CONFIDENTIAL — ATTORNEY-CLIENT PRIVILEGED / ATTORNEY WORK PRODUCT
CALDERWOOD & HARKNESS LLP 900 Third Avenue, 28th Floor New York, NY 10022
MEMORANDUM
April 15, 2024
TO: Beatrice Holloway, Partner, Mergers & Acquisitions
FROM: Tiffany Rosenthal, Associate, and Derek Okonkwo, Associate, Mergers & Acquisitions
RE: Legal Due Diligence Summary — Ridgeline Cobalt Inc. in Connection with Proposed $45,000,000 Cash Tender Offer by Torchlight Mining Corp.
MATTER: Torchlight Mining Corp. — Acquisition of Ridgeline Cobalt Inc. (Matter No. 1039-00004)
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I. EXECUTIVE SUMMARY
This memorandum summarizes the material findings from our comprehensive legal due diligence review of Ridgeline Cobalt Inc. ("Ridgeline" or "RCI") in connection with the proposed $45,000,000 all-cash tender offer by our client, Torchlight Mining Corp. ("Torchlight" or "TMC"), to acquire all 18,000,000 outstanding shares of common stock of RCI at a price of $2.50 per share (the "Tender Offer" or the "Transaction"). The Tender Offer represents a premium of approximately 38.89% to RCI's undisturbed closing price of $1.80 per share on March 13, 2024 (the last trading day prior to the public announcement of the Transaction), and a premium of approximately 45.35% to the 30-day volume-weighted average price ("VWAP") of $1.72 per share.
Scope of Review. Our due diligence review encompassed a thorough examination of corporate records, capitalization documents, mining titles and property interests, environmental filings and compliance history, material contracts, litigation dockets and proceedings, intellectual property, regulatory and compliance matters, and related financial documentation. The review was conducted on the basis of documents and information provided through the electronic virtual data room (the "VDR") established and maintained by Ridgeline's legal counsel, Galbraith Haver & Steele LLP, under the supervision of Martin Galbraith (lead partner) and Rebecca Tsang (associate). Our review also incorporated publicly available information, including filings made with the U.S. Securities and Exchange Commission (the "SEC"), the Ontario Ministry of Mines, the Michigan Department of Environment, Great Lakes, and Energy ("EGLE"), and other relevant governmental authorities.
Financial Advisors. The financial advisor to Torchlight in connection with the Transaction is Blackford Ames Securities LLC, with Richard Capewell, Managing Director, serving as lead advisor. The financial advisor to the Ridgeline Special Committee (described below) is Whitfield Partners LLC, with Joanna Whitfield, Managing Director, serving as lead advisor. Detailed financial and valuation due diligence has been conducted separately by Blackford Ames Securities LLC; this memorandum addresses legal due diligence matters and references financial data only to the extent relevant to our legal analysis.
Auditors. RCI's independent auditor is Aldgate Pryor LLP, CPA, with Dennis Pryor serving as Lead Engagement Partner (principal office at 211 West Fort Street, Suite 500, Detroit, MI 48226). Torchlight's independent auditor is Fessenden & Co., CPA, with Christine Maheux serving as Lead Engagement Partner. We have reviewed audited financial statements and related audit opinions in the course of our review but have not independently verified the underlying financial data, which is the province of the financial advisors and their respective accounting teams.
Key Deal Milestones. The Transaction has proceeded through the following principal milestones:
• March 14, 2024: Torchlight Board of Directors approved the Tender Offer and authorized the filing of Schedule TO with the SEC.
• March 18, 2024: The Ridgeline Board of Directors formed a Special Committee of independent directors, consisting of Samuel Kerensky (Chair), Priya Natarajan, and Claudette Duval (the "Special Committee"), to evaluate the Tender Offer and make a recommendation to the full Board.
• March 21, 2024: Premerger notification was filed under the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended (the "HSR Act") (HSR Transaction No. 20241387), with a filing fee of $111,000 (Tier 1).
• March 25, 2024: Notification was filed under the Investment Canada Act with Innovation, Science and Economic Development Canada.
• April 5, 2024: The Ridgeline Board of Directors and Special Committee filed Schedule 14D-9 (Solicitation/Recommendation Statement) with the SEC (SEC Acc. No. 0001193125-24-088234), recommending that RCI shareholders tender their shares into the Tender Offer.
• April 8, 2024: Pinnacle Venture Resources Fund II, LP ("Pinnacle"), RCI's largest shareholder and holder of $7,800,000 in convertible notes, executed a Tender & Support Agreement committing to tender all of its 3,600,000 shares of RCI common stock and consenting to repayment of the convertible notes at closing.
Overall Assessment. Based on our review, we have not identified any material legal impediments to the consummation of the Transaction. Certain risk items have been identified and are discussed in detail in Section XI of this memorandum. For each identified risk item, we have proposed recommended indemnification protections and other mitigation measures. Our overall recommendation is to proceed with the Transaction, subject to the implementation of the indemnification structure summarized below.
