Item
1.01. Entry into a Material Definitive Agreement
On
December 11, 2018, Foothills Exploration, Inc. through its indirect wholly owned subsidiary, Foothills Exploration, LLC (the “Company”),
entered into a purchase and sale letter agreement with a third-party seller to acquire 22 natural gas wells and approximately
18,214 gross acres (14,584 core), 78% held by production, located in the Greater Green River Basin in Wyoming (the “GRB
Assets”). Some of the underlying leases come with certain depth restrictions and roughly 80% of the acreage remains undeveloped.
On March 6, 2019, the Company closed on the acquisition, purchasing the GRB Assets for about $700,000, in an all-cash transaction,
which was financed through Company borrowings described further below. The 22 natural gas wells are currently producing approximately
900 Mcf/d and the Company plans to implement a field-wide optimization program over the next 60-90 days designed to increase current
production rates.
On
March 6, 2019, Foothills Exploration, Inc. (the “Company”), also closed on a loan transaction pursuant to which the
Company issued the lender a senior secured convertible promissory note (“Note”) in the principal amount of $705,882.35,
and received proceeds of $600,000.00 before giving effect to certain transactional costs. As part of this transaction the Company
issued (i) warrants having an 18-month term, to purchase 1,125,000 shares of the Company’s common stock at an exercise price
of $0.50 per share, with a cashless exercise feature. The warrants are subject to adjustment in certain events such as forward
or reverse stock splits or if subsequent financings during the exercise period of the warrants are at terms that are more favorable
to persons in subsequent issuances of securities. The Note accrues interest of 10% per annum, and matures on September 1, 2019
(“Maturity Date”), which is the date upon which the principal sum, the original issue discount, as well as any accrued
and unpaid interest and other fees, shall be due and payable. The Company has agreed to make payments of $20,000 per month pursuant
to a cash management agreement as described in the note agreements.
The
Note agreements give the lender the right to convert the loan amounts due into common stock at a conversion price of $0.50 per
share, subject to adjustment under certain events. The Company has the right, at any time prior to or as of but not later than
the earlier of the (i) the first conversion date for the respective tranche hereunder and (ii) maturity date for the respective
tranche hereunder, exercisable on not less than three (3) trading days prior written notice to the lender, to prepay the outstanding
principal amount and interest (including any default interest) then due under this Note, in whole or in part by paying 105% of
the principal amount then owing, plus any accrued and unpaid interest to avoid conversion under the Note agreements.
The
Note is collateralized by the GRB Assets described above, which principally are being acquired by the Company with the net proceeds
of this Note. The Note is further secured by a personal guaranty from the Company’s Executive Chairman, Kevin Sylla. The
Noteholder is also entitled to a ten percent “Net Profits” interest for a 3-year period, commencing on September 2,
2019, and ending on September 1, 2022. “Net Profits” is defined as total gross revenues reduced by any taxes, royalties,
overriding royalties, marketing, and field lease operating expenses to the wells and oil and gas leases being acquired by the
Company in Wyoming.
No
broker-dealer or placement agent was retained or involved in this transaction.
The
summary of the transactions described above is qualified in its entirety by reference to the Securities Purchase Agreement, the
Senior Secured Convertible Promissory Note and Form of Warrant, which are filed as Exhibit 10.1, 10.2 and 10.3 respectively, to
this report.