CALDERWOOD & HARKNESS LLP Attorneys at Law 450 Park Avenue New York, NY 10022
PRIVILEGED & CONFIDENTIAL — ATTORNEY WORK PRODUCT
MEMORANDUM
To: File — Matter No. 1039-00002
From: Audrey Zhou, Lead Associate; Brendan Walsh, Working Associate
Reviewed by: Vivienne St. Claire, Responsible Partner, Capital Markets
Date: February 11, 2022 (Updated March 18, 2022)
Re: Due Diligence Memorandum — Corporate & Organizational Structure: Torchlight Mining Corp. — $300,000,000 8.750% Senior Secured Notes due 2029 (Rule 144A / Regulation S)
Client: Torchlight Mining Corp.
Matter: 1039-00002
I. PURPOSE AND SCOPE
The purpose of this memorandum is to summarize the findings of the corporate and organizational due diligence conducted by Calderwood & Harkness LLP in connection with the proposed offering by Torchlight Mining Corp. (the "Company," the "Issuer," or "Torchlight") of $300,000,000 aggregate principal amount of 8.750% Senior Secured Notes due 2029 (the "Notes") in a private placement exempt from registration under the Securities Act of 1933, as amended, pursuant to Rule 144A and Regulation S thereunder (the "Offering"). The Notes will be governed by New York law. This memorandum is prepared as an internal attorney work product for the benefit of the Calderwood & Harkness LLP engagement team and is subject to the attorney-client privilege and the attorney work product doctrine.
The scope of the review encompasses: (a) the organizational documents and corporate records of each of the Issuer and the Guarantors; (b) the jurisdictions of incorporation and good-standing status of each entity; (c) the authorized capital and outstanding equity of each entity; (d) the ownership structure and subsidiary equity interests; (e) board and shareholder or stockholder approvals for the transactions contemplated by the Offering; and (f) a review of existing indebtedness, intercompany arrangements, and any organizational or contractual restrictions that may be relevant to the execution and delivery of the Transaction Documents.
The entities covered by this memorandum are as follows:
(i) Torchlight Mining Corp. — the Issuer of the Notes;
(ii) Wolverine Lake Mining Ltd. — a Subsidiary Guarantor;
(iii) Torchlight Milling & Processing Inc. — a Subsidiary Guarantor; and
(iv) Torchlight U.S. Holdings, Inc. — a Subsidiary Guarantor.
The sources reviewed in connection with the preparation of this memorandum include, but are not limited to, the following: articles of incorporation and certificates of incorporation, by-laws and bylaws, annual return filings, board of directors minutes and resolutions, shareholder and stockholder resolutions and written consents, certificates of good standing and compliance, corporate registers and stock ledgers, intercompany agreements, the existing credit agreement with Ridgeline Bank of Canada, and management representations provided during due diligence sessions held on February 14, 15, and 16, 2022 at the offices of Pendleton Ross LLP in Toronto, Ontario. A complete index of documents reviewed is set forth in Section VIII of this memorandum.
Calderwood & Harkness LLP has coordinated with Pendleton Ross LLP (Marie-Claire Bouchard, Partner) for purposes of Canadian law diligence on matters arising under the Canada Business Corporations Act, R.S.C. 1985, c. C-44 (the "CBCA") and the Business Corporations Act (Ontario), R.S.O. 1990, c. B.16 (the "OBCA"), as well as Ontario provincial registrations, Ontario Personal Property Security Act perfection matters, and Toronto Stock Exchange compliance matters. This memorandum addresses both New York and Delaware law matters (for which Calderwood & Harkness LLP is responsible) and Canadian law matters (for which we have relied upon the advice and analysis of Pendleton Ross LLP, as noted throughout).
II. CORPORATE STRUCTURE OVERVIEW
A. Organizational Chart Description
Torchlight Mining Corp. sits at the apex of the corporate structure as the sole parent entity and as the publicly traded company listed on the Toronto Stock Exchange. The Company directly owns 100% of the issued and outstanding share capital of each of its three wholly owned subsidiaries, which are described below.
The three wholly owned direct subsidiaries of the Company are as follows:
1. Wolverine Lake Mining Ltd. — the principal operating entity for the Wolverine Lake nickel-copper mine, a producing underground and open-pit mining operation encompassing approximately 12,400 hectares located approximately 85 kilometers northeast of Thunder Bay, Ontario, Canada. Wolverine Lake Mining Ltd. holds the Ontario mining claims, surface rights, and associated mineral rights for the Wolverine Lake property.
2. Torchlight Milling & Processing Inc. — the entity that owns and operates the concentrator and ore processing facilities situated adjacent to the Wolverine Lake mine site. This entity provides milling, concentration, and preliminary metallurgical processing services in connection with the ore extracted from the Wolverine Lake mine.
3. Torchlight U.S. Holdings, Inc. — a Delaware corporation that holds the Company's U.S. offtake and marketing contracts for the sale and distribution of nickel and copper concentrate to smelters and end-users in the United States. This entity also holds certain intercompany receivables from the Company.
All three subsidiaries will serve as Guarantors (each, a "Guarantor" and collectively, the "Guarantors") under the Indenture dated as of the expected closing date of April 19, 2022 (the "Indenture"), between the Issuer, the Guarantors, and Northern Dominion Trust Company, as Trustee, and under the related security documents. Each Guarantee will be a joint and several, senior secured obligation of the respective Guarantor.
