to facilitate Meta’s listing on NASDAQ and access to the U.S. capital markets. Pursuant to the Arrangement Agreement, Torchlight and Meta will complete a business combination pursuant to which Torchlight will indirectly acquire all of the Meta Shares and the Combined Company will be renamed “Meta Materials Inc.” and focus its business on the current business of Meta.

The Arrangement provides that Torchlight will acquire Meta pursuant to the Arrangement Agreement and Plan of Arrangement under Ontario law. Under the Arrangement, the issued and outstanding Meta Shares will be exchanged for Torchlight Shares or Exchangeable Shares in accordance with the Plan of Arrangement. After the Effective Time of the Arrangement, each Exchangeable Share will be exchangeable for one Combined Company Share in accordance with their terms. While outstanding, the Special Voting Share will enable holders of Exchangeable Shares to cast votes on matters for which holders of the Combined Company Shares are entitled to vote, and to receive dividends that are economically equivalent to any dividends declared with respect to the Combined Company Shares. Eligibility to elect to receive Exchangeable Shares will be subject to certain Canadian residency restrictions and tax statuses.

The Arrangement Agreement further provides that Torchlight will submit to its stockholders a proposal to amend Torchlight’s articles of incorporation to (a) increase the number of shares of common stock and preferred stock that Torchlight has authorized, (b) effect a reverse split of the Torchlight Shares to maintain compliance with the listing standards of NASDAQ, and (c) change Torchlight’s name to “Meta Materials Inc.”. Torchlight is fulfilling these requirements through this proxy statement.

 

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The Arrangement Agreement provides that Torchlight and the Combined Company will use commercially reasonable efforts to sell the O&G Assets prior to the Asset Sale Expiration Date. In connection with the Arrangement, Torchlight will declare a dividend, on a one-for-one basis, of shares of Series A Preferred Stock to holders of record of Torchlight Shares as of the Series A Preferred Record Date, which dividend will be paid immediately prior to the Closing of the Arrangement. The Series A Certificate of Designation will entitle the holders of Series A Preferred Stock to receive Asset Sale Dividends in the event that Torchlight or the Combined Company consummates one or more Asset Sale Transactions prior to the Asset Sale Expiration Date. In the event that any O&G Assets have not been sold in an Asset Sale Transaction that is consummated prior to the Asset Sale Expiration Date, the Combined Company will, subject to certain conditions and to the extent permitted by applicable law, declare a Spin-Off Dividend to distribute beneficial ownership of the Remaining Assets to the holders of Series A Preferred Stock. See “The Arrangement Agreement — Torchlight Business Sale,” “The Arrangement Agreement — Preferred Stock Dividend” and Description of Exchangeable Shares, Series A Preferred Stock and Related Agreements — Description of Series A Preferred Stock.

The consummation of the Arrangement is subject to certain closing conditions, including the requirements that (a) prior to the Effective Time, Torchlight consummate the Pre-Closing Financing, which occurred on February 10, 2021 via the Torchlight Offering, (b) all debt of Torchlight is converted into Torchlight Shares or repaid in full, provided that if the Straz Debt has not been so converted or repaid, then prior to the Effective Time, the terms of the Straz Debt will have been modified such that the debtholders’ sole recourse in respect thereof will be against the O&G Assets, with all of such conditions having been satisfied as of the date of this proxy statement, and (c) the Consideration Shares have been approved for listing on NASDAQ. Other closing conditions include the receipt of all required approvals from the holders of Torchlight Shares and Meta Securities, (with the Meta Securityholder Approval having been obtained at the Meta Meeting) and from the Court, and all other required regulatory approvals, the continued listing of the Torchlight Shares on NASDAQ through the Effective Date, the receipt of certain consents from holders of Meta debt, and the availability of certain exemptions from registration under applicable securities laws for the issuance of the Consideration Shares, as well as other customary closing conditions, including the absence of a Material Adverse Effect with respect to either Meta or Torchlight. See “The Arrangement Agreement — Conditions for Completion of the Arrangement.”

The Arrangement has been unanimously approved by the Meta Board, and Meta Securityholder Approval was obtained at the Meta Meeting. The Arrangement has also been unanimously approved by the Torchlight Board, and stockholders representing approximately 16.1% of the outstanding Torchlight Shares have entered into a Voting and Support Agreement, in the form attached as Annex D in connection with the Arrangement.

Does the Torchlight Board support the Arrangement?

Yes. Torchlight Board unanimously recommends that you vote “FOR” the Arrangement Proposal, the Articles Amendment Proposal, the Articles Amendment and Restatement Proposal, the Adjournment Proposal and the Advisory Proposal.

In making its recommendation, the Torchlight Board considered a number of factors as described in this proxy statement under the heading “The Arrangement — Reasons for the Arrangement,” including an opinion of Roth, financial advisor to Torchlight, that the Arrangement is fair, from a financial point of view, to the Torchlight stockholders. See “The Arrangement — Fairness Opinion.”

Why is Torchlight proposing the Arrangement?

Torchlight’s management believes that the Arrangement provides the current Torchlight stockholders an opportunity to retain their beneficial interest in the O&G Assets while also retaining ownership of approximately 25% of the outstanding Combined Company Shares after the consummation of the Arrangement (before giving effect to the issuance of Torchlight Shares in the Pre-Closing Financing). See “The Arrangement — Reasons for the Arrangement.

 

 

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Do any of Torchlight’s directors or executive officers have interests in the Arrangement that may differ from those of the Torchlight stockholders?

Yes. Our directors and executive officers have interests in the Arrangement that are different from, or in addition to, the interests of the Torchlight stockholders. See “The Arrangement — Interests of Certain Persons in the Arrangement.” The members of the Torchlight Board were aware of and considered these interests, among other matters, in evaluating the Arrangement Agreement and the Arrangement and in recommending that the stockholders vote to approve the Arrangement Proposal.

Why am I being asked to vote on the issuance of the Consideration Shares?

At the Special Meeting, you will be asked to consider and vote upon the issuance of the Consideration Shares in connection with the Arrangement, under which Torchlight will acquire all of the issued and outstanding Meta Shares. Under the Arrangement, Meta shareholders will receive the Consideration Shares (which would be comprised of approximately 455,000,000 Torchlight Shares, prior to effecting any reverse split of Torchlight Shares as contemplated herein, including the Torchlight Shares that would be issuable upon conversion or exchange of Meta Securities that will become convertible into or exchangeable for Torchlight Shares in connection with the Arrangement and Torchlight Shares that would be issuable upon exchange of the Exchangeable Shares, in each case based upon an illustrative Exchange Ratio, subject to certain assumptions, of 3.6019 Torchlight Shares for each outstanding Meta Share calculated as of the Record Date) in exchange for their Meta Shares. On completion of the Arrangement, Meta will be a wholly-owned subsidiary of Torchlight.

Torchlight Shares are listed on NASDAQ, and Rules 5635(a) and (b) of the NASDAQ Listing Rules require stockholder approval for the issuance of the Consideration Shares pursuant to the Arrangement. Rule 5635(a) of the NASDAQ Listing Rules requires stockholder approval if the number of shares of common stock to be issued in connection with the acquisition of another company will be equal to or in excess of 20% of the number of shares of common stock outstanding, and Rule 5635(b) requires stockholder approval of an issuance of securities that will result in a change of control.

Because the Consideration Shares issued pursuant to the Arrangement will exceed 20% of the issued and outstanding Torchlight Shares before the Closing of the Arrangement, and because the issuance of the Consideration Shares will result in the former Meta shareholders owning approximately 75% (before giving effect to the issuance of Torchlight Shares in the Pre-Closing Financing) of the outstanding Combined Company Shares after the consummation of the Arrangement, which will constitute a change of control of Torchlight under the NASDAQ Listing Rules, stockholder approval of the issuance of the Consideration Shares in connection with the Arrangement is required, and the Arrangement will not be completed unless such approval is obtained. See “The Arrangement Agreement — Conditions for Completion of the Arrangement.

Are there risks I should consider in connection with the Arrangement?

Yes. The material risks associated with the Arrangement are discussed under “Risk Factors — Risks Related to the Arrangement.” Those risks include, among others, the possibility that the Arrangement may not be completed, the possibility that the Meta business will not be successful, that the Combined Company may fail to realize the anticipated benefits of the Arrangement, and that the O&G Assets may not be successfully sold or spun off as described herein.

What will holders of Meta Shares receive under the Arrangement?

Under the terms of the Plan of Arrangement, (a) each Meta shareholder who is an Eligible Holder and not a Dissenting Shareholder may elect to (i) receive in respect of any or all of their Meta Shares, the Exchangeable Share Consideration and (ii) receive in respect of the balance of their Meta Shares, if any, the Torchlight Share Consideration, and (b) each Meta shareholder who is not an Eligible Holder or a Dissenting Shareholder or fails to make an election is entitled to receive the Torchlight Share Consideration. Any Meta shareholder that does not make an election will receive the Torchlight Share Consideration. See “The Arrangement — Principal Steps of the Arrangement” and “Description of Exchangeable Shares, Series A Preferred Stock and Related Agreements.

 

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What percentage of the Combined Company will the stockholders of Torchlight and shareholders of Meta own?

The Plan of Arrangement provides that after the Effective Time, the former Meta shareholders will own approximately 75% (before giving effect to the issuance of Torchlight Shares in the Pre-Closing Financing) of the outstanding Combined Company Shares (including Exchangeable Shares that are exchangeable for Torchlight Shares, but excluding the Meta Securities convertible into or exercisable for Meta Shares which will be converted into securities convertible into or exercisable for Combined Company Shares), based on the number of Torchlight Shares outstanding as of immediately prior to the Effective Time (excluding any Torchlight Shares issued or issuable in connection with the Pre-Closing Financing), with the legacy Torchlight stockholders owning approximately 25% (before giving effect to the issuance of Torchlight Shares in the Pre-Closing Financing) of the outstanding Combined Company Shares (excluding any Torchlight Shares issued or issuable in connection with the Pre-Closing Financing). The Arrangement Agreement also provides that Meta Securities that are convertible into or exercisable for Meta shares, including options, deferred share units, warrants, and convertible debt instruments, will become exercisable for Torchlight Shares after the Effective Time, in each case with adjustments based on the Exchange Ratio. The exact number of Consideration Shares that will be issued pursuant to the Arrangement will be determined at the Effective Time in accordance with the Exchange Ratio.

What is the Exchange Ratio under the Arrangement?

The Exchange Ratio pursuant to which Meta Shares will be exchanged for Torchlight Shares or Exchangeable Shares pursuant to the Arrangement is not fixed. Rather, it will be determined based on the number of Torchlight Shares and Meta Shares outstanding immediately prior to the completion of the Arrangement, such that the holders of Meta Shares immediately prior to the completion of the Arrangement will hold approximately 75% (before giving effect to the issuance of Torchlight Shares in the Pre-Closing Financing) of the outstanding Combined Company Shares upon completion of the Arrangement.

On February 10, 2021, Torchlight completed the Torchlight Offering, which constituted both the Working Capital Financing and the Pre-Closing Financing contemplated by the Arrangement Agreement. Of the Torchlight Shares issued in the Torchlight Offering, 4,166,667 constitute Torchlight Shares issued for the Working Capital Financing, which will be included in the pro forma number of Torchlight Shares outstanding for purposes of calculating the Exchange Ratio. The remaining 18,833,333 Torchlight Shares issued in the Torchlight Offering constitute Torchlight Shares issued for the Pre-Closing Financing, which will be excluded from the pro forma number of Torchlight Shares outstanding for purposes of calculating the Exchange Ratio. Following this paragraph is a pro forma calculation of the Exchange Ratio and the respective ownership percentages of the Combined Company of the legacy Meta shareholders and legacy Torchlight stockholders, giving effect to the Torchlight Shares issued in the Torchlight Offering and based on the number of Torchlight Shares and Meta Shares outstanding as of the Record Date.

Pro Forma Exchange Ratio Calculation

 

Torchlight Shares outstanding as of the Record Date:    145,563,667 shares

less the Torchlight Shares issued for the Pre-Closing Financing:

   145,563,667 shares minus 18,833,333 shares = 126,730,334 shares
Torchlight Shares outstanding as of the Record Date for purposes of calculating the Exchange Ratio:    126,730,334 shares
Pro forma Combined Company Shares outstanding upon completion of the Arrangement:    126,730,334 shares divided by 0.25 = 506,921,336 shares
Pro forma Combined Company Shares issuable to Meta shareholders in connection with the Arrangement:    506,921,336 shares minus 126,730,334 shares = 380,191,002 shares
Meta common shares outstanding as of the Record Date:    105,551,460 shares
Illustrative Exchange Ratio as of the Record Date:    380,191,002 shares divided by 105,551,460 shares = 3.6019 Combined Company Shares per Meta Share

 

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Pro Forma Ownership Split Calculation

 

Pro forma Combined Company Shares outstanding upon completion of the Arrangement (including the Torchlight Shares issued for the Pre-Closing Financing):    506,921,336 shares plus 18,833,333 shares = 525,754,669 shares
Legacy Meta shareholders pro forma percentage ownership of the Combined Company:    380,191,002 shares divided by 525,754,669 shares = 72.3%
Legacy Torchlight stockholders pro forma percentage ownership of the Combined Company (including investors in the Pre-Closing Financing):    145,563,667 shares divided by 525,754,669 shares = 27.7%

How was the Exchange Ratio determined?

The Exchange Ratio was determined after considerable negotiations between Torchlight and Meta and the contemplation of numerous factors that each company deemed relevant. In addition, Meta received a fairness opinion from the Meta Financial Advisor, which provided that the consideration in connection with the Arrangement was fair from a financial point of view to the Meta shareholders and Torchlight received a fairness opinion from Roth, which provided that the Arrangement was fair from a financial point of view to the Torchlight stockholders. See “The Arrangement — Fairness Opinion” and “The Arrangement — Background of the Arrangement.”

Why are Exchangeable Shares being offered to Canadian residents pursuant to the Arrangement?

The Exchangeable Shares provide an opportunity for Meta shareholders who are Eligible Holders to make a tax election to defer Canadian income tax on any capital gain otherwise arising on the exchange of their Meta Shares. Meta shareholders who are Eligible Holders may elect to (a) receive Exchangeable Shares in respect of any or all of their Meta Shares, and (b) receive Torchlight Shares in respect of the balance of their Meta Shares, if any. Holders of Exchangeable Shares are able to exchange their Exchangeable Shares for Torchlight Shares, on a one-for-one basis, as described under “Description of Exchangeable Shares, Series A Preferred Stock and Related Agreements.

Holders of Exchangeable Shares will be entitled to cast votes on matters which holders of Combined Company Shares are entitled to vote pursuant to the Voting and Exchange Trust Agreement and will be entitled to receive dividends that are economically equivalent to the dividends declared by the Combined Company on the Combined Company Shares.

While the holders of Exchangeable Shares may be able to trade such shares on the CSE, if the Exchangeable Shares are listed on the CSE, such holder may, at its option, exchange such shares for Torchlight Shares prior to 7 years after the Closing and then trade such Torchlight Shares on NASDAQ.

How will Meta Options, Meta Warrants and Meta DSUs be treated under the Arrangement?

Under the terms of the Arrangement, Meta Options that are not exercised prior to the Effective Time will be automatically exchanged for Replacement Options to purchase from Torchlight the number of Torchlight Shares equal to the product of (a) the number of Meta Shares issuable pursuant to the exercise of the Meta Option immediately before the Effective Time, and (b) the Exchange Ratio, provided that if the foregoing would result in a fraction of a Torchlight Share being issuable upon any particular exercise of Replacement Options, then the number of Torchlight Shares otherwise issuable upon exercise of such Replacement Options shall be rounded down to the nearest whole number of Torchlight Shares.

The exercise price per Torchlight Share subject to any such Replacement Option will be an amount equal to the quotient of (a) the exercise price per Meta Share under the exchanged Meta Option immediately prior to the Effective Time, divided by (b) the Exchange Ratio. Except as set out above, all terms and conditions of a Replacement Option, including the term to expiry, conditions to and manner of exercising, will be the same as the Meta Option for which it was exchanged and any document evidencing a Meta Option shall thereafter evidence and be deemed to evidence such Replacement Option.

 

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Each Meta Warrant shall, without any further action on the part of any holder thereof, be continued on the same terms and conditions as were applicable immediately prior to the Effective Time, except that, pursuant to the terms of the applicable warrant certificate, the terms of the Meta Warrants shall be amended so as to (a) substitute for the Meta Shares issuable pursuant to the exercise of such Meta Warrants such number of Torchlight Shares equal to (i) the number of Meta Shares issuable pursuant to the exercise of such Meta Warrants immediately prior to the Effective Time, multiplied by (ii) the Exchange Ratio, rounded down to the nearest whole number; and (b) adjust the exercise price per Torchlight Share issuable pursuant to the exercise of any such Meta Warrant following the Effective Time to be an amount equal to the quotient of (i) the exercise price per Meta Share under the Meta Warrant immediately prior to the Effective Time divided by (ii) the Exchange Ratio.

Each Meta DSU shall, without any further action on the part of any holder thereof, be continued on the same terms and conditions as were applicable immediately prior to the Effective Time, except that, pursuant to the terms of the deferred share unit plan of Meta, the terms of the Meta DSUs share be amended so as to substitute for the Meta Shares issuable pursuant to such Meta DSUs, such number of Torchlight Shares equal to (a) the number of Meta Shares issuable pursuant to the Meta DSUs immediately prior to the Effective Time, multiplied by (b) the Exchange Ratio, rounded down to the nearest whole number.

See “The Arrangement — Principal Steps of the Arrangement.

What is the dividend of Series A Preferred Stock to be paid to the Torchlight stockholders of record as of the Series A Preferred Record Date?

The Arrangement Agreement provides that Torchlight and the Combined Company will use commercially reasonable efforts to sell the O&G Assets prior to the Asset Sale Expiration Date. Torchlight stockholders of record as of the Series A Preferred Record Date, will receive a dividend, on a one-for-one basis, of shares of Series A Preferred Stock. The Series A Preferred Stock is not expected to be listed on a securities exchange and will be administered by the Combined Company’s transfer agent. Holders of shares of Series A Preferred Stock may receive Asset Sale Dividends from any Asset Sale Transactions consummated prior to the Asset Sale Expiration Date, and may also receive a Spin-Off Dividend of any Remaining Assets that have not been sold in an Asset Sale Transaction prior to the Asset Sale Expiration Date. For example, if you own 1% of the outstanding Torchlight Shares on the Series A Preferred Record Date, you will receive a dividend of Series A Preferred Stock that represents a 1% ownership of the outstanding shares of Series A Preferred Stock, which may entitle you to dividends representing 1% of the Net Proceeds and any remaining Holdback Amount from any Asset Sale Transactions consummated prior to the Asset Sale Expiration Date, and a Spin-Off Dividend representing a 1% interest in any Remaining Assets that have not been sold as of the Asset Sale Expiration Date, subject to certain limitations and conditions. See “The Arrangement Agreement — Torchlight Business Sale,” “The Arrangement Agreement — Preferred Stock Dividend” and “Description of Exchangeable Shares, Series A Preferred Stock and Related Agreements — Series A Preferred Stock.”

The dividend of Series A Preferred Stock will not replace or modify any Torchlight Shares held by Torchlight stockholders.

The anticipated and intended impact of the Series A Preferred Stock is to maintain the interest of the Torchlight stockholders as of the Series A Preferred Record Date in the O&G Assets after the consummation of the Arrangement.

How do I make sure I receive the dividend of Series A Preferred Stock?

Once the dividend of Series A Preferred Stock is declared and issued, the Torchlight stockholders who are eligible to receive the dividend will be notified in the following manner:

 

   

If you own your Torchlight Shares in certificate form or in DRS form (on account with the transfer agent), you will be mailed a statement from the transfer agent directly with evidence of your ownership; or

 

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If you own your Torchlight Shares in a brokerage account, your brokerage company will be responsible for making sure your dividend is applied to your account. Your brokerage company should have a dividend department that will ensure you receive the Series A Preferred Stock.

What will be the effects of the amendments to Torchlight’s Articles of Incorporation?

The proposed Amendment to the Articles of Incorporation of Torchlight and Amended and Restated Articles of Incorporation for Torchlight are attached hereto as Annex L and M, respectively, and will have the following effects:

 

  (a)

increase the authorized shares of Torchlight’s authorized (i) common stock from 150,000,000 shares to 1,000,000,000 shares and (ii) preferred stock from 10,000,000 shares to 200,000,000 shares;

 

  (b)

effect a reverse stock split of the Torchlight Shares within a range from 1-for-2 to 1-for-20, with the exact ratio of the reverse stock split to be determined by the Torchlight Board; and

 

  (c)

change the name of Torchlight to Meta Materials Inc.

Is the Arrangement conditioned on Torchlight raising at least $10,000,000 in new capital?

Yes. In order for the Arrangement to occur, Torchlight was required to raise at least $10,000,000 (less the principal amount of the Bridge Notes) in the Pre-Closing Financing for the Combined Company’s use going forward. As previously disclosed in our Current Reports on Form 8-K, Torchlight has provided $1,000,000 of bridge financing to Meta through the Bridge Notes. On February 10, 2021, Torchlight closed the Torchlight Offering, raising $27,600,000 in gross proceeds. $5,000,000 of the gross proceeds from the Torchlight Offering constitute Working Capital Financing, and the remaining $22,600,000 of the gross proceeds from the Torchlight Offering constitute the Pre-Closing Financing. Accordingly, this closing condition has been satisfied. Torchlight Shares issued in connection with the Pre-Closing Financing are intended to be proportionally dilutive at 75% to Meta shareholders and 25% to Torchlight stockholders, and will be excluded from the number of Torchlight Shares outstanding for purposes of calculating the Exchange Ratio. After the closing of the Pre-Closing Financing, Torchlight used a portion of the net proceeds to provide $10,000,000 per the Additional Bridge Financing to Meta. See “The Arrangement Agreement — Conditions for Completion of the Arrangement.”

Torchlight Shares issued in the Working Capital Financing will be taken into account in the calculation of the Exchange Ratio, such that the shares to be received by the holders Meta common shares will not be diluted by any Torchlight Shares issued in connection with such Working Capital Financing.

What will the new name of the Combined Company be following the Arrangement?

The name of the Combined Company will be Meta Materials Inc., which represents the current business of Meta, as described in greater detail in this proxy statement, and which will be the business of the Combined Company on a going forward basis, should the Arrangement occur.

Who will manage the Combined Company following the Arrangement?

Following the Effective Time, the Combined Company’s board of directors will be comprised of seven directors, with five of such directors to be nominees of Meta, one to be jointly nominated by Meta and Torchlight and one director to be a nominee of Torchlight, subject to the reasonable approval of Meta. 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. For more information, see “The Arrangement Agreement — Board of Directors and Officers” and “Information about Meta — Composition of the Board of Directors Following the Effective Time.”

 

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When do Torchlight and Meta expect to complete the Arrangement?

Subject to obtaining Court and other requisite approvals as well as the satisfaction of all other conditions precedent to the completion of the Arrangement, it is anticipated that the Arrangement will be completed on or about June 18, 2021 subject to the receipt of any required regulatory approvals and the satisfaction of all other conditions to Closing set forth in the Arrangement Agreement.

What will happen if the Arrangement is not completed for any reason?

If the Arrangement is not completed for any reason by June 18, 2021, the Arrangement Agreement may be terminated. If this occurs, Torchlight will continue to carry on its business operations in the normal course. See “Risk Factors — Risks Relating to the Arrangement.” In certain circumstances, Torchlight or Meta may be required to pay a termination fee of $2 million to the other party. In addition, if the completion of the Arrangement does not otherwise occur, then Meta shall be obligated to repay to Torchlight, the amounts owing to Torchlight pursuant to the Bridge Notes being an amount equal to $500,000 (plus interest accrued on such principal at the rate of 8% per annum) each, which is due and payable on September 20, 2022, subject to the redemption or conversion thereof and an amount equal to $500,000 (plus interest accrued on such principal at the rate of 8% per annum) on December 16, 2022, subject to the redemption or conversion thereof. Further, Meta will also be obligated to repay to Torchlight the principal amount of the Additional Bridge Financing (plus interest accrued on such principal at the rate of 8% per annum), which would be due and payable on the first anniversary of the closing of the Pre-Closing Financing. See “The Arrangement Agreement — Termination Payment Amount” and “The Arrangement Agreement — Supplementary Bridge Financing.”

 

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SUMMARY OF THE ARRANGEMENT

This summary is qualified in its entirety by the more detailed information appearing elsewhere in this proxy statement, including the Annexes which are incorporated into and form part of this proxy statement. Terms with initial capital letters in this summary are defined in the Glossary of Defined Terms immediately preceding this summary.

Parties

Torchlight Energy Resources, Inc.

Torchlight Energy Resources, Inc.

5700 W. Plano Parkway, Suite 2600

Plano, Texas 75093

Telephone: (214) 432-8002

Torchlight Energy Resources, Inc., a Nevada corporation, is an oil and gas exploration company with properties located in Texas.

2798831 Ontario Inc.

2798831 Ontario Inc.

c/o Torchlight Energy Resources, Inc.

5700 W. Plano Parkway, Suite 2600

Plano, Texas 75093

Telephone: (214) 432-8002

2798831 Ontario Inc., an Ontario corporation, or Callco, is a newly formed, directly wholly-owned subsidiary of Torchlight that was organized specifically for the purpose of completing the Arrangement. Callco has engaged in no business activities to date and it has no material assets or liabilities of any kind, other than those incident to its formation and in connection with the Arrangement.

Metamaterial Exchangeco Inc.

Metamaterial Exchangeco Inc.

c/o Torchlight Energy Resources, Inc.

5700 W. Plano Parkway, Suite 2600

Plano, Texas 75093

Telephone: (214) 432-8002

Metamaterial Exchangeco Inc., an Ontario corporation, or Canco, is a newly formed, directly wholly-owned subsidiary of Torchlight that was organized specifically for the purpose of completing the Arrangement. Canco has engaged in no business activities to date and it has no material assets or liabilities of any kind, other than those incident to its formation and in connection with the Arrangement.

Metamaterial Inc.

Metamaterial Inc.

1 Research Drive

Dartmouth, Nova Scotia

B2Y 4M9

Telephone: (902) 482-5729

Metamaterial Inc., an Ontario corporation, is a developer of high-performance functional materials and nanocomposites.

 

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Purpose and Description of the Arrangement

The Arrangement is in substance a reverse takeover of Torchlight by Meta, in order to facilitate Meta’s listing on NASDAQ and access to the US capital markets. Pursuant to the Arrangement Agreement, Torchlight and Meta will complete a business combination pursuant to which Torchlight will indirectly acquire all of the Meta Shares and the Combined Company will be renamed “Meta Materials Inc.” and focus its business on the current business of Meta.

The Arrangement Agreement provides that Torchlight and the Combined Company will use commercially reasonable efforts to sell the O&G Assets prior to the Asset Sale Expiration Date. In connection with the Arrangement, Torchlight will declare a dividend, on a one-for-one basis, of shares of Series A Preferred Stock to holders of record of Torchlight Shares as of the Series A Preferred the Record Date, which will dividend will be paid immediately prior to the Closing of the Arrangement. The Series A Certificate of Designation will entitle the holders of Series A Preferred Stock to receive Asset Sale Dividends in the event that Torchlight or the Combined Company consummates one or more Asset Sale Transactions prior to the Asset Sale Expiration Date. In the event that any O&G Assets have not been sold in an Asset Sale Transaction that is consummated prior to the Asset Sale Expiration Date, the Combined Company will, subject to certain conditions and to the extent permitted by applicable law, declare a Spin-Off Dividend to distribute beneficial ownership of the Remaining Assets to the holders of Series A Preferred Stock. See “The Arrangement Agreement — Torchlight Business Sale,” “The Arrangement Agreement — Preferred Stock Dividend” and Description of Exchangeable Shares, Series A Preferred Stock and Related Agreements — Description of Series A Preferred Stock.

Pursuant to the Arrangement, Meta shareholders will receive Torchlight Share Consideration and/or Exchangeable Share Consideration and are expected to hold approximately 75% (before giving effect to the issuance of Torchlight Shares in the Pre-Closing Financing) of the outstanding Combined Company Shares while Torchlight stockholders will retain approximately 25% (before giving effect to the issuance of Torchlight Shares in the Pre-Closing Financing) of the outstanding Combined Company Shares.

It is a condition of Closing that Torchlight shall complete the Pre-Closing Financing to raise gross proceeds of not less than $10 million (less the $1 million of financing provided by Torchlight to Meta by way of the Bridge Notes) through the issuance of Torchlight Shares or securities convertible into or exercisable for Torchlight Shares. This condition was satisfied through the Torchlight Offering. Torchlight Shares issued or issuable in connection with the Pre-Closing Financing are intended to be proportionally dilutive at 75% to Meta shareholders and 25% to Torchlight stockholders, and will be excluded from the number of Torchlight Shares outstanding for purposes of calculating the Exchange Ratio. After the closing of the Pre-Closing Financing, Torchlight used a portion of the net proceeds to provide $10,000,000 per the Additional Bridge Financing to Meta. See “The Arrangement Agreement — Conditions for Completion of the Arrangement.

