Quarterly report pursuant to Section 13 or 15(d)

Liquidity

v3.20.2
Liquidity
3 Months Ended
Mar. 31, 2020
Organization, Consolidation and Presentation of Financial Statements [Abstract]  
Liquidity
Liquidity

On March 19, 2020, the Company announced that it had fully drawn the available capacity under the revolving credit facility, pursuant to the Amended and Restated Credit Agreement (as defined in Note 13 - Long term debt, net). The draw was a precautionary measure in order to increase the Company’s cash position and preserve financial flexibility in light of uncertainty in the global markets and commodity prices. The draw brought the Company’s total outstanding principal under the Amended and Restated Credit Agreement to $340 million as of March 31, 2020.

On March 23, 2020, the Company received a letter from The Nasdaq Stock Market LLC (“Nasdaq”) indicating that for the 30 consecutive business days ending March 20, 2020, the bid price of the Company’s Class A Common Stock had closed below the $1.00 per share minimum bid price requirement for continued listing on The Nasdaq Capital Market under Nasdaq Listing Rule 5550(a)(2). Under Nasdaq Listing Rule 5810(c)(3)(A), the Company has 180 calendar days to regain compliance by meeting the continued listing standard, which was extended by Nasdaq in light of market conditions resulting from the COVID-19 pandemic to December 3, 2020.

In March 2020, in response to the substantial decrease in crude oil prices resulting from COVID-19 and the adverse effects on the Company’s financial condition as a result thereof, the Company halted all drilling and completion activity, which has resulted in a reduction in anticipated production and cash flows. The Company’s future cash flows from operations are subject to a number of variables, including uncertainty in forecasted commodity pricing and production, redetermined borrowing base capacity after the forbearance expires, which may be significantly reduced, and the Company’s ability to reduce costs. The Company may generate additional funds through (i) monetization of its commodity derivatives, subject to any required approval from lenders, (ii) the sale of non-core assets and (iii) other sources of capital. The Company may not accomplish any of these alternatives on acceptable terms or at all.

On April 1, 2020, the Company received a default notice from the agent under the Note Purchase Agreement (as defined in Note 13 - Long term debt, net), advising that a Default (as defined in the Note Purchase Agreement) under the Note Purchase Agreement had occurred on account of the Rosehill Operating’s failure to deliver or file audited financial statements in accordance with Section 8.01(a) of the Note Purchase Agreement by March 30, 2020, which failure constituted a Default under Section 10.01(e) of the Note Purchase Agreement and would mature into an Event of Default under and within the time period provided in Section 10.01(e) (the “Identified Default”).

On April 2, 2020, the Company received a default notice from JPMorgan Chase Bank, N.A., as agent under the Amended and Restated Credit Agreement, advising the Company that Rosehill Operating had failed to deliver or file certain of its or the Company’s audited financial statements without a “going concern” or like qualification or exception by March 30, 2020, as required pursuant to Section 8.01(a) of the Amended and Restated Credit Agreement, as well as the accompanying certificates and reports contemplated by Sections 8.01(c), (d), (e) and (m) of the Amended and Restated Credit Agreement. The default notice served as notice that the lenders deemed such failure to be a Default (as defined in the Amended and Restated Credit Agreement) under Section 10.01(e) of the Amended and Restated Credit Agreement.

On April 15, 2020, the Company did not declare or pay cash dividends on its Series B Preferred Stock (the “Series B Preferred Stock Dividend”) that were due on that day. In order to make a dividend payment, the Company’s Amended and Restated Credit Agreement requires that the Company’s borrowings outstanding be 20% less than the committed borrowing capacity in place at the time of a dividend payment. The Company was prohibited from declaring the Series B Preferred Stock Dividend due to insufficient borrowing capacity under the Amended and Restated Credit Agreement. As a result, the dividend rate of the Series B Preferred Stock Dividend increased to 12% per annum until such a time as dividends are fully paid and current, at which time the dividend rate will revert back to 10% per annum. If the Company fails to pay the Series B Preferred Stock Dividend for nine consecutive months, the holders of the Series B Preferred Stock may elect to seek redemption of all or a portion of the Series B Preferred Stock, which redemption amount was approximately $195.2 million had the full redemption occurred as of March 31, 2020. The Company does not expect to be able to pay dividends on the Series B Preferred Stock within the nine consecutive months following April 15, 2020; as such, we expect the Series B Preferred Stock would be redeemable at the holders’ option after that time. If the full redemption had occurred as of March 31, 2020, the redemption amount would have been approximately $195.2 million.