It should be noted that, pursuant to the terms of the Indenture, any future subsidiary of Torchlight Mining Corp. that meets a total asset threshold of $5,000,000 (determined as of the end of the most recent fiscal quarter for which financial statements are available) will be required to guarantee the Notes and accede to the Indenture by executing and delivering a Supplemental Indenture in the form attached as an exhibit to the Indenture, and to grant security on substantially all of its assets and pledge its equity interests.
B. Summary Entity Table
The following table summarizes the key organizational details for each entity within the Torchlight corporate structure:
As indicated in the table above, the corporate structure is straightforward, with a single-tier parent-subsidiary arrangement. There are no intermediate holding companies, joint ventures, limited partnerships, or other complex structural elements. Each subsidiary is a direct, wholly owned subsidiary of the Issuer, and there are no minority interests, co-investors, or other equity participants at any level of the structure.
III. ENTITY-BY-ENTITY ANALYSIS
A. Torchlight Mining Corp. (Issuer)
1. Basic Information
The following is a summary of the basic organizational and identifying information for the Issuer:
• Full Legal Name: Torchlight Mining Corp.
• Jurisdiction of Incorporation: Federal (Canada), incorporated under the Canada Business Corporations Act, R.S.C. 1985, c. C-44 (the "CBCA")
• Headquarters: 2200 – 400 Burrard Street, Vancouver, British Columbia V6C 3A6, Canada
• Registered Office: 1600 – 925 West Georgia Street, Vancouver, British Columbia V6C 3L2, Canada
• Stock Exchange Listing: Toronto Stock Exchange (TSX), trading under the ticker symbol "TMC"
• Market Capitalization (as of January 14, 2022): Approximately CAD $1,870,000,000
Torchlight Mining Corp. is the public parent company of the Torchlight corporate group and serves as the Issuer of the Notes. The Company is a reporting issuer in each of the provinces and territories of Canada and is subject to the continuous disclosure obligations applicable to TSX-listed issuers under National Instrument 51-102. The Company's principal business activity is the exploration, development, and production of base metals, primarily nickel and copper, through its wholly owned subsidiary, Wolverine Lake Mining Ltd.
2. Organizational Documents Reviewed
The following organizational documents of Torchlight Mining Corp. were reviewed in connection with this diligence:
(a) Articles of Incorporation (as amended): The Company's CBCA articles of incorporation, as amended and restated from time to time, were reviewed in certified copy form obtained from Corporations Canada. The articles set forth, among other things, the authorized share capital, the rights and restrictions applicable to each class of shares, the minimum and maximum number of directors, and any restrictions on the business activities or powers of the corporation. No restrictions were identified that would limit the Company's ability to issue the Notes, grant security, or execute the Transaction Documents.
(b) By-Laws: By-Law No. 1 (the general operating by-law) and By-Law No. 2 (the borrowing by-law) were reviewed. By-Law No. 1 addresses matters of general corporate governance, including the conduct of meetings of shareholders and directors, the appointment and duties of officers, the execution of instruments, and the giving of notice. By-Law No. 2 specifically authorizes the directors to borrow money on the credit of the corporation, issue debt obligations, pledge or hypothecate the assets of the corporation, and give guarantees on behalf of the corporation. Both by-laws are currently in effect and have not been amended since their initial adoption.
(c) Annual Return Filings: The Company's annual return filings with Corporations Canada were reviewed and confirmed to be current and up to date as of the date of diligence.
(d) Certificate of Compliance: A Certificate of Compliance was obtained from Corporations Canada, which confirms that the corporation is in compliance with the requirements of the CBCA as of the date indicated thereon. This certificate serves as the Canadian federal equivalent of a certificate of good standing under U.S. state corporate law.
3. Good Standing / Compliance Status
A Certificate of Compliance was obtained from Corporations Canada confirming that Torchlight Mining Corp. is in compliance with the CBCA as of the date of diligence. This certificate confirms that the Company has filed all required annual returns, has not been dissolved or discontinued, and is not the subject of any certificate of intent to dissolve.
The Company's extra-provincial registrations were confirmed in the Province of Ontario (where the Company's principal mining operations are located, through its subsidiary Wolverine Lake Mining Ltd.) and in the Province of British Columbia (where the Company's corporate headquarters are situated). These extra-provincial registrations are required under the applicable provincial extra-provincial corporations legislation and permit the Company to carry on business in those provinces. No irregularities or deficiencies were identified in respect of these registrations.
No dissolution, winding-up, arrangement, or other insolvency proceedings are pending against the Company, and no steps have been taken, or are contemplated, to dissolve or wind up the Company. This was confirmed through a review of applicable corporate records and management representations provided during the due diligence sessions.
4. Authorized Capital and Outstanding Equity
The authorized share capital of Torchlight Mining Corp. is as follows:
(a) Common Shares: An unlimited number of common shares, without par value, are authorized for issuance. The common shares carry voting rights (one vote per share at all meetings of shareholders), dividend rights (subject to the prior rights of holders of preferred shares, if any), and residual rights on dissolution or winding-up. The common shares are listed for trading on the Toronto Stock Exchange.
(b) Preferred Shares: An unlimited number of preferred shares, issuable in one or more series, are authorized for issuance. The specific rights, privileges, restrictions, and conditions attaching to each series of preferred shares may be determined by the board of directors at the time of issuance. As of the date of this memorandum, no preferred shares of any series are issued and outstanding.
