Hertz Energy Inc. (CSE: HZ) has announced that Coloured Ties Capital Inc. (TSXV: TIE), a related party, has agreed to subscribe for up to 2,777,777 HD Units in the company's previously announced non-brokered private placement of up to $1,607,400. The subscription is priced at $0.18 per HD Unit for gross proceeds of up to $500,000. The participation constitutes a related party transaction under Multilateral Instrument 61-101, adding a layer of regulatory scrutiny that investors in junior exploration companies may wish to monitor closely.

Key Points

  • Hertz Energy Inc. (CSE: HZ, OTCQB: HZLIF, FSE: A340) is a British Columbia-based junior exploration company
  • Coloured Ties Capital Inc. has agreed to subscribe for up to 2,777,777 HD Units at $0.18 each, for gross proceeds of up to $500,000
  • Upon completion, Coloured Ties is expected to hold approximately 14.96% of issued shares on a non-diluted basis and approximately 23.05% on a partially diluted basis
  • The offering remains subject to regulatory approval, including final approval of the Canadian Securities Exchange

Coloured Ties Capital's Stake in Hertz Energy Before and After the Offering

Coloured Ties currently holds 1,176,300 common shares of Hertz Energy, representing approximately 6.21% of issued and outstanding common shares. Assuming the offering closes as announced, Coloured Ties is expected to hold 3,954,077 common shares, representing approximately 14.96% on a non-diluted basis. On a partially diluted basis — assuming exercise of the warrants comprising the HD Units subscribed for by Coloured Ties and no other issuances — the holding would rise to approximately 23.05%. The company confirmed the offering will not result in a change of control.

Related Party Transaction Classification and MI 61-101 Exemptions

The participation of Coloured Ties is classified as a related party transaction under MI 61-101 because CEO Kal Malhi and his spouse together beneficially own or control more than 50% of Coloured Ties' outstanding common shares. Malhi also serves as CEO and director of both companies and declared his interest, abstaining from the approval vote. Hertz Energy is relying on exemptions from both the formal valuation requirement and minority shareholder approval requirement, as neither the fair market value of securities issued nor consideration paid exceeds 25% of the company's market capitalisation.

Closing Conditions and Securities Hold Period for the HD Unit Offering

Completion of the offering remains subject to conditions including receipt of all necessary regulatory approvals and final approval of the Canadian Securities Exchange. All securities issued under the offering, along with any warrant shares issued upon exercise of warrants, will be subject to a statutory hold period expiring four months and one day from the date of issuance. The company noted the material change report will not be filed at least 21 days before the anticipated closing date, citing the late settlement of Coloured Ties' participation and its desire to complete the offering expeditiously.