UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
 
FORM 10-Q
 
ý    QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the quarterly period ended March 31, 2020
 
☐    TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the transition period from                to              
Commission file number: 001-37712
 
ROSEHILL RESOURCES INC.
(Exact Name of Registrant as Specified in its Charter)
 
Delaware
 
90-1184262
(State or Other Jurisdiction of Incorporation or Organization)
 
(IRS Employer Identification No.)
 
16200 Park Row, Suite 300
Houston, Texas 77084
(Address of principal executive offices) (Zip Code)
 (281) 675-3400
(Registrant’s telephone number, including area code)
 
Securities registered pursuant to Section 12(b) of the Act:
Title of each class
 
Trading Symbol(s)
 
Name of each exchange on which registered
Class A Common Stock
 
ROSE
 
The NASDAQ Capital Market
Class A Common Stock Public Warrants
 
ROSEW
 
The NASDAQ Capital Market
Class A Common Stock Public Units
 
ROSEU
 
The NASDAQ Capital Market
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ý   No ☐
 
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ý   No ☐
 
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
 
Large accelerated filer
Accelerated filer
Non-accelerated filer
ý   
Smaller reporting company
ý
 
 
Emerging growth company
ý
 
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Securities Exchange Act of 1934). Yes ☐ No ý

As of June 26, 2020, 28,944,000 shares of Class A Common Stock, par value $0.0001 per share, and 15,707,692 shares of Class B Common Stock, par value $0.0001 per share, were issued and outstanding.





Explanatory Note
 
On March 4, 2020, the Securities and Exchange Commission issued an order (Release No. 34-88318) under Section 36 of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), granting exemptions from specified provisions of the Exchange Act and certain rules thereunder. On March 25, 2020, the order was modified and superseded by a new SEC order (Release No. 34-88465) (the “SEC Order”), that provides conditional relief to public companies that are unable to timely comply with their filing obligations as a result of the outbreak and spread of the COVID-19 coronavirus pandemic (“COVID-19”).  Rosehill Resources Inc. relied on the SEC Order to delay the filing of this Quarterly Report on Form 10-Q for the quarterly period ended March 31, 2020 due to circumstances related to COVID-19.  In particular, as a result of office closures due to “lock-down” or “stay at home” orders implemented in response to the COVID-19 pandemic, remote working arrangements we have implemented, and material reductions in personnel, we experienced delays in our accounting and control procedures. In addition, the disruptions to our business caused by COVID-19 have resulted in a significant diversion of resources to attend to the operational needs of the business.  As a result, we required additional time to prepare and finalize this report.





ROSEHILL RESOURCES INC.
FORM 10-Q FOR THE QUARTER ENDED MARCH 31, 2020
 
TABLE OF CONTENTS
 

 
 
Page
PART I – FINANCIAL INFORMATION
 
 
 
 
Item 1.
Financial Statements (Unaudited)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Item 2.
 
 
 
Item 3.
 
 
 
Item 4.
 
 
PART II – OTHER INFORMATION
 
 
 
 
Item 1.
 
 
 
Item 1A.
 
 
 
Item 2
 
 
 
Item 6.
 
 
 


1



PART I - FINANCIAL INFORMATION 
Item 1. Financial Statements.


2



ROSEHILL RESOURCES INC. 
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
(In thousands, except share and per share amounts)
 
 
March 31, 2020
 
December 31, 2019
ASSETS
 
 
 
 

Current assets:
 
 

 
 

Cash and cash equivalents
 
$
78,309

 
$
2,991

Accounts receivable
 
21,333

 
34,910

Derivative assets
 
79,907

 
10,340

Prepaid and other current assets
 
1,464

 
2,393

Total current assets
 
181,013

 
50,634

Property and equipment:
 
 

 
 

Oil and natural gas properties (successful efforts), net
 
409,322

 
744,597

Other property and equipment, net
 
2,739

 
2,984

Total property and equipment, net
 
412,061

 
747,581

Derivative assets
 
60,784

 
33,105

Deferred tax assets
 

 
37,726

Other assets, net
 
5,180

 
3,466

Total assets
 
$
659,038

 
$
872,512

LIABILITIES, MEZZANINE EQUITY AND STOCKHOLDERS’ EQUITY
 
 
 
 

Current liabilities:
 
 

 
 

Current portion of long-term debt, net
 
$
435,834

 
$

Accounts payable
 
10,928

 
15,922

Accounts payable, related parties
 
499

 
209

Derivative liabilities
 
2,122

 
4,016

Accrued liabilities and other
 
21,823

 
26,513

Accrued capital expenditures
 
22,613

 
23,031

Total current liabilities
 
493,819

 
69,691

Long-term liabilities:
 
 
 
 
Long-term debt, net
 

 
355,511

Asset retirement obligations
 
14,671

 
14,431

Deferred tax liabilities
 
378

 
1,196

Derivative liabilities
 
3,041

 
1,300

Liability related to tax receivable agreement
 
166

 
53,809

Other liabilities
 
1,064

 
432

Total long-term liabilities
 
19,320

 
426,679

Total liabilities
 
513,139

 
496,370

Commitments and contingencies (Note 19)
 


