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Lomiko Metals Inc. (“Lomiko Metalsâ€) (TSX-V: LMR, OTC: LMRMF, FSE: DH8C)  At the request of the Ontario Securities Commission, Lomiko Metals is issuing this release in order to better inform shareholders of the transaction that will be presented at the Annual Special General Meeting scheduled for November 29, 2019 at 11:00 am (Vancouver time) at Suite 1400, 885 West Georgia Street, Vancouver, BC, V6C 3E8 (the “Meetingâ€). Lomiko Metals encourages shareholders to read, in detail, the Information Circular mailed to shareholders dated October 25, 2019 and filed on SEDAR at www.sedar.com.
Sale of Assets
By agreement dated July 31, 2019, Lomiko Metals has agreed to sell its wholly-owned subsidiary, Lomiko Technologies Inc. (‘LTI’) to Promethieus Technologies Inc. (the “Purchaserâ€) for $1,236,625 plus $193,614.32 representing reimbursement of expenses (the “Asset Sale Transactionâ€). The transaction is non-arm’s length as (1) A. Paul Gill is a director and officer of Lomiko Metals, a director of LTI and a director of the Purchaser; (2) Satvinder (Sat) Samra is a director of Purchaser and a shareholder of Lomiko Metals; and (3) Lomiko Metals is a 20% shareholder of the Purchaser at present, prior to its IPO and financing.
Lomiko
Metals Inc.’s independent directors to this transaction are Julius
Galik and Gabriel Erdelyi (the “Independent Directorsâ€) which comprise a
Review Committee (‘Committee’) reviewing the transaction.
Assets of Lomiko Technologies
Smart Home Devices Ltd. (“SHDâ€)
SHD
is a private company developing a series of energy saving, connected
building automation and security products and is focused on developing
smart home automation and security devices for homes, offices,
industrial buildings and hotels. SHD was formed to commercialize
intellectual property jointly under development at the Megahertz Power
Systems innovation lab (the majority shareholder of SHD and the initial
developer of the Spider Charger concept). SHD technology focuses on
power savings, connectivity and security. LTI holds 1,792,269 shares of
SHD.
Lomiko
Metals previously accounted for the equity value of SHD through direct
costs that were incurred and in particular, incorporation expenses,
purchase of inventory parts, patents, website, and share value. Lomiko
Metals shareholding in SHD was diluted to 18.25% which caused
significant loss of control over the future of SHD. Lomiko Metals was
of the opinion that it should discontinue the accounting for SHD using
the equity method. As at July 31, 2018, Lomiko Metals assessed that the
investment in SHD was impaired and recorded a write-down of $1,136,574
to the investment to $1.
Graphene ESD Corp. (“G-ESDâ€)
G-ESD
is a private company developing energy storage-based graphene
platelets. On December 12, 2014, LTI purchased 1,800 shares of G-ESD
Series A Preferred Stock at a purchase price of $101.27 US per share for
a total consideration of $182,281 US. Each Series A Preferred Stock
held by LTI may be convertible to common stock at the option of LTI and
without the payment of additional consideration. Dividends would be
payable at the rate per annum of $4.05 per share; however, over the
period of four years there has been no activity in G-ESD and G-ESD
continued to accumulate losses. As of July 31, 2019, LTI equity value in
G-ESD was $56,572 and management assessed that the value in G-ESD was
impaired and should be written off.
Reasons for the Asset Sale Transaction
Lomiko
Metals has been unsuccessful in financing LTI and its assets. Both SHD
and G-ESD achieved progress and created prototypes with SHD achieving
partial advancement to underwriter’s lab testing and patent filings. In
2018 it became apparent that Lomiko Metals could not make any further
cash investments to the assets as Lomiko Metals’ primary focus was the
graphite project and alternative financing was required for LTI. Without
further funding, the assets were considered without value.
Lomiko
Metals had been funding various tech start-ups as a way to create
alternative income sources. It had funded from 2014 to present Graphene
3D Lab, G-ESD, SHD and Promethieus Technologies Inc. The idea was to
create a revenue-generating subsidiary that could act as a hedge against
the vagaries of the junior mining market where the ability to raise
funds for projects was and is very inconsistent. Despite some initial
success with Graphene 3D Lab and recovery of some of the funds put
forward, the other projects did not see commercial success and were
taxing the treasury. Further, the market capitalization of Lomiko
Metals become smaller and smaller and the percentage of technology
interest increased to the point in January 2018 that the BC Securities
Commission requested Lomiko Metals provide comment on whether it should
undergo a Change of Business to a technology issuer. It was at that
time the concept of spinning out or creating a technology vehicle was
conceived. In 2018 Management sought funding sources for the
advancement and/or sale of technology assets and settled on a plan to
change the focus of the subsidiary Promethieus to a technology incubator
that could qualify for listing in Europe as disclosed in April 6, 2018
and June 26, 2018 news releases. The process is currently ongoing and
confirmation of listing approval on an EU Exchange is still pending but
near completion.
An
initial concept of a sale of the technology assets to Promethieus was
proposed by Management as a way to separate the metals and technology.
