Item 1.01 Entry into a Material Definitive
Agreement.
Bow Energy/Blue Sky Share Exchange
Effective on August 31,
2018, Petrolia Energy Corp. (the “
Company
”, “
we
” and “
us
”), entered into
and closed the transactions contemplated by a Share Exchange Agreement with Blue Sky Resources Ltd. (“
Blue Sky
”
and the “
Exchange Agreement
”).
The President, Chief Executive
Officer and 100% owner of Blue Sky is Ilyas Chaudhary, the father of Zel C. Khan, the Company’s Chief Executive Officer.
Mr. Chaudhary indirectly owns and controls BSIH Ltd. (“
BSIH
”), which is a significant shareholder of the Company.
Additionally, prior to the acquisition of Bow Energy Ltd. (“
Bow
”) (which we acquired pursuant to an Arrangement
Agreement dated November 30, 2017, which acquisition closed on February 27, 2018), BSIH, and as a result of his ownership and control
of BSIH, Mr. Chaudhary, controlled Bow.
Pursuant to the Exchange
Agreement, we exchanged 100% of the ownership of Bow, in consideration for:
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(a)
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70,807,417 shares of the Company’s common stock owned and controlled by Mr. Chaudhary and
BSIH (the “
Blue Sky Shares
”);
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(b)
|
$100,000 in cash (less certain advances paid by Blue Sky or Bow to the Company since April 1, 2018);
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(c)
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the assumption of certain payables owed by Bow totaling $1,696,332 (which includes $730,000 owed
under the terms of a Loan Agreement, as amended, originally entered into by Bow, but not the subsequent $800,000 borrowed by Bow
pursuant to the amendment to the Loan Agreement dated May 9, 2018 (which obligation is documented by a Debt Repayment Agreement));
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(d)
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20% of Bow Energy International Holdings, Inc, which is wholly-owned by Bow (“
Bow EIH
”)(which
entity’s subsidiaries own certain Production Sharing Contracts (the “
PSC
”) and certain other participating
assets), pursuant to an Assignment Agreement;
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(e)
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certain carry rights described in greater detail in the Exchange Agreement, providing for Blue
Sky to carry the Company for up to the next $10 million of aggregate costs in BOW EIH and the PSC assets, with any profits from
BOW EIH being distributed 80% to Bow and 20% to the Company, pursuant to a Petrolia Carry Agreement (the “
Carry Agreement
”);
and
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(f)
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and a 3% royalty, after recovery of (i) the funds expended by Bukit Energy Bohorok Pte Ltd, which
is wholly-owned by BOW EIH in the Bohorok, Indonesia PSC (the “
Bohorok PSC
”) since July 1, 2018, plus (ii) $3,546,450
(i.e., ½ of Bow’s share of the prior sunk cost of the Bohorok PSC), which royalty is evidenced by an Assignment of
Petrolia Royalty (the “
Royalty Assignment
”).
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The Exchange Agreement
closed on August 31, 2018 and has an effective date of July 1, 2018.
The Exchange Agreement
contains customary and standard representations and warranties of the parties, indemnification obligations (which survive for six
months following the closing), and closing conditions. The Exchange Agreement may be terminated by either party for any reason
prior to closing.
The Company plans to cancel
the Blue Sky Shares and return such shares to the status of authorized but unissued shares of common stock after closing.
Tariq Chaudhary, the Company’s
Chief Financial Officer, is, and will continue serving as the Chief Financial Officer of Bow following the closing.
The foregoing description
of the Exchange Agreement, Debt Repayment Agreement, Assignment Agreement, Carry Agreement and Royalty Agreement, do not purport
to be complete and are qualified in their entirety by reference to the Exchange Agreement a copy of which is attached hereto as
Exhibit 2.1
, and the Debt Repayment Agreement, Assignment Agreement, Carry Agreement and Royalty Agreement, copies of which
form exhibits to the Exchange Agreement as attached hereto, all of which are incorporated herein by reference.
Director Convertible Notes
On August 17, 2018, the
Company sold an aggregate of $90,000 in Convertible Promissory Notes (the “
Director Convertible Notes
”), to
the Company’s directors, Ivar Siem ($20,000); Leo Womack ($60,000); and Joel Oppenheim ($10,000). The Director Convertible
Notes accrue interest at the rate of 12% per annum until paid in full and are due and payable on October 17, 2018. The amount owed
may be prepaid at any time without penalty. The outstanding principal and interest owed under the Director Convertible Notes are
convertible into common stock of the Company, from time to time, at the option of the holders of the notes, at a conversion price
of $0.10 per share. As additional consideration for entering into the notes, the Company agreed to grant one-year warrants to purchase
one share of the Company’s common stock at an exercise price of $0.10 per share for each dollar loaned pursuant to the Director
Convertible Notes (the “
Bridge Note Warrants
”). As such, the Company granted (a) 20,000 Bridge Note Warrants
with Ivar Siem; (b) 60,000 Bridge Note Warrants to Leo Womack; and (c) 10,000 Bridge Note Warrants to Joel Oppenheim. The Director
Convertible Notes contain standard and customary events of default. It is contemplated that up to an additional $160,000 in Director
Convertible Notes will be sold to affiliates of the Company in the next several months.
The foregoing description
of the Director Convertible Notes, does not purport to be complete and is qualified in its entirety by reference to the Form of
12% Bridge Note – 2018, a copy of which is attached hereto as
Exhibit 10.5
, and incorporated herein by reference.