Quarterly report pursuant to Section 13 or 15(d)

Stockholders' Equity

v3.20.2
Stockholders' Equity
3 Months Ended
Mar. 31, 2020
Equity [Abstract]  
Stockholders' Equity
10% Series B Redeemable Preferred Stock

On December 8, 2017, in connection with the acquisition of mineral rights, royalty interests and other associated assets in the Southern Delaware Basin (the “White Wolf Acquisition”), the Company entered into a Series B Redeemable Preferred Stock Purchase Agreement (the “Series B Preferred Stock Agreement”) to issue 150,000 shares of the Company’s 10.00% Series B Redeemable Preferred Stock, par value of $0.0001 per share (the “Series B Preferred Stock”), for an aggregate purchase price of $150.0 million, less transaction costs, advisory and up-front fees of approximately $10.0 million to certain private funds and accounts managed by EIG.

Holders of the Series B Preferred Stock are entitled to receive, when, as and if declared by the Board or a designated committee of the Board, cumulative dividends in cash, at a rate of 10.00% per annum on the $1,000 liquidation preference per share of Series B Preferred Stock, payable quarterly in arrears on January 15, April 15, July 15 and October 15 of each year, commencing on January 15, 2018. The Company’s Amended and Restated Credit Agreement restricts its cash distributions to an amount not to exceed $25.0 million on its Series B Preferred Stock in any fiscal year. Such distributions on its Series B Preferred Stock can only be made so long as both before and immediately following such distributions, (i) the Company is not in any default under its Amended and Restated Credit Agreement, (ii) its unused borrowing capacity is equal to or greater than 20% of the committed borrowing capacity and (iii) its ratio of Total Debt to EBITDAX is not greater than 3.5 to 1.0. As of March 31, 2020, the Company was fully drawn and had existing defaults under its Amended and Restated Credit Agreement and did not declare and pay cash dividends to the Series B Preferred Stock holders on April 15, 2020. Failure to pay dividends on the Series B Preferred Stock results in the following:

Upon the occurrence of not paying a dividend, the dividend rate will increase to 12% per annum and will remain at 12% per annum until all applicable quarterly dividends have been fully paid and are current, at which time a dividend rate of 10% per annum will once again apply.

Upon the occurrence of not paying a dividend with respect to three out of any four consecutive quarters or failing to pay a dividend six times (whether or not consecutive) at anytime the Series B Preferred Stock is outstanding will entitle the holders of the Series B Preferred Stock to a seat on the Board of Directors and the right to approve (a) all indebtedness by the Company if such indebtedness would cause the Company’s Leverage Ratio to exceed 3.25 to 1.00, (b) any budget or budget amendments and (c) any capital expenditures in excess of $0.5 million.

Upon the occurrence of not paying a dividend for a period of nine months consecutive months, the holders of the Series B Preferred Stock may elect to cause the Company to redeem all or a portion of the Series B Preferred Stock. 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.

Holders of the Series B Preferred Stock have no voting rights, but have certain consent rights with respect to the taking of certain corporate actions by the Company. Upon the Company’s voluntary or involuntary liquidation, winding-up or dissolution, each holder of Series B Preferred Stock will be entitled to receive the Base Return Amount (as defined in the Series B Preferred Stock Agreement) plus accrued and unpaid dividends.