 


Mezzanine equity
 
 
 
 
Series B Preferred Stock; $0.0001 par value, 10.0% Redeemable, $1,000 per share liquidation preference; of the 1,000,000 shares of Preferred Stock authorized, 210,000 shares designated, 156,746 shares issued and outstanding as of March 31, 2020 and December 31, 2019
 
168,924

 
163,026

Stockholders’ equity
 
 

 
 

Series A Preferred Stock; $0.0001 par value, 8.0% Cumulative Perpetual Convertible, $1,000 per share liquidation preference; of the 1,000,000 shares of Preferred Stock authorized, 150,000 shares designated, 107,658 and 105,589 shares issued and outstanding as of March 31, 2020 and December 31, 2019, respectively
 
90,620

 
88,551

Class A Common Stock; $0.0001 par value, 250,000,000 shares authorized and 28,811,078 and 28,554,526 shares issued and outstanding as of March 31, 2020 and December 31, 2019, respectively
 
3

 
3

Class B Common Stock; $0.0001 par value, 30,000,000 shares authorized, 15,707,692 shares issued and outstanding as of March 31, 2020 and December 31, 2019
 
2

 
2

Additional paid-in capital
 
64,754

 
72,859

Retained earnings (accumulated deficit)
 
(129,223
)
 
11,126

Total common stockholders’ equity (deficit)
 
(64,464
)
 
83,990

Noncontrolling interest
 
(49,181
)
 
40,575

Total stockholders’ equity (deficit)
 
(23,025
)
 
213,116

Total liabilities, mezzanine equity and stockholders’ equity
 
$
659,038

 
$
872,512

The accompanying notes are an integral part of these condensed consolidated financial statements.

3



ROSEHILL RESOURCES INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
(In thousands, except per share amounts) 
 
 
Three Months
 
 
Ended March 31,
 
 
2020
 
2019
Revenues:
 
 

 
 
Oil sales
 
$
57,752

 
$
65,853

Natural gas sales
 
104

 
1,474

Natural gas liquids sales
 
2,338

 
4,533

Total revenues
 
60,194

 
71,860

Operating expenses:
 
 

 
 

Lease operating expenses
 
12,095

 
9,635

Production taxes and ad valorem taxes
 
3,759

 
4,238

Gathering and transportation
 
1,371

 
2,361

Depreciation, depletion, amortization and accretion
 
31,486

 
35,964

Impairment of oil and natural gas properties
 
333,840

 

Exploration costs
 
13,720

 
1,255

General and administrative
 
10,620

 
9,055

Loss on disposition of property and equipment
 
18

 
9

Total operating expenses
 
406,909

 
62,517

Operating income (loss)
 
(346,715
)
 
9,343

Other income (expense):
 
 

 
 

Interest expense, net
 
(10,814
)
 
(5,600
)
Gain (loss) on commodity derivative instruments, net
 
110,120

 
(104,571
)
Other income, net
 
54,108

 
62

Total other income (expense), net
 
153,414

 
(110,109
)
Loss before income taxes
 
(193,301
)
 
(100,766
)
Income tax expense
 
37,027

 
3,306

Net loss
 
(230,328
)
 
(104,072
)
Net loss attributable to noncontrolling interest
 
(89,979
)
 
(73,909
)
Net loss attributable to Rosehill Resources Inc. before preferred stock dividends
 
(140,349
)
 
(30,163
)
Series A Preferred Stock dividends and deemed dividends
 
2,102

 
2,006

Series B Preferred Stock dividends, deemed dividends, and return
 
5,898

 
5,808

Net loss attributable to Rosehill Resources Inc. common stockholders
 
$
(148,349
)
 
$
(37,977
)
Loss per common share:
 
 

 
 

Basic
 
$
(5.19
)
 
$
(2.75
)
Diluted
 
$
(5.38
)
 
$
(2.75
)
Weighted average common shares outstanding:
 
 

 
 

Basic
 
28,566

 
13,830

Diluted
 
44,274

 
13,830


The accompanying notes are an integral part of these condensed consolidated financial statements.

4



ROSEHILL RESOURCES INC.
CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY (DEFICIT)
(Unaudited)
(In thousands, except share amounts)

Three Months Ended March 31, 2020:
 
 
Preferred Stock Series A
 
Common Stock
 
 
 
 
 
 
 
 
 
 
 
 
 
Class A
 
Class B
 
 
 
 
 
 
 
 
 
 
 
 
Shares
 
Value
 
Shares
 
Value
 
Shares
 
Value
 
Additional
Paid-in Capital
 
Retained Earnings (Accumulated Deficit)
 
Total
Common Stockholders’ Equity (Deficit)
 
Non-
controlling
Interest
 
Total Equity (Deficit)
Balance at December 31, 2019
 
105,589

 
$
88,551

 
28,554,526

 
$
3

 
15,707,692

 
$
2

 
$
72,859

 
$
11,126

 
$
83,990

 
$
40,575

 
$
213,116

Net loss
 

 

 

 

 

 

 

 
(140,349
)
 
(140,349
)
 
(89,979
)
 
(230,328
)
Restricted stock issued
 

 