The number of outstanding common shares is to be confirmed from the shareholder register maintained by the Company's transfer agent. The common shares are publicly traded on the TSX and are widely held.
The Company's equity incentive plans, including stock option plans and any outstanding warrants or other equity-linked instruments, were reviewed. No anti-dilution provisions, consent triggers, or other provisions of such plans or instruments were identified that would be triggered by, or impose restrictions upon, the Offering or the issuance of the Notes. There are no pre-emptive rights, rights of first refusal, or similar rights applicable to the issuance of the Notes or the granting of the Guarantees.
No shareholder agreement, unanimous shareholder agreement (as defined under the CBCA), or other contractual arrangement among shareholders was identified that would restrict the issuance of debt securities, the granting of guarantees, the creation of security interests, or the execution and delivery of the Transaction Documents.
5. Directors and Officers
The following individuals serve as directors and officers of Torchlight Mining Corp. as of the date of this memorandum:
The full composition of the board of directors, including all independent and non-independent directors, was reviewed. The board currently consists of seven directors, of whom four are independent within the meaning of National Instrument 52-110 — Audit Committees. The quorum requirements for meetings of the board of directors, as set forth in By-Law No. 1, were reviewed and confirmed; a quorum consists of a majority of the number of directors then in office. The board resolutions described in Section III.A.6 below were adopted at a duly convened meeting at which a quorum was present and acting throughout.
6. Board and Shareholder Approvals
Board Resolutions. On February 3, 2022, the board of directors of Torchlight Mining Corp. adopted resolutions (the "Issuer Board Resolutions") at a duly convened meeting of the board, at which a quorum of directors was present and acting throughout, authorizing the following actions in connection with the Offering:
(a) The issuance by the Company of $300,000,000 aggregate principal amount of 8.750% Senior Secured Notes due 2029, on the terms and conditions set forth in the Indenture, as described in the Offering Memorandum;
(b) The execution and delivery by the Company of the Indenture, to be entered into between the Company, the Guarantors, and Northern Dominion Trust Company, as Trustee (the "Trustee"), governing the terms and conditions of the Notes;
(c) The execution and delivery by the Company of the Purchase Agreement, to be entered into between the Company, the Guarantors, and Kelvantis Capital Markets LLC, Prestige Barrington & Co., Inc., and Halcyon Securities Inc., as Initial Purchasers (collectively, the "Initial Purchasers"), setting forth the terms of the sale of the Notes to the Initial Purchasers;
(d) The execution and delivery by the Company of the Registration Rights Agreement, to be entered into between the Company, the Guarantors, and the Initial Purchasers, providing for registration rights in respect of the Notes under the Securities Act of 1933, as amended;
(e) The execution and delivery by the Company of the Canadian General Security Agreement, granting a first-priority lien on substantially all of the assets of the Company in favor of the Collateral Agent for the benefit of the holders of the Notes, subject to certain permitted liens and exceptions as set forth therein;
(f) The execution and delivery by the Company of the Collateral Agency Agreement, to be entered into among the Company, the Guarantors, Northern Dominion Trust Company as Trustee, and Northern Dominion Trust Company as Collateral Agent (the "Collateral Agent"), governing the administration and enforcement of the collateral securing the Notes;
(g) The designation of the following individuals as authorized signatories for the Company in connection with the execution and delivery of the Transaction Documents: Magnus Thornberg (Chief Executive Officer), Lianne Prokopchuk (Chief Financial Officer), Deepak Rathore (General Counsel & Corporate Secretary), and Colleen Hébert (Treasurer); and
(h) The application of proceeds from the Offering as follows:
(i) $167,000,000 for the Phase II expansion of the Wolverine Lake nickel-copper mine, including the development of additional underground workings, the procurement and installation of mining equipment, and associated infrastructure improvements;
(ii) $110,250,000 for the full repayment of the outstanding balance under the revolving credit facility with Ridgeline Bank of Canada, as administrative agent (CAD $140,000,000, converted at a USD/CAD exchange rate of approximately 0.7875);
(iii) $14,250,000 for the payment of transaction fees and expenses, including Initial Purchaser discounts and commissions, legal fees, trustee and collateral agent fees, printing costs, and other offering-related expenses; and
(iv) $8,500,000 for general corporate purposes and working capital.
The Issuer Board Resolutions were reviewed and confirmed to be in proper form, duly adopted by the requisite vote of the board of directors, and consistent with the Company's articles of incorporation and by-laws.
Shareholder Approval. Under the CBCA, shareholder approval is not required for the issuance of debt securities or the granting of security interests in the ordinary course of business. This conclusion was confirmed by review of the Company's articles of incorporation, By-Law No. 1, By-Law No. 2, and the applicable provisions of the CBCA. No special shareholder agreement or unanimous shareholder agreement (as defined in Section 146 of the CBCA) is in effect that would impose additional requirements for shareholder approval of the transactions contemplated by the Offering. Accordingly, no shareholder resolution was required or obtained.
TSX Notification. Under the rules of the Toronto Stock Exchange, listed issuers are required to provide notification of material debt issuances to the TSX. However, TSX approval is not required for the Offering as the Offering does not involve the issuance of equity securities or any other transaction that would require prior TSX approval under the TSX Company Manual. Pendleton Ross LLP (Marie-Claire Bouchard) is advising the Company on the preparation and filing of the required TSX notification in connection with the Offering, and we have confirmed that this filing will be made on a timely basis.