In addition to the 10.00% per annum cumulative dividend holders of the Series B Preferred Stock are entitled to receive, upon redemption of the Series B Preferred Stock, a guaranteed base return on the initial 150,000 shares purchased in an amount equal to (x) $1,500 per share of Series B Preferred Stock and (y) an amount necessary to achieve a 16% internal rate of return (“IRR”) (the “Base Return Amount”) with respect to such shares of Series B Preferred Stock, minus all dividends paid on shares of Series B Preferred Stock, including dividends paid-in-kind, and minus up-front fees incurred at issuance of the Series B Preferred Stock. The shares of Series B Preferred Stock are redeemable at the election of the holders on or after December 8, 2023 and upon certain conditions and at any time at the Company’s option. As the holders of Series B Preferred Stock have an option to redeem the Series B Preferred Stock at a future date, the Series B Preferred Stock is included in temporary, or “mezzanine” equity, between total liabilities and stockholders’ equity on the Condensed Consolidated Balance Sheets.  The Series B Preferred Stock, while not currently redeemable at the option of the holders, is remeasured each reporting period by accreting the initial value to the estimated redemption value that will achieve a 16% IRR on December 8, 2023 when the Series B Preferred Stock is redeemable in whole or in part at the election of the holders of Series B Preferred Stock. The accretion is considered a deemed dividend, which increases the carrying value of the Series B Preferred Stock on the Condensed Consolidated Balance Sheets and is included within preferred dividends on the Condensed Consolidated Statements of Operations. If the Series B Preferred Stock would have been redeemed on March 31, 2020, the Base Return Amount was approximately $195.2 million, which was higher than the redemption amount accrued, and will be reduced by subsequent dividend payments. Any redemption must be made out of funds legally available therefor.

In the event of a Change of Control (which includes failure to maintain the listing of our Class A Common Stock on a national securities exchange), the Company shall redeem in cash all of the outstanding shares of Series B Preferred Stock, excluding Series B PIK Shares, for a price per share equal to the Base Return Amount and all Series B PIK Shares at the purchase price of $1,000 per share. The Company assessed the Change of Control feature and determined that the redemption of the outstanding shares of Series B Preferred Stock, excluding Series B PIK Shares, for a price per share equal to the Base Return Amount was an embedded derivative that required bifurcation and was accounted for at fair value. Because the Company recorded the Series B Preferred Stock at its current redemption value as of March 31, 2020, there was no value attributed to the bifurcated embedded derivative.

The Company reflected the following activity in mezzanine equity for the Series B Preferred Stock for the three months ended March 31, 2020:
 
Series B Preferred Shares
 
 Series B Preferred Stock Value
 
Guaranteed Return
 
Total
 
(In thousands, except share data)
Total Series B Preferred Stock at December 31, 2019
156,746

 
$
149,132

 
$
13,894

 
$
163,026

Discount - transaction costs

 

 

 

Base return amount

 

 
5,493

 
5,493

Accrued dividends

 
4,677

 
(4,677
)
 

Dividends declared and paid-in-kind

 

 

 

Accretion of discount - deemed dividend

 
405

 

 
405

Total Series B Preferred Stock at March 31, 2020
156,746

 
$
154,214

 
$
14,710

 
$
168,924



For the quarter ended March 31, 2020 the Company did not declare cash dividends on the Series B Preferred Stock. For the quarter ended March 31, 2019 dividends per share on the Company’s Series B Preferred Stock was $24.66.

The Company’s Proposed Plan of Reorganization as discussed in Note 20 - Subsequent Events, anticipates that in exchange for all of the Series B Preferred Stock, holders of the Series B Preferred Stock will receive their pro rata share of 1.48% of the New Common Shares of the reorganized entity.
Stockholders’ Equity
 
Class A Common Stock. Holders of the Company’s Class A Common Stock are entitled to one vote for each share held on all matters to be voted on by the stockholders. Holders of the Class A Common Stock and holders of the Class B Common Stock voting together as a single class have the exclusive right to vote for the election of directors and on all other matters properly submitted to a vote of the stockholders.

Class B Common Stock. Shares of Class B Common Stock may be issued only to Tema, their respective successors and assignees, as well as any permitted transferees of Tema. A holder of Class B Common Stock may transfer shares of Class B Common Stock to any transferee (other than the Company) only if such holder also simultaneously transfers an equal number of such holder’s Rosehill Operating Common Units to such transferee in compliance with the LLC Agreement. Holders of the Company’s Class B Common Stock will vote together as a single class with holders of the Company’s Class A Common Stock on all matters properly submitted to a vote of the stockholders.