Following the Closing of the Arrangement, the board of directors of the Combined Company will be comprised of seven members, one of whom will be appointed by Torchlight, a second to be jointly appointed by Meta and Torchlight and the remaining five members to be appointed by Meta. Meta’s Chief Executive Officer, George Palikaras, and Meta’s Chief Financial Officer, Kenneth Rice, will be appointed the chief executive officer and chief financial officer of the Combined Company, respectively. See “The Arrangement Agreement — Board of Directors and Officers.

The Arrangement Proposal, the Articles Amendment Proposal and the Articles Amendment and Restatement Proposal must each be approved by the Torchlight stockholders for the Arrangement to be consummated.

Under the terms of the Plan of Arrangement, (a) each Meta shareholder who is an Eligible Holder may elect to (i) receive in respect of any or all of their Meta Shares, the Exchangeable Share Consideration and (ii) receive in respect of the balance of their Meta Shares, if any, the Torchlight Share Consideration, and (b) each Meta shareholder who is not an Eligible Holder is entitled to receive the Torchlight Share Consideration. Any Meta shareholder that does not make an election will receive the Torchlight Share Consideration. See “Description of Exchangeable Shares, Series A Preferred Stock and Related Agreements.

 

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The Exchange Ratio pursuant to which Meta Shares will be exchanged for Torchlight Shares or Exchangeable Shares pursuant to the Arrangement is not fixed, but will be determined in accordance with the Plan of Arrangement pursuant to the following formula:

A = B/C

where

A = the number of Torchlight Shares or Exchangeable Shares to be received in exchange for each one (1) Meta Share, rounded to three decimal places;

B = the Meta shareholders’ proportionate share of the total pro forma number of Torchlight Shares to be outstanding upon completion of the Arrangement, which for greater certainty will be equal to 75% of the total pro forma number of outstanding Torchlight Shares upon completion of the Arrangement (including any Torchlight Shares issued by Torchlight pursuant to the Working Capital Financing, which are intended to be 100% dilutive to Torchlight stockholders, but excluding any Torchlight Shares issued by Torchlight pursuant to the Pre-Closing Financing, which are intended to be proportionally dilutive to each party at 75% to Meta shareholders and 25% to Torchlight stockholders), subject to further adjustment upward for any other Torchlight Shares issued or issuable prior to the Effective Time that are intended to be 100% dilutive to Torchlight stockholders; and

C = the number of Meta Shares outstanding immediately prior to the Effective Time.

Based on the above formula, the Exchange Ratio will be determined based on the number of Torchlight Shares and Meta Shares outstanding immediately prior to the completion of the Arrangement, such that the holders of Meta Shares immediately prior to the completion of the Arrangement will hold approximately 75% (before giving effect to the issuance of Torchlight Shares in the Pre-Closing Financing) of the outstanding Combined Company Shares upon completion of the Arrangement.

On February 10, 2021, Torchlight completed the Torchlight Offering, which constituted both the Working Capital Financing and the Pre-Closing Financing contemplated by the Arrangement Agreement. Of the Torchlight Shares issued in the Torchlight Offering, 4,166,667 constitute Torchlight Shares issued for the Working Capital Financing, which will be included in the pro forma number of Torchlight Shares outstanding for purposes of calculating the Exchange Ratio. The remaining 18,833,333 Torchlight Shares issued in the Torchlight Offering constitute Torchlight Shares issued for the Pre-Closing Financing, which will be excluded from the pro forma number of Torchlight Shares outstanding for purposes of calculating the Exchange Ratio. Following this paragraph is a pro forma calculation of the Exchange Ratio and the respective ownership percentages of the Combined Company of the legacy Meta shareholders and legacy Torchlight stockholders, giving effect to the Torchlight Shares issued in the Torchlight Offering and based on the number of Torchlight Shares and Meta Shares outstanding as of the Record Date.

 

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Pro Forma Exchange Ratio Calculation

 

Torchlight Shares outstanding as of the Record Date:    145,563,667 shares

less the Torchlight Shares issued for the Pre-Closing Financing:

   145,563,667 shares minus 18,833,333 shares = 126,730,334 shares
Torchlight Shares outstanding as of the Record Date for purposes of calculating the Exchange Ratio:    126,730,334 shares
Pro forma Combined Company Shares outstanding upon completion of the Arrangement:    126,730,334 shares divided by 0.25 = 506,921,336 shares
Pro forma Combined Company Shares issuable to Meta shareholders in connection with the Arrangement:    506,921,336 shares minus 126,730,334 shares = 380,191,002 shares
Meta common shares outstanding as of the Record Date:    105,551,460 shares
Illustrative Exchange Ratio as of the Record Date:    380,191,002 shares divided by 105,551,460 shares = 3.6019 Combined Company Shares per Meta Share

Pro Forma Ownership Split Calculation

 

Pro forma Combined Company Shares outstanding upon completion of the Arrangement (including the Torchlight Shares issued for the Pre-Closing Financing):    506,921,336 shares plus 18,833,333 shares = 525,754,669 shares
Legacy Meta shareholders pro forma percentage ownership of the Combined Company:    380,191,002 shares divided by 525,754,669 shares = 72.3%
Legacy Torchlight stockholders pro forma percentage ownership of the Combined Company (including investors in the Pre-Closing Financing):    145,563,667 shares divided by 525,754,669 shares = 27.7%

The foregoing is intended to be illustrative of the manner in which the Exchange Ratio will be determined; however, the actual Exchange Ratio could be higher or lower.

For more details about the purpose of the Arrangement, see “The Arrangement — Purpose and Description of the Arrangement,” and “The Arrangement Agreement”.

Background of the Arrangement

The provisions of the Arrangement Agreement are the result of arm’s length negotiations between representatives of Torchlight and Meta and their respective financial and legal advisors.

For more information, see “The Arrangement — Background of the Arrangement.”

Fairness Opinion

In connection with the Arrangement, the Torchlight Board received a written opinion, dated December 13, 2020, from Roth, which states that, as of such date, and subject to the assumptions, limitations and qualifications set out therein, the Arrangement is fair, from a financial point of view, to the Torchlight stockholders. The Torchlight Board is entitled to rely on the Fairness Opinion in connection with its decision to approve the Arrangement. The full text of the Fairness Opinion, which sets forth certain assumptions made, matters considered and limitations on the review undertaken in connection with such opinion, is attached as Annex J to this proxy statement. Torchlight stockholders are urged to, and should, read the Fairness Opinion in its entirety.

 

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Subject to the terms of its engagement, Roth has consented to the inclusion in this proxy statement of its Fairness Opinion in its entirety, together with the summary herein, and other information relating to Roth and its Fairness Opinion. The Fairness Opinion addresses only the fairness of the Arrangement from a financial point of view to the Torchlight stockholders and does not and should not be construed as a valuation of Torchlight or Meta or their respective assets, liabilities or securities or as recommendations to any Torchlight stockholders as to how to vote at the Special Meeting.

For more information, see “The Arrangement — Fairness Opinion.

Reasons for the Arrangement

In considering its decision to approve the Arrangement Agreement and to authorize and approve the Arrangement and, subject to the terms and conditions of the Arrangement Agreement, to recommend the approval of the Arrangement Proposal, the Articles Amendment Proposal and the Articles Amendment and Restatement Proposal by Torchlight’s stockholders, the Torchlight Board consulted with Torchlight’s management, as well as Torchlight’s legal and financial advisors, and considered the terms of the proposed Arrangement Agreement, the Arrangement and the other transactions set forth in the Arrangement Agreement, as well as other alternative transactions. In addition, Torchlight’s management believes that the Arrangement provides the current Torchlight stockholders an opportunity to retain their beneficial interest in the O&G Assets while also retaining ownership of approximately 25% (before giving effect to the issuance of Torchlight Shares in the Pre-Closing Financing) of the outstanding Combined Company Shares after the consummation of the Arrangement.

See “The Arrangement — Reasons for the Arrangement.

Recommendation of the Torchlight Board

After careful consideration of, among other things, the Fairness Opinion, and consultation with its financial and legal advisors, the Torchlight Board has unanimously determined that the Arrangement is in the best interests of Torchlight and that the Arrangement is fair and reasonable to the Torchlight stockholders. Accordingly, the Torchlight Board has determined UNANIMOUSLY to recommend to the Torchlight stockholders that they vote FOR the Arrangement Proposal, the Articles Amendment Proposal, the Articles Amendment and Restatement Proposal, the Adjournment Proposal and the Advisory Proposal. See “The Arrangement — Recommendation of the Torchlight Board.”

Principal Steps of the Arrangement

The following description is qualified in its entirety by reference to the full text of the Plan of Arrangement, a copy of which is attached hereto as Appendix B. At the Effective Time and pursuant to the Plan of Arrangement, the following transactions, among others, will occur and will be deemed to occur sequentially in the following order:

 

   

each Meta Share held by a Dissenting Shareholder shall be deemed to be transferred by the holder thereof, without any further act or formality on its part, free and clear of all Encumbrances, to Meta and Meta shall thereupon be obliged to pay the amount therefor determined and payable in accordance with the Plan of Arrangement, and the name of such holder shall be removed from the central securities register of Meta as a holder of Meta Shares and Meta shall be recorded as the registered holder of the Meta Shares so transferred and shall be deemed to be the legal owner of such Meta Shares, which Meta Shares shall thereupon be cancelled;

 

   

each issued and outstanding Meta Share (other than Exchangeable Elected Shares and other than Meta Shares held by Torchlight or an affiliate thereof or Dissenting Shareholders) held by a Meta shareholder shall be transferred by the holder thereof, without any further act or formality on its part, free and clear of all Encumbrances, to Canco in exchange for Torchlight Share Consideration in accordance with the election or deemed election of such Meta shareholder pursuant to the Plan of Arrangement;

 

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each Exchangeable Elected Share shall be transferred by the holder thereof, without any further act or formality on its part, free and clear of all Encumbrances, to Canco in exchange for Exchangeable Share Consideration in accordance with the election of such Meta shareholder pursuant to the Plan of Arrangement;

 

   

Torchlight, Canco and Callco shall execute the Support Agreement and Torchlight, Canco and the Transfer Agent shall execute the Voting and Exchange Trust Agreement and Torchlight shall issue to and deposit with the Transfer Agent the Special Voting Share in consideration of the payment to Torchlight by Meta on behalf of the Meta securityholders of one dollar ($1.00), to be thereafter held of record by the Transfer Agent as trustee for and on behalf of, and for the use and benefit of, the holders of the Exchangeable Shares in accordance with the Voting and Exchange Trust Agreement. All rights of holders of Exchangeable Shares under the Voting and Exchange Trust Agreement shall be received by them as part of the property receivable by them under the Plan of Arrangement in exchange for the Exchangeable Elected Shares for which they were exchanged;

 

   

each Meta Option outstanding immediately prior to the Effective Time shall, without further action or formality by or on behalf of the holders thereof, be exchanged for a Replacement Option to purchase from Torchlight the number of Torchlight Shares equal to the product of (a) the number of Meta Shares issuable pursuant to the exercise of the Meta Option immediately before the Effective Time, and (b) the Exchange Ratio, provided that if the foregoing would result in a fraction of a Torchlight Share being issuable upon any particular exercise of Replacement Options, then the number of Torchlight Shares otherwise issuable upon exercise of such Replacement Options shall be rounded down to the nearest whole number of Torchlight Shares. The exercise price per Torchlight Share subject to any such Replacement Option shall be an amount equal to the quotient of (a) the exercise price per Meta Share under the exchanged Meta Option immediately prior to the Effective Time, divided by (b) the Exchange Ratio. Except as set out above, all terms and conditions of an Replacement Option, including the term to expiry, conditions to and manner of exercising, will be the same as the Meta Option for which it was exchanged and any document evidencing a Meta Option shall thereafter evidence and be deemed to evidence such Replacement Option;

 

   

each Meta DSU shall, without any further action on the part of any holder thereof, be continued on the same terms and conditions as were applicable immediately prior to the Effective Time, except that, pursuant to the terms of the deferred share unit plan of Meta, the terms of the Meta DSUs shall be amended so as to substitute for the Meta Shares issuable pursuant to such Meta DSUs, such number of Torchlight Shares equal to (a) the number of Meta Shares issuable pursuant to the Meta DSUs immediately prior to the Effective Time, multiplied by (b) the Exchange Ratio, rounded down to the nearest whole number; and

 

   

each Meta Warrant shall, without any further action on the part of any holder thereof, be continued on the same terms and conditions as were applicable immediately prior to the Effective Time, except that, pursuant to the terms of the applicable warrant certificate, the terms of the Meta Warrants shall be amended so as to (a) substitute for the Meta Shares issuable pursuant to the exercise of such Meta Warrants such number of Torchlight Shares equal to (i) the number of Meta Shares issuable pursuant to the exercise of such Meta Warrants immediately prior to the Effective Time, multiplied by (ii) the Exchange Ratio, rounded down to the nearest whole number; and (b) adjust the exercise price Torchlight Share issuable pursuant to the exercise of any such Meta Warrant following the Effective Time to be an amount equal to the quotient of (i) the exercise price per Meta Share under the Meta Warrant immediately prior to the Effective Time divided by (ii) the Exchange Ratio.

In no event shall any fractional Torchlight Shares or Exchangeable Shares be issued under the Plan of Arrangement. Where the aggregate number of Torchlight Shares or Exchangeable Shares to be issued to a Meta securityholder would result in a fraction of a Torchlight Share or Exchangeable Share being issuable, then the number of Torchlight Shares or Exchangeable Shares to be issued to a Meta shareholder shall be rounded down to the nearest whole number and no compensation shall be issued in lieu of the issuance of a fractional Torchlight Share or Exchangeable Share.

 

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See “The Arrangement — Principal Steps of the Arrangement” and the Plan of Arrangement, a copy of which is attached as Annex B to this proxy statement.

Required Stockholder Approval for the Arrangement

In order for the Arrangement to be consummated, the Torchlight stockholders must approve the Arrangement Proposal, the Articles Amendment Proposal and the Articles Amendment and Restatement Proposal. Assuming a quorum is present, the affirmative vote of a majority of the shares entitled to vote that are present at the Special Meeting virtually or represented by proxy is required for the approval of the Arrangement Proposal. The Articles Amendment Proposal and the Articles Amendment and Restatement Proposal will be approved if a majority of the outstanding Torchlight Shares vote for such proposals.

Voting and Support Agreement

To the knowledge of Torchlight, the Torchlight Supporting Stockholders beneficially own, or exercise control or direction over, directly or indirectly, 23,578,670 Torchlight Shares representing approximately 16.1% of the issued and outstanding Torchlight Shares as of the Record Date, on a non-diluted basis.

On December 14, 2020, the Torchlight Supporting Stockholders entered into the Voting and Support Agreement with Meta pursuant to which, among other things, they agreed to cause to be counted as present for purposes of establishing quorum at the Special Meeting and to vote (or cause to be voted) the securities owned legally or beneficially by each of them or over which they exercise control or direction, as applicable, FOR matters related to the Arrangement, and to duly complete and cause forms of proxy in respect of all of the applicable securities held by them to be validly delivered to cause the applicable securities to be voted FOR matters related to the Arrangement.

The Voting and Support Agreement automatically terminates if the Arrangement Agreement is terminated in accordance with its terms.

See “The Arrangement Voting and Support Agreement.”

Expenses of the Arrangement

Except as otherwise provided in the Arrangement Agreement, all out-of-pocket third party transaction expenses incurred in connection with the Arrangement Agreement and the Plan of Arrangement and the transactions contemplated thereunder, shall be paid by the party incurring such fees, costs or expenses, whether or not the Arrangement is consummated.

See “The Arrangement — Expenses of the Arrangement.”

Court Approval of the Arrangement

An arrangement under the OBCA requires Court approval. On February 8, 2021, Meta obtained the Interim Order, which provides for the calling and holding of the Meta Meeting, the Dissent Rights and other procedural matters. The Meta Meeting was held on March 12, 2021, and, on that date, Meta received the votes required to secure Meta Securityholder Approval.

Meta made an application to the Court for the Final Order approving the Arrangement on March 17, 2021 at 12:00 pm (Toronto time) and the Court issued and entered the Final Order on that date. The Court considered, among other things, the substantive and procedural fairness of the Arrangement to the parties affected, including the Meta shareholders, Meta optionholders, Meta warrantholders, Meta DSU holders or other interested parties.

 

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The Court was advised that the Court’s approval of the Arrangement (including the fairness thereof), if granted, will form a basis for the exemption from the registration requirements of the Securities Act provided by Section 3(a)(10) thereof with respect to the issuance and distribution of the Consideration Shares to be issued by Torchlight to Meta shareholders pursuant to the Arrangement and with respect to the issuance and distribution of the Replacement Options to be issued to Meta optionholders pursuant to the Arrangement. Consequently, as the final order was granted, the Consideration Shares issuable to Meta shareholders pursuant to the Arrangement and the Replacement Options issuable to Meta optionholders pursuant to the Arrangement will not require registration under the Securities Act.

Assuming the other conditions to closing contained in the Arrangement Agreement are satisfied or waived to the extent legally permissible, then articles of arrangement will be filed to give effect to the Arrangement.

See “The Arrangement — Court Approval of the Arrangement” and “The Arrangement — Completion of the Arrangement.”

The Arrangement Agreement

A description of certain provisions of the Arrangement Agreement are included in this proxy statement under the heading “The Arrangement Agreement.” The description is not comprehensive and is qualified in its entirety by the full text of the Arrangement Agreement, which is attached as Annex B.

See “The Arrangement Agreement.”

Completion of the Arrangement

Subject to the provisions of the Arrangement Agreement, the Arrangement will become effective at 12:01 a.m. (Toronto time) on the Effective Date. Completion of the Arrangement is anticipated to occur on or about June 18, 2021; however, it is possible that completion may be delayed beyond this date if the conditions to completion of the Arrangement cannot be met on a timely basis. After the Effective Date, Meta will be an indirect subsidiary of Torchlight.

The Arrangement is subject to a number of conditions in addition to the approval of the Torchlight stockholders of the Arrangement Proposal, the Articles Amendment Proposal and the Articles Amendment and Restatement Proposal, including, among others, Court approval, the completion of the Pre-Closing Financing (which condition was satisfied via the Torchlight Offering), approval of NASDAQ, the approval of the Arrangement by the holders of Meta Securities, (which was obtained on March 12, 2021 at the Meta Meeting), approval of BDC Capital Inc., a holder of Meta debt (which was obtained on March 3, 2021) and all debt of Torchlight being converted to Torchlight Shares or repaid in full, other than the Straz Debt, which shall be amended so that the sole recourse will be against the O&G Assets. As of the date of this proxy statement, all of Torchlight’s debt has been settled.

See “The Arrangement Agreement — Conditions for Completion of the Arrangement.

Non-Solicitation of Acquisition Proposals

Each of Torchlight and Meta has agreed not to solicit alternative Acquisition Proposals during the Pre-Effective Date Period. Torchlight and Meta have also agreed to certain covenants and procedures for responding to an Acquisition Proposal that constitutes a Superior Proposal, including certain notice requirements and matching rights.

See “The Arrangement Agreement — Additional Covenants Regarding Non-Solicitation.

 

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Termination of the Arrangement Agreement

Each of Torchlight and Meta can terminate the Arrangement Agreement under certain circumstances, including to enter into an alternative transaction that constitutes a Superior Proposal, provided that the terminating Party has complied with the covenants regarding non-solicitation, notices and matching rights. If the Arrangement Agreement is terminated under certain circumstances, Meta or Torchlight may be required to make the Termination Payment of $2 million to the other Party.

See “The Arrangement Agreement — Termination of Arrangement Agreement.

Interests of Certain Persons in the Arrangement

You should be aware that members of the management and Torchlight Board have interests in the Arrangement that may be in addition to or different from the interests of Torchlight stockholders generally, which will present them with actual or potential conflicts of interest.

See “The Arrangement — Interests of Certain Persons in the Arrangement.

Risk Factors

Torchlight stockholders should carefully consider the risk factors relating to the Arrangement. Some of these risks include, but are not limited to: the possibility that the Arrangement may not be completed; the possibility that the Meta business will not be successful; that the Combined Company may fail to realize the anticipated benefits of the Arrangement; and that the O&G Assets may not be successfully sold or spun off as described herein.

For more information, see “Risk Factors.”

 

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RISK FACTORS

In evaluating the Arrangement, Torchlight stockholders should carefully consider the following risk factors relating to the Arrangement and the Combined Company. The following risk factors are not a definitive list of all risk factors associated with the Arrangement and the Combined Company. Additional risks and uncertainties, including those currently unknown or considered immaterial by Torchlight, may also adversely affect the Torchlight Shares, and/or the business of the Combined Company following the Arrangement.

Risks Related to the Arrangement

The Arrangement may not be completed due to failure to obtain the necessary court and/or regulatory approvals.

To complete the Arrangement, each of Meta and Torchlight must make certain filings with and obtain certain consents and approvals from various governmental and regulatory authorities including the Court, and the approval of NASDAQ of the listing of the Torchlight Shares to be issued pursuant to the Arrangement. Meta and Torchlight have not yet obtained these approvals, all of which are required to complete the Arrangement. The regulatory approval processes may take a lengthy period of time to complete which could delay completion of the Arrangement. The approval processes, including the undertakings and conditions that may be required for approval or whether the court and regulatory approvals, may not be obtained.

Uncertainty surrounding the Arrangement could adversely affect Torchlight’s retention of strategic partners and personnel and could negatively impact Torchlight’s future business and operations.

Because the Arrangement is dependent upon satisfaction of certain conditions, its completion is subject to uncertainty. In response to this uncertainty, Torchlight’s strategic partners may delay or defer decisions concerning Torchlight. Any delay or deferral of those decisions by strategic partners could have a material adverse effect on the business and operations of Torchlight, regardless of whether the Arrangement is ultimately completed.

The Parties could fail to complete the Arrangement or the Arrangement may be completed on different terms.

The Arrangement may not be completed as there are certain conditions that are outside the control of Meta and Torchlight, or if completed, that the Arrangement will be completed on the same or similar terms to those set out in the Arrangement Agreement. The completion of the Arrangement is subject to the satisfaction of a number of conditions which include, among others, (a) obtaining necessary approvals of securityholders and debtholders of Meta and Torchlight (with such approvals relating to Meta having been obtained on March 12, 2021 at the Meta Meeting), (b) that not more than 10% of the Meta shareholders exercise Dissent Rights; (c) the Pre-Closing Financing is completed (which was satisfied by the Torchlight Offering); and (d) performance by Meta and Torchlight of their respective obligations and covenants in the Arrangement Agreement. There can be no assurance that these conditions will be satisfied or, if satisfied, when they will be satisfied.

In addition, each of Meta and Torchlight has the right to terminate the Arrangement Agreement in certain circumstances. Accordingly, there is no certainty that the Arrangement Agreement will not be terminated by either Meta or Torchlight before the completion of the Arrangement. For example, Torchlight has the right, in certain circumstances, to terminate the Arrangement Agreement if changes occur that, in the aggregate, have a Meta Material Adverse Effect. Although a Meta Material Adverse Effect excludes certain events that are beyond the control of Meta and Torchlight, there is no assurance that a change having a Meta Material Adverse Effect on Meta will not occur before the Effective Date, in which case Torchlight could elect to terminate the Arrangement Agreement and the Arrangement would not proceed. In addition, if the Arrangement is not completed by June 18, 2021, Meta or Torchlight may choose to terminate the Arrangement Agreement in accordance with its terms.

If the Arrangement is not completed, the ongoing business of the Torchlight may be adversely affected as a result of the costs (including opportunity costs) incurred in respect of pursuing the Arrangement, and Torchlight

 

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could experience negative reactions from the financial markets, which could cause a decrease in the market price of the Torchlight Shares, particularly if the market price reflects market assumptions that the Arrangement will be completed or completed on certain terms. Torchlight may also experience negative reactions from its partners and there could be a negative impact on Torchlight’s ability to attract future acquisition opportunities. Failure to complete the Arrangement or a change in the terms of the Arrangement could each have a material adverse effect on Torchlight’s business, financial condition and results of operations.

If the Arrangement is not completed and the Torchlight Board decides to seek another merger or business combination, it may not be able to find a party willing to engage in a transaction that is equivalent to, or more attractive than, the Arrangement. In addition, in certain circumstances, Torchlight may be required to pay the Termination Payment to Meta.

The Termination Payment, if triggered, and the terms of the Voting and Support Agreement, may discourage other parties from attempting to acquire Torchlight.

Under the Arrangement Agreement, Torchlight is required to pay a Termination Payment of $2 million to Meta in the event the Arrangement Agreement is terminated in certain circumstances (see “The Arrangement Agreement — Termination Payment”). The Termination Payment may discourage other parties from attempting to acquire the engage in a transaction with Torchlight or otherwise making an Acquisition Proposal, even if those parties would otherwise be willing to offer greater value to the Torchlight stockholder than that offered by Meta under the Arrangement.

Furthermore, as noted above, Torchlight Supporting Stockholders holding approximately 16.1% of the issued and outstanding Torchlight Shares have entered into the Voting and Support Agreement which, subject to the terms of thereof, irrevocably commit them to, among other things, vote their Torchlight Shares in favor of the Arrangement Proposal, the Articles Amendment Proposal and the Articles Amendment and Restatement Proposal and not in favor of any Acquisition Proposal or Superior Proposal (See “The Arrangement — Voting and Support Agreement”). As a result, the Voting and Support Agreement may discourage other parties from attempting to engage in a transaction with Torchlight, even if those parties would otherwise be willing to offer greater value to Torchlight stockholder than that offered by Meta under the Arrangement.

Torchlight will incur substantial transaction-related costs in connection with the Arrangement even if the Arrangement is not completed.

Certain costs related to the Arrangement, such as legal, accounting and certain financial advisor fees must be paid by Torchlight even if the Arrangement is not completed, and some of such costs may be unanticipated or underestimated by Torchlight’s management. Also, if the Arrangement is not completed, Torchlight may be required to pay the Termination Payment to Meta in certain circumstances. Such costs may offset any expected cost savings and other synergies from the Arrangement.

While the Arrangement is pending, Torchlight is restricted from taking certain actions.

The Arrangement Agreement restricts Torchlight from taking specified actions until the Arrangement is completed without the consent of Meta, which may adversely affect the ability of Torchlight to execute certain business strategies including, but not limited to, the ability in certain cases to enter into or amend contracts, acquire or dispose of assets, incur indebtedness or incur capital expenditures. These restrictions may prevent Torchlight from pursuing attractive business opportunities that may arise prior to the completion of the Arrangement. See “The Arrangement Agreement — Conduct of Business of Torchlight.

The pending Arrangement may divert the attention of Torchlight’s management.

The pending Arrangement could cause the attention of Torchlight’s management to be diverted from the day-to-day operations. These disruptions could be exacerbated by a delay in the completion of the Arrangement and could have an adverse effect on the business, operating results or prospects of Torchlight regardless of whether the Arrangement is ultimately completed.

 

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Following the completion of the Arrangement, the Combined Company may issue additional securities.

Following the completion of the Arrangement, the Combined Company may issue additional securities (including equity securities) to finance its activities, including in order to finance acquisitions. If the Combined Company were to issue additional equity securities, the ownership interest of existing Torchlight stockholders may be diluted and some or all of the Combined Company’s financial measures on a per share basis could be reduced. Moreover, as the Combined Company’s intention to issue additional equity securities becomes publicly known, the Combined Company’s share price may be materially adversely affected.

The Torchlight stockholders may not receive any dividends in respect of the Series A Preferred Stock.

In connection with the Arrangement, Torchlight will declare a dividend of shares of Series A Preferred Stock to holders of record of Torchlight Shares as of the Series A Preferred Record Date. Such dividend will be paid immediately prior to the Closing of the Arrangement. See “The Arrangement Agreement — Preferred Stock Dividend.” While Torchlight intends to treat the dividend as a nontaxable stock distribution as defined in the Code, if the IRS were to determine that the distribution did not qualify as such, it is expected that the dividend would be taxable to the holders of Torchlight Shares that receive Series A Preferred Stock. See “The Arrangement — Federal Income Tax Consequences of the Transaction.” The Series A Certificate of Designation will entitle the holders of Series A Preferred Stock to receive Asset Sale Dividends in the event that Torchlight or the Combined Company consummates one or more Asset Sale Transactions prior to the Asset Sale Expiration Date. Any Asset Sale Transactions will be negotiated by the Sales Representatives. However, the Combined Company may not be able to consummate any such transaction prior to such date on terms that will permit the Combined Company to pay such dividends, or at all.

Holders of Series A Preferred Stock will be entitled to receive Asset Sale Dividends from any Asset Sale Transaction that is consummated prior to the Asset Sale Expiration Date. Prior to declaring or paying any Net Proceeds Dividend, the Combined Company will deduct from the gross proceeds from each Asset Sale Transaction various costs and expenses described in the Series A Certificate of Designation, which include, among others, (a) costs and expenses Torchlight or the Combined Company incurs in connection with the applicable Asset Sale Transaction, (b) costs the Combined Company incurs following the consummation of the Arrangement with respect to the O&G Assets, (c) taxes the Combined Company incurs in connection with the applicable Asset Sale Transaction, the payment of dividends to the holders of Series A Preferred Stock, and the O&G Assets, (d) liabilities the Combined Company incurs in connection with the applicable Asset Sale Transaction and the O&G Assets and (e) amounts paid or payable with respect to the Straz Debt (which is no longer applicable, as all of Torchlight’s debt has been settled as of the date of this proxy statement). In addition, the Combined Company will also withhold the Holdback Amount of 10% of the Net Proceeds from each Asset Sale Transaction to cover potential post-closing liabilities and obligations that the Combined Company may incur in respect of such Asset Sale Transaction. If, after the deduction and withholding of these amounts, there are no Net Proceeds from an Asset Sale Transaction available for distribution to the holders of Series A Preferred Stock, then the Combined Company will not declare or pay a dividend with respect to that Asset Sale Transaction unless and until any remaining funds from the Holdback Amount are due to be distributed to the holders of Series A Preferred Stock through a Holdback Dividend, or the Combined Company receives additional Net Proceeds from such Asset Sale Transaction (for example, as a result of post-closing payments or the release of escrowed funds). Further, the Combined Company will not be required to pay any Net Proceeds Dividends or Holdback Dividends until the aggregate amount of accrued Asset Sale Dividends is at least $2,000,000, or there are no Remaining Assets.