7. Existing Indebtedness
Torchlight Mining Corp. is a party to a revolving credit facility with Ridgeline Bank of Canada, as administrative agent and lead lender (the "Ridgeline Facility"). The key terms of the Ridgeline Facility are as follows:
• Committed Amount: CAD $225,000,000
• Outstanding Balance (as of January 2022): CAD $140,000,000
• Maturity Date: September 30, 2024
• Security: First-priority lien on substantially all assets of the Company and its subsidiaries (to be released upon repayment and termination)
In connection with the Offering, the Company intends to apply a portion of the proceeds from the sale of the Notes to repay in full all amounts outstanding under the Ridgeline Facility and to terminate the Ridgeline Facility in its entirety at the closing of the Offering (expected April 19, 2022). The underlying credit agreement was reviewed for change-of-control provisions, negative pledge covenants, and consent requirements. The repayment and termination of the Ridgeline Facility at closing eliminates any potential covenant conflicts with the terms of the Indenture and the security documents to be entered into in connection with the Offering.
No intercreditor agreement is required in connection with the Offering, as the Ridgeline Facility will be retired at or prior to the closing of the Offering, and no other secured indebtedness will remain outstanding following the closing. The first-priority security interests securing the Notes will be the sole security interests encumbering the assets of the Company and the Guarantors following the closing.
No other material indebtedness of the Company was identified during the due diligence review.
B. Wolverine Lake Mining Ltd. (Subsidiary Guarantor)
1. Basic Information
The following is a summary of the basic organizational and identifying information for Wolverine Lake Mining Ltd.:
• Full Legal Name: Wolverine Lake Mining Ltd.
• Jurisdiction of Incorporation: Ontario, Canada — incorporated under the Business Corporations Act (Ontario), R.S.O. 1990, c. B.16 (the "OBCA")
• Registered Office: 44 Lakeshore Boulevard, Wolverine Lake, Ontario P0L 1R0, Canada
• Relationship to Issuer: Wholly owned direct subsidiary of Torchlight Mining Corp.
• Principal Activity: Operating entity for the Wolverine Lake nickel-copper mine, an underground and open-pit mining operation encompassing approximately 12,400 hectares, comprising Ontario Mining Claim Nos. WL-4492-01 through WL-4492-47 (inclusive), located approximately 85 kilometers northeast of Thunder Bay, Ontario, Canada
• General Manager, Mine Operations: Stavros Katsaros (age 50)
Wolverine Lake Mining Ltd. is the principal revenue-generating entity within the Torchlight corporate group. It holds the mineral rights, mining claims, surface rights, and related permits and licenses necessary for the operation of the Wolverine Lake mine. The mine is currently in commercial production, with ore being extracted from both underground and open-pit workings and delivered to the adjacent concentrator and processing facilities operated by Torchlight Milling & Processing Inc.
2. Organizational Documents Reviewed
The following organizational documents of Wolverine Lake Mining Ltd. were reviewed in connection with this diligence:
(a) Articles of Incorporation under the OBCA: A certified copy of the articles of incorporation of Wolverine Lake Mining Ltd. was reviewed. The articles set forth the authorized share capital, the registered office address, and such other provisions as are required or permitted under the OBCA. No restrictions on the corporation's business activities or powers were identified that would be relevant to the Guarantee or the security grant.
(b) By-law: The general operating by-law of Wolverine Lake Mining Ltd. was reviewed. The by-law addresses matters of general corporate governance, including the conduct of meetings of shareholders and directors, the appointment and duties of officers, the execution of instruments, and borrowing powers. The by-law authorizes the directors to borrow money on the credit of the corporation and to grant security interests in the corporation's assets.
(c) Annual Return Filings: The annual return filings of Wolverine Lake Mining Ltd. with the Ontario Ministry of Government and Consumer Services were reviewed and confirmed to be current as of the date of diligence.
3. Good Standing / Compliance Status
A Certificate of Status was obtained from the Ontario Ministry of Government and Consumer Services confirming that Wolverine Lake Mining Ltd. is an active corporation in good standing under the OBCA. This certificate confirms that the corporation has not been dissolved, has not been cancelled for failure to comply with the requirements of the Corporations Tax Act or any other applicable legislation, and has filed all required annual returns.
No dissolution, winding-up, or other insolvency proceedings are pending against Wolverine Lake Mining Ltd. This was confirmed through a review of applicable corporate records and management representations provided during the due diligence sessions.
4. Authorized Capital and Equity Ownership
The authorized share capital of Wolverine Lake Mining Ltd. consists of an unlimited number of common shares, without par value. All of the issued and outstanding common shares of Wolverine Lake Mining Ltd. are held by Torchlight Mining Corp., representing 100% ownership of the entity. This ownership was confirmed by review of the shareholder register and share transfer records maintained by the corporation.
No minority interests, options, warrants, conversion rights, pre-emptive rights, or other equity-linked instruments are outstanding in respect of the shares of Wolverine Lake Mining Ltd. No shareholders' agreement or other contractual arrangement restricting the transfer, pledge, or hypothecation of the shares of Wolverine Lake Mining Ltd. is in effect.