 Holders of Class B Common Stock generally have the right to cause the Company to redeem all or a portion of their Rosehill Operating Common Units in exchange for shares of the Company’s Class A Common Stock on a one-to-one basis or, at the Company’s option, an equivalent amount of cash. The Company may, however, at its option, affect a direct exchange of cash or Class A Common Stock for such Rosehill Operating Common Units in lieu of such a redemption. Upon the future redemption or exchange of Rosehill Operating Common Units, a corresponding number of shares of Class B Common Stock will be canceled.
 
8% Series A Cumulative Perpetual Convertible Preferred Stock. Each share of Series A Preferred Stock has a liquidation preference of $1,000 per share and is convertible, at the holder’s option at any time, initially into 86.9565 shares of the Company’s Class A Common Stock (which is equivalent to an initial conversion price of approximately $11.50 per share of Class A Common Stock), subject to specified adjustments and limitations as set forth in the Certificate of Designation of Series A Preferred Stock (the “Certificate of Designation”). In the event of a Fundamental Change (as defined in the Certificate of Designation of the Series A Preferred Stock, which includes failure to maintain the listing of the Company’s Class A Common Stock on a national securities exchange), the Company will increase the conversion rate. Please read Note 3 - Liquidity for details on the letter from The Nasdaq Stock Market LLC regarding the Company’s stock price trading below the minimum bid price requirement for continued listing.
 
The Company reflected the following in equity for the Series A Preferred Stock for the following periods:
 
 
Three Months Ended March 31,
 
 
2020
 
2019
 
 
(In thousands)
Series A Preferred Stock paid-in-kind
 
$
2,102

 
$

Series A Preferred Stock paid or payable in cash
 

 
2,006

Series A Preferred Stock dividends
 
$
2,102

 
$
2,006



For the quarters ended March 31, 2020 and 2019, dividends per share on the Company’s Series A Preferred Stock was $19.89 and $19.73, respectively.

The Company’s Proposed Plan of Reorganization as discussed in Note 20 - Subsequent Events, anticipates that in exchange for all of the Series A Preferred Stock, holders of the Series A Preferred Stock will receive their pro rata share of 1.48% of the New Common Shares of the reorganized entity.

Warrants. Each of the Company’s warrants entitles the registered holder to purchase one share of the Company’s Class A Common Stock at a price of $11.50 per share, subject to adjustment pursuant to the terms of the warrant agreement. The warrants have a five-year term which commenced on April 27, 2017. As of March 31, 2020, there were 25,594,158 warrants exercisable for shares of Class A Common Stock outstanding at a price of $11.50. The Company may call 17,185,320 warrants for redemption if the reported last sale price of the Class A Common Stock equals or exceeds $21.00 per share for any 20 trading days within a 30-trading day period ending on the third trading day prior to the date the Company sends the notice of redemption to the warrant holders. The remaining 8,408,838 warrants are not redeemable by the Company and are exercisable on a cashless basis so long as they are held by the initial holders or their permitted transferees. Otherwise, such warrants may be redeemed on terms and provisions that are identical to those described above.
 
Noncontrolling Interest. Noncontrolling interest represents the membership interest in Rosehill Operating held by Tema. The Company has consolidated the financial position and results of operations of Rosehill Operating and reflected the proportionate interest held by Tema as a noncontrolling interest. The noncontrolling interest will change if warrants are exercised for Class A Common Stock, when shares of Series A Preferred Stock are converted into shares of Class A Common Stock, when shares of Class A Common Stock are issued in connection with the Company’s LTIP and if Tema elects to exchange the Class B Common Stock received in connection with the Transaction for shares of Class A Common Stock. At March 31, 2020, Tema held an approximate 35.3% noncontrolling interest in Rosehill Operating. On December 26, 2019, Tema redeemed 14,100,000 shares of its Rosehill Operating Common Units in exchange for an equivalent number of shares of Class A Common Stock, which significantly decreased Tema’s noncontrolling interest in Rosehill Operating. After the exchange, Tema holds 15,707,692 shares of Class B Common Stock.