In September 2018 Promethieus changed its name to Promethieus
Technologies Inc. It was clear that Lomiko Metals needed funding in
2018-19 to complete its option and drilling and administration would tax
the treasury. During the progress of the strategy, the Independent
Directors were provided progress reports regarding the inability to
complete funding for Promethieus, SHD, and G-ESD during Directors
meetings. In 2019, Lomiko Metals was approached by the management of
the Purchaser which made an offer to purchase SHD for $ 350,000.
Negotiations then ensued among the parties. Promethieus also became
interested in licenses to manufacture SHD technology which was held by
LTI and they were included in the negotiations. After examination,
Promethieus then offered to acquire all the assets of LTI and that
included G-ESD shares. Lomiko Metals then arranged to transfer its
direct holdings of SHD to LTI. The negotiations culminated in July 2019
with Promethieus offering to purchase all of the shares of LTI. The
Committee worked hard to establish a fair value for LTI and its sale.
The Committee’s main focus was to recover Lomiko Metals’ initial
investment which was achieved.
In
determining that the terms and conditions of the Asset Sale Transaction
contemplated thereby are in the best interests of the shareholders of
Lomiko Metals, the Committee considered and relied upon a number of
factors, including, among other things, the following:
It is apparent that the status-quo of Lomiko Metals funding LTI was not economically viable as the assets were not advancing;
- the consideration to be paid pursuant to the Asset Sale Transaction is all cash;
- the
Asset Sale Transaction is the result of a strategic review process
conducted by a Committee comprised of Lomiko Metals Independent Board of
Directors, which included reviewing a broad range of strategic
alternatives available to Lomiko Metals;
- The
Committee reviewed Management’s equity funding efforts for Lomiko
Metals as a whole and the specific projects to discover any ways to fund
LTI without a sale of the assets;
- The Committee reviewed Management efforts to seek funding via a debenture or loan;
- The
Committee communicated with the CEO of Promethieus to discover if the
maximum value had been attained by Lomiko Metals for the assets;
- The
Committee confirmed with Auditors the expenditures of Lomiko Metals to
fund LTI in the past and found the sale price was equal to the costs
incurred by Lomiko Metals;
- The Committee reviewed Management’s effort to attract buyers and investors in the projects;
- The
Committee considered an evaluation for the projects but determined that
it would not be cost-effective or beneficial for Lomiko Metals, as the
buyer would not pay more than the negotiated price;
- At
the conclusion of this Strategic Review, the Committee unanimously
determined that the Asset Sale Transaction was the best alternative
among the limited opportunities available to Lomiko Metals to maximize
shareholder value having regard to Lomiko Metals current financial and
operational position;
- the
resolution approving the Asset Sale Transaction must be approved by a
special resolution by a majority of the common shares represented and
voted at the Meeting after excluding the votes required to be excluded
under MI 61-101 (as defined below);
- the
terms and conditions of the Asset Sale Transaction, including the
parties’ respective representations, warranties and covenants, and the
conditions to their respective obligations have been disclosed;
- the Committee believes that it is likely that the limited conditions to complete the Asset Sale Transaction will be satisfied;
- to
the knowledge of the Committee, there are no material regulatory issues
which are expected to arise in connection with the Asset Sale
Transaction so as to prevent completion, and it is anticipated that all
required regulatory clearances are obtained; and
- after
conducting a review of Lomiko Metals’ financing and strategic
alternatives, the Committee has determined that Lomiko Metals
subsidiaries could not continue to operate as going concerns and was not
likely to create greater value for shareholders than the value obtained
for shareholders pursuant to the Asset Sale Transaction.
The
foregoing summary of the information and factors considered by the
Committee is not, and is not intended to be, exhaustive. In view of the
variety of factors and the amount of information considered in
connection with its evaluation of the Asset Sale Transaction, the
Committee did not quantify or otherwise attempt to assign any relative
weight to each specific factor considered in reaching its conclusion and
recommendation. The Committee’s recommendations were made after
consideration of all of the above-noted factors and in light of the
Committee’s collective knowledge of the business, financial condition
and prospects of Lomiko Metals.
Summary of Terms
The
following summary of the Asset Sale Transaction is qualified in its
entirety by the terms of the Share Purchase Agreement, a copy of which
has been filed on SEDAR at www.sedar.com. Any capitalized terms and
section reference not otherwise defined herein shall have the meanings
set forth in the Share Purchase Agreement.
the Purchaser will acquire all of the shares of LTI;
- the
purchase price for all of the common shares of LTI is Cdn. $1,236,625
plus $193,614.32 representing reimbursement of expenses;
- pending
approval of the Asset Sale Transaction at the meeting and satisfaction
of all conditions to closing set forth in the Share Purchase Agreement,
closing is scheduled to occur within five (5) business days after all
closing conditions have been met, and in any event no later than
December 31, 2019;
- major
conditions to closing are: (1) the approval of the Asset Sale
Transaction at the Meeting; (2) a financing to be completed by the
Purchaser of $3,670,750; (3) the approval of the TSX Venture Exchange;
and (4) the representations and warranties being correct at the time of
closing and no material adverse change having occurred at the time of
closing;
- Lomiko Metals has made normal-course representations and warranties; and
- both
Lomiko Metals and the Purchaser will be responsible for the payment of
their own transaction costs, including legal, accounting, tax and
regulatory compliance costs.