In the event that any O&G Assets have not been sold in an Asset Sale Transaction that is consummated prior to the Asset Sale Expiration Date, the Combined Company will, to the extent permitted by applicable law, declare a Spin-Off Dividend to distribute beneficial ownership of the Remaining Assets to the holders of Series A Preferred Stock. Effecting a Spin-Off Dividend may result in tax liability for the Combined Company and the holders of Series A Preferred Stock, and the amount of any Spin-Off Dividend will generally be reduced by any taxes the Combined Company incurs in connection with the Spin-Off Dividend. However, if the Combined Company cannot effect the Spin-Off Dividend in a manner that is exempt from registration under all applicable securities laws, the Combined Company will not declare the Spin-Off Dividend and instead will use good faith, commercially reasonable efforts to preserve the value of the Remaining Assets or to distribute or provide the value of the Remaining Assets to the holders of Series A Preferred Stock, so long as the Combined Company is

 

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not required to divert the attention of management or incur material expenses in excess of the Spin-Off Cost Reserve Amount. Torchlight cannot assure you that the Combined Company will ultimately be able to deliver the value of any Remaining Assets to the holders of Series A Preferred Stock. Ultimately, the Combined Company may not be able to consummate an Asset Sale Transaction or declare the Spin-Off Dividend, and holders of Series A Preferred Stock may not receive any Asset Sale Dividends, Spin-Off Dividends or other value from the O&G Assets.

See “The Arrangement Agreement — Preferred Stock Dividend,” “The Arrangement Agreement — Torchlight Business Sale” and “Description of Exchangeable Shares, Series A Preferred Stock and Related Agreements — Description of Series A Preferred Stock.

The Series A Preferred Stock will not be listed or traded on any exchange and will not be registered, and will not be freely transferable unless such shares are thereafter registered or are saleable pursuant to an applicable exemption from registration.

The Series A Preferred Stock to be issued by Torchlight to holders of record of Torchlight Shares as of the Series A Preferred Record Date will not be listed or traded on any exchange. No market is expected to develop for the Series A Preferred Stock in the foreseeable future and holders of the Series A Preferred Stock may not be able to find a buyer and sell their shares if they desired to do so.

Additionally, the Series A Preferred Stock to be issued by Torchlight to holders of record of Torchlight Shares as of the Series A Preferred Record Date will not be registered under the Securities Act. Holders of Series A Preferred Stock may not be able to sell, liquidate or transfer such Series A Preferred Stock, unless such shares are registered for sale with the SEC, which we do not expect will happen, or if an exemption from registration applies.

Risks Related to the Combined Company

The Combined Company will have limited cash flow and may not able to meet its financial obligations.

As at March 31, 2021, Meta owed the aggregate amount of $1,656,710, out of which $860,473 is payable to its suppliers and service providers in relation to the material received, patent fees, software purchases, equipment purchase, legal and professional fees and Meta’s general overhead for the past few months and $153,932 of interest expected to be paid to the holders of convertible notes of Meta. The suppliers and service providers have been extending time and flexibility to Meta to deal with overdue payments.

Meta currently does not expect that the Combined Company will have an operating cash deficiency in the next 12 months. Should future funds not be made available to the Combined Company or made available on terms that are not commercially reasonable, the Combined Company would be unable to meet its financial obligations and may have cash flow issues that could materially and adversely affect the Combined Company’s business, operations, financial condition and results of operations.

These factors indicate the existence of a material uncertainty that may cast significant doubt about the Combined Company’s ability to continue as a going concern.

The Combined Company’s inability to raise additional financing would limit its growth and may have a material adverse effect upon future profitability.

The Combined Company will require additional funding, likely through equity or debt financing, in order to execute on its business plan. The Combined Company plans to invest in marketing of metaAIR, build prototypes to present its proprietary capability for HOEs and HUDs, build a small scale wafer to wafer Nanoweb production

 

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line and a Pilot scale roll-to-roll Nanoweb production line to address initial and identified market demand. Meta expects that the market demand for its products will grow significantly. However, producing at larger scale and volumes would require additional growth capital and there can be no assurance that additional financing would be available to the Combined Company when needed or on terms that are commercially viable. The Combined Company’s inability to raise financing in the future would limit its growth and may have a material adverse effect upon future profitability.

If additional funds are raised through further issuances of equity or convertible debt securities, holders of Combined Company Shares could suffer significant dilution. Any debt financing secured in the future could involve restrictive covenants relating to capital raising activities and other financial and operational matters, which may make it more difficult for the Combined Company to obtain additional capital and to pursue business opportunities, including potential acquisitions.

The Combined Company’s need for additional financing may dilute existing stockholders.

With the unforeseen delay in sales, in order to execute on its business plan the Combined Company will likely require additional funding by way of equity, debt or government grants/loans. If additional funds are raised through further issuances of equity or convertible debt securities, Combined Company stockholders could suffer significant dilution. Any debt financing secured in the future could involve restrictive covenants relating to capital raising activities and other financial and operational matters, which may make it more difficult for the Combined Company to obtain additional capital and to pursue business opportunities, including potential acquisitions.

A substantial portion of the pro forma total assets of the Combined Company are represented by goodwill, which may fluctuate prior to the Closing of the Arrangement, may be subject to future impairment, and which the Combined Company may be required to write down, up to and including its total value.

In accordance with Accounting Standards Codification Topic 805 (“ASC 805”), the Arrangement will be accounted for as a reverse acquisition in which Meta will be treated as the accounting acquirer and Torchlight will be treated as the accounting acquiree. The relevant portion of ASC 805 provides that in a reverse acquisition, goodwill should be recorded for and attributed to any difference between the total consideration deemed to be transferred by the accounting acquirer and the total net assets of the accounting acquiree. On this basis, the parties have calculated the pro forma goodwill of the Combined Company to be approximately $60.8 million, or approximately 36% of the pro forma total assets of the Combined Company. See note (k) to the “Unaudited Pro Forma Financial Information” included in this proxy statement for additional information regarding the calculation of the pro forma goodwill of the Combined Company.

The pro forma goodwill of the Combined Company is highly sensitive to changes in the assets and liabilities of the parties between the date of presentation of the “Unaudited Pro Forma Financial Information” included in this proxy statement and the Closing of the Arrangement, as well as fluctuations in the market price of the Meta Shares prior to the Closing of the Arrangement. As such, the actual goodwill of the Combined Company as of the Closing of the Arrangement may be substantially different from the pro forma goodwill of the Combined Company presented in the “Unaudited Pro Forma Financial Information” included in this proxy statement.

Further, after the Closing of the Arrangement, the Combined Company will conduct reviews to determine whether its goodwill is impaired and should be written down. These reviews may take place in connection with Asset Sale Transactions, as one significant potential source of goodwill recovery is from the O&G Assets. If the Combined Company determines goodwill is impaired, the Combined Company will be required to take a potentially significant impairment charge and write down the value of such goodwill to its fair value. It is not possible to estimate the amount or magnitude of any such impairment charge or its effect on the financial position of the Combined Company at this time. However, any such impairment charge would have a negative effect on the stockholders’ equity of the Combined Company and its financial results, and may cause a decline in the trading price of the Combined Company Shares.

 

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Meta’s limited operating history makes it difficult to ascertain the health of its business and access its future prospects.

Meta has a limited operating history, which can make it difficult for investors to evaluate the Combined Company’s operations and prospects and may increase the risks associated with investment into the Combined Company.

Meta has not generated significant profits or revenues in the periods covered by its financial statements included herein, and, as a result, has only a very limited operating history upon which its business and future prospects may be evaluated. The Combined Company is expected to be subject to many of the risks common to early-stage enterprises for the foreseeable future, including challenges related to laws, regulations, licensing, integrating and retaining qualified employees; making effective use of limited resources; achieving market acceptance of existing and future products; competing against companies with greater financial and technical resources; acquiring and retaining customers; and developing new solutions.

These factors indicate the existence of a material uncertainty that may cast significant doubt about the Combined Company’s ability to continue as a going concern.

There is uncertainty surrounding whether the aviation industry may accept holography laser protection related products such as metaAIR.

Meta launched its first product, a laser protection eyewear, named metaAIR, in March 2019, with a primary focus on the aviation market. The product offers unique performance and benefits over the competition and is the only industry-approved solution to date. Meta has co-developed this product with Airbus through a strategic partnership. Airbus further extended its support by introducing Meta to Satair, an Airbus owned company, which became the global distribution partner for metaAIR to the aviation market. Since 2016, Airbus and Satair invested a total of $2,000,000 for the product development and exclusive distribution rights. Since the launch of metaAIR in March 2019, Meta has sold fifty units to its distributor Satair. Meta is currently in the process of increasing its marketing and sales capacity.

Despite Meta’s close collaboration with Airbus there can be no assurance that the aviation market will accept the metaAIR product at the expected market penetration rates and a slower than forecasted market acceptance may have a material adverse effect on the Holography laser protection related products and the Combined Company’s financial position. Meta is pursuing ancillary markets outside of the aviation industry for its metaAIR laser protection eyewear such as in law enforcement and defense.

There is uncertainty surrounding whether the telecommunications and automotive markets will accept lithography related product such as NanoWeb.

The lithography-related products have not yet reached the required technical maturity and are expected to be launched in two to three years’ time after a successful product development completion. Despite Meta’s close collaboration with two automotive partners and a major chemical company focused on telecommunications infrastructure, there can be no assurance that these markets will accept the NanoWeb product at the expected market penetration rates and a slower than forecasted market acceptance may have a material adverse effect on the lithography related products and the Combined Company’s financial position.

Uncertainty and change in laws, regulations and guidelines may adversely impact the Combined Company.

The current and proposed operations of Meta and the Combined Company, respectively, are subject to a variety of laws, regulations and guidelines relating to production, the conduct of operations, transportation, storage, health and safety, medical device regulation and the protection of the environment. These laws and regulations are broad in scope and subject to evolving interpretations, which could require the Combined Company to incur substantial costs associated with compliance or alter certain aspects of its business plan. In

 

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addition, violations of these laws, or allegations of such violations, could disrupt certain aspects of the Combined Company’s business plan and result in a material adverse effect on certain aspects of its planned operations.

Meta launched a new product metaAIR in March 2019 to provide laser glare protection to pilots in the airline industry. Currently, metaAIR is not subject to any Federal Aviation Administration regulations. However, metaAIR may become subject to evolving regulation by governmental authorities as metaAIR market evolves further.

Uncertainty surrounding setting up a new facility and permits for lithography products may have an adverse impact on the Combined Company.

The Combined Company plans to scale its lithography production in Canada and plans to move into a larger facility suitable to host the holography and lithography production scale up as the current facility does not have enough space and capability to have production line for lithography. Lithography is a wet chemistry process which requires specific approvals from the local government to allow use of certain chemicals and its disposal.

The Combined Company’s plans to scale its lithography production in Canada is dependent on obtaining adequate additional funding. Any delay in setting up the facility and receiving permits may have a material adverse effect on launch and/or development of related products, and also may have a material adverse effect on the lithography and holography related products and the Combined Company’s financial position.

Meta purchases all of its holographic raw materials from a single source, which makes it vulnerable to supply shortages and price fluctuations that could have a material adverse effect on its business, financial condition and results of operations.

Meta purchases, and the Combined Company expects to continue to purchase, its holographic raw materials from a tier 1 German manufacturer which is a single source supplier. Disruption in supply from this supplier may cause a material adverse effect on the holography related products.

The Combined Company may be unable to maintain, obtain or adequately protect its intellectual property rights, which may cause the Combined Company not to be able to compete effectively in its market or it could be required to incur significant expenses to enforce or defend its rights or attempt to do the same.

The success of the Combined Company will depend, in part, on its ability to maintain and enhance intellectual property and trade secret protection over various existing and potential proprietary techniques and products. The Combined Company may be vulnerable to competitors who develop competing technology, whether independently or as a result of acquiring access to the proprietary products and trade secrets. In addition, effective future patent, copyright, trademark, and trade secret protection may be unavailable or limited in certain foreign countries and may be unenforceable under the laws of certain jurisdictions.

The Combined Company’s market development efforts may be unsuccessful, any failure of which may materially affect the Combined Company’s business.

Although the Combined Company, itself and through its investments, is committed to researching and developing new markets and products and improving existing products, there can be no assurances that such research and market development activities will prove profitable or that the resulting markets and/or products, if any, will be commercially viable or successfully produced and marketed.

A failure in the demand for products to materialize as a result of competition, technological change or other factors could have a material adverse effect on the business, results of operations and financial condition of the companies in which Meta has or will invest in, and consequently, on the Combined Company.

 

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The Combined Company faces potential risks associated with foreign operations.

Since Meta operates a subsidiary, MediWise in the United Kingdom and another subsidiary, MTI USA in California, there are potential foreign exchange risks to the Combined Company because the British pound and Canadian dollar as well as the U.S. dollar are difficult to predict, trend and trade.

The Combined Company will incur significant costs, and the Combined Company’s management will expend a significant amount of energy and resources, to maintain the Combined Company’s public securities listings, which may detract from the Combined Company from furthering its other business objectives.

As a public company, there are costs associated with legal, accounting and other expenses related to regulatory compliance. Securities legislation and the rules and policies of the SEC require listed companies to, among other things, adopt corporate governance and related practices, and to continuously prepare and disclose material information, all of which add to a company’s legal and financial compliance costs. The Combined Company may also elect to devote greater resources than it otherwise would have on communication and other activities typically considered important by publicly traded companies.

The Combined Company may face product liability claims related to its wireless sensing products.

Meta’s wireless sensing technology to enhance MRI imaging and non-invasive glucose monitoring is under development. Meta has performed many experiments on animals and humans and will continues to perform additional experiments as needed to continue the development of the related products.

Any product liability claims or regulatory action against the Combined Company related to wireless sensing products could have a material adverse effect on this business segment of the Combined Company.

The Combined Company’s success relies heavily on its management, the loss of any of whom may have a material adverse effect on the Combined Company’s business.

The success of the Combined Company is dependent upon the ability, expertise, judgment, discretion and good faith of the senior management of the Combined Company. Any loss of the services of such individuals could have a material adverse effect on the Combined Company’s business, operating results or financial condition.

The Combined Company may be exposed to significant currency exchange fluctuations, which may affect the Combined Company’s financial condition.

The Combined Company’s revenues and expenses are expected to be denominated in Canadian dollars, U.S. dollars, and British Pounds, and therefore may be exposed to significant currency exchange fluctuations. Recent events in the global financial markets have been coupled with increased volatility in the currency markets.

Fluctuations in the exchange rate between the U.S. dollar and the Canadian dollar may have a material adverse effect on the Combined Company’s business, financial condition and operating results. The Combined Company may, in the future, establish a program to hedge a portion of its foreign currency exposure with the objective of minimizing the impact of adverse foreign currency exchange movements. However, even if the Combined Company develops a hedging program, there can be no assurance that it will effectively mitigate currency risks.

There may not be an active market for the Combined Company Shares, which may adversely affect the price of the Combined Company Shares.

An active and liquid market for the Combined Company Shares may not be developed or maintained following the completion of the Arrangement will develop or be maintained and an investor may find it difficult

 

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to resell any securities of the Combined Company. In addition, there can be no assurance that the publicly-traded price of the Combined Company Shares following the completion of the Arrangement will be high enough to create a positive return for investors. Further, there can be no assurance that the Combined Company Shares will be sufficiently liquid so as to permit investors to sell their position in the Combined Company without adversely affecting the stock price. In such event, the probability of resale of the Combined Company Shares would be diminished.

The Combined Company shares may be subject to substantial price volatility which may have a negative effect on the value of such shares.

In recent years, the securities markets in the United States and Canada have experienced a high level of price and volume volatility, and the market prices of securities of many companies have experienced wide fluctuations in price which have not necessarily been related to the operating performance, underlying asset values or prospects of such companies. There can be no assurance that continuing fluctuations in price will not occur. It may be anticipated that any quoted market for the Combined Company Shares will be subject to market trends generally, notwithstanding any potential success of the Combined Company in creating revenues, cash flows or earnings. The value of the Combined Company Shares will be affected by such volatility.

It is not anticipated that the Combined Company will pay any dividends.

Meta has not paid dividends in the past, and it is not anticipated that the Combined Company will pay any dividends in the foreseeable future. Dividends paid by the Combined Company would be subject to tax and, potentially, withholdings.

The Combined Company will be required to maintain insurance coverage to cover certain risks associated with the Combined Company’s business, the total coverage of which may not be sufficient to cover all claims and losses that the Combined Company becomes subject to.

The Combined Company will require insurance coverage for a number of risks. Although the management of the Combined Company believes that the events and amounts of liability covered by its insurance policies will be reasonable, taking into account the risks relevant to its business, and the fact that agreements with users contain limitations of liability, there can be no assurance that such coverage will be available or sufficient to cover claims to which the Combined Company may become subject. If insurance coverage is unavailable or insufficient to cover any such claims, the Combined Company’s financial resources, results of operations and prospects could be adversely affected.

The Combined Company might be involved in litigation claims and legal proceedings.

The Combined Company may become party to litigation from time to time in the ordinary course of business which could adversely affect its business. Should any litigation in which the Combined Company becomes involved be determined against the Combined Company, such a decision could adversely affect the Combined Company’s ability to continue operating and the market price for its shares and could use significant resources. Even if the Combined Company is involved in litigation and wins, litigation can redirect significant resources.

Certain directors and officers of the Combined Company may have conflicts of interest that are unfavorable to the Combined Company.

Certain of the Combined Company’s directors and officers are, and may continue to be, involved in other business ventures through their direct and indirect participation in corporations, partnerships, joint ventures, etc. that may become potential competitors of the technologies, products and services the Combined Company intends to provide. Situations may arise in connection with potential acquisitions or opportunities where the other interests of these directors and officers conflict with or diverge from the Combined Company’s interests. In

 

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accordance with applicable corporate law, directors who have a material interest in or who are a party to a material contract or a proposed material contract with the Combined Company are required, subject to certain exceptions, to disclose that interest and generally abstain from voting on any resolution to approve the contract. In addition, the directors and officers are required to act honestly and in good faith with a view to the Combined Company’s best interests. However, in conflict of interest situations, the Combined Company’s directors and officers may owe the same duty to another company and will need to balance their competing interests with their duties to the Combined Company. Circumstances (including with respect to future corporate opportunities) may arise that may be resolved in a manner that is unfavorable to the Combined Company.

 

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INFORMATION ABOUT META

Business Description

Company Overview

Meta was incorporated on August 15, 2011 as Lamda Guard Canada Inc. Meta amended its articles of incorporation on March 27, 2013 and continued operations under the name Metamaterial Technologies Inc. since April 30, 2013. On March 28, 2013, Meta incorporated Lamda Guard Inc., Lamda Lux Inc., and Lamda Solar Inc., under the federal laws of Canada, as wholly-owned subsidiaries of Meta. These subsidiaries have minimal operational activity. Meta specializes in designing and producing nanocomposite transparent materials with properties not found in nature that can manipulate light and other forms of energy, either by enhancing, absorbing, reflecting or blocking them.

On September 7, 2015, Meta incorporated Metamaterial Technologies USA Inc. (“MTI USA”), as a wholly-owned subsidiary, and on May 25, 2016, MTI USA acquired the assets and operations of Rolith Inc. On March 31, 2018, Meta acquired 100% of the common shares of a business operating as Medical Wireless Sensing Ltd. (“MediWise”), incorporated in the United Kingdom.

On March 5, 2020, Metamaterial Inc. (formerly known as Continental Precious Minerals Inc. (“CPM”) and Metamaterial Technologies Inc. (“MTI”) completed a business combination by way of a three-cornered amalgamation pursuant to which MTI amalgamated with Continental Precious Minerals Subco Inc. (“CPM Subco”) a wholly-owned subsidiary of CPM to become “Metacontinental Inc.,” (such transaction constituting the “RTO”). The RTO was completed pursuant to the terms and conditions of an amalgamation agreement dated August 16, 2019 between CPM, MTI and CPM Subco, as amended March 4, 2020. Following completion of the RTO, Metacontinental Inc. is carrying on the business of the former MTI, as a wholly-owned subsidiary of CPM. In connection with the RTO, CPM changed its name, effective March 2, 2020, from Continental Precious Minerals Inc. to Metamaterial Inc. The common shares of CPM were delisted from the TSX Venture Exchange on March 4, 2020 and were posted for trading on the CSE on March 9, 2020 under the symbol “MMAT”. See “Information About Meta — Management Discussion and Analysis” for additional information regarding the RTO.

Description of Business, Operational Overview and Business Objective

Meta has generated a portfolio of intellectual property and is now moving toward commercializing products at a performance and price point combination that has the potential to be disruptive in multiple market verticals. Meta’s platform technology includes holography, lithography and medical wireless sensing. The underlying approach that powers all of Meta’s platform technologies comprises advanced materials, metamaterials and functional surfaces. These materials include structures that are patterned in ways that manipulate light, heat and electromagnetic waves in unusual ways. Meta’s advanced structural design technologies and scalable manufacturing methods provide a path to broad commercial opportunities in aerospace, medical, automotive, energy and other industries.

Controlling light, electricity and heat have played key roles in technological advancements throughout history. Advances in electrical and electromagnetic technologies, wireless communications, lasers, and computers have all been made possible by challenging our understanding of how light and other types of energy naturally behave, and how it is possible to manipulate them.

Over the past 20 years, techniques for producing nanostructures have matured, resulting in a wide range of groundbreaking solutions that can control light and heat at very small scales. Some of the areas of advancement that have contributed to these techniques are photonic crystals, nanolithography, plasmonic phenomena and nanoparticle manipulation. From these advances, a new branch of material science has emerged — metamaterials. Metamaterials are composite structures, consisting of conventional materials such as metals and

 

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plastics, that are engineered by Meta scientists to exhibit new or enhanced properties relating to reflection, refraction, diffraction, filtering, conductance and other properties that have the potential for multiple commercial applications.

A metamaterial typically consists of a multitude of structured unit nano-cells that are comprised of multiple individual elements. These are referred to as meta-atoms. The individual elements are usually arranged in periodic patterns that, together, can manipulate light, heat or electromagnetic waves. Development strategies for metamaterials and functional surfaces focus on structures that produce unusual and exotic electromagnetic properties by manipulating light in ways that have never been naturally possible. They gain their properties not as much from their composition as from their exactingly designed structures. The precise shape, geometry, size, orientation, and arrangement of these nanostructures affect the electromagnetic waves of light to create material properties that are not easily achievable with conventional materials.

Meta’s platform technology (holography, lithography and medical wireless sensing) is being used to develop potentially transformative and innovative products for: aerospace and defense, automotive, energy, healthcare, consumer electronics, and data transmission. Meta has many product concepts currently in different stages of development with multiple customers in diverse market verticals. Meta’s business model is to co-develop innovative products or applications with industry leaders that add value. This approach enables Meta to understand market dynamics and ensure the relevance and need for Meta’s products.

Holography Technology

Holography is a technique where collimated visible wavelength lasers are used to directly write an interference pattern inside the volume of light-sensitive material (photopolymer) in order to produce highly transparent optical filters and holographic optical elements. For some product lines that require large surface areas, this is combined with a proprietary scanning technique, where the lasers, optically or mechanically, directly write nano-patterns to cover large surface areas with nanometer accuracy.

Meta’s principal products that employ holography technology are its metaAIR® laser glare protection eyewear, metaAIR laser protection films for law enforcement and metaOPTIX notch filters. Meta co-developed its metaAIR laser protection eyewear product with Airbus S.A.S. that has been engineered to provide laser glare protection for pilots, military and law enforcement using Meta’s holography technology. metaAIR® is a holographic optical filter developed using nano-patterned designs that block and deflect specific colors or wavelengths of light. Meta launched metaAIR® with strategic and exclusive distribution partner, Satair, a wholly owned Airbus company and started producing and selling metaAIR® in April 2019. The scale-up and specification for the raw photopolymer material used to produce the eyewear was successfully finalized in late 2019 and commercialized in 2020.

Meta launched its laser protection films for law enforcement use in late 2020. These films are designed to be applied to face shields and helmet visors providing the wearer with the same type of laser eye protection afforded to pilots by metaAIR glasses while preserving peripheral vision critical to law enforcement duties. metaOPTIX notch filters are optical filters that selectively reject a portion of the spectrum, while transmitting all other wavelengths. They are used in applications where it is necessary to block light from a laser, as in machine vision applications and in confocal or multi-photon microscopy, laser-based fluorescence instrumentation, or other life science applications. metaOPTIX notch filters were commercially launched by Meta in November 2020.

Meta has additional products in development that utilize its proprietary holography technology. Included in the metaOPTIXTM family of products are holographic optical elements (“HOEs”). HOEs are a core component in the display of augmented reality smart glasses products, as well as (in their larger version) in Heads-Up Displays (“HUDs”), in automobiles and aircraft.

Meta operates its holographic division from Dartmouth, Nova Scotia, Canada.

 

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Lithography Technology

In order to meet the performance, fabrication-speed, and/or cost criteria required for many potential applications that require large area and low cost nanopatterning. Meta has developed a new nanolithography method called “Rolling Mask” lithography (registered trademark RML®), which combines the best features of photolithography, soft lithography and roll-to-plate/roll-to-roll printing capability technologies. Rolling Mask lithography utilizes a proprietary UV light exposure method where a master pattern is provided in the form of a cylindrical mask. These master patterns are designed by Meta and over the years they have become part of a growing library of patterns, enriching the intellectual property of Meta. The nanostructured pattern on the mask is then rolled over a flat surface area writing a nano-pattern into the volume of a light-sensitive material (a photoresist), creating patterned grooves, metal is then evaporated and fills the patterned grooves. The excess metal is then removed by a known post-process called lift-off. The result is an invisible conductive metal mesh-patterned surface (registered trademark NanoWeb®) that can be fabricated onto any glass or plastic transparent surface in order to offer high transparency, high conductivity and low haze smart materials.

Meta’s current principal prototype product in lithography technology is its transparent conductive film, NanoWeb®. The lithography division operates out of Meta’s wholly owned U.S. subsidiary, which can produce meter-long samples of NanoWeb®, at a small volumes scale, for industry customers/partners.

There are six NanoWeb®-enabled products and applications that are currently in early stages of development including NanoWeb® for Transparent EMI Shielding, NanoWeb® for 5G signal enhancement, NanoWeb Transparent Antennas, NanoWeb® for Touch Screen Sensors, NanoWeb® for Solar cells and NanoWeb® for Transparent Heating to de-ice and de-fog. Currently these products are in the design and prototyping phase and Meta is performing market trials with potential customers.

Throughout 2020, Meta was ordering and upgrading its equipment at its California facility to efficiently supply NanoWeb samples in larger volumes. Meta has entered into a collaboration agreement with Crossover Solutions Inc. to commercialize the NanoWeb-enabled products and applications for the automotive industry and with ADI Technologies to help secure contracts with the U.S. Department of Defense.

Wireless Sensing Technology

Wireless sensing is the ability to cancel reflections (anti-reflection) from the skin to increase the Signal-to-Noise-Ratio transmitted through body tissue to enable better medical diagnostics. This breakthrough wireless sensing technology is made using proprietary patterned designs, printed on metal-dielectric structures on flexible substrates that act as anti-reflection (impedance-matching) coatings when placed over the human skin in combination with medical diagnostic modalities, such as MRI, ultrasound systems, non-invasive glucometers etc. For example, as a medical imaging application, Meta is developing metaSURFACETM, or RadiWiseTM, an innovation which allows up to 40 times more energy to be transmitted through the human tissue, instead of being reflected. The benefit is increased diagnostic speed and imaging accuracy leading to patient throughput increases for healthcare providers. The metaSURFACETM device consists of proprietary non-ferrous metallic and dielectric layers that are exactingly designed to interact (resonate) with radio waves allowing the waves to “see-through the skin.”

Meta is developing wireless sensing applications from its London, UK office and advancing the wireless sensing technology with Innovate UK grants.

Overall Performance, Industry Trends and Economic Factors

In Q1 2019, Meta completed the setup of its metaAIR® eyewear production facility and started providing its eyewear to several airlines for in-market flight tests through its distributor, Satair (an Airbus Company). Meta sold 50 units during 2019 and it is further increasing its reach to airlines through Airbus and Satair. Satair

 

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prepared a series of marketing initiatives to promote Meta’s laser glare protection eyewear solution to increase market awareness in the existing laser glare protection market. During May 2019, Meta received the prestigious Silver A’ Design Award in Safety Clothing and Personal Protective Equipment Design Category, from the A’ Design Award and Competition in Italy for its metaAIR® eyewear.