Recommended Indemnification Structure (Summary):
• General Indemnification Cap: 20% of aggregate deal value = $9,000,000
• Escrow: $9,000,000 to be deposited at closing with Clearmont National Bank, N.A., with an 18-month escrow period
• Tipping Basket: 1% of deal value = $450,000 (once exceeded, recovery from dollar one)
• De Minimis Per-Claim Threshold: $25,000
• Fundamental Representations: 100% cap ($45,000,000) with 36-month survival period
• Representations and Warranty Insurance: $9,000,000 policy limit excess of $9,000,000 retention, to be placed through Cartwright Insurance Group Ltd. with Northern Shield Specialty Insurance Co. (estimated premium of $315,000, split equally between the parties)
II. CORPORATE ORGANIZATION AND GOOD STANDING
A. Incorporation and Organizational Documents
Ridgeline Cobalt Inc. is a corporation organized and existing under the laws of the State of Delaware. RCI was incorporated on September 12, 2018, with a Certificate of Incorporation filed with the Delaware Secretary of State, Division of Corporations. The company's Employer Identification Number ("EIN") is 83-2196504.
RCI maintains a registered agent in Delaware through National Corporate Filing Services, Inc., located at 1209 Orange Street, Wilmington, Delaware 19801. The company's principal executive offices are located at 44 Lakeshore Drive, Suite 300, Marquette, Michigan 49855.
We have reviewed the original Certificate of Incorporation and all amendments thereto, as well as the current Amended and Restated Bylaws of RCI. Our review of the Certificate of Incorporation confirms that the authorized share capital of RCI consists of 50,000,000 shares of common stock, par value $0.001 per share, and 5,000,000 shares of preferred stock, par value $0.001 per share. No shares of preferred stock have been issued or are currently outstanding.
The organizational documents do not contain any unusual or non-standard provisions that would impede the consummation of the Transaction. The Certificate of Incorporation does not include a classified board structure, a poison pill provision embedded at the charter level, or any supermajority voting requirements for business combinations beyond those required by the Delaware General Corporation Law (the "DGCL"). The Bylaws contain standard provisions regarding meetings of stockholders, quorum requirements, director qualifications, officer appointments, and indemnification of directors and officers. RCI's Bylaws include an advance notice provision for stockholder proposals, which is consistent with market practice for publicly traded companies.
B. Good Standing and Foreign Qualifications
We obtained a Certificate of Good Standing from the Delaware Secretary of State, Division of Corporations, dated March 28, 2024, confirming that RCI is in good standing under the laws of the State of Delaware. All franchise taxes and annual reports have been timely filed, and there are no pending administrative dissolution proceedings.
RCI is qualified to do business as a foreign corporation in the following jurisdictions:
Michigan. RCI is registered as a foreign corporation with the Michigan Department of Licensing and Regulatory Affairs ("LARA"). We reviewed RCI's LARA filings and confirmed that RCI is in good standing in Michigan. RCI's Michigan qualification is necessary in connection with its principal executive offices located in Marquette, Michigan, and its exploration operations at the Iron Lake Project in Baraga County, Michigan.
Ontario, Canada. RCI has an extra-provincial registration under the laws of the Province of Ontario, Canada, which is required in connection with its mining exploration operations at the Hawk Ridge Project in the Timiskaming District of Ontario. We reviewed the Ontario extra-provincial registration documents and confirmed that RCI's registration is current and in good standing with the Ontario Ministry of Government and Consumer Services.
No lapses in good standing or foreign qualification status were identified in any jurisdiction in which RCI is registered or qualified to do business. We note that RCI is not qualified to transact business in any other state or foreign jurisdiction, and based on our review, we do not believe that RCI is required to be qualified in any additional jurisdictions.
C. Officers and Directors
The current officers and directors of RCI are as follows:
We reviewed the minutes of the Board of Directors and any committees thereof for the three most recent fiscal years (FY 2021, FY 2022, and FY 2023), as well as all minutes from FY 2024 to date. Our review did not identify any irregularities, unauthorized actions, or failures to obtain required board or committee approvals for material corporate actions. Board meetings were regularly held and properly noticed, and quorum requirements were consistently satisfied.
As noted above, the Special Committee was formed by the Board of Directors on March 18, 2024, consisting of Samuel Kerensky (Chair), Priya Natarajan, and Claudette Duval. All three members of the Special Committee have been determined by the Board to be independent directors within the meaning of the NYSE American listing standards and applicable SEC regulations. The Special Committee was given the authority and mandate to evaluate the Tender Offer, negotiate terms on behalf of Ridgeline shareholders, retain independent legal counsel and financial advisors, and make a recommendation to the full Board regarding the Tender Offer. The Special Committee retained Whitfield Partners LLC (Joanna Whitfield, Managing Director) as its independent financial advisor and is being advised by Galbraith Haver & Steele LLP, acting as counsel to both the full Board and the Special Committee in this Transaction.
D. Subsidiaries and Affiliates
We reviewed the corporate organizational chart provided in the VDR (see Appendix A). RCI has one wholly-owned subsidiary: Ridgeline Cobalt (Canada) Inc., an Ontario corporation incorporated under the Ontario Business Corporations Act on February 8, 2019 ("RCI Canada"). RCI Canada holds the mining claims comprising the Hawk Ridge Project in the Timiskaming District of Ontario. RCI owns 100% of the issued and outstanding shares of RCI Canada, and there are no minority interests, joint venture interests, or other third-party equity interests in RCI Canada.
Other than RCI Canada, we have not identified any additional subsidiaries, affiliates, joint ventures, or special purpose entities associated with RCI. The Iron Lake Project mineral leases in Michigan are held directly by RCI and not through any subsidiary entity.
No material undisclosed subsidiaries or affiliates were identified during our review.
III. CAPITALIZATION
A. Common Stock
RCI has 18,000,000 shares of common stock, par value $0.001 per share, issued and outstanding as of the date of this memorandum. As noted in Section II.A above, RCI's Certificate of Incorporation authorizes the issuance of up to 50,000,000 shares of common stock and 5,000,000 shares of preferred stock. No shares of preferred stock are issued or outstanding.