5. Directors and Officers
The board of directors of Wolverine Lake Mining Ltd. consists of nominees from Torchlight Mining Corp. management, consistent with the Company's practice of appointing its senior management and designees to serve as directors of its wholly owned subsidiaries. Stavros Katsaros serves as General Manager of mine operations in an officer capacity. The incumbency of all directors and officers was confirmed for purposes of the preparation of the secretary's certificate to be delivered at closing.
6. Board Approvals for Guarantee and Security
On February 3, 2022, the board of directors of Wolverine Lake Mining Ltd. adopted resolutions at a duly convened meeting (the "WLM Board Resolutions") authorizing the following actions in connection with the Offering:
(a) The execution and delivery by Wolverine Lake Mining Ltd. of the Guarantee under the Indenture, pursuant to which Wolverine Lake Mining Ltd. will jointly and severally guarantee the payment and performance of the Company's obligations under the Notes on a senior secured basis;
(b) The execution and delivery by Wolverine Lake Mining Ltd. of the Canadian General Security Agreement, granting a first-priority lien on all of its assets in favor of the Collateral Agent for the benefit of the holders of the Notes, including, without limitation, mining rights and mineral claims (Ontario Mining Claim Nos. WL-4492-01 through WL-4492-47), surface rights, equipment, inventory, accounts receivable, intellectual property, and all other personal property; and
(c) The execution and delivery by Wolverine Lake Mining Ltd. of the Collateral Agency Agreement with Northern Dominion Trust Company as Collateral Agent.
In addition, Torchlight Mining Corp., as the sole shareholder of Wolverine Lake Mining Ltd., executed a resolution consenting to the guarantee and security grant by Wolverine Lake Mining Ltd. (the "WLM Shareholder Resolution"). The WLM Shareholder Resolution was reviewed and confirmed to be in proper form and duly adopted.
OBCA Considerations. The financial assistance provisions of the OBCA (Section 20) were reviewed and analyzed in consultation with Pendleton Ross LLP. It was confirmed that the guarantee by Wolverine Lake Mining Ltd. of the obligations of its parent company, Torchlight Mining Corp., constitutes an upstream guarantee that provides corporate benefit to Wolverine Lake Mining Ltd. as a wholly owned subsidiary of the Issuer. The proceeds of the Notes will be used, in part, to fund the Phase II expansion of the Wolverine Lake mine operated by Wolverine Lake Mining Ltd., providing a direct and demonstrable corporate benefit to the guarantor entity. The financial assistance restrictions under Section 20 of the OBCA were reviewed, and it was confirmed that these provisions do not apply to the grant of security in these circumstances, given the corporate benefit received by Wolverine Lake Mining Ltd. and the absence of any financial assistance to shareholders of the Company in connection with the Offering.
C. Torchlight Milling & Processing Inc. (Subsidiary Guarantor)
1. Basic Information
The following is a summary of the basic organizational and identifying information for Torchlight Milling & Processing Inc.:
• Full Legal Name: Torchlight Milling & Processing Inc.
• Jurisdiction of Incorporation: Ontario, Canada — incorporated under the Business Corporations Act (Ontario) (the "OBCA")
• Registered Office: 44 Lakeshore Boulevard, Wolverine Lake, Ontario P0L 1R0, Canada
• Relationship to Issuer: Wholly owned direct subsidiary of Torchlight Mining Corp.
• Principal Activity: Operates the concentrator and ore processing facilities adjacent to the Wolverine Lake mine site, providing milling, concentration, and preliminary metallurgical processing services for nickel and copper ore extracted from the Wolverine Lake mine
Torchlight Milling & Processing Inc. operates under an intercompany processing agreement with Wolverine Lake Mining Ltd. (discussed further in Section V below), pursuant to which it receives ore from the Wolverine Lake mine and processes it into nickel and copper concentrate for sale or further refining.
2. Organizational Documents Reviewed
The following organizational documents of Torchlight Milling & Processing Inc. were reviewed in connection with this diligence:
(a) Articles of Incorporation under the OBCA: A certified copy of the articles of incorporation was reviewed. No restrictions were identified that would limit the corporation's ability to provide the Guarantee or grant security in connection with the Offering.
(b) By-law: The general operating by-law was reviewed. The by-law authorizes the directors to borrow money on the credit of the corporation and to grant security interests in the corporation's assets, consistent with the by-law provisions of the other entities in the Torchlight corporate group.
(c) Annual Return Filings: The annual return filings with the Ontario Ministry of Government and Consumer Services were reviewed and confirmed to be current as of the date of diligence.
3. Good Standing / Compliance Status
A Certificate of Status was obtained from the Ontario Ministry of Government and Consumer Services confirming that Torchlight Milling & Processing Inc. is an active corporation in good standing under the OBCA. No dissolution or winding-up proceedings are pending against the entity, and all required filings are current.
4. Authorized Capital and Equity Ownership
The authorized share capital of Torchlight Milling & Processing Inc. consists of an unlimited number of common shares, without par value. All of the issued and outstanding common shares are held by Torchlight Mining Corp., representing 100% ownership of the entity. This ownership was confirmed by review of the shareholder register and share transfer records.
No minority interests, options, warrants, conversion rights, or other equity-linked instruments are outstanding in respect of the shares of Torchlight Milling & Processing Inc. No shareholders' agreement or other contractual arrangement restricting the transfer, pledge, or hypothecation of the shares is in effect.