In January 2019, Meta was named one of the Global Cleantech 100 companies in the world, out of over 13,000 innovators from over 90 countries. Also in January 2019, Meta, Dalhousie University and Mitacs announced a CAD$1,620,000 collaboration to explore different areas of application of metamaterial including absorption enhancement of ultra-thin solar cells, light emission enhancement for LEDs, development of next-generation optics for augmented reality applications and development of a wearable thin-film glucose sensor. This was Mitacs’ largest supported project in Atlantic Canada.

In June 2019, Meta’s quality management system was awarded ISO 9001: 2015 certificate in the area of design, development, manufacturing, and distribution of metamaterials for applications in Photonics, Transportation, Renewable Energy, Aviation, Space and Defense.

In June 2019, Meta entered into a statement of work (“SOW”) with a third party for the purchase of manufacturing equipment. The SOW was initiated based on the Industrial and Regional Benefits, IRB, general investment funding between the third party and the Government of Canada. Meta received the funding of CAD$1,300,000 in two tranches, one in June 2019 and the second in October 2019 and acquired the related equipment in July 2019. The CAD$1,300,000 received under the SOW is repayable based on 10% of the revenue from the sale of holographic film for augmented or virtual reality that is produced using the related manufacturing equipment.

During Q2 2019, the team at Meta’s wholly owned U.K. based subsidiary, Mediwise, tested, in a clinical environment, its medical device prototypes that increased the image quality of 1.5T MRI scans.

In August 2019, Meta, through its U.S. wholly owned subsidiary, MTI USA, signed an agreement with SOFWERX, an innovation hub acting as a partnership intermediary for the United States of America Government as represented by United States Special Operation Command to develop NanoWeb® films for de-fogging applications to be applied on wearable equipment such as gas masks and diving masks. During Q4 2019, Meta’s designs were reviewed with the SOFWERX team and in Q1 2020 Meta demonstrated a working prototype to SOFWERX resulting in approval to move to the next stage including delivery of 40 samples.

During December 2019, Meta received a purchase order for its second holographic product HOEs from an established consumer electronic industry leader.

During Q4 2019, the engineering team worked on a plan to set up lithographic capabilities in Canada and enhance the lithography fabrication equipment at Meta’s facility located in Silicon Valley, California.

During 2019 and throughout 2020, Meta was paid to deliver NanoWeb® proof of concept and product samples to large blue-chip Original Equipment Manufacturers in Japan, Israel, USA, South Korea, Germany, and China. In addition, Meta secured purchase orders and delivered NanoWeb® samples for testing in solar and energy product applications from BDC Capital Inc.

On April 3, 2020, Meta closed a secured debenture financing from BDC Capital Inc., a wholly owned subsidiary of the Business Development Bank of Canada, in the amount of CAD$5,000,000 (the “Secured Debenture Financing”). See additional information regarding Secured Debenture Financing in the section of this proxy statement entitled “Information About Meta — Liquidity and Capital Resources.” Additionally, and also on April 3, 2020, Meta received an additional CAD$500,000 in Unsecured Convertible Debentures.

On May 26, 2020, Meta’s Chief Financial Officer and Corporate Secretary resigned.

 

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On June 1, 2020, Mark Gosine was appointed Corporate Secretary and Keith Abriel was appointed Interim Chief Financial Officer.

During Q3 of 2020, Meta signed a three-year supply deal with Covestro Deutschland AG, which will provide early access to new photo-sensitive holographic film materials, the building block of Meta’s holographic product. This agreement will not only allow early access to Covestro’s R&D library of photopolymer films but will also accelerate Meta’s product development and speed of innovation. Target markets include photonics/optical filters and holographic optical elements, diffusers, laser eye protection, optical combiners, and AR (augmented reality) applications.

On December 13, 2020, Keith Abriel, Meta’s Interim Chief Financial Officer resigned.

On December 14, 2020, Meta announced the hiring of Mr. Kenneth L. Rice Jr. as Chief Financial Officer and Executive Vice President. Mr. Rice replaced Meta’s Interim Chief Executive Officer, Keith Abriel and, assuming the Arrangement is completed, he will be named Chief Financial Officer of the Combined Company.

On December 17, 2020, Meta announced the hiring of Dr. Jonathan Waldern as Chief Technical Officer.

Meta also entered into a cooperation framework agreement with Covestro Deutschland AG. Under the agreement, Covestro is obligated to provide EUR 800,000 to Meta in exchange for a license to the Interglass patents and certain support services. This will enable Meta to invest in and expand its capabilities in design, development, and manufacturing of metaFUSIONTM products for smart eyewear in augmented reality and other advanced applications. This highly integrated solution combines embedded metamaterial and functional film elements with precision cast corrective lenses, which are required by over 50% of potential users in the market.

In fourth quarter 2020, Meta entered into a contribution agreement with Atlantic Canada Opportunities Agency (“ACOA” and the “ACOA Contribution”), for funding from the Regional Relief and Recovery Fund (“RRRF”), under ACOA’s Regional Economic Growth Through Innovation — Business Scale-up and Productivity stream. The RRRF is part of the Federal government’s COVID-19 economic response plan. Pursuant to the contribution agreement, Meta will receive an interest-free loan of up to CAD$390,000, repayable in 36 monthly installments starting April 1, 2023. The amount available to be drawn under the loan is based on eligible expenses incurred by Meta since March 15, 2020.

Also on November 29, 2020, Meta entered into a commitment letter (the “Commitment Letter”), with a shareholder of Meta, pursuant to which the shareholder will provide up to CAD$5,500,000 in debt financing (the “Bridge Loan”) to fund Meta’s continued operations while Meta works toward completion of the Arrangement with Torchlight. Pursuant to the Commitment Letter, Meta will be able to draw up to CAD$500,000 monthly beginning in November 2020. The Bridge Loan bears interest at the rate of 8% per annum, payable monthly in arrears. The principal amount and any accrued but unpaid interest will be due and payable on the 10th business day after the closing of the Arrangement, or on November 29, 2022 if the Arrangement does not close before that date. To date, Meta has drawn CAD$1,000,000 under the Bridge Loan. At the option of the holder, the Bridge Loan or any portion of the Bridge Loan and accrued but unpaid interest is convertible into Meta Shares at a conversion price of CAD$0.50 per share, subject customary adjustments. Meta may repay the Bridge Loan in whole or in part, without penalty, at any time on or after March 28, 2021.

Research and Product Development; Intellectual Property

Meta has 6 registered trademarks, 58 patents granted in 22 patent families and 44 patents pending. Meta believes that its combination of patents and additional intellectual property that is being held confidential by way of multiple trade secrets provides Meta with an important competitive advantage, marketing benefits, and licensing revenue opportunities. In addition, Meta acquired specialized lens casting production equipment and intellectual property, including more than 70 patents, from Interglass Technology AG (Switzerland).

 

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Covid-19 Impact

During Q1-2020, the COVID-19 outbreak was declared a pandemic by the World Health Organization. This has resulted in governments worldwide enacting emergency measures to combat the spread of the virus. In response to this, Meta’s management implemented a Work From Home policy for management and non-engineering employees in all three locations, and further developed additional safety protocols to address the pandemic. Engineering staff in all three locations are continuing to work on given tasks and are following strict safety guidelines. Although Meta’s supply chain has slowed down to a degree, Meta is currently able to maintain inventory of long lead items and is working with its suppliers to optimize future supply orders.

COVID-19 has negatively impacted Meta’s 2020 sales of metaAIR® laser protection eyewear product as worldwide restrictions on travel are significantly impacting the airline industry and purchasing of metaAIR® eyewear may not be the primary focus of airlines post COVID-19, however, Meta is pursuing sales in adjacent markets including consumer, military and law enforcement. The situation is dynamic and the ultimate duration and magnitude of the impact on the economy and the financial effect on Meta’s business is not known at this time.

Meta’s scheduled purchase of equipment to upgrade its California lab facility has been delayed due to supply chain issues as a result of COVID-19. This may result in Meta requiring more capital to execute on its business plan.

Transactions With Related Parties

Related party transactions impacting the accompanying consolidated financial statements for the year ended December 31, 2020 are summarized below:

 

   

The Consulting fees includes $176,946 (2019 — $186,982) to directors of Meta related to advisory services provided.

 

   

Technology license fees of $14,602 (2019 — $50,807) to Lamda Guard Technologies Ltd (“LGTL”), a shareholder of Meta, to allow the use of certain patents to Meta as per an exclusive technology license agreement.

 

   

Reimbursement of rent and utilities from LGTL to MediWise of $46,554 (2019 — $41,153) for using a portion of MediWise’s premises in the U.K.

 

   

As at December 31, 2020, Meta had a loan balance of $312,528 (December 31, 2019 — $345,033) due to LGTL that is unsecured and repayable in full on demand.

Competition

The lithography and holography materials industries in which Meta operates are subject to rapid change and are characterized by intense competition to develop new technologies and proprietary products. Meta faces potential competition from many different sources, including larger and better-funded companies. While Merta believes that Meta’s unique strategy provides it with competitive advantages, Meta has identified several companies which are active in the arena. Not only must Meta compete with other companies that are focused on lithography technology, any products that Meta may commercialize will have to compete with existing technologies and new technologies that may become available in the future.

Employees and Human Capital

As of March 31, 2021, Meta had 51 full-time equivalent employees, 36 of whom were engaged in research and development activities. None of Meta’s employees are represented by a labor union or covered under a collective bargaining agreement.

 

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Meta’s human capital resources objectives include, as applicable, identifying, recruiting, retaining, incentivizing and integrating Meta’s existing and new employees, advisors and consultants. The principal purposes of our equity and cash incentive plans are to attract, retain and reward personnel through the granting of stock-based and cash-based compensation awards, in order to increase stockholder value and the success of Meta by motivating such individuals to perform to the best of their abilities and achieve our objectives.

Facilities

On August 31, 2020, Meta announced it had signed a lease for an approximately 53,000 square foot facility in Nova Scotia, Canada, which will host Meta’s holography and lithography research and development labs and the next phase of Meta’s volume manufacturing. Meta expects to open the facility in Q2 of 2021, following leasehold improvements. The term of the lease for the new facility is ten years, commencing on January 1, 2021. Commencing in September 2021, Meta will pay monthly basic rent of CAD$28,708 and additional rent for its proportionate share of operating costs and property taxes of CAD$24,910 per month, subject to periodic adjustments. In conjunction with signing the lease, Meta has entered into a loan agreement with the landlord in the amount of CAD$500,000 to fund leasehold improvements. The loan carries an interest rate of 5% per annum and is repayable in equal monthly blended payments of principal and interest over a period of seven years, and as of the date of this proxy statement remains available and undrawn. Meta also has research and development facilities in London, England, Pleasanton, California and Dartmouth, Nova Scotia.

Legal Proceedings

As of the date of this proxy statement, there are no material legal proceedings, and no contemplated legal proceedings known to be material, to Meta or its expected subsidiaries, to which Meta or its expected subsidiaries is a party or of which any of Meta or its expected subsidiaries’ respective property is the subject matter.

Market Price of Common Stock and Dividends and Related Matters of Meta

Market Price

Meta Shares are currently traded on the CSE, under the symbol “MMAT” and neither Meta Shares nor Meta’s preferred stock have ever traded on a US public trading market. The closing price of Meta Shares on the CSE on December 11, 2020, the full trading day immediately prior to the public announcement of the Arrangement on December 14, 2020 was CAD$0.72 per share. The closing price of Meta Shares on May 5, 2021, as reported on the CSE, was CAD$3.06 per share.

Assuming successful application for initial listing with NASDAQ, following the consummation of the Arrangement, we anticipate that the Torchlight Shares will continue to be listed on NASDAQ and will trade under the Combined Company’s new name “Meta Materials Inc.” and we expect the new trading symbol to be “MMAT.”

Dividends

Meta has never declared or paid any cash dividends on the Meta Shares. Except for the Asset Sale Dividends, Meta anticipates that the Combined Company will retain all of its future earnings to advance the development and commercialization of its products, and does not anticipate paying any cash dividends on the Combined Company Shares in the foreseeable future. Any future determination to declare cash dividends on the Combined Company Shares will be made at the discretion of the Combined Company’s board of directors, subject to applicable law and contractual restrictions and will depend on its financial condition, results of operations, capital requirements, general business conditions and other factors that such board of directors may deem relevant.

 

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Current Capitalization of Meta

Meta’s outstanding securities as of December 31, 2020 and as of May 5, 2021 are as follows (all figures in CAD$ unless otherwise noted):

 

Description of Security(1)   

Number Of Shares
Outstanding

as of

December 31,  2020(1)

   

Number Of Shares
Outstanding

as of

May 5, 2021

 

Common shares

     83,557,679 (2)      105,551,460 (2)(4)(5)(6)(7)(8) 

Stock options (“ESOP”)

     13,226,936 (2)      13,147,069 (2)(4) 

DSUs

     1,872,750 (2)      1,872,750 (2) 

Warrants

     1,651,352 (2)(3)      1,606,855 (2)(3)(4) 

Broker warrants

     52,861 (2)(3)      19,619 (2)(3)(4) 

Unsecured convertible debentures

     2,724,261 (5)      —    

Unsecured convertible promissory notes

     3,986,377 (6)      7,320,450 (6) 

Secured convertible debenture

     7,568,703 (7)      —    
  

 

 

   

 

 

 

Total Shares Issued & Outstanding Fully Diluted

     114,590,918       129,518,204  

 

(1)

Meta’s audited consolidated financial statements provide a detailed breakdown of all securities transactions that occurred during the year ended December 31, 2020.

(2)

Pursuant to the RTO, CPM agreed to acquire all of the issued and outstanding Meta Shares, Class A-1 Preferred Shares and Class A-2 Preferred Shares in exchange for CPM common shares on the basis of 2.75 CPM common shares for each Meta Share and Class A-1 Preferred Share and 4.125 CPM common shares for each Class A-2 Preferred Share. Options issued to employees, directors, and consultants, DSUs issued to directors and each outstanding warrant were also converted as per the agreed exchange rate of 2.75:1 upon completion of the RTO.

(3)

For every warrant, warrant holders shall have the right to purchase one Meta Share for $0.90 and for every broker warrant, broker warrant holders shall have the right to purchase one Meta Share for $0.62.

(4)

Subsequent to December 31, 2020, 119,867 stock options, 44,497 warrants and 33,242 broker warrants were exercised.

(5)

Unsecured convertible debentures of $1,700,000 principal, plus $206,983 interest, are convertible at a value of $0.70 per Meta Share. Subsequent to December 31, 2020, the total debentures balance of $1,936,984 was converted to 2,767,120 Meta Shares.

(6)

Unsecured convertible promissory note of $500,000 principal, plus $3,507 interest is convertible at a value of $0.50 per Meta Share. Subsequent to December 31, 2020, Meta received an additional $5,000,000 under the same conditions and the total balance of $5,526,082, including interest was converted to 11,052,164 Meta Shares. In addition, unsecured convertible promissory notes of US$511,111 and US$501,613 principal and interest, are convertible at a value of $0.35 and $0.62 respectively per META Share. Subsequent to December 31, 2020, Meta received an additional US$10,000,000 convertible at a value of $2.80 per Meta Share. All unsecured convertible promissory notes are owed to Torchlight and, as such, will fall away at Closing.

(7)

Secured convertible debenture of $5,000,000, plus $298,082 paid in kind interest, is convertible at $0.70 per Meta Share. Subsequent to December 31, 2020, the total balance of $5,370,776, including interest was converted to 7,672,537 Meta Shares.

(8)

Subsequent to December 31, 2020, Meta converted $261,735 of principal and accrued interest of long term debt at $3.87 per Meta Share into 67,597 Meta Shares and $367,944 due to a related party at $4.51 per Meta Share into 81,584 Meta Shares.

 

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Management’s Discussion and Analysis

Critical Accounting Policies and Estimates

The preparation of consolidated financial statements in accordance with IFRS requires management to make certain estimates, judgments and assumptions that affect the reported amounts of assets and liabilities at the date of the consolidated financial statements and reported amounts of revenues and expenses during reporting periods. Actual results could differ materially from those estimates and would impact future results of operations and cash flows. For more information about Meta’s accounting policies and estimates, please refer to note 2 of the audited annual consolidated financial statements of Meta for the year ended December 31, 2020, which are attached as Annex N to this proxy statement. Meta has identified certain accounting policies that it believes are most critical in understanding the judgments that are involved in producing the consolidated financial statements and the estimates made that could impact results of the operations, which are discussed below.

Non-repayable government assistance is recorded in the period earned as other income or netted against expenses. Interest-free repayable government loans are recorded initially at fair value, with the difference between book value and fair value recorded as government assistance.

Financial Instruments

Financial assets and financial liabilities are recognized when Meta becomes a party to the contractual provisions of a financial instrument. Financial assets and financial liabilities are initially measured at fair value. Financial assets are classified into one of the following specified categories: amortized cost, or fair value through profit or loss, (“FVTPL”). Transaction costs that are directly attributable to the acquisition or issue of financial assets and financial liabilities (other than financial assets and financial liabilities classified as FVTPL) are added to, or deducted from, the fair value of the financial assets or financial liabilities, as appropriate, on initial recognition. Transaction costs directly attributable to the acquisition of financial assets or financial liabilities classified as FVTPL are recognized immediately in the audited statement of loss and comprehensive loss.

Meta’s financial instruments are classified and subsequently measured as follows:

 

Financial Instrument    IFRS 9

Grants receivable

   Amortized cost

Other receivables

   Amortized cost

Trade payables

   Amortized cost

Due to related parties

   Amortized cost

Unsecured convertible debentures

   FVTPL

Unsecured convertible promissory note

   FVTPL

Secured convertible debentures

   FVTPL

Promissory notes

   FVTPL

Derivative liability

   FVTPL

Long-term debt

   Amortized cost

Financial Assets

Subsequent to initial recognition, financial assets classified as loans and receivables are measured at amortized cost using the effective interest method.

Financial Liabilities

Financial liabilities are classified as and are measured at either amortized cost subsequent to initial measurement at fair value or, as noted in the above chart, at FVTPL.

 

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New Accounting Standards and Interpretations Adopted

IAS 1 — Presentation of Financial Statements and IAS 8 — Accounting Policies, Changes in Estimates and Errors

Effective January 1, 2020, Meta adopted certain issued amendments to IAS 1 Presentation of Financial Statements and IAS 8 Accounting Policies, Changes in Accounting Estimates and Errors. These amendments clarify the definition of ‘material’ and aligns the definition used within the IFRS Standards.

The application of this amendment did not have a material impact on Meta. IFRS 3 — Business Combinations

Effective January 1, 2020, Meta adopted certain amendments to IFRS 3 Business Combinations to narrow the definition of a business and introduce a screening test, which eliminates the requirement for a detailed assessment of the definition, when met.

The application of this amendment did not have a material impact on Meta.

Critical Accounting Estimates

The preparation of consolidated financial statements in conformity with IFRS requires management to make judgments, estimates and assumptions about future events that affect the application of policies and the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenue and expenses during the reporting period. Revisions to accounting estimates are recognized in the period in which the estimates are revised and in any future periods affected. Information about critical accounting judgments and estimates in applying accounting policies that have the most significant impact on the amounts recognized in the audited consolidated financial statements are outlined below.

Share-based Payments and Warrants

Meta makes certain estimates and assumptions when calculating the estimated fair values of stock options granted and warrants issue. The significant assumptions used include estimates of expected life, expected volatility, expected dividend rate and expected risk-free rate of return. Changes in these assumptions may result in a material change to the expense recorded for grants of stock options and the issuance of warrants.

FVTPL Liabilities

The convertible debentures and convertible promissory notes contain embedded derivatives. Meta has chosen to account for the entire instruments at fair value thought profit or loss rather than to separately account for the liability and derivative components. This requires determination of the most appropriate valuation model and determination of the most appropriate inputs to the valuation model including the probability of conversion, and discount rate to be used. Changes in these estimates and assumptions rate may result in a material change to the unrealized change in the liability.

Income Tax

Meta is subject to income tax in various jurisdictions. Significant judgement is required to determine the consolidated tax provision. The tax rates and tax laws used to compute income tax are those that are enacted or substantively enacted at the reporting date in the countries where Meta operates and generates taxable income.

Impairment of Non-financial Assets

Assessment of impairment triggers are based on management’s judgement of whether there are sufficient internal and external factors that would indicate an asset or cash generating unit (“CGU”), is impaired, or any indicators of impairment reversal. The determination of Meta’s CGUs is also based on management’s judgement and is an assessment of the smallest group of assets that generate cash inflows independently of other assets.

 

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Meta’s estimate of the recoverable amount for the purpose of impairment testing requires management to make assumptions regarding future cash flows before taxes. Future cash flows are estimated based on budgets and a terminal value calculated by discounting the final year in perpetuity. The future cash flows are then discounted to their present value using an appropriate discount rate.

Results of Operations for the Three Months Ended December 31, 2020 and 2019 (in Canadian dollars unless otherwise indicated)

Meta recorded a net loss for the three months ended December 31, 2020 of $7,926,322, or $0.11 per share as compared to a net loss of $3,295,493 or $0.34 per share for the three months ended December 31, 2019. The increase in the loss of $3,693,407 in the three months ended December 31, 2020 as compared to December 31, 2019 is primarily due to:

 

   

a $162,294 decrease in revenue;

 

   

a $1,349,526 increase in consulting and professional fees;

 

   

a $87,510 increase in share-base compensation expenses;

 

   

a $653,153 increase in finance costs and decrease in finance income;

 

   

a $530,960 decrease in other income;

 

   

a $329,629 decrease in research and development cost, and travel and entertainment expenses;

 

   

a $520,564 net decrease in depreciation and amortization and impairment, investor relations, and salaries and benefits;

 

   

a $2,534,103 increase in unrealized loss on FVTPL and derivative liabilities and realized and unrealized foreign exchange losses; and

 

   

a $82,524 net increase in other expenses as further explained below.

$162,294 decrease in revenue;

The major revenue stream for three months ending December 31, 2020 was development revenue of $357,373 compared to 2019 of $499,554 with a decrease of 28%. During three months ended December 31, 2020, Meta recognized revenues from various customers, included but not limited to Lockheed Martin and Satair A/S Creal SA, ThermoFisher Scientific, Sofwerx and CORNES Technologies Ltd.

On April 13, 2017, Meta entered into an Offset Project Agreement (“OPA”) with Lockheed Martin Aeronautics Corporation (“LM Aero”) for research and development and commercialization of MetaSOLAR technology for $4,150,000 USD. During the three months ended December 31, 2020, Meta recognized $176,284 in development revenue related to these distribution rights.

On September 18, 2018, Meta signed an exclusive distribution agreement with Satair A/S for a term of 10 years and received $1,299,700 as distribution fees. During the three months ended December 31, 2020, Meta recognized $31,830 in development revenue related to these distribution rights.

Product sales for the three months ended December 31, 2020 were $0 (2019 - $20,113) as sales of Meta’s metaAIR laser protection eyewear have been negatively impacted by COVID-19.

$1,349,526 increase in consulting and professional fees;

This increase is primarily due to $1,121,457 increase in legal, consulting and auditing fees as a result of the Arrangement. Meta expects the increased professional fees to continue as Meta advances toward closing the Arrangement and listing on NASDAQ.

 

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This remaining $228,069 increase is due to increase in accounting, marketing and technical consulting.

$87,510 increase in share-base compensation expenses;

This increase was due to the issuance of 1,889,000 stock options to senior executives and consultants hired by Meta during Q4 2020, and 600,000 options to other employee in Q4 2020. This was offset by decrease in share-based compensation expense for options issued before 2020 due to using graded vesting attribution method in the accounting of stock options.

$653,153 increase in finance costs and decrease in finance income;

This increase is primarily due to:

 

   

$130,630 increase in interest and bank charges mainly as a result of the issuance of promissory notes and debentures of $7,754,570 during 2020.

 

   

$151,491 increase in non-cash interest accretion due to the increase in Q4 2020 in interest accretion relating to the UK finance lease, ACOA loans and funding obligation as well as interest accretion relating to US finance leases recognized in Q4 2020.

$530,960 decrease in other income;

This decrease is mainly due to recognition of $530,960 in 2019 as fair value of interest-free component on the proceeds received under the funding obligation agreement.

$329,629 decrease in research and development cost, and travel and entertainment expenses;

The decrease in research and development of $130,744 as a result of decreased lab time and materials consumption due to the operational impact of COVID-19. In addition, the decrease of travel and entertainment expenses by $198,297 is due to expenses incurred in Q4 2019 as part of the private placement in late 2019 and in preparation of a private placement in January 2020 as well as the RTO. Travel bans and restrictions on gatherings due to ongoing COVID-19 pandemic has also attributed to significantly lower travel cost in 2020 in spite of the continuous efforts in raising capital and the Arrangement.

$520,564 net decrease in depreciation and amortization and impairment, investor relations, and salaries and benefits;

This decrease is primarily due to:

 

   

$570,900 decrease in depreciation and amortization comprising of a decrease of $159,318 due to fully depreciated assets in 2020 in addition to $411,562 SDTC grant that was recognized from deferred revenue into depreciation and amortization during Q4 2020.

 

   

$81,942 decrease in impairment expense mainly due to impairment expense recognized in 2019.

 

   

$11,982 increase in investor relations as a result of the CSE listing.

 

   

$120,297 increase in salaries and benefits due to new hires in Q4 2020 as part of Meta’s operations expansion as well as reduction in UK grants.

$2,534,103 increase in unrealized loss on FVTPL and derivative liabilities and realized and unrealized foreign exchange losses;

This increase is primarily due to:

 

   

$2,221,528 increase in unrealized loss on FVTPL liabilities of mainly due to the increase in the stock price and the decrease in the discount price between the initial recognition date of the FVTPL liabilities and December 31, 2020 (remeasurement date).

 

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$312,575 increase in realized and unrealized foreign exchange losses due to fluctuations in global currencies as a result of COVID-19, especially relating to the US dollar.

$82,524 net increase in other expenses as further explained below;

This increase is primarily due to subscriptions and licenses net of other expenses.

Results of Operations for the Years Ended December 31, 2020 and 2019 (in Canadian dollars unless otherwise indicated)

Meta recorded a net loss for the year ended December 31, 2020 of $19,806,340, or $0.27 per share as compared to a net loss of $11,083,258 or $1.14 per share for the year ended December 31, 2019. The increase in the loss of $8,723,082 in the years ended December 31, 2020 as compared to December 31, 2019 is primarily due to:

 

   

a $312,632 increase in revenue;

 

   

a $2,296,176 increase in consulting and professional fees;

 

   

a $321,104 increase in share-base compensation expenses;

 

   

a $1,992,769 increase in finance costs and decrease in finance income;

 

   

a $527,109 decrease in other income and increase in amortization of deferred government assistance;

 

   

a $686,330 decrease in research and development cost, and travel and entertainment expenses;

 

   

a $53,918 net increase in depreciation and amortization and impairment, investor relations, and salaries and benefits;

 

   

a $1,104,791 net increase in realized and unrealized loss on FVTPL and derivative liabilities and realized and unrealized foreign exchange losses;

 

   

a $3,570,281 net increase in other expenses as further explained below.

$312,632 increase in revenue;

The major revenue stream for year ending December 31, 2020 was development revenue of $1,505,075 compared to 2019 of $1,163,632 with an increase of 29%. During year ended December 31, 2020, Meta recognized revenues from various customers, including but not limited to Elbit Systems, Lockheed Martin, The Boeing Company, which collectively account for the increase.

On April 13, 2017, Meta entered into the OPA with LM Aero for research and development and commercialization of MetaSOLAR technology for $4,150,000 USD. During the year ended December 31, 2020, Meta recognized $705,137 in development revenue related to these distribution rights.

On September 18, 2018, Meta signed an exclusive distribution agreement with Satair A/S for a term of 10 years and received $1,299,700 as distribution fees. During the year ended December 31, 2020, Meta recognized $131,678 in development revenue related to these distribution rights.

Product sales for the year ended December 31, 2020 were $2,615 (2019 - $31,426) as sales of Meta’s metaAIR laser protection eyewear have been negatively impacted by COVID-19.

$2,296,176 increase in consulting and professional fees;

This increase is primarily due to $1,815,644 increase in legal, consulting and auditing fees as a result of the RTO and the public listing process on CSE which had begun to be incurred during August 2019 until April 2020

 

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as well as the Arrangement later in 2020. Meta expects the increased professional fees to continue as Meta advances toward closing the Arrangement and listing on NASDAQ.

The remaining $480,532 increase is due to increase in accounting, marketing and technical consulting.

$321,104 increase in share-base compensation expenses;

This increase was due to the issuance of 4,575,000 stock options, excluding forfeitures, to directors and senior management upon completion of the RTO in March 2020, 2,089,000 options to senior executives and consultants hired by Meta during 2020, and 600,000 options to other employees in Q4 2020. This was offset by a decrease in share-based compensation expense for options issued before 2020 due to using the graded vesting attribution method in accounting for stock option expenses.

$1,992,769 increase in finance costs and decrease in finance income;

This increase is primarily due to:

 

   

Increase in interest and bank charges of $579,277 mainly as a result of the issuance of promissory notes and debentures of $7,754,570 during 2020.