RCI's common stock is listed for trading on the NYSE American exchange under the ticker symbol "RCI." Based on the undisturbed closing price of $1.80 per share on March 13, 2024 (the last trading day prior to the public announcement of the Transaction), RCI's pre-announcement market capitalization was approximately $32,400,000 (18,000,000 shares × $1.80).
The transfer agent and registrar for RCI's common stock is Dominion Transfer & Trust Co., located at 1100 Centre Street, Suite 600, Wilmington, Delaware 19805. We reviewed the stockholder register as of the most recently available record date and confirmed that the register is consistent with the outstanding share count of 18,000,000 shares. No discrepancies between the stockholder register and the representations made by RCI in the VDR or in its public filings were identified.
The Tender Offer price of $2.50 per share represents the following premiums:
• 38.89% premium to the undisturbed closing price of $1.80 per share on March 13, 2024
• 45.35% premium to the 30-day VWAP of $1.72 per share
B. Convertible Notes
RCI has outstanding $7,800,000 in aggregate principal amount of 6.5% Senior Secured Convertible Notes due June 30, 2026 (the "Convertible Notes"), issued pursuant to an Indenture dated June 30, 2022 (the "Indenture"), between RCI, as issuer, and Pinnacle Venture Resources Fund II, LP, as holder and secured party.
Holder Information. The Convertible Notes are held in their entirety by Pinnacle Venture Resources Fund II, LP ("Pinnacle"), a Delaware limited partnership. The general partner of Pinnacle is Pinnacle Venture Resources GP II, LLC, a Delaware limited liability company. The principal of Pinnacle is Theodore "Ted" Vanderhoek, Managing Partner. Pinnacle's principal office is located at 75 Ashbury Asset Advisors, Suite 1400, Boston, Massachusetts 02109. Pinnacle's EIN is 84-3317629.
Key Terms. The material terms of the Convertible Notes are as follows:
• Principal Amount: $7,800,000
• Interest Rate: 6.5% per annum, payable semi-annually in arrears on June 30 and December 31
• Maturity Date: June 30, 2026
• Conversion Price: $2.00 per share
• Shares Issuable Upon Conversion: 3,900,000 shares ($7,800,000 ÷ $2.00 per share)
• Security: Senior secured by substantially all assets of RCI (domestic) and RCI Canada (Canadian); UCC-1 financing statements filed in Delaware and Michigan; Ontario Personal Property Security Act ("PPSA") registrations filed in Ontario
We note that the conversion price of $2.00 per share is below the Tender Offer price of $2.50 per share, which means the notes are "in the money" for conversion purposes. However, the economic analysis of whether conversion or repayment at par plus accrued interest is more favorable to Pinnacle depends on the timing and certainty of the closing.
Change-of-Control Provisions. The Indenture contains a change-of-control provision that is triggered upon the acquisition by any person or group of more than 50% of the outstanding voting securities of RCI (on a fully diluted basis) or a merger, consolidation, or sale of substantially all assets. Upon the occurrence of a change-of-control event, the holder of the Convertible Notes has the right to elect either: (i) repayment of the outstanding principal amount plus all accrued and unpaid interest, or (ii) conversion of the notes into shares of common stock at the conversion price. We reviewed the anti-dilution provisions in the Indenture and confirmed that they are standard weighted-average anti-dilution provisions; no adjustment to the conversion price is triggered by the Tender Offer.
Accrued Interest Calculation. Based on the anticipated closing date of July 16, 2024, we calculate accrued interest on the Convertible Notes as follows:
• Accrual period: December 31, 2023 through July 16, 2024 (198 days)
• Accrued interest: $7,800,000 × 6.5% × (198/365) = $275,014
• Total expected payoff at closing: $7,800,000 (principal) + $275,014 (accrued interest) = $8,075,014
Pinnacle's Equity Holdings. In addition to holding the Convertible Notes, Pinnacle holds 3,600,000 shares of RCI common stock, representing approximately 20.0% of the 18,000,000 outstanding shares. Including the 3,900,000 shares issuable upon conversion of the Convertible Notes, Pinnacle's aggregate potential ownership of RCI common stock is 7,500,000 shares, or approximately 32.6% of RCI's fully diluted share count of 23,000,000 shares (as calculated below).
Security Interest Review. We reviewed the UCC-1 financing statements filed by Pinnacle against RCI in the State of Delaware (filing date: June 30, 2022; file number: 2022-4501833) and the State of Michigan (filing date: July 3, 2022; file number: 2022-125478), as well as the Ontario PPSA registration filed against RCI Canada (registration date: July 5, 2022; registration number: 20220705 1534 1862 3991). All filings are current and in good standing, with no competing liens or security interests of record against RCI or RCI Canada (other than permitted liens and encumbrances under the Indenture). The collateral package covers substantially all assets of RCI and RCI Canada, including the mining claims, equipment, intellectual property, and accounts receivable.
Tender & Support Agreement. On April 8, 2024, Pinnacle executed a Tender & Support Agreement with Torchlight, pursuant to which Pinnacle has irrevocably committed to: (i) tender all 3,600,000 of its shares of RCI common stock into the Tender Offer; (ii) consent to repayment of the Convertible Notes at par plus accrued interest at closing (rather than exercising conversion rights); and (iii) release all security interests upon receipt of the payoff amount. The Tender & Support Agreement contains customary representations and warranties, voting commitments, and restrictions on transfer. We have reviewed the Tender & Support Agreement and confirmed that it is duly executed and enforceable in accordance with its terms.