5. Directors and Officers
The board of directors of Torchlight Milling & Processing Inc. consists of nominees from Torchlight Mining Corp. management, consistent with the Company's governance practices for its wholly owned subsidiaries. The incumbency of all directors and officers was confirmed for purposes of the preparation of the secretary's certificate to be delivered at closing.
6. Board Approvals for Guarantee and Security
On February 3, 2022, the board of directors of Torchlight Milling & Processing Inc. adopted resolutions at a duly convened meeting (the "TMP Board Resolutions") authorizing the following actions in connection with the Offering:
(a) The execution and delivery by Torchlight Milling & Processing Inc. of the Guarantee under the Indenture, pursuant to which Torchlight Milling & Processing Inc. will jointly and severally guarantee the payment and performance of the Company's obligations under the Notes on a senior secured basis;
(b) The execution and delivery by Torchlight Milling & Processing Inc. of the Canadian General Security Agreement, granting a first-priority lien on all of its assets in favor of the Collateral Agent for the benefit of the holders of the Notes; and
(c) The execution and delivery by Torchlight Milling & Processing Inc. of the Collateral Agency Agreement with Northern Dominion Trust Company as Collateral Agent.
In addition, Torchlight Mining Corp., as the sole shareholder of Torchlight Milling & Processing Inc., executed a resolution consenting to the guarantee and security grant (the "TMP Shareholder Resolution"). The TMP Shareholder Resolution was reviewed and confirmed to be in proper form and duly adopted.
OBCA Financial Assistance and Corporate Benefit Analysis. The same analysis applied to Wolverine Lake Mining Ltd. in Section III.B.6 above was conducted with respect to Torchlight Milling & Processing Inc. It was confirmed that the guarantee by Torchlight Milling & Processing Inc. provides corporate benefit to the entity, as the proceeds of the Notes will fund the expansion of the Wolverine Lake mine, which is the source of ore processed by Torchlight Milling & Processing Inc. at its concentrator facilities. The financial assistance provisions of Section 20 of the OBCA were reviewed and confirmed not to apply in these circumstances, consistent with the conclusion reached for Wolverine Lake Mining Ltd.
D. Torchlight U.S. Holdings, Inc. (Subsidiary Guarantor)
1. Basic Information
The following is a summary of the basic organizational and identifying information for Torchlight U.S. Holdings, Inc.:
• Full Legal Name: Torchlight U.S. Holdings, Inc.
• Jurisdiction of Incorporation: Delaware, United States — incorporated under the Delaware General Corporation Law, Title 8, Chapter 1 of the Delaware Code (the "DGCL")
• Registered Office: 1209 Orange Street, Wilmington, Delaware 19801, United States (c/o Crowne Albany Corporation, as registered agent)
• Employer Identification Number (EIN): 84-3921057
• Relationship to Issuer: Wholly owned direct subsidiary of Torchlight Mining Corp.
• Principal Activity: Holds U.S. offtake and marketing contracts for the sale and distribution of nickel and copper concentrate to U.S.-based smelters and end-users, and holds certain intercompany receivables from Torchlight Mining Corp.
Torchlight U.S. Holdings, Inc. was formed to facilitate the Company's commercial operations in the United States and to serve as the counterparty to U.S.-based offtake contracts. The entity does not have significant physical assets in the United States but holds contractual rights of material value, including the U.S. offtake and marketing contracts and intercompany notes receivable.
2. Organizational Documents Reviewed
The following organizational documents of Torchlight U.S. Holdings, Inc. were reviewed in connection with this diligence:
(a) Certificate of Incorporation: The Certificate of Incorporation of Torchlight U.S. Holdings, Inc. as filed with the Delaware Secretary of State was reviewed in certified copy form. The certificate sets forth the authorized share capital, the name and address of the registered agent, and such other provisions as are required or permitted under the DGCL. No restrictions on the corporation's powers to guarantee indebtedness or grant security interests were identified.
(b) Bylaws: The Bylaws of Torchlight U.S. Holdings, Inc. were reviewed. The bylaws address matters of general corporate governance, including the conduct of meetings of stockholders and directors, the appointment and duties of officers, and the execution of instruments. The bylaws do not restrict the corporation's ability to guarantee the indebtedness of its parent or to grant security interests in its assets.
(c) Annual Franchise Tax Filings: The annual franchise tax filings of Torchlight U.S. Holdings, Inc. with the Delaware Secretary of State were reviewed and confirmed to be current. All franchise tax payments have been made on a timely basis.
3. Good Standing / Compliance Status
A Certificate of Good Standing was obtained from the Delaware Secretary of State confirming that Torchlight U.S. Holdings, Inc. is a corporation in good standing under the laws of the State of Delaware. The certificate confirms that the corporation has filed all required annual reports, has paid all franchise taxes due, and has not been dissolved, merged, or otherwise terminated.
No dissolution proceedings are pending against Torchlight U.S. Holdings, Inc. All franchise tax payments are current, and no tax delinquency notices have been received.
4. Authorized Capital and Equity Ownership
The authorized share capital of Torchlight U.S. Holdings, Inc., as set forth in its Certificate of Incorporation, was reviewed. All of the issued and outstanding shares of the corporation are held by Torchlight Mining Corp., representing 100% ownership of the entity. This ownership was confirmed by review of the stock ledger maintained by the corporation.