On April 29, 2020, the Company received a default notice from the agent under the Note Purchase Agreement, advising that, in addition to the Identified Default, an Event of Default under the Note Purchase Agreement had occurred on account of Rosehill Operating’s failure to cause Rosehill Intermediate Holdco, LLC, Rosehill Holdco, LLC, and Rosehill Mergerco, LLC (collectively, the “New Rosehill Entities”) to (x) guarantee the Obligations pursuant to Guaranty Agreements and to grant liens and security interests in all of such New Rosehill Entities’ collateral pursuant to a security agreement, and (y) pledge all of the Equity Interests (as defined in the Note Purchase Agreement) of the New Rosehill Entities and to execute and deliver such other additional closing documents, legal opinions and certificates as reasonably requested by the Requisite Holders (as defined in the Note Purchase Agreement), in each case as required pursuant to Section 8.14(b) of the Note Purchase Agreement, which failure constituted an Event of Default under Section 10.01(d) of the Note Purchase Agreement (the “Identified Event of Default”).

On April 29, 2020, the New Rosehill Entities were dissolved pursuant to their organizational documents and the Delaware Limited Liability Company Act.

On May 4, 2020, the Company entered into a forbearance agreement (the “Forbearance Agreement”) with the lenders under the Amended and Restated Credit Agreement. As a condition to the forbearance, Rosehill Operating made a $20 million payment on the amounts outstanding under the Amended and Restated Credit Agreement. Under the Forbearance Agreement, the periodic redetermination of the borrowing base that was scheduled to occur on or about April 1, 2020, which the Company expected to result in a borrowing base deficiency, was postponed throughout the forbearance period, and the lenders agreed not to accelerate the amounts owed under the Amended and Restated Credit Agreement as a result of certain existing and anticipated Events of Default during the forbearance period. During the forbearance period, the lenders have no obligation to make any further loans under the Amended and Restated Credit Agreement. In addition, the Forbearance Agreement requires the Company to comply with certain other provisions, including that within 25 days of entering into the Forbearance Agreement, the Company and certain stakeholders agree in principle to a term sheet for a restructuring transaction (or “Restructuring Term Sheet,” as defined in the Forbearance Agreement) and within 40 days of entering into the Forbearance Agreement, the Company and those certain stakeholders enter into a restructuring support agreement, which shall provide for a restructuring under Chapter 11 of the U.S. Bankruptcy Code. The Forbearance Agreement will terminate on July 3, 2020 unless terminated earlier under these provisions. The dates by which the Company and certain stakeholders were required to agree in principle to the Restructuring Term Sheet and enter into the RSA were subsequently extended pursuant to certain letter agreements between the Company, Rosehill Operating and the lenders under the Amended and Restated Credit Agreement. As a condition to such letter agreements, the Company and Rosehill Operating agreed that all settlement payments and other net cash proceeds received in respect of any swap agreement be applied to the prepayment of Borrowings (as defined in the Amended and Restated Credit Agreement) then outstanding under the Amended and Restated Credit Agreement.

On May 8 and 19, 2020, the Company received separate notices from the agent under the Note Purchase Agreement, advising the Company that the Identified Default and the Identified Event of Default had matured into Events of Default (collectively, the “Identified Events of Default”) and that the holders reserved all of their rights, powers, privileges and remedies under the Note Purchase Agreement, and asserted a right to an additional 2% interest on the amounts outstanding under the Note Purchase Agreement.

The Company did not provide the lenders under the Amended and Restated Credit Agreement and the Note Purchase Agreement with unaudited financial statements and other required certificates and operating reports within 45 days after March 31, 2020, which constituted a default under the Amended and Restated Credit Agreement and the Note Purchase Agreement. The Amended and Restated Credit Agreement and the Note Purchase Agreement each give the Company a 30-day cure period before it becomes an event of default under the respective agreement. However, the Company was unable to satisfy these requirements within the cure period. As such, this represents an event of default under the Amended and Restated Credit Agreement and Note Purchase Agreement.

Due to the matters noted above, debt outstanding under the Amended and Restated Credit Agreement and the Second Lien Notes have been reflected as current in the accompanying condensed consolidated balance sheet as of March 31, 2020.

On June 30, 2020, the Company entered into the RSA with the stakeholders named therein, pursuant to which the Company expects to file for protection under Chapter 11 of the Bankruptcy Code to effect consummation of the Plan. Please read Note 20 - Subsequent Events for more details.

These matters raise substantial doubt about the Company’s ability to continue as a going concern for a period of one year after the date that these condensed consolidated financial statements are issued. The condensed consolidated financial statements included in this report have been prepared on a going concern basis of accounting, which contemplates continuity of operations, realization of assets and satisfaction of liabilities and commitments in the normal course of business. The condensed consolidated financial statements do not include adjustments that might result from the outcome of these uncertainties.