 

   

Increase in non-cash interest accretion of $422,761 due to the increase in 2020 in interest accretion relating to the UK finance lease, ACOA loans and funding obligation as well as interest accretion relating to US finance leases recognized in Q4 2020

 

   

$959,350 change in the interest-free component of the long-term debt mainly due to significant proceeds received in 2019 from ACOA as well as changes to the estimated repayment schedule resulting in a total change during 2020.

$527,109 decrease in other income and increase in amortization of deferred government assistance;

The decrease in other income is due to recognition of $530,960 in 2019 as fair value of interest-free component on the proceeds received under the funding obligation agreement and the increase is due to $3,851 increase in the amortization of deferred government assistance.

$686,330 decrease in research and development cost, and travel and entertainment expenses;

The decrease in research and development of $271,899 as a result of decreased lab time and materials consumption due to the operational impact of COVID-19. In addition, the decrease of travel and entertainment expenses by $414,431 is due to expenses incurred in 2019 as part of the private placement in late 2019 and in preparation of the private placement in January 2020 as well as the RTO. Travel bans and restrictions on gatherings due to ongoing COVID-19 pandemic have also attributed to significantly lower travel cost in 2020 in spite of the continuous efforts in raising capital and the Arrangement.

$53,918 net increase in depreciation and amortization and impairment, investor relations, and salaries and benefits;

This increase is primarily due to:

 

   

$337,865 decrease in depreciation and amortization comprising of an increase of $75,219 due to additions net of $411,562 SDTC grant that was recognized from deferred revenue into depreciation and amortization.

 

   

$81,942 decrease in impairment expense mainly due to impairment expense recognized in 2019.

 

   

$123,560 increase in investor relations as a result of the CSE listing.

 

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$350,165 increase in salaries and benefits due to bonuses and new hires in 2020 as part of Meta’s operations expansion as well as reduction in UK grants.

$1,104,791 net increase in realized and unrealized loss on FVTPL and derivative liabilities and realized and unrealized foreign exchange losses;

This increase is primarily due to:

 

   

$1,055,684 increase in unrealized loss on FVTPL liabilities of mainly due to the increase in the stock price and the decrease in the discount rate between the initial recognition date of the FVTPL liabilities and December 31, 2020 (remeasurement date).

 

   

$128,652 realized loss on derivative liability recognized in 2020 due to conversion of secured promissory notes as part of the RTO.

 

   

$79,545 decrease in realized and unrealized foreign exchange losses due to fluctuations in global currencies as a result of COVID-19, especially relating to the US Dollar.

$3,570,281 net increase in other expenses;

This increase is primarily due to:

   

Listing expenses of $3,370,249 recognized as a result of the RTO and subsequent CSE fees of $12,000 in 2020.

 

   

Increase in other expenses by $234,496 net of decrease in technology license fees by $36,205 and rent and utilities by $10,259.

Results of Operations for the Years Ended December 31, 2019 and 2018

Meta recorded a net loss for the year ended December 31, 2019 of CAD$11,083,258, or CAD$1.12 per share as compared to a net loss of CAD$5,106,647 or CAD$0.56 per share for the year ended December 31, 2018. Before commercializing its first product metaAIR, Meta raised capital through various rounds of financing in addition to securing government grants, product development funding from industry partners, and unsecured, interest-free loans from ACOA. These funds were used to fund Meta’s research and product development, general and overhead expenses. The increase of CAD$5,976,611 in loss in 2019 is primarily due to:

 

   

a CAD$390,133 decrease in revenue;

 

   

a CAD$1,858,532 increase in consulting, professional fees, interest and bank charges and unrealized loss on derivative liability;

 

   

a CAD$1,644,761 increase in share-based compensation expense;

 

   

a CAD$1,712,212 increase in depreciation, amortization, impairment and research and development;

 

   

a CAD$424,085 increase in non-cash interest accretion, increase in unrealized foreign exchange, net of increase in other income and income tax recovery and;

 

   

a CAD$53,113 net decrease in expenses as further explained below.

CAD$390,133 decrease in revenue

The major revenue stream during 2019 and 2018 relates to that certain Offset Project Agreement entered into with Lockheed Martin Aeronautics Corporation on April 13, 2017 for research and development and commercialization of MetaSOLAR technology for CAD$5,641,095 (US$4,150,000), increased demand of Nanoweb product proof of concepts during 2019 and development revenue related to Build in Canada Innovation Program project, to provide metaAIR helmet visors to the Royal Canadian Mounted Police, entered on November 15, 2017 and delivered in 2018.

 

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During 2019, contributions of CAD$705,137 (2018-CAD$1,124,861) were recorded as development revenue which reflects the research activities performed by Meta in accordance with the agreed milestones in the previously mentioned Offset Project Agreement. During 2019, Meta recorded lithography development revenue of CAD$323,712 (2018-14,880) related to increased Nanoweb product proof of concepts samples by industry partners in USA, Japan, Germany, and China. During 2019, Meta accounted sale of metaAIR eyewear amounting to CAD$31,426. On March 27, 2018, Meta delivered the helmet visors related to Build in Canada Innovation Program project and recognized development revenue of CAD$419,560 as compared to $nil in 2019. On September 18, 2018, Meta signed an exclusive distribution agreement with Satair A/S for a term of 10 years and received CAD$1,299,700 as distribution fees. During 2019 Meta has recognized CAD$129,970 of distribution rights related revenue earned over the first year of the contract.

Meta launched its first product, metaAIR, in Q1 2019, however, the primary source of revenue during 2019 and 2018 remains development revenue and the primary reason for the decrease in revenue of CAD$390,133 is receiving $nil revenue related to Build in Canada Innovation Program as compared to CAD$419,560 during 2018.

CAD$1,858,532 increase in consulting, professional fees, interest and bank charges and unrealized loss on derivative liability

The increase in consulting expenses of CAD$229,732 is primarily due to CAD$70,000 of consulting fees payable to a consultant in relation to the RTO, CAD$127,582 payable to a director and a former director, including related tax payable to CRA, related to advisory services and their contribution during the RTO and CAD$45,000, payable in stock, to a former director related to advisory services. The increase in professional fees of CAD$571,000 is primarily due to an increase of CAD$387,051 in legal fees related to the RTO and an increase of CAD$257,760 of audit and review fees for additional reporting requirements. During the RTO process, existing investors financially supported Meta by funding Meta through convertible promissory notes and the increases in interest expense of CAD$195,624 is primarily due to interest on additional promissory notes received during 2019. The conversion feature of convertible promissory notes was recorded as a derivative liability at initial receipt and upon further remeasurement of its fair value CAD$862,176 was recognized in the consolidated statement of loss and comprehensive loss as an unrealized loss on derivative liability during the year ended 2019.

CAD$1,644,761 increase in share-based compensation

The increase of CAD$1,644,761 of share-based compensation expense in 2019 primarily includes CAD$933,593 for options issued to employees in December 2018 and CAD$597,140 for the options issued to employees, directors, and advisors during 2019, primarily in connection with the RTO.

CAD$1,712,212 increase in depreciation, amortization, impairment and research and development

Since April 2019, Meta’s Dartmouth based production facility has started producing its first holographic product, metaAIR® eyewear, offering laser glare protection for pilots. The increase in depreciation and amortization of CAD$1,141,147 is primarily due to CAD$330,768 of increased depreciation related to metaAIR production facility which was set up in late 2019, CAD$193,750 of increased depreciation related augmented reality equipment set up in 2019, CAD$140,313 of amortization of software purchase for product development during 2019, CAD$51,885 of amortization of amortization of ERP beginning 2019, CAD$79,222 of lease amortization upon adoption of IFRS 16 leases in January 2019 and CAD$223,079 additional amortization of intangibles assets primary related to MediWise intangibles acquired on March 31, 2018. The increase in research and development expenses of CAD$483,899 is primarily due to the write-off of CAD$291,995 of inventory that was restricted in use during 2019 and CAD$191,904 of product development expenses for increased work with industry partners for different applications of the holography and lithography film. The increase in impairment losses of CAD$87,166 is related to the patents that was not renewed considering the maintenance cost of the patents in relation to commercial value of these patents.

 

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CAD$423,485 net increase includes increase in non-cash interest, increase in unrealized foreign exchange net of increase in other income and income tax recovery

The increase of CAD$908,423 in unrealized foreign currency exchange (gain) loss is primarily due to rise of USD to CAD foreign exchange rate during 2018 and as at December 31, 2018 as compared to fall in USD to CAD foreign exchange rate during 2019 and as at December 31, 2018. The increase of CAD$530,960 in other income represents interest free portion of CAD$1,300,000 of funding received from a third party in June 2019 and October 2019 to set up augment reality production line as explained above in Overall Performance Section. The increase in income tax recovery of CAD$114,778 is primarily due to change in temporary difference on account of intangibles and non capital losses and also change of applicable UK income tax rate. The increase of CAD$161,400 in non-cash interest is primarily due to the accretion expenses of CAD$208,632 accounted related to conversion feature of promissory notes.

CAD$53,113 net decrease in all the expenses other than mentioned above

The net decrease of CAD$53,113 is primarily due to the decrease of CAD$77,960 in travel and entertainment expenses resulting from management reducing travel to focus on taking Meta public pursuant to the RTO and preparation of the listing statement for the CSE.

Liquidity and Capital Resources

Continued operations of Meta are dependent on Meta’s ability to complete equity and/or debt financings and generate profitable operations in the future. During the year ending December 31, 2020, Meta has not generated significant revenue, and has incurred a net loss of $19,806,340 and negative cash flow from operations of $9,802,829 and has an accumulated deficit of $52,088,351 as at December 31, 2020.

During the year ended December 31, 2020, Meta raised equity of $875,612, completed the RTO, received META’s cash and cash equivalents of $4,174,979 and converted promissory notes of $5,948,003 into common shares. Further and pursuant to the RTO, Meta raised gross proceeds of $5,000,000 through the issuance of secured convertible debentures and $950,000 through the issuance of unsecured convertible debentures.

Torchlight is required pursuant to the Arrangement Agreement to deliver gross proceeds of at least US $10 million through the issuance of new debt or common shares coincident with the closing of the Arrangement and to be otherwise debt free or only liable for indebtedness secured solely by its oil and gas assets. Through December 31, 2020, Torchlight provided US $1,000,000 of financing to Meta through the issuance of unsecured convertible promissory notes, which reduced the required amount to be raised for the closing of the transaction. Meta also obtained a commitment letter for $5,500,000 in debt financing (the “Bridge Loan”), of which $500,000 has been drawn.

As at December 31, 2020, Meta had cash of $1,776,983, as compared to $528,691 as at December 31, 2019. As at December 31, 2020, Meta has working capital deficit of $12,313,755 defined as current assets less current liabilities, compared to a working capital deficit of $9,371,518 as at December 31, 2019. The total increase in the working capital deficit of $2,942,247 during the year is primarily a result of securing the abovementioned funds of $12,745,161 during the year offset by cash used in operating activities of $9,802,829. Meta is also in breach of a debt covenant with BDC Capital Inc. for convertible secured debentures and has reclassified the balance as at December 31, 2020 of $7,060,493 into current liabilities. Subsequent to December 31, 2020, the secured debentures were converted into equity as outlined below.

Subsequent to December 31, 2020, Meta received the remaining balance of $5,000,000 under the bridge loan. Torchlight was successful in raising additional equity funds and consequently has provided US $10,000,000 of financing to Meta through the issuance of an unsecured convertible promissory note. Furthermore, Meta converted unsecured convertible promissory notes issued pursuant to the Bridge Loan of $5,526,082, unsecured convertible debentures of $1,936,984, long-term debt of $261,735, and due to related parties of $367,944 into common shares as well as forced conversion of secured convertible debentures of $5,370,776 into Meta Shares.

 

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As of the date of this proxy statement, Meta holds cash and cash equivalents of approximately $13.8 million, has a current monthly burn rate, excluding cost of sales, of approximately $900,000, which has increased as a result of incremental costs associated with the Arrangement, and has committed capital expenditures of approximately $0.5 million. Additionally, as of the date of this proxy statement and giving consideration to the secured and available but not yet drawn debt facilities discussed herein, Meta’s cash runway is approximately 14 months, assuming no product sales. Management and the Meta Board are closely monitoring Meta’s sales, capital expenditures and monthly burn rate so as to ensure that Meta has sufficient working capital to execute its strategic business plan. Appropriate adjustments to capital expenditures and the monthly burn rate will be made if necessary. Concurrent with focusing on generating sales, management is advancing applications that have been submitted for government grants and or loans, as well as exploring raising additional equity in the capital markets and pursuing debt financings. There are no assurances that any of the aforementioned sources of cash will be available to Meta on acceptable terms, or at all.

Meta continues to generate revenues from a combination of engineering services and new product sales. Growth in future revenues is dependent on developing and commercializing additional products, further development of on-going collaborations, strategic partnerships or other transactions with third parties, and merger and acquisition opportunities. Management estimates that Meta’s working capital is sufficient to fund its operations into the 2nd quarter of 2022. There is no certainty that Meta will ultimately achieve profitable operations, become cash flow positive, or raise additional debt and/or equity capital.

In accordance with certain of the ACOA loan agreements, Meta is required to maintain a minimum in equity throughout the term of the loan. However, on November 14, 2019, ACOA waived this requirement for June 30, 2019 and for each period thereafter until the loans are fully repaid.

Liquidity risk is the risk that Meta will not meet its financial obligations as they become due after use of currently available cash. Meta has a planning and budgeting process to monitor operating cash requirements, including amounts projected for capital expenditures, which are adjusted as input variables change. These variables include, but are not limited to, the ability of Meta to generate revenue from current and prospective customers, general and administrative requirements of Meta and the availability of equity or debt capital and government funding. As these variables change, it may necessitate the need for Meta to issue equity or obtain debt financing.

Although Meta is currently pursuing financing alternatives, there can be no assurance that additional future financings will be available on acceptable terms or at all. If Meta is unable to obtain additional financing when required, Meta may have to substantially reduce or eliminate planned expenditures. The risk is that Meta’s availability of future financings or future profitability cannot be assured. Meta expects to record losses until such time as it further commercializes its products and secures additional customers. These factors indicate the existence of a material uncertainty that may cast significant doubt on Meta’s ability to continue as a going concern.

Off-Balance Sheet Arrangements

Meta has no other off-balance sheet arrangements.

Changes in and Disagreements with Accountants on Accounting and Financial Disclosure

Meta has had no disagreements with its accountants on accounting and financial disclosure. Meta switched auditors from Ernst & Young LLP to KPMG LLP in early 2020.

 

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Qualitative and Quantitative Disclosure About Market Risk

Meta’s principal financial liabilities include trade payables, due to related parties, derivative liability and long-term debt. Meta’s financial assets include trade receivables, and grants receivable. Meta’s financial instruments have been classified as either assets or liabilities at amortized cost, or financial liabilities at fair value. The following table illustrates how the positions in the consolidated statements of financial position are classified and measured:

 

Financial asset/liability

   Classification and measurement

Grants receivable

   Amortized cost

Other receivables

   Amortized cost

Trade payables

   Other financial liabilities at amortized cost

Due to related parties

   Other financial liabilities at amortized cost

Derivative liability

   Fair value

Long-term debt

   Loans and borrowings at amortized cost

The risks arising from Meta’s financial instruments are interest rate risk, foreign currency risk, and liquidity risk.

Fair Value

The fair values of grants receivable, other receivables, and trade payables approximate their carrying values due to the short-term maturity of these financial instruments. The fair value of due to related parties approximates their carrying value due to the market-based rates. Meta uses a fair value hierarchy, based on the relative objectivity of inputs used to measure fair value, with Level 1 representing inputs with the highest level of objectivity and Level 3 representing the lowest level of objectivity. The fair value of long-term debt is classified at Level 3 in the fair value hierarchy as it is estimated based on unobservable inputs including discounted cash flows using the market rate, which is subject to similar risks and maturities with comparable financial instruments as at the reporting date. The fair value of the derivative liability resulting from the embedded conversion feature related to the promissory notes is classified as Level 3 in the fair value hierarchy and is measured using the contractual conversion rate and the estimated probability of conversion.

Interest Rate Risk

Interest rate risk is the risk that the fair value or future cash flows of a financial instrument will fluctuate because of changes in market interest rates. Interest rate risk is minimized through management’s decision to primarily obtain fixed rate or interest free debt. The interest rate exposure in respect of cash balances, the long-term debt and the convertible notes on the consolidated statement of financial position is immaterial. The long-term debt, except bank equipment loans and shareholder loans, is at a nil or fixed interest rate and the interest on the cash balances is insignificant. As a result, Meta is not exposed to material cash flow interest rate risk.

Foreign Currency Risk

Foreign currency risk is the risk to earnings or capital arising from changes in foreign exchange rates. Meta has transactional currency exposures that arise from loans and receivables in currencies other than its functional currency. Meta has transactional currency exposures that arise from purchases in currencies other than their functional currency, including US dollars and Euros. Meta does not enter into derivatives to hedge the exposure.

The impact of foreign currency sensitivity on Meta’s loss before tax is due to the changes in the fair value of monetary assets and liabilities as at the date of financial position. With all other variables held constant the increase or decrease in exchange rates by 5% will result in below mentioned decrease or increase respectively in net loss before tax for the period ended December 31, 2020:

 

   

by CAD$78,479 on account of change in US dollar exchange rate;

 

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by CAD$8,076 on account of change in British pound exchange rate;

 

   

by CAD$9,633 on account of change in EURO exchange rate.

Liquidity Risk

Liquidity risk represents the risk that Meta will have difficulty meeting obligations of financial liabilities. There can be significant fluctuation in the timing of Meta’s cash receipts due to various external factors. Meta mitigates this risk by regular monitoring of its cash position. Liquidity risk is also related to the possibility of insufficient debt and equity financing available to fund the desired growth of Meta and to refinance the current and long-term debt as they become due. Meta’s financial condition and results of operations could be adversely affected if it were not able to obtain appropriate levels of financing.

As at December 31, 2020, Meta has the following contractual obligations (based on principal repayments for debt items):

     Long-term
debt

CAD$
     Trade
payables
CAD$
     Due to
related
party
CAD$
     Unsecured
convertible
promissory
notes
CAD$
     Secured
convertible
debentures
CAD$
     Unsecured
convertible
debentures
CAD$
     Leases(1)
CAD$
     Total
CAD$
 

2021

     369,921        3,743,783        312,528                                      214,472        4,640,704  

2022

     890,429                            1,804,570                            643,416        3,338,415  

2023

     1,223,041                                                          643,416        1,866,457  

2024

     2,079,945                                      5,000,000                  643,416        7,723,361  

2025

     621,183                                                1,700,000        643,416        2,964,599  

Thereafter

     1,290,181                                                          3,646,024        4,936,205  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 
     6,474,700        3,743,783        312,528        1,804,570        5,000,000        1,700,000        6,434,160        25,469,741  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

(1)

On March 12, 2021, Meta entered into a letter of intent with Rank Incorporated and Page Property Management (the “Landlord”) to amend the lease agreement for its Highfield facility (the “Highfield Facility”), located in Dartmouth, Nova Scotia and thus expanding the space by about 15,000 square feet, to approximately 68,000 square feet. In addition to holography and lithography R&D labs and the next phase of Meta’s development of roll-to-roll processes, the expanded space will include a new customer center for training and technology transfer.

In exchange for the Landlord’s agreement to expand the rentable square footage in Meta’s lease at Highfield Park Drive, their further agreement to reduce the annual rent for the 10-year term of the lease by $2,699,250, and their agreement to provide Meta with $500,000 in cash for on-going tenant improvements, the Landlord agreed to subscribe to 990,480 Meta Shares at $3.23 per Meta Share, representing a 15% discount to the closing price of the Meta Shares on the CSE on March  11, 2021.

Statement of Meta Executive Compensation

Meta’s Statement of Executive Compensation, in accordance with the requirements of Form 51-102F6V — Statement of Executive Compensation — Venture Issuers, is set forth below, which contains information about the compensation paid to, or earned by, Meta’s Chief Executive Officer, Chief Financial Officer and the next most highly compensated executive officer of Meta earning more than CAD$150,000.00 in total compensation for the financial year ended December 31, 2020 (the “Meta Named Executive Officers”).

In the financial year ended December 31, 2020, the Meta Named Executive Officers were:

 

  1.

George Palikaras, President and Chief Executive Officer

 

  2.

Kenneth Rice, Chief Financial Officer and Executive Vice President(1)

 

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  3.

Keith Abriel, Interim Chief Financial Officer(2)

 

  4.

Mayank Mahajan, Chief Financial Officer and Corporate Secretary(3)

 

  5.

Gardner Wade, Chief Product Officer

 

  6.

Jonathan Waldern, Chief Technical Officer(4)

On March 5, 2020, MTI completed the RTO of CPM as described in Meta’s filing statement dated March 5, 2020 on SEDAR. On closing of the RTO, CPM changed its name to Metamaterial Inc. and certain changes to the Meta Named Executive Officers of CPM were made. For more information on the executive compensation of the NEOs of Pubco prior to the RTO, please see the Statement of Executive Compensation of CPM included in CPM’s circular filed on September 23, 2019.

Notes:

 

(1)

Kenneth Rice was appointed Chief Financial Officer and Executive Vice President on December 14, 2020.

 

(2)

Keith Abriel served as interim Chief Financial Officer from June 1, 2020 until December 13, 2020.

 

(3)

Mayank Mahajan served as Chief Financial Officer and Corporate Secretary until May 26, 2020.

 

(4)

Jonathan Waldern was appointed Chief Technical Officer on December 17, 2020.

Compensation Discussion and Analysis

The Meta Board as a whole determines the compensation for directors and officers, together with the Human Resources and Compensation Committee. Executive compensation has been designed to encourage executives to make decisions and take actions that will result in the improvement of long-term shareholder value as reflected in the growth in assets and value of the Meta Shares. The focus of Meta’s current compensation policy is to:

 

   

strengthen the relationship between compensation and enhancement of shareholder value by focusing on variable compensation, such as annual performance incentives and ownership of Meta Shares, primarily by using options for acquiring Meta Shares;

 

   

enhance Meta’s ability to attract, encourage and retain knowledgeable and experienced executives; and

 

   

balance the short-term and long-term business goals of Meta.

The key components of executive compensation include: (1) base salary; (2) a short-term incentive comprised of quarterly bonus awards paid in cash and/or stock options; and (3) long-term incentives comprised primarily of stock option incentives, which are reviewed annually based on job performance as well as corporate performance and external competitive practices.

The Meta Board has constituted a Compensation Committee that works with the CEO to establish annual and quarterly performance measures for each executive along with assessing the overall performance of Meta and its executives and relies on its experience and judgment in determining the overall compensation package for executives. Compensation of executives as detailed herein is linked to the achievement corporate and individual objectives but not improvement in the Meta Share price on the CSE.

 

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Table of Compensation Excluding Compensation Securities

The following table provides a summary of total compensation excluding compensation securities earned during the fiscal years ended December 31, 2020 and 2019 by each Meta Named Executive Officer and director.

 

Name and Position

   Year      Salary,
consulting
fee,
retainer or
commission
(CAD$)
     Bonus
(CAD$)
     Committee
or meeting
fees
(CAD$)
     Value of
perquisites
(CAD$)
     Value of all
other
compensation
(CAD$)
     Total
Compensation

(CAD$)
 

George Palikaras(1),(2)

     2020      $ 206,923      $ 216,000        —          —          —        $ 422,923  

President and CEO & Director

     2019      $ 167,308        —          —          —          —        $ 167,308  

Jonathan Waldern(12)

     2020      $ 7,798        —          —          —          —        $ 7,798  

Chief Technical Officer

     2019        —          —          —          —          —          —    

Kenneth Rice,(3), (11)

     2020      $ 10,759        —          —          —          —        $ 10,759  

CFO and Executive Vice President

     2019        —          —          —          —          —          —    

Keith Abriel,(4)

Interim CFO

     2020      $ 122,044        —          —          —          —        $ 122,044  
     2019        —          —          —          —          —          —    

Mayank Mahajan,(5)

     2020      $ 88,962      $ 20,000        —          —          —        $ 108,962  

CFO and Corporate Secretary

     2019      $ 104,192      $ 23,333        —          —          —        $ 127,525  

Gardner Wade,(6), (11)

Chief Product Officer

     2020      $ 360,863        —          —          —          —        $ 360,863  
     2019      $ 356,936      $ 36,490        —          —          —        $ 393,426  

Charles Baxter,(7)

Director

     2020        —          —          —          —          —          —    
     2019        —          —          —          —          —          —    

Allison Christilaw,(8)

Director

     2020      $ 19,846        —          —          —          —        $ 19,846  
     2019        —          —          —          —          —          —    

Maurice Guitton,(9)

Director

     2020      $ 22,784        —          —          —          —        $ 22,784  
     2019      $ 16,560        —          —          —          —        $ 16,560  

Steen Karsbo,(8)

Director

     2020      $ 21,981        —          —          —          —        $ 21,981  
     2019        —          —          —          —          —          —    

William Lambert, (7)

Director

     2020        —          —          —          —          —          —    
     2019        —          —          —          —          —          —    

Mark Lerohl,(7),(10)

Director

     2020        —          —          —          —          —          —    
     2019        —        $ 107,595        —          —          —        $ 107,595  

Eric Leslie,(9),(10)

Director

     2020      $ 19,846        —          —          —          —        $ 19,846  
     2019        —        $ 96,154        —          —          —        $ 96,154  

Ram Ramkumar,(8)

Director

     2020      $ 19,846        —          —          —          —        $ 19,846  
     2019        —          —          —          —          —          —    

Notes:

 

(1)

Disclosure with respect to the compensation of George Palikaras prior to March 5, 2020 refers to compensation received at MTI, a predecessor company.

(2)

All compensation received by George Palikaras was for his service as CEO. George Palikaras did not receive any compensation as a director. George received a bonus of CAD$216,000 in consideration for entering into a non-competition agreement with Meta.

(3)

Kenneth Rice was appointed the Chief Financial Officer on December 14, 2020 to replace Mr. Abriel, who resigned as the Interim Chief Financial Officer on December 13, 2020.

(4)

Keith Abriel was appointed the Interim Chief Financial Officer effective June 1, 2020 to replace Mr. Mahajan who resigned as the Chief Executive Officer on May 26, 2020. Mr. Abriel resigned as Interim Chief Financial Officer on December 13, 2020. He was replaced by Mr. Rice. Mr. Abriel provided services

 

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  to Meta through a company he controls. References in this proxy statement to a salary paid to Mr. Abriel are to the equivalent fees paid to Mr. Abriel under the applicable services agreement.
(5)

Disclosure with respect to the compensation of Mayank Mahajan prior to March 5, 2020 refers to compensation received at MTI, a predecessor company. Mayank Mahajan served as Chief Financial Officer and Corporate Secretary of Meta until May 26, 2020. He was replaced by Mr. Abriel.

(6)

Disclosure with respect to the compensation of Gardner Wade prior to March 5, 2020 refers to compensation received at MTI, a predecessor company.

(7)

Charles Baxter, William Lambert and Mark Lerohl were directors of MTI, a predecessor company. Each resigned as a director on March 4, 2020.

(8)

Allison Christilaw, Steen Karsbo and Ram Ramkumar were appointed as directors of Meta on March 5, 2020.

(9)

Disclosure with respect to Maurice Guitton and Eric Leslie prior to March 5, 2020 refers to compensation received at MTI, a predecessor company.

(10)

The bonuses received by Mark Lerohl and Eric Leslie were awarded in connection with the completion of the RTO.

(11)

Kenneth Rice and Gardner Wade are paid in US dollars. Amounts for Mr. Rice and Mr. Wade have been converted from US dollars to Canadian dollars. The rate of exchange used to convert US dollars to Canadian dollars for Kenneth Rice was the average exchange rate reported by the Bank of Canada for the December, 2020 which was C$1.2808 per $1.00. The rate of exchange used to convert US dollars to Canadian dollars for Gardner Wade (i) for compensation paid in 2019 was the average exchange rate reported by the Bank of Canada for the year ended December 31, 2019, which was C$1.3269 per $1.00 and (ii) for compensation paid in 2020 was the average exchange rate reported by the Bank of Canada for the year ended December 31, 2020, which was C$1.3415 per US $1.00

(12)

Jonathan Waldern was appointed Chief Technical Officer December 17, 2020. He is paid in US dollars. Amounts for him have been converted from US dollars to Canadian dollars. The rate of exchange used to convert US dollars to Canadian dollars for him was the average exchange rate reported by the Bank of Canada for December, 2020 which was C$1.2808 per $1.00.

 

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Stock Options and other Compensation Securities

The following table provides a summary of stock options and other compensation securities earned during the fiscal year ended December 31, 2020 by each Meta Named Executive Officer and director for services provided or to be provided, directly or indirectly, to Meta or any of its subsidiaries.