Independent Valuation
Lomiko
Metals has relied on an exemption to a Formal Valuation based on MI
61-101 Section 5(5)(g). Lomiko Metals CFO, Jacqueline Michael, has
verified Lomiko Metals expenditures and expenses for the financial years
2015, 2016, 2017 and 2018 relating to LTI.
TSX Venture Exchange Application
Lomiko
Metals has filed its application for approval of the Asset Sale
Transaction with the TSX Venture Exchange and has received conditional
approval.
Effect of the Asset Sale Transaction on the Corporation and Plans of the Corporation Post-Closing
Assuming
that the Asset Sale Transaction is approved at the Meeting and
subsequently completed according to the terms disclosed herein, Lomiko
Metals will still continue its exploration in the mining sector.
Summary of Anticipated Tax Consequences of Asset Sale Transaction
Lomiko
Metals did not retain any formal tax opinion on the transaction but is
of the view that there are no anticipated tax consequences passed on to
the shareholders.
Anticipated Ramifications of Failure to Approve the Asset Sale Transaction
If
the Asset Sale Transaction resolution is not approved by shareholders
at the meeting, Lomiko Metals shall continue with its current
operations. The Committee will continue to evaluate and consider
strategic alternatives going forward but has unanimously recommended
that shareholders vote in favour of the Asset Sale Transaction as they
believe it is in the best interests of Lomiko Metals for the reasons
set out herein.
Required Shareholder Approvals for the Asset Sale Transaction
Canada Business Corporations Act
Although
the Asset Sale Transaction is in the ordinary course of business, it is
a non-arm’s length transaction that requires that the Asset Sale
Transaction resolution must be approved by disinterested shareholder
approval.
TSX Venture Exchange Policy 5.9 and MI 61-101
Multilateral
Instrument 61-101 – Protection of Minority Security Holders in Special
Transactions (“MI 61-101â€) is intended to regulate certain transactions
to ensure equality of treatment among security holders, generally
requiring enhanced disclosure, approval by a majority of security
holders (excluding interested or related parties), independent
valuations and, in certain circumstances, approval and oversight of the
transaction by a special committee of independent directors.
Lomiko
Metals is subject to the provisions of MI 61-101 because the common
shares are listed on the TSX Venture Exchange and Policy 5.9 of the
TSX-V Corporate Finance Manual (the “Policy 5.9â€) incorporates MI 61-101
into the policies of the TSX Venture Exchange and Policy 5.9 applies to
all issuers listed on the TSX Venture Exchange.
Lomiko
Metals is a 20% holder of the Purchaser and this creates a requirement
for review under MI 61-101. MI 61-101 states that a “related party
transaction†means, for an issuer, a transaction between the issuer and a
person that is a related party of the issuer at the time the
transaction is agreed to, whether or not there are also other parties to
the transaction, as a consequence of which, either through the
transaction itself or together with connected transactions, the issuer
directly or indirectly (a) purchases or acquires an asset from the
related party for valuable consideration, (b) purchases or acquires, as a
joint actor with the related party, an asset from a third party if the
proportion of the asset acquired by the issuer is less than the
proportion of the consideration paid by the issuer, (c) sells, transfers
or disposes of an asset to the related party,….â€. Pursuant to MI
61-101 this is a “related party transaction†and minority approval will
be sought at the Meeting.
Further,
the Purchaser’s directors are A. Paul Gill and Sat Samra. Mr. Gill is a
director and officer of Lomiko Metals and LTI. Mr. Samra is a director
and officer of SHD and a shareholder of Lomiko Metals. Therefore, Mr.
Gill’s and Mr. Samra’s common shares will be excluded from voting on
such matters for purposes of determining whether the required “minority
approval†has been obtained as provided by MI 61-101. Mr. Gill
currently holds 5,725,910 common shares of Lomiko Metals, directly and
indirectly. Mr. Samra holds 1,976,474 common shares of Lomiko Metals,
directly and indirectly.
Based
upon the Committee’s consideration of, among other things, the current
market conditions and other relevant matters as set forth herein, the
Committee has unanimously determined that the terms and conditions of
the Asset Sale Transaction contemplated thereby are fair to the
shareholders and in the best interests of Lomiko Metals and the
shareholders.
A
resolution shall be placed before shareholders at the Meeting scheduled
for November 29, 2019 at 11:00 am (Vancouver time) at Suite 1400, 885
West Georgia Street, Vancouver, BC, V6C 3E8.
For more information on this transaction please contact Gabriel Erdelyi at [email protected].
On Behalf of the Board,
LOMIKO METALS INC.
“Gabriel Erdelyiâ€
Gabriel Erdelyi
Director