C. Options, Warrants, and Other Equity Rights
RCI has reserved 1,100,000 shares of common stock for issuance upon exercise of outstanding stock options and warrants. We reviewed the RCI 2019 Equity Incentive Plan (as amended, the "Equity Plan") and all outstanding option and warrant agreements.
The outstanding equity awards are summarized as follows:
The Equity Plan and each of the outstanding option and warrant agreements contain change-of-control provisions. Upon a change of control (as defined in the applicable award agreements), all unvested options accelerate and become immediately exercisable. Under the terms of the Tender Offer, holders of in-the-money options and warrants (those with exercise prices below $2.50 per share) will be entitled to receive a cash payment equal to the difference between the Tender Offer price and the exercise price, multiplied by the number of shares subject to the option or warrant. All outstanding options and warrants have exercise prices below $2.50 per share, meaning all awards are in the money. We have calculated the aggregate cash consideration payable in respect of option and warrant cancellation at closing to be approximately $1,150,000, subject to final confirmation based on the actual closing date.
Fully Diluted Share Count. The fully diluted share count of RCI is as follows:
The minimum condition under the Tender Offer requires that a majority of the fully diluted shares of RCI (i.e., at least 11,500,001 shares) be validly tendered and not withdrawn. Given that Pinnacle has committed to tender 3,600,000 shares (representing 20.0% of outstanding shares), and in light of the Board/Special Committee recommendation, we believe the minimum condition is likely to be satisfied.
D. Capitalization Table Summary
Set forth below is a summary capitalization table for RCI, presented for ease of reference (see also Appendix B for a more detailed capitalization summary):
As shown above, Pinnacle's aggregate ownership on a fully diluted basis (common shares plus conversion shares) represents approximately 32.6% (7,500,000 / 23,000,000) of RCI's fully diluted capitalization. The Tender & Support Agreement with Pinnacle therefore provides a meaningful anchor of committed shares for the Tender Offer.
IV. MINING TITLES AND PROPERTY INTERESTS
A. Hawk Ridge Project (Ontario, Canada)
The Hawk Ridge Project is the principal asset of RCI and the primary driver of value in the Transaction. The project is located in the Timiskaming District of Ontario, Canada, approximately 75 kilometers northeast of the City of Velmoran Lake. The project encompasses an aggregate area of approximately 12,400 hectares.
Mining Claims. The Hawk Ridge Project consists of 65 contiguous mining claims registered under the Ontario Mining Act, bearing Ontario Mining Claim Numbers 4271883 through 4271947 (inclusive). The claims are registered in the name of Ridgeline Cobalt (Canada) Inc. ("RCI Canada"), the wholly-owned Ontario subsidiary of RCI. A detailed listing of all 65 mining claims is set forth in Appendix C.
Title Review. We conducted a comprehensive title review of all 65 mining claims by searching the Ontario Mining Lands Administration System ("MLAS") and reviewing claim abstracts provided through the VDR. Our review confirmed that all 65 mining claims are in good standing with the Ontario Ministry of Mines as of the date of this memorandum. We verified that annual assessment work requirements have been satisfied for each claim, and that no claims are at risk of forfeiture or expiry for failure to comply with work requirements. The assessment work filings for the most recent assessment period were reviewed and found to be timely and properly documented.
NI 43-101 Technical Report. An independent NI 43-101 compliant technical report was prepared for the Hawk Ridge Project (the "Technical Report"), which establishes an indicated mineral resource of 28,600 tonnes of contained cobalt equivalent. The Technical Report was prepared by a qualified person as defined under National Instrument 43-101 and was filed on SEDAR+. The indicated resource estimate is based on extensive drilling, sampling, and geological modeling, and forms the basis for the valuation work conducted by Blackford Ames Securities LLC. We note that geological data and technical reports represent significant proprietary value and recommend that the integrity of this data be protected through appropriate representations, warranties, and post-closing data management protocols. We discuss this further in Section VIII below.
Royalty Interests and Encumbrances. We reviewed the claim abstracts and all documents in the VDR relating to royalties, net smelter return ("NSR") royalties, or other encumbrances on the Hawk Ridge claims. Our review identified one existing royalty obligation: a 2.0% NSR royalty in favor of Northwoods Exploration Corp. (predecessor claim holder), payable upon commencement of commercial production. The NSR royalty is documented in a Royalty Agreement dated March 15, 2019, between RCI Canada and Northwoods Exploration Corp. We note that because the Hawk Ridge Project is currently at the advanced exploration stage and has not commenced commercial production, the NSR royalty has not yet become payable. However, the existence of this royalty should be disclosed in the definitive transaction documents and factored into any mine development economics.
No other royalties, encumbrances, liens (other than the Pinnacle security interest described in Section III.B), or adverse claims affecting the Hawk Ridge mining claims were identified in our review.
Aboriginal/Indigenous Consultation Obligations. As a matter of Canadian constitutional law, the Crown (i.e., the Ontario provincial government) has a duty to consult with, and in certain circumstances accommodate, affected Indigenous communities before authorizing activities that may adversely affect established or asserted Aboriginal or treaty rights. We reviewed the consultation record provided in the VDR, which indicates that RCI Canada has engaged in consultation with the Matachewan First Nation and the Temagami First Nation, the two Indigenous communities with traditional territory claims overlapping or proximate to the Hawk Ridge Project area. To date, no objections or unresolved disputes have been raised by either First Nation in connection with the exploration activities conducted on the project. However, we note that the duty to consult is an ongoing obligation, and future development activities (including any transition from exploration to mine development and production) will require additional and potentially more extensive consultation with affected Indigenous communities.