 

Name and position

  Type of
compensation
security
  Number of
compensation
securities,
and
percentage of
class(13)
(#)
  Date of
issue or grant
  Issue,
conversion
or exercise

price
(CDN$)
    Closing
price of
security or
underlying
security on
date of
grant
(CDN$)
    Closing
price of
security or
underlying
security at
year end

(CDN$)
    Expiry Date

George Palikaras,(1)

President and CEO & Director

  Options   1,600,000

12.13%

  March 23,
2020
  $ 0.62     $ 0.39     $ 0.66     March 23,
2030

Kenneth Rice,(2),(11)

CFO and Executive Vice President

  Options   300,000

2.27%

  December 14,
2020
  $ 0.62     $ 0.58     $ 0.66     March 23,
2030

Jonathan Waldern

Chief Technical Officer

  Options   1,115,000

8.46%

  December 17,
2020
  $ 0.62     $ 0.60     $ 0.66     December 16,
2030

Keith Abriel,(3),(11)

Interim CFO

  Options   100,000

0.76%

  June 2,
2020
  $ 0.62     $ 0.38     $ 0.66     June 1, 2030

Mayank Mahajan,(4)

CFO and Corporate Secretary

  Options   375,000

2.84%

  March 23,
2020
  $ 0.62     $ 0.39     $ 0.66     March 23,
2030

Gardner Wade,(5)

Chief Product Officer

  N/A   —      —        —          —          —        —   

Charles Baxter,(6)

Director

  N/A   —      —        —          —          —        —   

Allison Christilaw,(7),(11)

Director

  Options   300,000

2.27%

  March 23,
2020
  $ 0.62     $ 0.39     $ 0.66     March 23,
2030

Maurice Guitton,(8),(9)

Director

  Options   300,000

2.27%

  March 23,
2020
  $ 0.62     $ 0.39     $ 0.66     March 23,
2030

Steen Karsbo,(7),(11)

Director

  Options   300,000

2.27%

  March 23,
2020
  $ 0.62     $ 0.39     $ 0.66     March 23,
2030

William Lambert,(6)

Director

  N/A   —      —        —          —          —        —   

Mark Lerohl,(6),(11),(12)

Director

  Warrants   40,441

0.86%

  March 9,
2020
  $ 0.90     $ 1.70     $ 0.66     March 5,
2022

Eric Leslie,(10),(12)

Director

  Options   300,000

2.27%

  March 23,
2020
  $ 0.62     $ 0.39     $ 0.66     March 23,
2030
  Warrants   40,441

0.86%

  March 9,
2020
  $ 0.90     $ 1.70     $ 0.66     March 5,
2022

Ram Ramkumar,(7),(11)

Director

  Options   200,000
1.52%
  March 5,
2020
  $ 0.35     $ 0.89     $ 0.66     March 3,
2030
  Options   300,000
2.27%
  March 23,
2020
  $ 0.62     $ 0.39     $ 0.66     March 23,
2030

Notes:

 

(1)

As at December 31, 2020, George Palikaras held 2,474,227 options.

(2)

Kenneth Rice was appointed the Chief Financial Officer on December 14, 2020 to replace Mr. Abriel, who resigned as the Interim Chief Financial Officer on December 13, 2020.

 

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(3)

Keith Abriel was appointed the Interim Chief Financial Officer effective June 1, 2020 to replace Mr. Mahajan who resigned as the Chief Executive Officer on May 26, 2020. Mr. Abriel resigned as Interim Chief Financial Officer on December 13, 2020. He was replaced by Mr. Rice.

(4)

Mayank Mahajan served as Chief Financial Officer and Corporate Secretary of Meta until May 26, 2020. He was replaced by Mr. Abriel. All options granted to Mayank Mahajan were forfeited as a result of his departure.

(5)

As at December 31, 2020, Gardner Wad held 2,062,500 options.

(6)

Charles Baxter, William Lambert and Mark Lerohl were directors of MTI, a predecessor company. Each resigned as a director on March 4, 2020.

(7)

Allison Christilaw, Steen Karsbo and Ram Ramkumar were appointed as directors of Meta on March 5, 2020.

(8)

Disclosure with respect to Maurice Guitton and Eric Leslie prior to March 5, 2020 refers to stock options received at MTI, a predecessor company.

(9)

As at December 31, 2020, Maurice Guitton held 839,603 options.

(10)

As at December 31, 2020, Eric Leslie held 487,428 options.

(11)

Options granted to Kenneth Rice, Keith Abriel, Allison Christilaw, Steen Karsbo, Mark Lerohl, and Ram Ramkumar represent all compensation securities held by them as at December 31, 2020.

(12)

Warrants granted to Mark Lerohl and Eric Leslie are related to advisory services.

(13)

Each option is exercisable into one common share in the capital of Meta. Percentage with respect to options is based on 13,186,936 options outstanding as at December 31, 2020 and percentage with respect to warrants is based on 1,704,213 warrants outstanding as at December 31, 2020.

Exercise of Compensation Securities by Directors and Meta Named Executive Officers

No director or Meta Named Executive Officer exercised any compensation securities during Meta’s most recently completed fiscal year.

Securities Authorized For Issuance Under Equity Compensation Plans

The following table provides information as of December 31, 2020 with respect to the compensation plans under which equity securities of Meta are authorized for issuance.

 

Plan Category   

Number of securities to
be issued upon exercise
of outstanding options,
warrants and rights

(a)

  

Weighted-average
exercise price of
outstanding options,
warrants and rights

(b)

   Number of securities
remaining available for future
issuance under equity
compensation plans
(excluding securities reflected
in column (a))
(c)

Equity compensation plans approved by security holders

   Options -13,186,936
DSUs - 1,872,750
   Options -0.61
DSUs - N/A
   1,659,741

Equity compensation plans not approved by security holders

        
  

 

  

 

  

 

TOTAL

   Options - 13,186,936
DSUs - 1,872,750
   Options - 0.61
DSUs - N/A
   1,659,741

The number of Meta Shares reserved for issuance under Meta’s compensation plans is 16,719,427.

Summary of the Meta Option Plan

The Meta Option Plan was approved by Shareholders on October 10, 2019 and was effective as of March 4, 2020 (the “Meta Option Plan”). Effective upon the Closing of the Arrangement, Torchlight will adopt and assume the Meta option Plan, including awards thereunder and the ability to grant post-closing awards under the Meta Option Plan, in accordance with applicable laws and without shareholder approval in accordance with NASDAQ Listing Rule 5635(c)(3) and IM-5635-1.

 

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Pursuant to the Meta Option Plan, employees, directors or consultants of Meta may be granted options to purchase Meta Shares. The Meta Board may terminate the Meta Option Plan at any time in its absolute discretion. If the Meta Option Plan is terminated, no further options will be granted but the options then outstanding, will continue in full force until the time that they are exercised or terminated or expired under the terms of the Meta Option Plan.

Unless otherwise determined by the Meta Board, or specified in the relevant option agreement, 25% of the options will vest and become exercisable on the first anniversary of the grant date, and the remaining 75% will vest and become exercisable in equal monthly installments over the three year period commencing immediately after the first anniversary of the grant date. The Meta Board may at any time accelerate the date on which any options will vest and become exercisable.

The Meta Board, on the grant date of a given option will set the expiry date of such option. The expiry date may be no later than 10 years unless otherwise determined by the Meta Board or specified in the relevant option or employment agreement. If a participant in the Meta Option Plan ceases to be an employee, director or consultant, any unvested options will immediately expire as of their termination date and any vested options will expire on the earlier of: (a) the expiry date set by the Meta Board; (b) in the case of termination of employment without cause, failure of a director to be re-elected, or failure by Meta or a subsidiary thereof to renew a contract for services, 90 days after the termination date; (c) death of the participant; (d) in the case of disability or retirement, 180 days after the termination date; and (e) in all other cases, the termination date.

In the event of: (a) the acquisition of a sufficient number of voting securities in the capital of Meta such that the acquirer and persons acting jointly with the acquirer become entitled to more than 50% of the voting rights attaching to the outstanding voting securities of Meta; (b) the completion of a consolidation, merger, arrangement or amalgamation of Meta with or into any other entity whereby the securityholders of Meta immediately prior to such transaction receive less than 50% of the voting rights attaching to the outstanding voting rights attaching to the outstanding voting securities of the subsequent entity; (c) the completion of a sale of all or substantially all of Meta’s assets; and (d) any other transaction which, in the reasonable opinion of the Meta Board, constitutes a change of control of Meta, the Meta Board has the right, in its sole discretion, to deal with any options in the manner it deems equitable and appropriate in the circumstances.

To the extent that any options granted under the Meta Option Plan expire or are terminated without having been exercised in whole or in part, such options will then be considered to be part of the pool of Meta Shares available for options under the Meta Option Plan.

Summary of Meta Deferred Share Unit Plan

The deferred share unit plan (“Meta DSU Plan”) was approved by Meta’s Shareholders on October 10, 2019.

The Meta DSU Plan authorizes the grant of Meta DSU’s to directors, officers and employees of Meta and others approved by the Meta Board. A Meta DSU is a unit equivalent in value to one Meta Share, which is credited to an eligible individual’s account on a deferred basis from time to time in accordance with the terms of the Meta DSU Plan.

The vesting conditions of a Meta DSU, which may include performance vesting conditions or acceleration upon achievement of certain benchmarks, may be decided at the sole discretion of the Meta Board upon the date of grant and may be changed by the Meta Board from time to time. Upon the due redemption of a Meta DSU, the holder of the Meta DSU is entitled to an amount equal to number of Meta DSUs redeemed multiplied by the fair market value of the Meta Shares as of the redemption date, which may be satisfied in a lump sum payment of cash, such number of Meta Shares issued from treasury, or a combination thereof.

 

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The Meta DSU Plan provides that Meta DSU holders must redeem their Meta DSUs by December 15th of the first calendar year after their termination of service from Meta. Failure to do so will result in the Meta DSUs being deemed to have been redeemed on that date. A participant in the Meta DSU Plan will not be entitled to redeem any Meta DSUs, whether or not vested, on or before the date of such participant’s termination of service unless such participant’s termination of service is a result of the participant’s death, in which case all unvested Meta DSUs will vest and all Meta DSUs credited to such participant’s account may be redeemed.

Employment Agreements, Termination and Change of Control Benefits

Certain of the employment agreements described below were entered into by MTI prior to its acquisition by Meta. As such, references to “Meta” below should be deemed to include reference to MTI, as applicable.

George Palikaras

On March 5th, 2020, Meta entered into an executive employment contract (the “Palikaras Employment Agreement”) with George Palikaras, which amended the prior employment contract entered into between Mr. Palikaras and MTI, pursuant to which Meta agreed to employ Mr. Palikaras as the President and Chief Executive Officer of Meta, effective as of March 5th, 2020, for an indefinite term in consideration of an annual base salary of CAD$200,000. Mr. Palikaras’s years of service since December 15, 2010 are recognized under the Palikaras Employment Agreement. Mr. Palikaras is eligible to receive an annual bonus of 50% of his base salary (“Palikaras Target Bonus”) upon achievement of objectives agreed to by the Board and he is also eligible to participate in the Meta Option Plan.

In the event that the Palikaras Employment Agreement is terminated by Meta without cause or for good reason (as defined in the agreement) by Mr. Palikaras, Meta shall pay Mr. Palikaras salary continuation for a period of one month of base salary and the Palikaras Target Bonus per year of service, for a period equal to a minimum of ten months and a maximum of 24 months (“Severance Period”). Mr. Palikaras will also be entitled to receive any earned bonus for the fiscal year during which the termination occurs and prorated to the date of termination. Mr. Palikaras’s options shall continue to vest during the Severance Period until their expiration. In the event that the agreement is terminated by Meta with cause, Meta shall only provide Mr. Palikaras with earned but unpaid salary, vacation pay and reimbursement of expenses.

In the event of both a change of control (as defined in the agreement) and a termination of Mr. Palikaras’s employment without cause by Meta or for good reason by Mr. Palikaras, Mr. Palikaras shall be entitled to a lump sum payment equal to 1.5 months of base salary and of the Palikaras Target Bonus per year of service, with a minimum of 15 and a maximum of 24 months (the “COC Severance Period”). Mr. Palikaras’s stock options will continue to vest during the COC Severance Period until their expiration.

Kenneth Rice

On December 14th, 2020, Meta entered into an executive employment agreement with Kenneth Rice (the “Rice Employment Agreement”) pursuant to which Meta agreed to employ Mr. Rice as the Chief Financial Officer and Executive Vice President of Meta, effective as of December 14th, 2020, for an indefinite term in consideration of an annual base salary of $156,000 which will be increased to $216,000 on March 1st, 2021. Mr. Rice is eligible to receive a quarterly bonus of up to $27,000 based on his achievement of a balanced scorecard, in the sole discretion of Meta or the Meta Board. In the first two years, 25% of any quarterly bonus shall be issued in an amount of fully vested options of Meta. In addition, Meta granted Mr. Rice an option to acquire 300,000 common shares in connection with the execution of the Rice Employment Agreement.

In the event that the agreement is terminated by Mr. Rice without good reason (as defined in the agreement), Mr. Rice will continue to receive base salary and benefits for a period of 6 months after providing Meta advance written notice, but will not be entitled to quarterly bonuses for any calendar quarter that ends or begins during

 

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that period. In the event that the agreement is terminated by Meta without cause or by Mr. Rice for good reason (as defined in the agreement), Meta shall pay Mr. Rice continued payment of base salary for six months, plus payment of two quarterly bonus. There will be a six months’ accelerated vesting of the stock options. If Mr. Rice is terminated for cause, he will only be entitled to earned but unpaid salary, vacation pay and reimbursement of expenses.

Keith Abriel

Keith Abriel provided services to Meta pursuant to a services agreement between Meta and his holding company, 3245939 Nova Scotia Inc. (“NS Holdco”), effective as of June 1, 2020. Under the services agreement, it was agreed that Mr. Abriel would serve as Interim Chief Financial Officer and receive CAD$1,200.00 per day of service. Meta granted Mr. Abriel 100,000 vested stock options in connection with the signing of the agreement at a strike price of CAD$0.62. The Corporation and Mr. Abriel were each able to terminate the agreement on 30 days’ notice.

Gardner Wade

On October 15th, 2018, Meta’s entered into an employment agreement with Gardner Wade pursuant to which Meta agreed to continue employing Mr. Wade as the Chief Product Officer and Vice President of Meta, effective as of October 15th, 2018, for an indefinite term in consideration of an annual base salary of $269,000. Meta provided Mr. Wade a signing bonus of $55,000 in addition to 75,000 options which vested over a two year period. Mr. Wade is eligible to receive an annual performance-based bonus of up to 150% of the annual salary at the discretion of Meta. In certain cases where Mr. Wade’s options would have terminated following a corporate transaction that follows a triggering event (as defined in the agreement), the vesting and exercisability of each option will be accelerated.

In the event that the agreement is terminated by Meta with no cause (as defined in the agreement), Meta shall pay Mr. Wade a severance package of two week’s salary for each year of service for up to a maximum of 26 weeks or $55,000, whichever is higher. There is no severance pay if the agreement is terminated for cause or if Mr. Wade leaves voluntarily.

Jonathan Waldern

On December 17th, 2020, Meta entered into an executive employment agreement with Jonathan Waldern pursuant to which Meta agreed to employ Mr. Waldern as the Chief Technology Officer of Meta, effective as of December 14th, 2020, for an indefinite term in consideration of an annual base salary of $150,000 which will be increased to $250,000 on March 1st, 2021. Mr. Waldern is eligible to receive a quarterly bonus of up to $50,000 based on his achievement of a balanced scorecard, in the sole discretion of Meta or the Meta Board. In the first two years, Mr. Waldern shall also be eligible to receive fully vested options totaling 0.25% of Meta’s then outstanding common shares at an exercise price equal to the market price of the Meta Shares on the date of grant. In addition, Meta granted Mr. Waldern an option to acquire 1,115,000 Meta Shares vesting evenly over 3 years in connection with the execution of the Waldern Employment Agreement.

In the event that the agreement is terminated by Mr. Waldern without good reason (as defined in the agreement), Mr. Waldern will continue to receive base salary and benefits for a period of 6 months after providing Meta advance written notice, but will not be entitled to quarterly bonuses for any calendar quarter that ends or begins during that period. In the event that the agreement is terminated by Meta without cause or by Mr. Waldern for good reason (as defined in the agreement), Meta shall pay Mr. Waldern continued payment of base salary for six months, plus payment of two quarterly bonus. There will be a six months’ accelerated vesting of the stock options. If Mr. Waldern is terminated for cause, he will only be entitled to earned but unpaid salary, vacation pay and reimbursement of expenses.

 

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Pension Plan Benefits

No pension or retirement benefits plans have been instituted and none are proposed at this time.

Composition of the Board of Directors Following the Closing

The following table provides information regarding the expected directors of the Combined Company after the Effective Time:

 

Name

   Age     

Position

George Palikaras

     39      Chief Executive Officer and Director

Ram Ramkumar

     69      Chairman of the Board of Directors

Allison Christilaw

     57      Director

Eric Leslie

     65      Director

Maurice Guitton

     73      Director

Kenneth Hannah

     51      Director

Steen Karsbo

     62      Director

Independence of the Board of Directors

Under the NASDAQ Listing Rules, a majority of the members of the Combined Company’s board of directors must qualify as “independent,” as affirmatively determined by the board of directors. The board of directors has affirmatively determined that all of the expected directors, except for Mr. Palikaras, are independent directors within the meaning of the applicable Nasdaq listing standards. All members of the combined company’s audit committee, compensation committee and nominating and corporate governance committee will be independent directors under the applicable NASDAQ Listing Rules.

Board Leadership

The Combined Company’s board of directors will be responsible for the control and direction of the Combined Company. The Chairperson of the Combined Company’s board of directors will be selected by the Combined Company’s board of directors and will initially be Mr. Ramkumar.

Committees of the Combined Company’s Board of Directors

The Combined Company’s board of directors will establish an audit committee, a compensation committee and a nominating and corporate governance committee. The expected composition and responsibilities of each committee are described below. Members will serve on these committees until their resignations or until otherwise determined by the board of directors. The audit committee, compensation committee and nominating and corporate governance committee each will operate under a written charter adopted by the board of directors, all of which will be available on the Combined Company’s website.

Audit Committee

The Combined Company’s audit committee is expected to be comprised of three members. Mr. Hannah is expected to be the chairperson of the audit committee, and Ms. Christilaw and Mr. Guitton are expected to be the other members of the audit committee. Each member of the audit committee will meet the requirements for independence under current NASDAQ Listing Rules and SEC rules and regulations and will be financially literate as required by NASDAQ Listing Rules. In addition, the board of directors has determined that Mr. Hannah is an “audit committee financial expert” as defined in Item 407(d)(5)(ii) of Regulation S-K promulgated under the Securities Act. This designation does not impose any duties, obligations or liabilities that are greater than those generally imposed on members of the audit committee and the board of directors.

 

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Among other functions, the Combined Company’s audit committee will evaluate the performance of and assesses the qualifications of the independent registered public accounting firm; engage the independent registered public accounting firm; determine whether to retain or terminate the existing independent registered public accounting firm or to appoint and engage a new independent registered public accounting firm; confer with senior management and the independent registered public accounting firm regarding the adequacy and effectiveness of internal control over financial reporting; establish procedures, as required under applicable law, for the receipt, retention and treatment of complaints received regarding accounting, internal accounting controls or auditing matters and the confidential and anonymous submission by employees of concerns regarding questionable accounting or auditing matters; review and approve the retention of the independent registered public accounting firm to perform any proposed permissible non-audit services; monitor the rotation of partners of the independent registered public accounting firm on the audit engagement team as required by law; review annually the audit committee’s written charter and the committee’s performance; review the financial statements to be included in the Annual Report on Form 10-K; and discuss with management and the independent registered public accounting firm the results of the annual audit and the results in the quarterly financial statements. The audit committee will have the authority to retain special legal, accounting or other advisors or consultants as it deems necessary or appropriate to carry out its duties.

Human Resources and Compensation Committee

The Combined Company’s human resources and compensation committee is expected to be comprised of three members. Ms. Christilaw is expected to be the chairperson of the human resources and compensation committee, and Mr. Leslie and Mr. Karsbo are expected to be the other members of the human resources and compensation committee. The composition of the human resources and compensation committee will meet the requirements for independence under current NASDAQ Listing Rules and SEC rules and regulations.

The Combined Company’s human resources and compensation committee will oversee the overall compensation strategy and related policies, plans and programs. Among other functions, the human resources and compensation committee will determine and approve the compensation and other terms of employment of the Chief Executive Officer; determine and approve the compensation and other terms of employment of the other executive officers, as appropriate; review and recommend to the board of directors the type and amount of compensation to be paid to board members; recommend to the board of directors the adoption, amendment and termination of the Combined Company’s equity incentive plans; administer the combined company’s equity incentive plans; and review and establish appropriate insurance coverage for the directors and executive officers. The human resources and compensation committee will have the authority to retain special legal, accounting or other advisors or consultants as it deems necessary or appropriate to carry out its duties.

Nominating and Corporate Governance Committee

The Combined Company’s nominating and corporate governance committee is expected to be comprised of three members. Mr. Karsbo is expected to be the chairperson of the nominating and corporate governance committee, and Ms. Christilaw and Mr. Guitton are expected to be the other members of the nominating and corporate governance committee. The composition of the nominating and corporate governance committee will meet the requirements for independence under current Nasdaq listing standards and SEC rules and regulations.

The Combined Company’s nominating and corporate governance committee will be responsible for identifying, reviewing and evaluating candidates to serve on the board of directors; reviewing and evaluating incumbent directors and the performance of the board of directors; recommending candidates to the board of directors for election; making recommendations regarding the membership of the committees of the board of directors; assessing the performance of the board of directors, including its committees; and developing a set of corporate governance guidelines for the Combined Company.

 

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Director Liability and Indemnification

The Combined Company purchased directors’ and officers’ liability insurance and will enter into indemnification arrangements with each of its directors and executive officers. The indemnification agreements and the Combined Company’s amended and restated articles of incorporation and bylaws will require it to indemnify the directors and officers to the fullest extent permitted by Nevada law.

Corporate Governance Guidelines

The Combined Company’s board of directors will adopt and maintain corporate governance guidelines that set forth expectations for directors, director independence standards, board committee structure and functions and other policies for the governance of the Combined Company. The corporate governance guidelines will be made available on the Combined Company’s website.

Code of Business Conduct and Ethics

The Combined Company’s board of directors will maintain a Code of Business Conduct and Ethics that applies to all board members, officers and employees. The Code of Business Conduct and Ethics, and any applicable waivers or amendments, will be made available on the Combined Company’s website.

 

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UNAUDITED PRO FORMA FINANCIAL INFORMATION

The following tables set forth selected unaudited pro forma historical financial information and unaudited pro forma per share information in connection with the Combined Company. The pro forma amounts included in the tables below are presented as if the acquisition had been consummated for all periods presented, have been prepared in accordance with GAAP, but have not been audited. You should read this information in conjunction with, and such information is qualified in its entirety by, the consolidated financial statements and accompanying notes of Meta included in this proxy statement (including the related Management’s Discussion and Analysis), the consolidated financial statements and accompanying notes of Torchlight (including Management’s Discussion and Analysis) contained in Torchlight’s annual reports on Form 10-K and quarterly reports on Form 10-Q, and the unaudited pro forma consolidated financial statements and accompanying discussions and notes found in this proxy statement. The pro forma amounts in the tables below are presented for informational purposes. You should not rely on the pro forma amounts as being indicative of the financial position or the results of operations of the Combined Company that would have actually occurred had the acquisition been consummated during the periods presented or of the future financial position or future results of operations of the Combined Company.

General

The accompanying unaudited pro forma consolidated financial statements of Torchlight are presented to illustrate the estimated effects of the Arrangement.

The unaudited pro forma consolidated financial statements have been derived from the historical consolidated financial statements of Torchlight and Meta. The unaudited pro forma consolidated statements of operations for the year ended December 31, 2020 combine the historical consolidated statement of operations of Torchlight for the year ended December 31, 2020 and the historical consolidated statement of operations of Meta for the year ended December 31, 2020, giving effect to the Arrangement as if it had been consummated on January 1, 2020, the beginning of the earliest period presented. The unaudited pro forma consolidated balance sheet combines the historical consolidated balance sheet of Torchlight as of December 31, 2020 and the historical consolidated balance sheet of Meta as of December 31, 2020, giving effect to the Arrangement as if it had been consummated on December 31, 2020. The historical consolidated financial statements have been adjusted in the unaudited pro forma consolidated financial statements to give pro forma effect to events that are: (a) directly attributable to the Arrangement; (b) factually supportable; and (c) with respect to the statements of operations, expected to have a continuing impact on Torchlight’s results following the completion of the Arrangement.

The assumptions and estimates underlying the unaudited adjustments to the pro forma combined financial statements are described in the accompanying notes, which should be read together with the pro forma combined financial statements. The unaudited pro forma combined financial statements should be read together with the Torchlight’s historical consolidated financial statements, which are included in Torchlight’s latest annual report on Form 10-K, and the historical consolidated financial statements of Meta as of December 31, 2020 presented in this proxy statement.

The unaudited pro forma consolidated financial statements are presented for illustrative purposes only, in accordance with Article 11 of Regulation S-X. The pro forma financial information presented gives effect to pro forma events that are (a) directly attributable to the Arrangement, (b) factually supportable and (c) with respect to the pro forma statement of operations, expected to have a continuing impact. The Arrangement is being accounted for as a business combination using the acquisition method in accordance with accounting standards codification 805, Business Combinations. Under this method of accounting the purchase price will be allocated to the assets acquired and liabilities assumed based upon their estimated fair values at the date of consummation of the Arrangement.

The Arrangement is in substance a reverse takeover of Torchlight by Meta, in order to facilitate Meta’s listing on NASDAQ and access to the US capital markets. On completion of the Arrangement, holders of Meta

 

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Shares are expected to hold an approximate 75% (before giving effect to the issuance of Torchlight Shares in the Pre-Closing Financing) of the outstanding Combined Company Shares while holders of Torchlight Shares will retain an approximate 25% (before giving effect to the issuance of Torchlight Shares in the Pre-Closing Financing) of the outstanding Combined Company Shares. Following completion of the Arrangement, Torchlight is expected to be renamed “Meta Materials Inc.” and the business of the Combined Company will be the business of Meta. It is also expected that, following completion of the Arrangement, the O&G Assets will be sold in Asset Sale Transactions with any resulting Net Proceeds being distributed to holders of Series A Preferred Stock. Holders of Meta Shares will not participate in the Net Proceeds from Asset Sale Transactions.

 

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TORCHLIGHT ENERGY RESOURCES, INC.

Unaudited Pro Forma Consolidated Balance Sheet

As of December 31, 2020

 

    Meta
Historical
    Torchlight
Energy
Historical
    Torchlight
Energy
Proforma
Adjustments
    Note
Ref.
  Meta
Proforma
Adjustments
    Note
Ref.
    Pro Forma
Combined
 

ASSETS

             

Current assets:

             

Cash

    1,395,683       131,327       14,673,583     1     10,000,000       1       26,200,593  

Accounts receivable

    —         137,801       (137,801   a     —           —    

Grants and other receivables

    521,754       92,320       —           —           614,074  

Production revenue receivable

    —         21,182       (21,182   a     —           —    

Inventory

    463,382       —         —           —           463,382  

Prepayments — development costs

    —         35,272       (35,272   a     —           —    

Prepaid expenses

    343,155       103,672       (103,672   a     —           343,155  

Other current assets

    265,034       —         —           —           265,034  
 

 

 

   

 

 

   

 

 

     

 

 

     

 

 

 

Total current assets

    2,989,008       521,574       14,375,656         10,000,000         27,886,238  

Oil and gas properties, net

    —         30,857,959       (30,857,959   a,b,c     —           —    

Convertible note receivable

    —         1,012,822       (1,012,822   a     —           —    

Assets held for sale

    —         —         72,797,392     c,n     —           72,797,392  

Property and equipment

    2,761,171       4,549       (4,549   a     —           2,761,171  

Goodwill

    —         —         60,756,107     k     —           60,756,107  

Note receivable

    —         —         10,000,000     1     (10,000,000     1       —    

Intangibles

    4,476,615       —         —           —           4,476,615  
 

 

 

   

 

 

   

 

 

     

 

 

     

 

 

 

TOTAL ASSETS

    10,226,794       32,396,904       126,053,825         —           168,677,523  
 

 

 

   

 

 

   

 

 

     

 

 

     

 

 

 

LIABILITIES AND STOCKHOLDERS’ EQUITY

             

Current liabilities:

             

Accounts payable

    2,940,452       1,026,950       (508,899   a     —           3,458,503  

Accrued payroll

    —         1,213,779       (1,213,779   l     —           —    

Due to working interest owners

    —         54,320       (54,320   a     —           —    

Accrued interest payable

    —         503,229       (503,229   d     —           —    

Related party payables

    245,467       98,805       (98,805   d     —           245,467  

Preferred stock liability

    —         —         77,906,354     g     —           77,906,354  

Liabilities held for sale

    —         —         19,386     n     —           19,386  

Current portion of long-term debt

    290,544       —         —           —           290,544  

Current portion of deferred revenue

    1,239,927       —         —           —           1,239,927  

Current portion of deferred government assistance

    779,578       —         —           —           779,578  

Secured convertible debentures

    5,545,470       —         —           —           5,545,470  

Unsecured convertible promissory notes

    1,203,236       —         —           (665,313     o       537,923  

Note payable

    —         —         —           —           —    

Current portion of lease liabilities

    150,802       —         —           —           150,802  
 

 

 

   

 

 

   

 

 

     

 

 

     

 

 

 

Total current liabilities

    12,395,476       2,897,083       75,546,708         (665,313       90,173,954  

12% 2021 Secured promissory notes, net of $69,179 of discount and financing costs

    —         12,430,821       (12,430,821   d     —           —    

8% 2021 Convertible promissory notes payable, net of $505,957 of discount and BCF

    —         1,454,043       (1,454,043   d     —           —    

6% 2021 Secured promissory note

    —         1,600,000       (1,600,000   d     —           —    

14% 2021 Convertible promissory notes, net of $10,862 of discount and financing costs

    —         989,138       (989,138   d     —           —    

PPP note payable

    —         77,477       —           —           77,477  

Interest payable, net of current portion

    —         283,080       —           —           283,080  

 

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    Meta
Historical
    Torchlight
Energy
Historical
    Torchlight
Energy
Proforma
Adjustments
    Note
Ref.
    Meta
Proforma
Adjustments
    Note
Ref.
    Pro Forma
Combined
 

Deferred revenue

    804,143       —         —           —           804,143  

Deferred government assistance

    146,510       —         —           —           146,510  

Deferred tax liability

    318,054       —         —           —           318,054  

Lease liabilities

    119,781       —         —           —           119,781  

Unsecured convertible debentures

    1,825,389       —         —           —           1,825,389  

Funding Obligation

    776,884       —         —           —           776,884  

Long-term debt

    2,743,504       —         —           —           2,743,504  

Asset retirement obligations

    —         21,844       (21,844     a       —           —    
 

 

 

   

 

 

   

 

 

     

 

 

     

 

 

 

Total liabilities

    19,129,741       19,753,486       59,050,862         (665,313       97,268,776  
 

 

 

   

 

 

   

 

 

     

 

 

     

 

 

 

Commitments and contingencies

             

Stockholders’ equity:

             

Preferred stock, par value $0.001, 10,000,000 shares authorized;
-0- issued and outstanding

             

Common stock, par value $0.001; 150,000,000 shares authorized; 103,274,264 issued and outstanding

    —         103,276       —           —           542,125  

Note payable conversions

        16,726       d        

Warrant exercises

        1,300       1        

Business combination

            397,823       f    

Capital raise

        23,000       l        

Additional paid-in capital

    4,966,328       124,475,739           26,614,137       m,o       111,082,544  

Remove TRCH equity

        (124,475,739     e        

Note payable conversions

        17,246,939       d        

Warrant exercises

        1,298,700       l        

Business combination

        35,245,514       j        

Capital raise

        25,710,926       l        

Common shares, unlimited shares authorized; nil and 83,557,679 issued and outstanding

    25,999,138       —         —           (25,999,138     m       —    

Accumulated other comprehensive loss

    (14,609     —         —           —           (14,609

Accumulated deficit

    (39,853,804     (111,935,597     111,935,597       e       (347,509     o       (40,201,313
 

 

 

   

 

 

   

 

 

     

 

 

     

 

 

 

Total stockholders’ equity

    (8,902,947     12,643,418       67,002,963         665,313         71,408,747  
 

 

 

   

 

 

   

 

 

     

 

 

     

 

 

 

TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY

    10,226,794       32,396,904       126,053,825         —           168,677,523  
 

 

 

   

 

 

   

 

 

     

 

 

     

 

 

 

See accompanying notes to the unaudited pro forma combined financial statements.