No minority interests, options, warrants, conversion rights, or other equity-linked instruments are outstanding in respect of the shares of Torchlight U.S. Holdings, Inc. No stockholders' agreement, voting trust, or other contractual arrangement restricting the transfer, pledge, or hypothecation of the shares is in effect.
5. Directors and Officers
The board of directors of Torchlight U.S. Holdings, Inc. consists of nominees from Torchlight Mining Corp. management, consistent with the Company's governance practices for its wholly owned subsidiaries. The incumbency of all directors and officers was confirmed for purposes of the preparation of the secretary's certificate to be delivered at closing.
6. Board Approvals for Guarantee and Security
On February 3, 2022, the board of directors of Torchlight U.S. Holdings, Inc. adopted resolutions (the "TUSH Board Resolutions") authorizing the following actions in connection with the Offering:
(a) The execution and delivery by Torchlight U.S. Holdings, Inc. of the Guarantee under the Indenture, pursuant to which Torchlight U.S. Holdings, Inc. will jointly and severally guarantee the payment and performance of the Company's obligations under the Notes on a senior secured basis;
(b) The execution and delivery by Torchlight U.S. Holdings, Inc. of the U.S. Security Agreement with Northern Dominion Trust Company as Collateral Agent, granting a first-priority security interest in substantially all of the assets of Torchlight U.S. Holdings, Inc., including, without limitation, accounts receivable, inventory (if any), equipment (if any), intellectual property, intercompany notes receivable, general intangibles, and all proceeds and products thereof; and
(c) The execution and delivery by Torchlight U.S. Holdings, Inc. of the Collateral Agency Agreement with Northern Dominion Trust Company as Collateral Agent.
In addition, Torchlight Mining Corp., as the sole stockholder of Torchlight U.S. Holdings, Inc., executed a written consent in lieu of a meeting of stockholders approving the guarantee and security grant (the "TUSH Stockholder Consent"). The TUSH Stockholder Consent was reviewed and confirmed to be in proper form and duly executed in accordance with Section 228 of the DGCL.
DGCL Considerations. The Certificate of Incorporation of Torchlight U.S. Holdings, Inc. was reviewed and confirmed not to contain any restrictions on the corporation's power to guarantee the indebtedness of its parent or to grant security interests in its assets. Under the DGCL, a corporation has the power to guarantee the obligations of others, including its parent corporation, subject to any restrictions set forth in its certificate of incorporation. No such restrictions were identified. A corporate benefit analysis was conducted and supports the enforceability of the upstream guarantee, given that Torchlight U.S. Holdings, Inc. is a wholly owned subsidiary of the Issuer and derives its business operations and economic value from its position within the Torchlight corporate group. The proceeds of the Notes will indirectly benefit Torchlight U.S. Holdings, Inc. by strengthening the financial position of the corporate group as a whole and ensuring the continued operation of the Wolverine Lake mine, the primary source of the concentrate marketed and sold through U.S. offtake contracts held by Torchlight U.S. Holdings, Inc.
IV. SUBSIDIARY EQUITY INTERESTS — COLLATERAL IMPLICATIONS
The equity interests in each of the three Guarantor subsidiaries — specifically, all of the issued and outstanding shares of Wolverine Lake Mining Ltd., all of the issued and outstanding shares of Torchlight Milling & Processing Inc., and all of the issued and outstanding shares of Torchlight U.S. Holdings, Inc. — are included in the collateral package securing the Notes. The pledge of these equity interests, in addition to the security interests granted by each entity over its own assets, provides the holders of the Notes with a comprehensive security position across the entire Torchlight corporate structure.
Ontario Subsidiaries. For the two Ontario subsidiaries (Wolverine Lake Mining Ltd. and Torchlight Milling & Processing Inc.), the pledge of equity interests will be perfected under the Personal Property Security Act (Ontario), R.S.O. 1990, c. P.10 (the "Ontario PPSA"). Pendleton Ross LLP is responsible for the preparation, filing, and perfection analysis of the PPSA registrations in Ontario. We understand from Pendleton Ross LLP that the PPSA registrations will be filed at or promptly after closing and that a perfection opinion will be delivered by Pendleton Ross LLP to the Initial Purchasers at closing.
Delaware Subsidiary. For Torchlight U.S. Holdings, Inc. (Delaware), the pledge of equity interests will be perfected by either (a) the delivery of stock certificates to the Collateral Agent (if the shares are certificated), together with duly executed stock powers endorsed in blank, or (b) the filing of a UCC-1 financing statement with the Delaware Secretary of State (if the shares are uncertificated). Calderwood & Harkness LLP is responsible for the preparation and filing of the UCC-1 financing statement in Delaware, if applicable, and for the preparation of the perfection opinion to be delivered to the Initial Purchasers at closing with respect to the pledge of the equity interests in Torchlight U.S. Holdings, Inc.
No restrictions on the transfer, pledge, or hypothecation of the shares of any subsidiary were identified in any organizational document, including the articles of incorporation, certificates of incorporation, by-laws, and bylaws of each entity. No shareholders' agreements, stockholders' agreements, voting trusts, irrevocable proxies, or other equity arrangements exist that would restrict or impair the pledge of the subsidiary equity interests in favor of the Collateral Agent for the benefit of the holders of the Notes.