Conclusion. No material defects in title to the Hawk Ridge mining claims were identified. We recommend that representations and warranties concerning title to the Hawk Ridge mining claims be designated as fundamental representations, with a 36-month survival period and a 100% cap ($45,000,000), given the central importance of this asset to the Transaction.
B. Iron Lake Project (Michigan, USA)
The Iron Lake Project is an early-stage exploration property located in Baraga County, Michigan, in the Upper Peninsula. The project encompasses an area of approximately 3,200 hectares.
Mineral Leases. The Iron Lake Project is held through two mineral leases issued by the Michigan Department of Environmental Quality (now administered by EGLE): Michigan DEQ Lease No. ML-2021-0334 and Michigan DEQ Lease No. ML-2021-0335. Both leases are held in the name of Ridgeline Cobalt Inc. directly. A summary of the lease terms is set forth in Appendix C.
Lease Terms. We reviewed both mineral leases in their entirety. Key terms include: (i) annual rental payments of $5.00 per acre; (ii) minimum annual work commitments of $25,000 per lease; (iii) ten-year initial term (expiring in 2031) with renewal options subject to compliance with lease conditions; and (iv) standard environmental and reclamation covenants. We confirmed that RCI has timely made all annual rental payments and has complied with minimum work commitments for both leases through the current lease year.
Review of Compliance. We reviewed RCI's compliance with the conditions of both mineral leases, including work commitments, reporting obligations, and environmental covenants. No material compliance deficiencies were identified. RCI has submitted all required annual reports and work summaries to EGLE.
Stage and Value. We note that the Iron Lake Project is at an early stage of exploration and does not have a defined mineral resource. No NI 43-101 or similar compliant technical report has been prepared for the Iron Lake property. Accordingly, the Iron Lake Project has limited standalone assessed value relative to the Hawk Ridge Project. The acquisition rationale for the Iron Lake Project is primarily strategic, as a potential domestic U.S. cobalt source that could complement Torchlight's broader North American cobalt supply chain.
No material defects in the mineral leases were identified.
C. Strategic Rationale for Title Review
We understand from Torchlight management and from discussions with Blackford Ames Securities LLC that the Transaction is driven principally by Torchlight's desire to secure domestic North American cobalt feedstock for its battery-grade cobalt sulfate refinery currently under construction in Sudbury, Ontario, with commissioning expected in the first quarter of 2025. The Hawk Ridge Project, with its NI 43-101 indicated resource of 28,600 tonnes of contained cobalt equivalent, represents a strategically significant feedstock source within relatively close proximity to the Sudbury refinery.
Given that the Hawk Ridge Project is the principal asset underlying the Transaction, the integrity of mining title is critical to the deal value and to Torchlight's ability to realize the strategic benefits of the acquisition. We accordingly recommend that representations and warranties concerning title to all mining claims and mineral leases (both Hawk Ridge and Iron Lake) be designated as fundamental representations in the definitive Offer-to-Purchase Agreement, with a 36-month survival period (expiring July 16, 2027, assuming a July 16, 2024 closing) and a 100% cap equal to the full $45,000,000 deal value.
V. ENVIRONMENTAL COMPLIANCE
A. Hawk Ridge Project — Ontario Environmental Review
We reviewed the environmental permits, filings, and compliance history for the Hawk Ridge Project in Ontario. The key regulatory framework applicable to the Hawk Ridge Project includes the Ontario Mining Act, the Ontario Environmental Protection Act, the Ontario Water Resources Act, and the Environmental Assessment Act (Ontario).
Exploration Permits. RCI Canada holds all required exploration permits for the activities currently being conducted on the Hawk Ridge Project. We reviewed the permits and associated environmental conditions, including conditions relating to water management, waste disposal, drill site rehabilitation, and protection of fish habitat and sensitive ecosystems. Our review confirmed that all permit conditions have been complied with and that no amendments, extensions, or new permits are currently required for the planned exploration activities.
Closure Plans. Under the Ontario Mining Act, an operator of a mine or mining operation in Ontario is required to file a closure plan before commencing advanced exploration or mine development. As the Hawk Ridge Project is currently in the advanced exploration stage but has not yet progressed to mine development, no closure plan filing has been required. We note, however, that any future transition to mine development will trigger the closure plan requirement, which will entail the preparation of detailed financial assurance estimates and the posting of closure security with the Ontario Ministry of Mines.
Environmental Site Assessments. We reviewed Phase I and Phase II environmental site assessments that were available in the VDR. The Phase I assessment, conducted in 2020, did not identify any recognized environmental conditions on the project site. A limited Phase II assessment, conducted in 2022 in connection with the expansion of drilling activities, similarly did not identify any contamination or environmental liabilities requiring remediation. We note that the assessments were conducted in accordance with Canadian Standards Association Z768-01 and Z769-00 standards.
Compliance History. We searched the records of the Ontario Ministry of the Environment, Conservation and Parks ("MECP") for any environmental orders, inspection reports, notices of violation, or compliance actions involving RCI Canada or the Hawk Ridge Project. No such orders, notices, or actions were identified. The Hawk Ridge Project has a clean compliance record with the Ontario environmental regulatory authorities.