 

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TORCHLIGHT ENERGY RESOURCES, INC.

Unaudited Pro Forma Consolidated Statements of Operations

For the Year Ended December 31, 2020

 

    Meta
Historical
    Torchlight
Energy
Historical
    Torchlight
Energy
Proforma
Adjustments
    Note
Ref.
    META
Proforma
Adjustments
    Note
Ref.
    Pro Forma
Combined
 

Oil and gas sales

    —       $ 193,379     $ (193,379     h       —         $ —    

Product sales

    1,950       —         —           —           1,950  

Development revenue

    1,121,976       —         —           —           1,121,976  
 

 

 

   

 

 

   

 

 

     

 

 

     

 

 

 

Revenue, net

    1,123,926       193,379       (193,379       —           1,123,926  

Cost of goods sold — Exclusive of depreciation

    3,287       188,481       (188,481     h       —           3,287  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

     

 

 

 

Gross profit

    1,120,639       4,898       (4,898       —           1,120,639  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

     

 

 

 

Expenses (income)

             

General and administrative

    10,741,305       3,526,700       (964,465     i       —           13,303,540  

Depreciation, depletion and amortization

    2,117,502       820,441       (820,441     b       —           2,117,502  

Loss on sale of oil and gas property

    —         2,928,276       (2,928,276     d       —           —    

Impairment loss

    3,894       2,108,301       (2,108,301     b       —           3,894  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

     

 

 

 

Total operating expenses

    12,862,701       9,383,718       (6,821,483       —           15,424,936  

Interest expense and accretion

    1,445,799       1,239,532       (1,239,532     d       —           1,445,799  

Fair value adjustments on loans and funding obligation

    133,983       —         —           —           133,983  

Interest income

    (8,481     (12,822     —           —           (21,303
 

 

 

   

 

 

   

 

 

     

 

 

     

 

 

 

Total finance costs — net

    1,571,301       1,226,710       (1,239,532       —           1,558,479  

Net fair value losses on FVTPL liabilities

    1,525,597       —         —           347,509       o       1,873,106  

Amortization of deferred government assistance

    (136,185     —         —           —           (136,185

Debt conversion expense

    —         176,400       (176,400     d       —           —    

Loss on extinguishment of debt

    —         1,999,866       (1,999,866     d       —           —    

Net foreign exchange losses

    252,623       —         —           —           252,623  

Franchise tax

    —         100       —           —           100  
 

 

 

   

 

 

   

 

 

     

 

 

     

 

 

 

Total other expense

    1,642,035       2,176,366       (2,176,266       347,509         1,989,644  
 

 

 

   

 

 

   

 

 

     

 

 

     

 

 

 

Loss before income taxes

    (14,955,398     (12,781,896     10,232,383         (347,509       (17,582,420

Income tax recovery

    190,611       —         —           —           190,611  
 

 

 

   

 

 

   

 

 

     

 

 

     

 

 

 

Net loss

    (14,764,787   $ (12,781,896   $ 10,232,383         (347,509     $ (17,661,809
 

 

 

   

 

 

   

 

 

     

 

 

     

 

 

 

Basic and Diluted

    (0.20   $ (0.14   $ 0.02         —         $ (0.03
 

 

 

   

 

 

   

 

 

     

 

 

     

 

 

 
Weighted average number of common
shares outstanding:
                                         

Basic and Diluted

    74,271,609       90,721,599       438,848,797         0         529,570,396  
 

 

 

   

 

 

   

 

 

     

 

 

     

 

 

 

See accompanying notes to the unaudited pro forma combined financial statements.

 

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Torchlight Energy Resources, Inc.

Notes to the Unaudited Pro Forma Combined Financial Statements

1. Description of Transaction

On December 14, 2020, Torchlight and its newly formed subsidiaries, Canco and Callco, entered into the Arrangement Agreement with Meta. Under the Arrangement Agreement, Canco is to acquire all of the outstanding common shares of Meta by way of the Arrangement.

2. Basis of presentation

The unaudited pro forma combined financial statements were prepared in accordance with accounting principles generally accepted in the United States of America and pursuant to the rules and regulations of SEC Regulation S-X, and present the pro forma financial position and results of operations of the combined companies after giving effect to the Arrangement.

Meta historical financial information was prepared in CAD in accordance with IFRS and have been converted to USD and to US GAAP for purposes of the proformas.

Note 3 — Preliminary Purchase Price Allocation

The Arrangement is being accounted for as a business combination using the acquisition method in accordance with Accounting Standards Codification 805, Business Combinations. Under this method of accounting the purchase price will be allocated to the assets acquired and liabilities assumed based upon their estimated fair values at the date of consummation of the Arrangement.

The Arrangement is in substance a reverse takeover of Torchlight by Meta, in order to facilitate Meta’s listing on NASDAQ and access to the US capital markets. On completion of the Arrangement, holders of Meta Shares are expected to hold an approximate 75% (before giving effect to the issuance of Torchlight Shares in the Pre-Closing Financing) of the outstanding Combined Company Shares while holders of Torchlight Shares will retain an approximate 25% (before giving effect to the issuance of Torchlight Shares in the Pre-Closing Financing) of the outstanding Combined Company Shares. Following completion of the Arrangement, Torchlight is expected to be renamed “Meta Materials Inc.” and the business of the Combined Company will be the business of Meta. It is also expected that, following completion of the Arrangement, the O&G Assets will be sold in Asset Sale Transactions with any resulting Net Proceeds being distributed to holders of Series A Preferred Stock. Holders of Meta Shares will not participate in the Net Proceeds from Asset Sale Transactions.

The following table presents the preliminary allocation of the $79,934,004 consideration for the transaction as of the acquisition date. This amount was determined based on the additional number of Meta Shares that would be issued for Meta shareholders to hold 75% of the Combined Company, valued at the market price as of April 12, 2021 of CAD 3.60 per share or USD $2.87:

 

Cash and cash equivalents

   $ 14,804,910  

Oil and natural gas properties

     72,797,392  

Other asset

     10,000,000  

Goodwill

     60,756,107  

Accounts payable

     (518,051

Preferred Stock (Proforma 12/31/2020)

     (77,906,354
  

 

 

 

Consideration for the acquisition - common stock

   $ 79,934,004  
  

 

 

 

 

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Note 4 — Pro Forma Adjustments

Management has made significant estimates and assumptions in its determination of the pro forma adjustments. As the unaudited pro forma condensed combined financial information has been prepared based on these preliminary estimates, the final amounts recorded may differ materially from the information presented. The pro forma adjustments are based on our preliminary estimates and assumptions that are subject to change. The following adjustments have been reflected in the unaudited pro forma combined financial information:

Adjustments to Unaudited Pro Forma Combined Balance Sheets and Unaudited Pro Forma Combined Statements of Operations:

 

  (a)

To remove assets, liabilities, and asset retirement obligations not retained by the Company in the Arrangement, including amounts associated with Torchlight’s oil and gas properties working interest.

 

  (b)

Represents the elimination of the historical Torchlight oil and natural gas properties and related accumulated depreciation, depletion, amortization, and impairment.

 

  (c)

Represents preliminary fair value adjustment related to the purchase price allocation.

 

  (d)

Represents debt and accrued interest that was paid or converted in connection with the Arrangement and related interest expense. The conversion of convertible promissory notes was converted into approximately 16,725,797 Torchlight Shares. Proforma adjustments recorded as increases to common stock of 16,726 and additional paid in capital $17,246,939.

 

  (e)

Represents the elimination of Torchlight’s equity.

 

  (f)

Represents Torchlight Shares issued in the Arrangement.

 

  (g)

Represents Series A Preferred Stock issued in connection with the Arrangement. This amount is determined using the assets the holders of Series A Preferred Stock will receive of oil and natural gas properties of approximately $73 million and additional cash of approximately $5 million.

 

  (h)

Represents the removal of revenues and cost of sales related to Torchlight’s oil and natural gas properties that were disposed of.

 

  (i)

Represents the removal of certain general and administrative expenses related to certain Torchlight expenses that will no longer be incurred going forward.

 

  (j)

Reflects the approximately $79.9 million in total consideration for the Arrangement. The approximately $79.9 million of total consideration valued at approximately $79.9 million, represents the additional number of Meta Shares that would be issued for Meta shareholders to hold 75% of the combined company. Proforma adjustments are recorded as increases to common stock of 397,823, adjustments to additional paid in capital of approximately $79.5 million related to the consideration and approximately a $44.3 million decrease related to Torchlight equity being eliminated. Resulting in a net increase in additional paid in capital of approximately $35.2 million.

 

  (k)

This figure is goodwill related to the Closing of the Arrangement. In accordance with ASC 805, the Arrangement will be accounted for as a reverse acquisition in which Meta will be treated as the accounting acquirer and Torchlight will be treated as the accounting acquiree. The relevant portion of ASC 805 provides that in a reverse acquisition, goodwill should be recorded for and attributed to any difference between the total consideration deemed to be transferred by the accounting acquirer and the total net assets of the accounting acquiree. For purposes of the goodwill analysis under ASC 805, the total “consideration” transferred by Meta, as the accounting acquirer in the Arrangement, equals the market value (in U.S. dollars) of the number of Meta Shares that would have to be issued to Torchlight, as the accounting acquiree in the Arrangement, that would result in Meta owning 75% of the outstanding Combined Company Shares after the Closing of the Arrangement. Based on the market value of the Meta Shares on April 12, 2021, this would result in pro forma total “consideration” being

 

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  transferred to the Company of approximately $80.0 million. Further, the pro forma total net assets of Torchlight to be transferred to Meta, as the accounting acquirer, would be equal to approximately $19.2 million, based on pro forma total assets of Torchlight of approximately $97.6 million (including approximately $14.8 million in cash, $10 million in notes receivable and $72.8 million of O&G Assets), less pro forma liabilities of approximately $78.4 million (including liabilities attributable to the Series A Preferred Stock). The difference between the $80.0 million of consideration and the $19.2 of pro forma net assets yields goodwill of approximately $60.8 million. In addition to the cash and fixed assets being transferred, Torchlight is delivering a NASDAQ listed legal entity in good standing that will provide the Combined Company with ready access to significant capital sources in the future to fund its growth plans. The value of this listing is a contributing factor to the goodwill but is difficult to quantify and may be difficult to support in any subsequent goodwill impairment testing.

 

      

Accounting Standards Codification Topic 350 provides that the Combined Company’s recorded goodwill is not to be amortized and is to be tested, at least annually for impairment. Impairment of goodwill is the condition that exists when the carrying amount of the Combined Company unit that includes goodwill exceeds its fair value. A goodwill impairment loss is to be recognized for the amount that the carrying amount including goodwill, exceeds its fair value, limited to the total amount of goodwill. The goodwill estimated in the “Unaudited Pro Forma Financial Information” has not been tested for impairment given the uncertainties surrounding ascertaining the fair value of the Combined Company prior to the Closing of the Arrangement. The pro forma goodwill of the Combined Company is highly sensitive to changes in the assets and liabilities of the parties between the date of presentation of the “Unaudited Pro Forma Financial Information” included in this proxy statement and the Closing of the Arrangement, as well as fluctuations in the market price of the Meta Shares prior to the Closing of the Arrangement. A 15% reduction in the market price of the Meta Shares results in a $12 million, or 20%, reduction in pro forma goodwill of the Combined Company. The volatility of trading price of the Meta Shares, combined with transactions undertaken by both parties between the date of presentation of the “Unaudited Pro Forma Financial Information” and the Closing of the Arrangement could also have a material impact on the pro forma goodwill and the fair value of the Combined Company. The impairment analysis is intended to be performed in conjunction with reviews of the Combined Company’s quarterly financial statements, or upon triggering events (which would include Asset Sale Transactions) and adjustments required will be made at such time.

 

  (l)

Represents the issuance of 23,000,000 Torchlight Shares at $1.20 per share for total cash consideration of $27,600,000 less issuance costs of $1,866,074, plus $1,300,000 of estimated proceeds from exercises of warrants and options, less other liabilities of $1,510,343 and estimated business combination transaction costs of $850,000. These costs are not included in the unaudited pro forma condensed combined statement of operations as they are deemed to not have a continuing impact on the results of the post-combination company. Proforma adjustments recorded as a reduction in note payable and other liabilities and increases to common stock 16,726 and additional paid in capital $17,246,939. In conjunction with the cash consideration from the issuance of Torchlight Shares, Torchlight loaned Meta $10,000,000 in cash in exchange for a note receivable from Meta.

 

  (m)

Represents the reclassification of Meta equity into Torchlight Shares.

 

  (n)

The remaining oil and natural gas properties are classified as Assets Held for Sale.

 

  (o)

Represents the conversion of unsecured convertible promissory note and its accrued interest into additional paid in capital at the close of the Arrangement.

 

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Note 5 — Earnings per share

For purposes of the Pro Forma Statements, earnings per share has been calculated using the weighted average number of Torchlight Shares which would have been outstanding for the years ended December 31, 2020 and 2019 after giving effect to the Arrangement as if it had occurred on January 1, 2020. The following is information on pro forma basic and diluted weighted average common shares outstanding:

 

     Year Ended
December 31, 2020
 

Torchlight actual weighted average common shares outstanding — basic and diluted

     90,721,599  

Torchlight shares to be issued to Meta

     397,823,000  

Torchlight shares to be issued in conversion — see note 3 d)

     16,725,797  

Torchlight shares to be issued with capital raise — see note 3 l)

     24,300,000  
  

 

 

 

Pro forma weighted average common shares outstanding — basic and diluted

     529,570,396  
  

 

 

 

 

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THE ARRANGEMENT

Purpose and Description of the Arrangement

The Arrangement is in substance a reverse takeover of Torchlight by Meta, in order to facilitate Meta’s listing on NASDAQ and access to the US capital markets. Pursuant to the Arrangement Agreement, Torchlight and Meta will complete a business combination pursuant to which Torchlight will indirectly acquire all of the Meta Shares and the Combined Company will be renamed “Meta Materials Inc.” and focus its business on the current business of Meta.

The Arrangement Agreement provides that Torchlight and the Combined Company will use commercially reasonable efforts to sell the O&G Assets prior to the Asset Sale Expiration Date. In connection with the Arrangement, Torchlight will declare a dividend, on a one-for-one basis, of shares of Series A Preferred Stock to holders of record of Torchlight Shares as of the Series A Preferred Record Date, which will dividend will be paid immediately prior to the Closing of the Arrangement. The Series A Certificate of Designation will entitle the holders of Series A Preferred Stock to receive Asset Sale Dividends in the event that Torchlight or the Combined Company consummates one or more Asset Sale Transactions prior to the Asset Sale Expiration Date. In the event that any O&G Assets have not been sold in an Asset Sale Transaction that is consummated prior to the Asset Sale Expiration Date, the Combined Company will, subject to certain conditions and to the extent permitted by applicable law, declare a Spin-Off Dividend to distribute beneficial ownership of the Remaining Assets to the holders of Series A Preferred Stock. See “The Arrangement Agreement — Torchlight Business Sale,” “The Arrangement Agreement — Preferred Stock Dividend” and Description of Exchangeable Shares, Series A Preferred Stock and Related Agreements — Description of Series A Preferred Stock.

Pursuant to the Arrangement, Meta shareholders will receive Torchlight Share Consideration and/or Exchangeable Share Consideration and are expected to hold approximately 75% (before giving effect to the issuance of Torchlight Shares in the Pre-Closing Financing) of the outstanding Combined Company Shares while Torchlight stockholders will retain approximately 25% (before giving effect to the issuance of Torchlight Shares in the Pre-Closing Financing) of the outstanding Combined Company Shares.

It is a condition of Closing that Torchlight shall complete the Pre-Closing Financing to raise gross proceeds of not less than $10 million (less the $1 million of financing provided by Torchlight to Meta by way of the Bridge Notes) through the issuance of Torchlight Shares or securities convertible into or exercisable for Torchlight Shares. This condition was satisfied through the Torchlight Offering. Torchlight Shares issued or issuable in connection with the Pre-Closing Financing are intended to be proportionally dilutive at 75% to Meta shareholders and 25% to Torchlight stockholders, and will be excluded from the number of Torchlight Shares outstanding for purposes of calculating the Exchange Ratio. After the closing of the Pre-Closing Financing, Torchlight used a portion of the net proceeds to provide $10,000,000 per the Additional Bridge Financing to Meta. See “The Arrangement Agreement — Conditions for Completion of the Arrangement.

Following the Closing of the Arrangement, the board of directors of the Combined Company will be comprised of seven members, one of whom will be appointed by Torchlight, a second to be jointly appointed by Meta and Torchlight and the remaining five members to be appointed by Meta. Meta’s Chief Executive Officer, George Palikaras, and Meta’s Chief Financial Officer, Kenneth Rice, will be appointed the chief executive officer and chief financial officer of the Combined Company, respectively. See “The Arrangement Agreement — Board of Directors and Officers.

The Arrangement Proposal, the Articles Amendment Proposal and the Articles Amendment and Restatement Proposal must each be approved by the Torchlight stockholders for the Arrangement to be consummated.

 

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Under the terms of the Plan of Arrangement, (a) each Meta shareholder who is an Eligible Holder may elect to (i) receive in respect of any or all of their Meta Shares, the Exchangeable Share Consideration and (ii) receive in respect of the balance of their Meta Shares, if any, the Torchlight Share Consideration, and (b) each Meta shareholder who is not an Eligible Holder is entitled to receive the Torchlight Share Consideration. Any Meta shareholder that does not make an election will receive the Torchlight Share Consideration. See “Description of Exchangeable Shares, Series A Preferred Stock and Related Agreements.

The Exchange Ratio pursuant to which Meta Shares will be exchanged for Torchlight Shares or Exchangeable Shares pursuant to the Arrangement is not fixed, but will be determined in accordance with the Plan of Arrangement pursuant to the following formula:

A = B/C

where

A = the number of Torchlight Shares or Exchangeable Shares to be received in exchange for each one (1) Meta Share, rounded to three decimal places;

B = the Meta shareholders’ proportionate share of the total pro forma number of Torchlight Shares to be outstanding upon completion of the Arrangement, which for greater certainty will be equal to 75% of the total pro forma number of outstanding Torchlight Shares upon completion of the Arrangement (including any Torchlight Shares issued by Torchlight pursuant to the Working Capital Financing, which are intended to be 100% dilutive to Torchlight stockholders, but excluding any Torchlight Shares issued by Torchlight pursuant to the Pre-Closing Financing, which are intended to be proportionally dilutive to each party at 75% to Meta shareholders and 25% to Torchlight stockholders), subject to further adjustment upward for any other Torchlight Shares issued or issuable prior to the Effective Time that are intended to be 100% dilutive to Torchlight stockholders; and

C = the number of Meta Shares outstanding immediately prior to the Effective Time.

Based on the above formula, the Exchange Ratio will be determined based on the number of Torchlight Shares and Meta Shares outstanding immediately prior to the completion of the Arrangement, such that the holders of Meta Shares immediately prior to the completion of the Arrangement will hold approximately 75% (before giving effect to the issuance of Torchlight Shares in the Pre-Closing Financing) of the outstanding Combined Company Shares upon completion of the Arrangement.

On February 10, 2021, Torchlight completed the Torchlight Offering, which constituted both the Working Capital Financing and the Pre-Closing Financing contemplated by the Arrangement Agreement. Of the Torchlight Shares issued in the Torchlight Offering, 4,166,667 constitute Torchlight Shares issued for the Working Capital Financing, which will be included in the pro forma number of Torchlight Shares outstanding for purposes of calculating the Exchange Ratio. The remaining 18,833,333 Torchlight Shares issued in the Torchlight Offering constitute Torchlight Shares issued for the Pre-Closing Financing, which will be excluded from the pro forma number of Torchlight Shares outstanding for purposes of calculating the Exchange Ratio. Following this paragraph is a pro forma calculation of the Exchange Ratio and the respective ownership percentages of the Combined Company of the legacy Meta shareholders and legacy Torchlight stockholders, giving effect to the Torchlight Shares issued in the Torchlight Offering and based on the number of Torchlight Shares and Meta Shares outstanding as of the Record Date.

 

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Pro Forma Exchange Ratio Calculation

 

Torchlight Shares outstanding as of the Record Date:    145,563,667 shares

less the Torchlight Shares issued for the Pre-Closing Financing:

   145,563,667 shares minus 18,833,333 shares = 126,730,334 shares
Torchlight Shares outstanding as of the Record Date for purposes of calculating the Exchange Ratio:    126,730,334 shares
Pro forma Combined Company Shares outstanding upon completion of the Arrangement:    126,730,334 shares divided by 0.25 = 506,921,336 shares
Pro forma Combined Company Shares issuable to Meta shareholders in connection with the Arrangement:    506,921,336 shares minus 126,730,334 shares = 380,191,002 shares
Meta common shares outstanding as of the Record Date:    105,551,460 shares
Illustrative Exchange Ratio as of the Record Date:    380,191,002 shares divided by 105,551,460 shares = 3.6019 Combined Company Shares per Meta Share

Pro Forma Ownership Split Calculation

 

Pro forma Combined Company Shares outstanding upon completion of the Arrangement (including the Torchlight Shares issued for the Pre-Closing Financing):    506,921,336 shares plus 18,833,333 shares = 525,754,669 shares
Legacy Meta shareholders pro forma percentage ownership of the Combined Company:    380,191,002 shares divided by 525,754,669 shares = 72.3%
Legacy Torchlight stockholders pro forma percentage ownership of the Combined Company (including investors in the Pre-Closing Financing):    145,563,667 shares divided by 525,754,669 shares = 27.7%

The foregoing is intended to be illustrative of the manner in which the Exchange Ratio will be determined; however, the actual Exchange Ratio could be higher or lower.

For more details about the purpose of the Arrangement, see “The Arrangement — Purpose and Description of the Arrangement,” and “The Arrangement Agreement.”

Principal Steps of the Arrangement

The following description is qualified in its entirety by reference to the full text of the Plan of Arrangement, a copy of which is attached hereto as Appendix B to this proxy Statement. At the Effective Time and pursuant to the Plan of Arrangement, the following transactions, among others, will occur and will be deemed to occur sequentially in the following order:

 

   

each Meta Share held by a Dissenting Shareholder shall be deemed to be transferred by the holder thereof without any further act or formality on its part, free and clear of all Encumbrances to Meta and Meta shall thereupon be obliged to pay the consideration therefor determined and payable in accordance with the Plan of Arrangement, and the name of such holder shall be removed from the central securities register of Meta as a holder of Meta Shares and Meta shall be recorded as the registered holder of the Meta Shares so transferred and shall be deemed to be the legal owner of such Meta Shares which Meta Shares shall thereupon be cancelled;

 

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each issued and outstanding Meta Share (other than Exchangeable Elected Shares and other than Meta Shares held by Torchlight or an affiliate thereof or Dissenting Shareholders) held by a Meta shareholder shall be transferred by the holder thereof, without any further act or formality on its part, free and clear of all Encumbrances, to Canco in exchange for Torchlight Share Consideration in accordance with the election or deemed election of such Meta shareholder pursuant to the Plan of Arrangement;

 

   

each Exchangeable Elected Share shall be transferred by the holder thereof, without any further act or formality on its part, free and clear of all Encumbrances, to Canco in exchange for Exchangeable Share Consideration in accordance with the election of such Meta shareholder pursuant to the Plan of Arrangement;

 

   

Torchlight, Canco and Callco shall execute the Support Agreement and Torchlight, Canco and the Transfer Agent shall execute the Voting and Exchange Trust Agreement and Torchlight shall issue to and deposit with the Transfer Agent the Special Voting Share in consideration of the payment to Torchlight by Meta on behalf of the Meta shareholders of one dollar ($1.00), to be thereafter held of record by the Transfer Agent as trustee for and on behalf of, and for the use and benefit of, the holders of the Exchangeable Shares in accordance with the Voting and Exchange Trust Agreement. All rights of holders of Exchangeable Shares under the Voting and Exchange Trust Agreement shall be received by them as part of the property receivable by them under the Plan of Arrangement in exchange for the Exchangeable Elected Shares for which they were exchanged;

 

   

each Meta Option outstanding immediately prior to the Effective Time shall, without further action or formality by or on behalf of the holders thereof, be exchanged for a Replacement Option to purchase from Torchlight the number of Torchlight Shares equal to the product of (a) the number of Meta Shares issuable pursuant to the exercise of the Meta Option immediately before the Effective Time, and (b) the Exchange Ratio, provided that if the foregoing would result in a fraction of a Torchlight Share being issuable upon any particular exercise of Replacement Options, then the number of Torchlight Shares otherwise issuable upon exercise of such Replacement Options shall be rounded down to the nearest whole number of Torchlight Shares. The exercise price per Torchlight Share subject to any such Replacement Option shall be an amount equal to the quotient of (i) the exercise price per Meta Share under the exchanged Meta Option immediately prior to the Effective Time, divided by (ii) the Exchange Ratio. Except as set out above, all terms and conditions of an Replacement Option, including the term to expiry, conditions to and manner of exercising, will be the same as the Meta Option for which it was exchanged and any document evidencing a Meta Option shall thereafter evidence and be deemed to evidence such Replacement Option;

 

   

each Meta DSU shall, without any further action on the part of any holder thereof, be continued on the same terms and conditions as were applicable immediately prior to the Effective Time, except that, pursuant to the terms of the deferred share unit plan of Meta, the terms of the Meta DSUs share be amended so as to substitute for the Meta Shares issuable pursuant to such Meta DSUs, such number of Torchlight Shares equal to (a) the number of Meta Shares issuable pursuant to the Meta DSUs immediately prior to the Effective Time, multiplied by (b) the Exchange Ratio, rounded down to the nearest whole number; and

 

   

each Meta Warrant shall, without any further action on the part of any holder thereof, be continued on the same terms and conditions as were applicable immediately prior to the Effective Time, except that, pursuant to the terms of the applicable warrant certificate, the terms of the Meta Warrants shall be amended so as to (a) substitute for the Meta Shares issuable pursuant to the exercise of such Meta Warrants such number of Torchlight Shares equal to (i) the number of Meta Shares issuable pursuant to the exercise of such Meta Warrants immediately prior to the Effective Time, multiplied by (ii) the Exchange Ratio, rounded down to the nearest whole number; and (b) adjust the exercise price Torchlight Share issuable pursuant to the exercise of any such Meta Warrant following the Effective Time to be an amount equal to the quotient of (i) the exercise price per Meta Share under the Meta Warrant immediately prior to the Effective Time divided by (ii) the Exchange Ratio.