V. INTERCOMPANY ARRANGEMENTS
The following intercompany arrangements within the Torchlight corporate group were identified and reviewed in connection with this diligence:
Intercompany Management Services Agreement. An intercompany management services agreement exists between Torchlight Mining Corp. and Wolverine Lake Mining Ltd., pursuant to which Torchlight Mining Corp. provides certain management, administrative, and corporate support services to Wolverine Lake Mining Ltd. in exchange for a management fee. This agreement was reviewed for its terms, including any change-of-control triggers or consent requirements. No change-of-control trigger was identified in this agreement, and no consent is required under this agreement in connection with the Offering or the transactions contemplated by the Transaction Documents.
Intercompany Processing Agreement. An intercompany processing agreement exists between Wolverine Lake Mining Ltd. and Torchlight Milling & Processing Inc., pursuant to which Wolverine Lake Mining Ltd. delivers ore extracted from the Wolverine Lake mine to Torchlight Milling & Processing Inc. for milling, concentration, and preliminary metallurgical processing. The agreement was reviewed and confirmed to be on arm's-length terms, consistent with transfer pricing requirements and applicable Canadian tax regulations. No change-of-control trigger or consent requirement relevant to the Offering was identified.
Intercompany Notes Receivable. Intercompany notes receivable exist between Torchlight Mining Corp. and Torchlight U.S. Holdings, Inc. These intercompany receivables are included in the collateral package securing the Notes. It was confirmed that the intercompany notes will be subordinated to the Notes pursuant to the terms of the Indenture and the applicable security documents. The subordination provisions were reviewed and confirmed to be in customary form for transactions of this nature.
U.S. Offtake and Marketing Contracts. The U.S. offtake and marketing contracts held by Torchlight U.S. Holdings, Inc. were reviewed for assignment and change-of-control provisions. The detailed analysis of these contracts, including the terms of the offtake arrangements and any counterparty consent requirements, is addressed in the separate Due Diligence Memorandum — Material Contracts & Mining Rights prepared by the Calderwood & Harkness LLP engagement team and is not repeated in this memorandum.
VI. FUTURE SUBSIDIARY GUARANTOR REQUIREMENT
The Indenture includes a covenant requiring that any future subsidiary of Torchlight Mining Corp. that meets a total asset threshold of $5,000,000 (determined as of the end of the most recent fiscal quarter for which financial statements are available) must accede as a Guarantor under the Indenture by executing and delivering a Supplemental Indenture in the form of the First Supplemental Indenture attached as an exhibit to the Indenture. Such future subsidiary guarantors will also be required to grant security interests on substantially all of their assets and to pledge their equity interests in favor of the Collateral Agent for the benefit of the holders of the Notes, on terms and conditions substantially consistent with the security arrangements entered into by the existing Guarantors.
As of the date of this memorandum, no additional subsidiaries exist beyond the three identified Guarantors (Wolverine Lake Mining Ltd., Torchlight Milling & Processing Inc., and Torchlight U.S. Holdings, Inc.). During the due diligence sessions held on February 14–16, 2022, management of the Company confirmed that no new subsidiary formation is contemplated in the near term and that no steps have been taken toward the formation of any additional subsidiary. This representation will be confirmed again at closing through the delivery of officer's certificates and management bring-down representations.
VII. KEY FINDINGS AND ISSUES
A. Items Confirmed
Based on the review of the organizational documents, corporate records, and other materials described in this memorandum, and subject to receipt of the pending items noted in Section VII.B below, the following key findings have been confirmed:
1. Due Organization, Valid Existence, and Good Standing. All four entities — Torchlight Mining Corp., Wolverine Lake Mining Ltd., Torchlight Milling & Processing Inc., and Torchlight U.S. Holdings, Inc. — are duly organized, validly existing, and in good standing (or in compliance, as applicable under CBCA terminology) in their respective jurisdictions of incorporation. Certificates of compliance, status, and good standing have been obtained from the applicable governmental authorities for each entity.
2. Corporate Power and Authority. Each entity has the requisite corporate power and authority to execute, deliver, and perform its obligations under the Transaction Documents to which it is or will be a party, including the Indenture, the Purchase Agreement, the applicable Security Agreements (whether the Canadian General Security Agreement or the U.S. Security Agreement, as applicable), the Collateral Agency Agreement, and the Registration Rights Agreement.
3. Board and Shareholder/Stockholder Approvals. Board of directors resolutions have been duly adopted for each entity authorizing the transactions contemplated by the Offering, including the issuance of the Notes (in the case of the Issuer), the execution and delivery of the Guarantees (in the case of each Guarantor), and the granting of security interests. Where applicable, sole shareholder or sole stockholder resolutions or written consents have been duly adopted or executed.
4. 100% Ownership Confirmed. The 100% ownership of each subsidiary by Torchlight Mining Corp. has been confirmed through review of shareholder registers, share transfer records, and stock ledgers. No minority interests exist at any level of the corporate structure.
5. No Restrictive Provisions. No organizational document of any entity — including articles of incorporation, certificates of incorporation, by-laws, and bylaws — contains restrictions that would prevent or limit the issuance of the Notes, the granting of the Guarantees, or the creation of the security interests contemplated by the Transaction Documents.
6. No Conflicting Agreements. No conflicting shareholder agreements, unanimous shareholder agreements (within the meaning of the CBCA), stockholder agreements, voting trusts, or other equity arrangements are in effect that would restrict or impair the transactions contemplated by the Offering.