Conclusion. No material environmental liabilities were identified in connection with the Hawk Ridge Project. As an exploration-stage property with limited development disturbance, the Hawk Ridge Project has minimal legacy environmental issues. However, we note that any future mine development will require a comprehensive environmental assessment process under Ontario's Environmental Assessment Act, including potentially a lengthy public review and Indigenous consultation process, and will require the filing of a closure plan with associated financial assurance.
B. Iron Lake Project — Michigan Environmental Review
We reviewed the environmental permits, filings, and compliance history for the Iron Lake Project in Michigan. The key regulatory framework applicable to the Iron Lake Project includes the Michigan Natural Resources and Environmental Protection Act ("NREPA"), administered by the Michigan Department of Environment, Great Lakes, and Energy ("EGLE"), and the environmental covenants contained in the mineral leases (Michigan DEQ Lease Nos. ML-2021-0334 and ML-2021-0335).
Permits and Compliance. RCI holds all required EGLE permits for the exploration activities currently being conducted on the Iron Lake property. We reviewed the environmental covenants in both mineral leases, which require compliance with NREPA provisions relating to wetlands protection, soil erosion and sedimentation control, and hazardous materials management. Our review confirmed that RCI has complied with all environmental covenants in the leases and that no notices of violation, enforcement actions, or outstanding remediation orders have been issued by EGLE in connection with the Iron Lake Project.
Wetlands and Endangered Species. Given the location of the Iron Lake Project in Baraga County, Michigan, which encompasses significant wetland areas and habitat for sensitive species, we reviewed RCI's wetlands delineation and endangered species surveys. The surveys, conducted in 2021, identified the presence of wetlands on portions of the project area but concluded that the planned exploration activities would not result in any unpermitted impacts to jurisdictional wetlands. No endangered or threatened species were identified within the active exploration areas, although the presence of the eastern massasauga rattlesnake (a species listed as threatened under the Endangered Species Act) has been documented in the broader Baraga County region. Future development activities may require additional biological surveys and permitting.
Conclusion. No material environmental liabilities were identified in connection with the Iron Lake Project. As with the Hawk Ridge Project, the early exploration stage of the Iron Lake property limits the extent of existing environmental disturbance and associated liabilities.
C. Environmental Risk Assessment and Recommendations
Based on our review of both the Hawk Ridge and Iron Lake projects, we assess the current environmental risk as low. However, we note the following considerations:
First, while both properties are currently in the exploration stage with limited environmental disturbance, any transition to mine development and production will significantly increase environmental risks, regulatory requirements, and potential liabilities. Torchlight should be aware that substantial additional environmental permitting and compliance efforts will be required as part of any mine development plan.
Second, we recommend that the definitive transaction documents include environmental representations and warranties with a standard survival period (18 months for general environmental representations, coterminous with the general escrow period). We further recommend that environmental indemnification be covered under the general indemnification structure described in Section XI.
Third, we note that the representations and warranty insurance policy to be placed with Northern Shield Specialty Insurance Co. (Policy No. NSW-RWI-2024-05117) may contain customary environmental exclusions, including exclusions for known environmental liabilities and, in some cases, exclusions for certain categories of unknown environmental liabilities (such as cleanup costs associated with pre-existing contamination). We recommend that Calderwood & Harkness coordinate with Cartwright Insurance Group Ltd. (the insurance broker) during the policy negotiation process to ensure that environmental coverage under the R&W policy is as broad as commercially available.
VI. MATERIAL CONTRACTS
A. Convertible Note Indenture
As described in detail in Section III.B above, RCI is party to an Indenture dated June 30, 2022, with Pinnacle Venture Resources Fund II, LP, governing the $7,800,000 in 6.5% Senior Secured Convertible Notes due June 30, 2026. The Indenture is the most significant material contract to which RCI is a party, both in terms of the magnitude of the financial obligation and in terms of the change-of-control consent requirement.
The change-of-control provisions in the Indenture require that the noteholder (Pinnacle) be given the opportunity to elect repayment at par plus accrued interest or conversion into common stock upon a change of control. Pinnacle has consented to repayment at closing pursuant to the Tender & Support Agreement executed on April 8, 2024. As set forth in Section III.B, the total expected payoff at closing is $8,075,014 (principal of $7,800,000 plus accrued interest of $275,014).
We reviewed the collateral package securing the Convertible Notes and confirmed that the security interest covers substantially all assets of RCI and RCI Canada. At closing, upon repayment of the notes in full, Pinnacle will be required to release all security interests and provide UCC-3 termination statements (Delaware and Michigan) and an Ontario PPSA discharge. The mechanics for the release of security interests should be addressed in the closing conditions of the definitive Offer-to-Purchase Agreement.
B. Toll-Processing Arrangements
RCI derived its fiscal year 2023 revenue of approximately $1.2 million from toll-processing arrangements and pilot production activities associated with the Hawk Ridge Project. We reviewed the toll-processing agreements provided in the VDR. The principal counterparty is Northern Minerals Processing Inc., an Ontario corporation, which provides toll-milling and cobalt concentrate processing services under a Toll-Processing Agreement dated October 1, 2022 (the "Toll-Processing Agreement").
The Toll-Processing Agreement has an initial term of three years (expiring September 30, 2025) with automatic one-year renewal periods unless terminated by either party upon 90 days' prior written notice. The agreement contains a change-of-control provision requiring RCI Canada to provide Northern Minerals Processing Inc. with written notice of any change of control at least 30 days prior to the effective date of such change of control. Importantly, the change-of-control provision is a notice requirement only and does not give the counterparty a right to terminate or renegotiate upon a change of control. We recommend that the required notice be provided to Northern Minerals Processing Inc. in a timely manner prior to the closing date.