 

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The transfers and exchanges provided for in the Plan of Arrangement will be deemed to occur at the Effective Time, notwithstanding that certain of the procedures related thereto are not completed until after the Effective Date.

In no event will any fractional Torchlight Shares or Exchangeable Shares be issued under the Plan of Arrangement. Where the aggregate number of Torchlight Shares or Exchangeable Shares to be issued to a Meta securityholder as Consideration would result in a fraction of a Torchlight Share or Exchangeable Share being issuable, then the number of Torchlight Shares or Exchangeable Shares to be issued to such Meta securityholder will be rounded down to the nearest whole number and no compensation will be issued in lieu of the issuance of a fractional Torchlight Share or Exchangeable Share.

Voting and Support Agreements

Meta Voting and Support Agreement

On December 14, 2020 the Meta Supporting Shareholders entered into the Voting and Support Agreement with Torchlight, substantially in the form attached hereto as Annex C, pursuant to which, among other things, and subject to certain terms, conditions and exceptions, the Meta Supporting Shareholders agreed to cause to be counted as present for purposes of establishing quorum and to vote (or cause to be voted) all of the Meta Securities legally or beneficially owned by them or over which they exercise control or direction, as applicable (the “Meta Subject Securities”) in favor of the approval, consent, ratification and adoption of any resolution approving the Arrangement (and any transactions contemplated in connection with the Arrangement Agreement), subject to the other terms of the Voting and Support Agreement.

In addition, Meta Supporting Shareholders have agreed, among other things and subject to the terms and conditions of the Voting and Support Agreement, until the earlier of (a) the Effective Time, (b) the termination of the Voting and Support Agreement, or (c) it being determined that the Meta Securityholder Approval is not required, to:

 

   

not, directly or indirectly, option, sell, assign, transfer, pledge, encumber, grant a security interest in or power of attorney over, hypothecate or otherwise convey or dispose of any Meta Subject Securities, or any right or interest therein (legal or equitable), to any Person or group or Persons acting jointly or in concert or agree to do any of the foregoing, other than: to certain permitted transferees, provided that in such case and for greater certainty, any Meta Subject Securities acquired as a result thereof shall remain Meta Subject Securities and shall be subject to the terms and conditions of the Voting and Support Agreement and, in the case of a corporation, partnership, limited liability company or other entity solely controlled by, the Meta Supporting Shareholders provided that such entity remains solely controlled by the Meta Supporting Shareholders until the earlier of (a) the Effective Time and (b) the termination of the Voting and Support Agreement;

 

   

not, directly or indirectly, grant or agree to grant any proxy or other right to vote any Meta Subject Securities except for any proxies granted to vote in favor of the Meta Securityholder Approval, or enter into any voting trust, vote pooling or other agreement with respect to the right to vote, call meetings of the Meta shareholders or give consents or approval of any kind as to any Meta Subject Securities;

 

   

not vote or cause to be voted any Meta Subject Securities in favor of, and vote or cause to be voted all Meta Subject Securities against, any proposed action, transaction or agreement by or involving Meta or any of its affiliates or the Meta Supporting Shareholders or any other Person in a manner which could reasonably be expected to (i) prevent, hinder or delay the successful completion of the Arrangement or the transactions contemplated by the Arrangement Agreement; or (ii) change in any manner the voting rights of any class of shares of Meta;

 

   

other than set forth in the Voting and Support Agreement, take all such steps as are necessary or advisable to ensure that at all relevant times his, her or its Meta Subject Securities will not be subject to any shareholders’ agreements, voting trust or similar agreements or any option, right or privilege

 

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(whether by law, pre-emptive or contractual) capable of becoming a shareholders’ agreement, voting trust or other agreement affecting or restricting the ability of him, her or it to exercise all voting rights attaching to such Meta Subject Securities;

 

   

not withdraw, amend, modify or qualify, or publicly propose or state an intention to withdraw, amend, modify or qualify, support for the transactions contemplated by the Arrangement Agreement; and

 

   

irrevocably waive to the fullest extent permitted by Law any and all rights of the Meta Supporting Shareholders to dissent with respect to the Arrangement, and not exercise any such rights with respect to the Arrangement or the transactions contemplated by the Arrangement Agreement.

The Voting and Support Agreement between Torchlight and the Meta Supporting Shareholders may be terminated:

 

   

by written instrument executed by each of the parties;

 

   

in the event that the Arrangement Agreement is terminated in accordance with its terms;

 

   

on the Effective Time; or

 

   

it being determined that the Meta Securityholder Approval is not required.

Torchlight Voting and Support Agreement

On December 14, 2020 the Torchlight Supporting Stockholders entered into the Voting and Support Agreement with Meta, substantially in the form attached hereto as Annex D, pursuant to which, among other things, and subject to certain terms, conditions and exceptions, the Torchlight Supporting Stockholders agreed to cause to be counted as present for purposes of establishing quorum and to vote (or cause to be voted) all of the securities legally or beneficially owned by them or over which they exercise control or direction, as applicable (the “Torchlight Subject Securities”) in favor of the matters to be voted upon at the Special Meeting, subject to the other terms of the Voting and Support Agreement.

In addition, Torchlight Supporting Stockholders have agreed, among other things and subject to the terms and conditions of the Voting and Support Agreement, until the earlier of (a) the Effective Time, (b) the termination of the Voting and Support Agreement or (c) it being determined that the Torchlight Stockholder Approval is not required:

 

   

not, directly or indirectly, option, sell, assign, transfer, pledge, encumber, grant a security interest in or power of attorney over, hypothecate or otherwise convey or dispose of any Torchlight Subject Securities, or any right or interest therein (legal or equitable), to any Person or group or Persons acting jointly or in concert or agree to do any of the foregoing, other than: to certain permitted transferees, provided that in such case and for greater certainty, any Torchlight Subject Securities acquired as a result thereof shall remain Torchlight Subject Securities and shall be subject to the terms and conditions of the Voting and Support Agreement and, in the case of a corporation, partnership, limited liability company or other entity solely controlled by, the Torchlight Supporting Stockholders provided that such entity remains solely controlled by the Torchlight Supporting Stockholders until the earlier of (a) the Effective Time and (b) the termination of the Voting and Support Agreement;

 

   

not, directly or indirectly, grant or agree to grant any proxy or other right to vote any Torchlight Subject Securities except for any proxies granted to vote in favor of the Arrangement, or enter into any voting trust, vote pooling or other agreement with respect to the right to vote, call meetings of the Torchlight stockholders or give consents or approval of any kind as to any Torchlight Subject Securities;

 

   

not vote or cause to be voted any Torchlight Subject Securities in favor of, and vote or cause to be voted all Torchlight Subject Securities against, any proposed action, transaction or agreement by or involving Torchlight or any of its affiliates or the Torchlight Supporting Stockholders or any other Person in a manner which could reasonably be expected to prevent, hinder or delay the successful completion of the Arrangement or the transactions contemplated by the Arrangement Agreement;

 

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other than set forth in the Voting and Support Agreement, take all such steps as are necessary or advisable to ensure that at all relevant times his, her or its Torchlight Subject Securities will not be subject to any shareholders’ agreements, voting trust or similar agreements or any option, right or privilege (whether by law, pre-emptive or contractual) capable of becoming a shareholders’ agreement, voting trust or other agreement affecting or restricting the ability of him, her or it to exercise all voting rights attaching to such Torchlight Subject Securities; and

 

   

not withdraw, amend, modify or qualify, or publicly propose or state an intention to withdraw, amend, modify or qualify, support for the matters to be voted upon at the Special Meeting.

The Voting and Support Agreement between Meta and the Torchlight Supporting Stockholders may be terminated:

 

   

by written instrument executed by each of the parties;

 

   

in the event that the Arrangement Agreement is terminated in accordance with its terms;

 

   

on the Effective Time; or

 

   

it being determined that the Torchlight Stockholder Approval is not required.

Expenses of the Arrangement

Except as otherwise provided in the Arrangement Agreement, all costs and expenses of the Parties relating to the Arrangement Agreement and the transactions contemplated thereunder, including legal fees, accounting fees, financial advisory fees, strategic advisory fees, regulatory filing fees, stock exchange fees, all disbursements of advisors and printing and mailing costs, shall be paid by the Party incurring such expenses.

Court Approval of the Arrangement

An arrangement under the OBCA requires Court approval. On February 8, 2021, Meta obtained the Interim Order, which provides for the calling and holding of the Meta Meeting, the Dissent Rights and other procedural matters. The Meta Meeting was held on March 12, 2021, and, on that date, Meta received the votes required to secure Meta Securityholder Approval.

Subject to the terms of the Arrangement Agreement, Meta made an application to the Court for the Final Order. The application for the Final Order approving the Arrangement was made on March 17, 2021 at 12:00 pm (Toronto time) and the Court issued and entered the Final Order on that date. The Court considered, among other things, the substantive and procedural fairness of the Arrangement to the parties affected, including the Meta shareholders, Meta optionholders, Meta warrantholders, Meta DSU holders or other interested parties.

The Court was advised that the Court’s approval of the Arrangement (including the fairness thereof), if granted, will form a basis for the exemption from the registration requirements of the Securities Act provided by Section 3(a)(10) thereof with respect to the issuance and distribution of the Consideration and Replacement Options to be issued by Torchlight to Meta shareholders pursuant to the Arrangement. Consequently, if the Final Order is granted, the Torchlight Shares and Exchangeable Shares issuable to Meta shareholders pursuant to the Arrangement and the Replacement Options issuable to Meta optionholders pursuant to the Arrangement will not require registration under the Securities Act, but the Combined Company Shares underlying the Exchangeable Shares may be registered. See “The Arrangement — Federal Securities Law Consequences; Resale Restrictions.”

Assuming the other conditions to closing contained in the Arrangement Agreement are satisfied or waived to the extent legally permissible, then articles of arrangement will be filed to give effect to the Arrangement.

 

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Background of the Arrangement

The Arrangement Agreement is the result of arm’s length negotiations among representatives of Torchlight and Meta and their respective legal and financial advisors. The following is a summary of the background leading up to the announcement of the Arrangement Agreement.

On June 2, 2020, the Torchlight Board met and discussed pursuing strategic alternatives for Torchlight in light of the downturn in the oil and gas industry and the COVID-19 pandemic. At this meeting, John Brda, Torchlight’s Chief Executive Officer and President, informed the Torchlight Board that he had received calls and inquiries from acquaintances of Mr. Brda and certain major Torchlight stockholders who were aware of the permeating financial climate of the oil and gas industry in 2020 about potential opportunities for Torchlight to engage in a strategic transaction. The Torchlight Board directed management to continue to engage in discussions regarding potential strategic alternatives for Torchlight. The majority of the potential transaction partners were not engaged in the oil and gas business. Prior to engaging in discussions with Meta, Torchlight considered potential strategic opportunities with several companies outlined below. These discussions often overlapped as Torchlight performed due diligence and negotiated with multiple companies concurrently. During the course of discussions with these companies, on July 28, 2020, Torchlight engaged Roth to serve as its financial advisor in connection with a strategic transaction.

Company A

On or about May 15, 2020, a representative of Company A called Mr. Brda to discuss a potential strategic transaction between Torchlight and Company A. Prior to this discussion, Torchlight and Company A had never engaged in any prior transactions and there was no relationship between the companies. Company A is involved in the waste recycling business.

On May 22, 2020, Mr. Brda and Gregory McCabe, chairman of the Torchlight Board, held a conference call with the president of Company A and its representative. The discussion involved the merits of a potential reverse acquisition of Torchlight by Company A and how to potentially divest the O&G Assets as part of the transaction process. Torchlight and Company A did not discuss potential valuations.

After reviewing the publicly available technical and corporate information of Company A, the representative of Company A called Mr. Brda and expressed interest in signing a confidentiality agreement to conduct detailed due diligence in furtherance of a potential strategic transaction between Torchlight and Company A.

On May 27, 2020, Torchlight and Company A entered into a confidentiality agreement, which did not include a standstill provision, and made arrangements for the exchange of confidential information.

From May 27, 2020 to approximately July 15, 2020, Torchlight and Company A continued to provide and analyze financial and technical data and evaluate the prospects of a strategic transaction.

On or about July 15, 2020, Mr. Brda informed Company A that a transaction between Torchlight and Company A was not feasible due to the proposed structure, which stemmed from a disagreement as to the value of Company A and Company A’s desire that Torchlight divest the O&G Assets prior to consummating the transaction, which Torchlight viewed as inadvisable due to market conditions and timing.

Company B

On or about May 22, 2020, a representative of Company B phoned Mr. Brda to discuss a potential transaction between Torchlight and Company B. Prior to this discussion, Torchlight and Company B had never engaged in any prior transactions and there was no relationship between the companies. Company B is involved in the work-from-home industry with a focus on virtual events.

 

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On May 29, 2020, Mr. Brda and the chief executive officer of Company B met on a videoconference. Mr. Brda requested a follow-up call to include Mr. McCabe, which took place on June 3, 2020. Torchlight executed a confidentiality agreement, which did not include a standstill provision, with Company B on June 3, 2020 and the parties began exchanging due diligence information. The discussion involved the merits of a potential reverse acquisition of Torchlight by Company B and how to potentially divest the O&G Assets as part of the transaction process. Mr. Brda informed the full Torchlight Board of his preliminary discussions with Company B on June 9, 2020, and kept the Torchlight Board informed regarding developments in the discussions and negotiations thereafter.

Negotiations with Company B continued into early August 2020. Multiple draft term sheets were exchanged and discussed. Representatives of Torchlight and Company B also engaged in initial high-level discussions regarding the terms of a potential transaction. Ultimately, Torchlight and Company B ended negotiations due to the failure to agree on the major terms of a transaction and issues relating to the potential sale of the O&G Assets.

Company C

On or about August 6, 2020, a representative of Company C phoned Mr. Brda to discuss a potential transaction between Torchlight and Company C. Prior to this discussion, Torchlight and Company C had never engaged in any prior transactions and there was no relationship between the companies. Company C is involved in the merchant services industry with a focus on blockchain settlement.

Torchlight and Company C signed a confidentiality agreement, which did not include a standstill provision, on August 28, 2020 and began sharing due diligence information. After a short period of time, the parties mutually determined not to pursue a strategic transaction due to disagreements between Torchlight and Company C, largely stemming from Company C requesting too high of a valuation of itself from Torchlight and requiring that the O&G assets be sold prior to the consummation of any transaction with Company C, after preliminary discussions regarding their respective valuations.

Company D

On or about August 18, 2020, a consultant for Company D called Mr. Brda to discuss a potential transaction between Torchlight and Company D. Prior to this discussion, Torchlight and Company D had never engaged in any prior transactions and there was no relationship between the companies. Company D is involved in the third-party IT maintenance business.

Torchlight and Company D signed a confidentiality agreement, which did not include a standstill provision, on August 18th, 2020 and began sharing due diligence information. After a preliminary due diligence review and initial discussions, Torchlight and Company D ended discussions due to Company D requesting a valuation that would have provided no value, in the eyes of Torchlight’s management, for completing the transaction.

Company E

On or about August 19, 2020, a representative of Company E phoned Mr. Brda to discuss a potential transaction between Torchlight and Company E. Prior to this discussion, Torchlight and Company E had never engaged in any prior transactions and there was no relationship between the companies. Company E is involved in the electronic vehicle industry.

Mr. Brda and the chief executive officer of Company E held an introductory call on August 20, 2020. After the call, the parties signed a confidentiality agreement, which did not include a standstill provision, and both companies shared due diligence information. On August 24, 2020, principals of Company E, Mr. Brda and Mr. McCabe held a virtual meeting and discussed details of Company E’s business plans. The parties planned for Mr. Brda to travel to Company E’s headquarters to meet with the principals of Company E and tour their facility.

 

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On August 25, 2020, Mr. Brda traveled to Company E’s headquarters. The visit was productive and the parties agreed to prepare draft terms for a potential business combination transaction. The parties exchanged draft term sheets, but were not able to mutually agree on acceptable terms of a transaction due to an extreme discrepancy between the valuation asked for by Company E and what Torchlight was prepared to provide.

Transaction with Meta

In early September 2020, Torchlight’s external investor relations representative, who had been monitoring Torchlight’s efforts to pursue strategic alternatives, suggested that representatives of Torchlight have a virtual meeting with George Palikaras, the Chief Executive Officer of Meta. Upon notice of interest in a meeting with Meta by Torchlight’s management, Torchlight and Meta’s investor relations representative’s coordinated a virtual meeting, which occurred on September 4, 2020, between Mr. Brda, Mr. McCabe and Mr. Palikaras. Mr. Brda and Mr. McCabe were impressed with the presentation given by Mr. Palikaras, and determined to engage in further discussions with Meta regarding a potential strategic transaction.

Torchlight and Meta signed a confidentiality agreement, which did not include a standstill provision, on September 4, 2020 and performed initial due diligence. The parties also engaged in initial discussions regarding a proposed structure for a potential business combination transaction.

Following these initial discussions, the parties engaged in mutual efforts to prepare a draft letter of intent for a potential strategic transaction with the assistance of their respective legal and financial advisors. The letter of intent was heavily negotiated, as the parties attempted to agree on their respective relative valuations to determine the pro forma post-closing ownership split of the Combined Company between their respective legacy stockholder bases. The parties initially encountered difficulties moving forward with this approach due to Meta’s desire that Torchlight divest the O&G Assets, the anticipated impact of that divestiture on Torchlight’s market capitalization prior to closing the transaction (which the parties were using to determine Torchlight’s valuation), the appropriate method for valuing the O&G Assets, and how the value of the O&G Assets should be allocated between each party’s legacy stockholder base. The parties discussed several potential methodologies to address these issues, including a potential waterfall arrangement to allocate the value of the divested O&G Assets, and eventually determined that attempting to arrive at a preemptive solution for these issues without sufficient information about how the divestiture of the O&G Assets would ultimately take place was impeding the transaction process. Meta then suggested that the parties structure the transaction so that all of the value of the O&G Assets would be allocated to the legacy Torchlight stockholders, and on that basis agree on the pro forma ownership percentage of the Combined Company that would be allocated to each party’s legacy stockholder base. This proposal was attractive to Torchlight because it provided Torchlight with flexibility with respect to eventual divestiture of the O&G Assets (including the ability to structure and consummate the divestiture after the closing of the transaction with Meta), while also ensuring that the value obtained in the divestiture would benefit investors in Torchlight’s legacy oil and gas business, and providing those investors with a substantial ownership percentage of Meta’s business on an ongoing basis (which would have a large stockholder base and access to additional capital). The parties agreed to move forward on this basis, and after substantial negotiation, arrived at the 75%/25% ownership split described elsewhere in this proxy statement, with the ultimate Exchange Ratio generally subject to adjustment for shares issued by either company for its own benefit prior to the closing of the transaction to maintain the agreed ownership split.

The parties continued to negotiate other key transaction terms through the first three weeks of September 2020. During this time, the parties gave particular consideration to each party’s capital requirements during the period leading up to the consummation of a strategic transaction, as well as the anticipated capital requirements of the Combined Company immediately following the consummation of a strategic transaction. In these negotiations, Torchlight agreed to provide Meta with $1,000,000 of bridge financing to help meet its current cash needs, $500,000 of which would be loaned upon the execution of the letter of intent, and the remaining $500,000 of which would be loaned upon the execution of a definitive agreement for the transaction. Torchlight and Meta also agreed that while one of the key drivers for the transaction was to provide the Combined Company with access to the U.S. capital markets via a NASDAQ listing, the Combined Company would also require capital

 

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shortly after closing the business combination. To that end, the parties agreed to condition the transaction on Torchlight raising at least $10,000,000 of capital for the benefit of the Combined Company prior to the closing of the transaction, with any Torchlight Shares issued or issuable in such financing diluting the legacy Meta shareholders and legacy Torchlight stockholders in accordance with the agreed 75%/25% pro forma post-closing ownership split. The parties also agreed that Torchlight would be required to settle all of its outstanding indebtedness (other than the Straz Debt), either via repayment in cash or conversion into Torchlight Shares, prior to the consummation of the transaction, with any Torchlight Shares issued in connection therewith diluting only the legacy Torchlight stockholders. The Straz Debt would either be repaid in cash, converted into Torchlight Shares or restructured so that the only recourse of the debtholders after the closing of the transaction would be against the O&G Assets.

On September 14, 2020, the Torchlight Board met, which included representatives of Torchlight’s legal advisor and a representative of Roth, and reviewed a substantially final draft letter of intent for a strategic transaction with Meta which included the foregoing key terms. The Torchlight Board authorized Torchlight to enter into the letter of intent, and in connection therewith, Mr. McCabe agreed to provide to Torchlight a convertible bridge loan of $1,500,000, a portion of which would be used to provide the agreed $1,000,000 of bridge financing to Meta. The parties executed and publicly announced the letter of intent on September 21, 2020. Shortly thereafter, Torchlight loaned $500,000 to Meta through the Initial Bridge Note.

After September 21, 2020, Torchlight engaged K&L Gates LLP and Stikeman Elliot LLP as additional legal advisors for the transaction. On October 14, 2020, the parties and their legal and financial advisors held a conference call to initiate the transaction process and discuss details regarding the transaction structure. The parties subsequently agreed to move forward with the Plan of Arrangement and exchangeable share structure described elsewhere in this proxy statement, and commenced their respective due diligence reviews of each other’s businesses. On October 28, 2020, Meta’s legal advisors circulated an initial draft of the Arrangement Agreement, and subsequently circulated drafts of the other key transaction documents. Meta’s initial draft of the Arrangement Agreement included, among other terms: (a) fairly stringent requirements with respect to the process for selling the O&G Assets, including covenants requiring Torchlight to take certain steps in that process prior to the closing of the Arrangement and a June 30, 2021 deadline to complete the divestiture of the O&G Assets; (b) fulsome covenants regarding the operation of Torchlight’s business prior to the closing of the Arrangement, including covenants that would prohibit Torchlight from raising equity or debt financing for working capital or other purposes without Meta’s consent, without similarly restrictive covenants with respect to the operation of Meta’s business during that period; (c) covenants generally prohibiting the parties from engaging in discussions with other interested parties in respect of alternative transactions; and (d) provisions limiting the ability of the parties to terminate the Arrangement Agreement, except in certain limited circumstances in which a termination fee would also be payable. On November 13, 2020, Torchlight’s legal advisors provided their initial comments on Meta’s draft Arrangement Agreement, which were primarily intended to: (a) provide Torchlight’s representatives with additional flexibility, control and time with respect to the process for selling the O&G Assets; (b) modify the covenants regarding the operation of the parties’ respective businesses prior to the closing of the Arrangement to provide for more mutual restrictions, and to enable Torchlight to raise equity or debt financing up to a threshold amount without Meta’s consent; (c) provide the parties with more flexibility to engage in discussions with respect to alternative transactions; and (d) broaden the circumstances in which the parties would be permitted to terminate the Arrangement Agreement, subject to payment of a termination fee in certain circumstances.

Between November 13, 2020 and December 13, 2020, the parties and their respective legal advisors negotiated these issues and other key points in the Arrangement Agreement. The parties also negotiated the other transaction documents, and held several meetings to discuss the optimal structure to allocate and distribute the value obtained from the sale of the O&G Assets to Torchlight’s legacy stockholders, before deciding to move forward with the dividend of Series A Preferred Stock described elsewhere in this proxy statement. On December 3, 2020, Torchlight’s legal advisors circulated an initial draft of the Series A Certificate of Designation. Between December 3, 2020 and December 13, 2020, the parties negotiated key issues relating to the

 

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terms of the Series A Preferred Stock and the Asset Sale Transactions, including: (a) the Asset Sale Expiration Date; (b) the items that would be deducted from the proceeds from Asset Sale Transactions to calculate the Net Proceeds distributable as Asset Sale Dividends; (c) whether Asset Sale Dividends would be paid in respect of each Asset Sale Transaction, or in a lump sum following the Asset Sale Expiration Date; (d) the Holdback Amount and the timing for payment of Holdback Dividends; (e) the amount of control each party’s representatives would exercise over the process for selling the O&G Assets; and (f) the treatment of any Remaining Assets, the circumstances under which the Combined Company would (and would not) be required to pay a Spin-Off Dividend, and the Spin-Off Cost Reserve Amount. During this process, Torchlight and Meta mutually agreed to extend the exclusivity period provided for in the letter of intent on two occasions, which the parties announced on November 2, 2020, extending to November 30, 2020, and November 30, 2020, extending to December 11, 2020.

On December 13, 2020, the parties finalized the Arrangement Agreement, the Series A Certificate of Designation and the other transaction documents. The final issues that were negotiated included the amount of the Termination Payment, the exact manner in which the Exchange Ratio would be calculated, and the issues described in clause (f) of the preceding paragraph with respect to the Series A Preferred Stock. That evening, the Torchlight Board met with members of Torchlight management and representatives of Torchlight’s legal and financial advisors. At the meeting, Roth presented its financial analysis of the Arrangement, answered questions from members of the Torchlight Board, and ultimately delivered to the Torchlight Board its verbal Fairness Opinion, which was followed by its written Fairness Opinion. Torchlight’s legal advisors then summarized the terms of the Arrangement and the Arrangement Agreement for the Torchlight Board and answered questions. Following these presentations, the Torchlight Board unanimously approved the Arrangement Agreement and the Arrangement.

On December 14, 2020, Torchlight and Meta executed and announced the Arrangement Agreement. Shortly thereafter, Torchlight loaned Meta an additional $500,000 through the Additional Bridge Note.

On February 3, 2021, Torchlight and Meta entered into an amending agreement to the Arrangement Agreement pursuant to which the Parties agreed, among other things, (a) that the date of the Special Meeting shall be no later than March 31, 2021; (b) to set February 28, 2021 as the outside date for Meta to have applied to the Court for the Interim Order; (c) that upon the closing of the Pre-Closing Financing, Torchlight shall pay to Meta an amount equal to at least $5,000,000 in cash in the Additional Bridge Financing; and (d) to update the Plan of Arrangement to among other things, include amended terms for the Exchangeable Shares and update the definitions of the Election Deadline and the Exchange Ratio. The note issued in the Additional Bridge Financing stipulates that in the event the Arrangement Agreement is terminated, and the Arrangement does not otherwise occur, then Meta shall be obligated to repay to Torchlight, on the one-year anniversary of the closing of the Pre-Closing Financing, the outstanding principal plus interest accrued on such principal at the rate of 8% per annum.

On February 10, 2021, Torchlight completed the Torchlight Offering, raising gross proceeds of $27,600,000. The Torchlight Offering constituted both the Working Capital Financing and the Pre-Closing Financing contemplated by the Arrangement Agreement. On February 18, 2021, Torchlight used a portion of the proceeds from the Torchlight Offering to provide $10,000,000 per the Additional Bridge Financing to Meta.

On March 11, 2021, Torchlight and Meta entered into a second amending agreement to the Arrangement Agreement pursuant to which the Parties agreed, among other things, (a) that the date of the Special Meeting shall be no later than April 30, 2021; (b) that the notice date of the Special Meeting shall be no later than March 31, 2021; and (c) to update the Plan of Arrangement to among other things, update the definition of the Election Deadline.

On March 31, 2021, Torchlight and Meta entered into a third amending agreement to the Arrangement Agreement pursuant to which the Parties agreed, among other things, (a) that the date of the Special Meeting shall be no later than May 10, 2021 and (b) that the notice date of the Special Meeting shall be no later than April 15, 2021.

 

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On April 15, 2021, Torchlight and Meta entered into a fourth amending agreement to the Arrangement Agreement pursuant to which the Parties agreed that the notice date of the Special Meeting shall be no later than April 30, 2021.

On May 2, 2021, Torchlight and Meta entered into a fifth amending agreement to the Arrangement Agreement pursuant to which the Parties agreed, among other things, (a) that the Outside Date shall be extended to June 18, 2021, (b) that the date of the Special Meeting shall be no later than June 11, 2021 and (c) that the notice date of the Special Meeting shall be no later than May 10, 2021. The Parties also agreed to make certain other clarifying changes to the Arrangement Agreement to account for developments after the Arrangement Agreement was executed by the Parties, and certain clarifying changes to the terms of the Series A Preferred Stock.

Reasons for the Arrangement

In considering its decision to approve the Arrangement Agreement and to authorize and approve the Arrangement and, subject to the terms and conditions of the Arrangement Agreement, to recommend the approval of the Arrangement Proposal, the Articles Amendment Proposal and the Articles Amendment and Restatement Proposal by Torchlight’s stockholders, the Torchlight Board consulted with Torchlight’s management, as well as Torchlight’s legal and financial advisors, and considered the terms of the proposed Arrangement Agreement, the Arrangement and the other transactions set forth in the Arrangement Agreement, as well as other alternative transactions. The Torchlight Board considered a number of factors in its deliberations, including the following (which factors are not necessarily presented in order of relative importance):

 

   

The Exchange Ratio represented an attractive valuation for Torchlight.

 

   

The Arrangement presented an opportunity for the Torchlight stockholders to maintain a beneficial interest in the O&G Assets through the dividend of Series A Preferred Stock, while also retaining ownership of approximately 25% of the outstanding Combined Company Shares (before giving effect to the issuance of Torchlight Shares in the Pre-Closing Financing) after the consummation of the Arrangement.

 

   

The fairness opinion given by Roth concluded that, as of December 13, 2020, subject to the assumptions, limitations and qualifications set out therein, the Arrangement i