Additional small-scale pilot production and sample processing agreements were reviewed. All such agreements are standard in form and do not contain change-of-control provisions requiring consent or conferring termination rights.
C. Mining and Exploration Contracts
We reviewed the contracts governing drilling operations, geological consulting services, and camp and logistics services for both the Hawk Ridge and Iron Lake projects. Key contracts reviewed include:
• Drilling services agreement with Boréal Diamond Drilling Ltd. (Ontario) for the Hawk Ridge Project, dated January 15, 2023 (annual term, renewable);
• Geological consulting agreement with Precambrian Geosciences Inc. (Ontario) for geological mapping, sampling, and data analysis related to the Hawk Ridge Project, dated March 1, 2022 (ongoing engagement);
• Camp management and logistics services agreement with Northern Outpost Services Corp. (Ontario) for the Hawk Ridge Project camp facility, dated May 1, 2022; and
• Drilling services agreement with Upper Peninsula Drilling Co. (Michigan) for the Iron Lake Project, dated April 15, 2023 (annual term, renewable).
All of the foregoing contracts contain standard industry terms and conditions. No unusual provisions, onerous obligations, or change-of-control restrictions were identified. The contracts are generally assignable without consent and do not impose minimum spending commitments beyond those already planned by RCI.
D. Employment and Management Agreements
We reviewed the employment agreements for the key executive officers of RCI, specifically:
Gordon McTavish, CEO. Mr. McTavish's employment agreement, dated January 1, 2020 (as amended), provides for a base salary of $275,000 per annum, an annual bonus target of 50% of base salary (based on achievement of performance objectives set by the Board), and participation in the Equity Plan. The agreement contains a change-of-control provision that entitles Mr. McTavish to severance of 18 months of base salary plus the greater of his target bonus or most recent actual bonus upon either (a) termination by RCI without cause within 12 months following a change of control, or (b) resignation by Mr. McTavish for good reason within 12 months following a change of control (a "double trigger" provision). The estimated maximum change-of-control severance for Mr. McTavish, assuming termination or resignation for good reason, is approximately $550,000 (18 months × $275,000/12 = $412,500 salary, plus $137,500 bonus component). The agreement also contains 12-month non-compete and 18-month non-solicitation covenants.
Elaine Bricker, CFO. Ms. Bricker's employment agreement, dated March 1, 2021, provides for a base salary of $215,000 per annum, an annual bonus target of 40% of base salary, and participation in the Equity Plan. The change-of-control severance provision is similar to Mr. McTavish's (18 months base salary plus bonus upon double trigger), with an estimated maximum severance of approximately $430,000. The agreement contains 12-month non-compete and 12-month non-solicitation covenants.
We recommend that Torchlight budget for aggregate potential change-of-control severance obligations of approximately $980,000 for the two key executives, recognizing that these obligations are contingent upon a qualifying termination or resignation event following the change of control. We understand from discussions with Torchlight management that Mr. McTavish is expected to be retained in a leadership role post-closing, which may reduce the likelihood of severance payments.
E. Leases and Real Property
RCI's principal executive offices are located at 44 Lakeshore Drive, Suite 300, Marquette, Michigan 49855, pursuant to a commercial office lease (the "Office Lease") with Lakeshore Properties LLC. We reviewed the Office Lease and noted the following key terms: initial term of five years commencing January 1, 2021, with two one-year renewal options; base rent of $4,200 per month; and standard tenant improvements and maintenance responsibilities.
The Office Lease contains an assignment clause that prohibits assignment or subletting without the landlord's prior written consent, which consent shall not be unreasonably withheld. We believe that the Tender Offer and subsequent merger should not constitute an "assignment" under the Office Lease for purposes of the consent requirement, as RCI will continue as the tenant entity (or its successor by merger). However, we recommend that notice of the Transaction be provided to the landlord and that consent to any subsequent assignment or subletting be obtained if Torchlight intends to consolidate RCI's operations into its existing offices.
RCI does not own any real property. All mining interests are held through mining claims (Hawk Ridge) and mineral leases (Iron Lake), as described in Section IV above.
F. Insurance Policies
We reviewed the existing insurance policies maintained by RCI, including:
• Directors' and officers' liability insurance policy (D&O) — underwritten by Great Northern Mutual Insurance Co., with a $5,000,000 aggregate limit; policy period: January 1, 2024, through December 31, 2024;
• Commercial general liability insurance policy — underwritten by Great Northern Mutual Insurance Co., with a $2,000,000 per-occurrence limit and $5,000,000 aggregate limit;
• Property insurance covering equipment and camp facilities at Hawk Ridge and Iron Lake; and
• Environmental impairment liability insurance — underwritten by Sentinel Environmental Insurance Co., with a $3,000,000 aggregate limit.
With respect to the D&O policy, we recommend that Torchlight arrange for a "tail" D&O policy (also known as an extended reporting period endorsement) to cover the current directors and officers of RCI for claims made after the closing of the Transaction but arising from acts or omissions occurring during the pre-closing period. Tail D&O coverage is standard in change-of-control transactions and is typically provided for a period of six years following the closing. We recommend that the cost of the tail D&O policy be addressed in the definitive transaction documents and allocated as a closing expense of RCI.
G. Summary of Contract Risk Items
Based on our review of material contracts, we have identified the following contracts requiring consent, notice, or other action in connection with the Transaction:
The convertible note consent is the most significant contract-related requirement in the Transaction and has been addressed through the Pinnacle Tender & Support Agreement. The remaining notice requirements are ministerial in nature and should be completed as part of the pre-closing checklist.
VII. LITIGATION AND PROCEEDINGS
A. Pending Litigation
We conducted comprehensive litigation searches of the following court systems and dockets:
• U.S. federal courts (PACER system) — all districts
• Delaware Court of Chancery and Delaware Superior Court
• Michigan circuit courts (Marquette County, Baraga County, and Wayne County)
• Ontario Superior Court of Justice and Ontario Court of Justice (Timiskaming District and Toronto)
Our searches covered Ridgeline Cobalt Inc., Ridgeline Cobalt (Canada) Inc., and the current directors and officers of RCI (in their capacities as directors or officers of RCI). We searched for all actions filed within the past ten years in which any of the foregoing were named as a party, whether as plaintiff or defendant.
Finding: No material pending litigation was identified against RCI, RCI Canada, or any of RCI's current directors or officers in their capacities as such. A small number of routine administrative matters (vendor payment disputes, insurance subrogation claims) were identified, none of which involve amounts in controversy exceeding $15,000 individually or $50,000 in the aggregate, and none of which are considered material for purposes of this review.
B. Threatened Litigation
We reviewed the correspondence files maintained by RCI and provided through the VDR for any demand letters, cease-and-desist notices, pre-litigation settlement demands, or other communications that could indicate threatened claims or litigation.
Finding: No material threatened litigation was identified. The correspondence files do not contain any communications from third parties asserting material claims against RCI or its directors and officers.
C. Regulatory Proceedings
We reviewed the records and filings of the following regulatory authorities for any pending or threatened regulatory proceedings involving RCI:
• U.S. Securities and Exchange Commission (SEC EDGAR system and enforcement docket)
• Michigan Department of Environment, Great Lakes, and Energy (EGLE)
• Ontario Ministry of Mines
• Ontario Ministry of the Environment, Conservation and Parks (MECP)
• Investment Industry Regulatory Organization of Canada (IIROC)
Finding: No material pending or threatened regulatory proceedings were identified. RCI has not received any subpoenas, investigative demands, or formal or informal inquiries from the SEC or any other regulatory body (other than routine examinations and filings in the ordinary course of business).
D. Litigation Risk Assessment
Based on our comprehensive review, we assess the overall litigation risk for RCI as low. The absence of material pending, threatened, or regulatory litigation is a positive finding that supports the Transaction. We recommend that the definitive transaction documents include standard litigation representations and warranties, with survival and indemnification consistent with the general representation framework described in Section XI.
A summary of our litigation search results is provided in Appendix E.
VIII. INTELLECTUAL PROPERTY
A. Patents and Patent Applications
We reviewed the VDR for any patents or patent applications held by RCI or RCI Canada. Our review confirmed that RCI does not hold any issued patents and does not have any pending patent applications. This is consistent with RCI's profile as a junior mining exploration company. Mining companies at this stage of development typically do not possess patentable technologies, as their value is derived primarily from mineral resource assets and proprietary geological data rather than technological inventions.
B. Trademarks and Trade Names
RCI uses the trade names "Ridgeline Cobalt" and "RCI" in its business operations and public filings. We searched the records of the United States Patent and Trademark Office ("USPTO") and the Canadian intellectual Property Office ("CIPO") for trademark registrations or pending applications in the name of RCI.
Our search identified the following:
• "RIDGELINE COBALT" — U.S. Trademark Application Serial No. 88/726,445, filed October 15, 2019, registered June 2, 2020 (Registration No. 6,061,238), for use in connection with mining exploration and mineral processing services (Class 37 and Class 40). The registration is current and in good standing.
• "RIDGELINE COBALT" (Canada) — Canadian Trademark Application No. 1,987,342, filed November 1, 2019; registered March 15, 2021 (Registration No. TMA1,062,578). The registration is current and in good standing.
No third-party challenges, oppositions, or infringement claims relating to RCI's trademarks were identified.
C. Proprietary Geological Data and Technical Reports
The most significant category of intellectual property held by RCI consists of proprietary geological, geochemical, and geophysical data generated in connection with the exploration of the Hawk Ridge and Iron Lake projects. This data includes, but is not limited to:
• Drill core samples, drill logs, and assay results;
• Geological maps, cross-sections, and three-dimensional geological models;
• Geochemical survey data (soil, till, and rock sampling);
• Geophysical survey data (airborne magnetic, electromagnetic, and ground-based induced polarization surveys);
• The NI 43-101 Technical Report for the Hawk Ridge Project (establishing an indicated resource of 28,600 tonnes contained cobalt equivalent); and
• Internal geological interpretations, resource models, and technical memoranda.
This proprietary geological data represents a significant component of the value of RCI's assets. The data has been accumulated over several years of exploration work at substantial cost, and the NI 43-101 Technical Report for the Hawk Ridge Project provides the basis upon which the valuation of the Hawk Ridge Project has been conducted by Blackford Ames Securities LLC.
We recommend that representations and warranties concerning the ownership, accuracy, and completeness of proprietary geological data and the NI 43-101 Technical Report be designated as fundamental representations in the definitive transaction documents, with enhanced survival and indemnification protections. We further recommend that Torchlight implement post-closing data management protocols to ensure the security and integrity of the geological data, including appropriate physical and electronic access controls and backup procedures.