 
339,001

 

 

 

 

 

 

 

 

Restricted stock withheld for taxes
 

 

 
(82,449
)
 

 

 

 

 

 

 

 

Stock-based compensation
 

 

 

 

 

 

 
118

 

 
118

 

 
118

Series A Preferred Stock dividends
 
2,069

 
2,069

 

 

 

 

 
(2,102
)
 

 
(2,102
)
 

 
(33
)
Series A Preferred Stock conversions
 

 

 

 

 

 

 

 

 

 

 

Series B Preferred Stock dividends, deemed dividends and return
 

 

 

 

 

 

 
(5,898
)
 

 
(5,898
)
 

 
(5,898
)
Equity shift
 

 

 

 

 

 

 
(223
)
 

 
(223
)
 
223

 

Balance at March 31, 2020
 
107,658

 
$
90,620

 
28,811,078

 
$
3

 
15,707,692

 
$
2

 
$
64,754

 
$
(129,223
)
 
$
(64,464
)
 
$
(49,181
)
 
$
(23,025
)

Three Months Ended March 31, 2019:
 
 
Preferred Stock Series A
 
Common Stock
 
 
 
 
 
 
 
 
 
 
 
 
 
Class A
 
Class B
 
 
 
 
 
 
 
 
 
 
 
 
Shares
 
Value
 
Shares
 
Value
 
Shares
 
Value
 
Additional
Paid-in Capital
 
Retained Earnings (Accumulated Deficit)
 
Total
Common Stockholders’ Equity (Deficit)
 
Non-
controlling
Interest
 
Total Equity (Deficit)
Balance at December 31, 2018
 
101,669

 
$
84,631

 
13,760,136

 
$
1

 
29,807,692

 
$
3

 
$
42,271

 
$
26,661

 
$
68,936

 
$
113,770

 
$
267,337

Net loss
 

 

 

 

 

 

 

 
(30,163
)
 
(30,163
)
 
(73,909
)
 
(104,072
)
Restricted stock issued
 

 

 
558,239

 

 

 

 

 

 

 

 

Restricted stock withheld for taxes
 

 

 
(31,054
)
 

 

 

 
(89
)
 

 
(89
)
 

 
(89
)
Stock-based compensation
 

 

 

 

 

 

 
974

 

 
974

 

 
974

Series A Preferred Stock dividends
 

 

 

 

 

 

 
(2,006
)
 

 
(2,006
)
 

 
(2,006
)
Series B Preferred Stock dividends, deemed dividends and return
 

 

 

 

 

 

 
(5,808
)
 

 
(5,808
)
 

 
(5,808
)
Equity shift
 

 

 

 

 

 

 
(86
)
 

 
(86
)
 
86

 

Balance at March 31, 2019
 
101,669

 
$
84,631

 
14,287,321

 
$
1

 
29,807,692

 
$
3

 
$
35,256

 
$
(3,502
)
 
$
31,758

 
$
39,947

 
$
156,336

The accompanying notes are an integral part of these condensed consolidated financial statements. 

5



ROSEHILL RESOURCES INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(In thousands) 
 
 
Three Months Ended March 31,
 
 
2020
 
2019
Cash flows from operating activities:
 
 
 
 

Net loss
 
(230,328
)
 
(104,072
)
Adjustments to reconcile net loss to net cash provided by operating activities:
 
 
 
 

Depreciation, depletion, amortization and accretion
 
31,486

 
35,964

Impairment of oil and gas properties
 
333,840

 

Deferred income taxes
 
37,027

 
2,994

Stock-based compensation
 
19

 
974

(Gain) loss on derivative instruments
 
(106,025
)
 
104,490

Net cash received (paid) in settlement of derivative instruments
 
8,627

 
(1,821
)
Amortization of debt issuance costs
 
518

 
427

Write-off of undeveloped and exploratory costs
 
12,806

 

Other
 
283

 
1

Revaluation of Tax Receivable Agreement liability
 
(53,643
)
 

Changes in operating assets and liabilities:
 
 
 
 
Decrease (increase) in accounts receivable and accounts receivable, related parties
 
13,577

 
(650
)
Decrease (increase) in prepaid and other assets
 
918

 
(329
)
Increase (decrease) in accounts payable and accrued liabilities and other
 
(4,507
)
 
13,670

Increase (decrease) in accounts payable, related parties
 
290

 
(275
)
Increase (decrease) in lease liabilities
 
(305
)
 

Net cash provided by operating activities
 
44,583

 
51,373

Cash flows from investing activities:
 
 

 
 

Additions to oil and natural gas properties
 
(45,204
)
 
(75,825
)
Proceeds received from disposition of oil and natural gas properties
 

 
1,100

Additions to other property and equipment
 
(120
)
 
(55
)
Proceeds from sale of other property and equipment
 
10

 

Net cash used in investing activities
 
(45,314
)
 
(74,780
)
Cash flows from financing activities:
 
 

 
 

Proceeds from revolving credit facility
 
96,000

 
13,000

Repayment on revolving credit facility
 
(16,000
)
 

Debt issuance costs
 

 
(644
)
Dividends paid on preferred stock
 
(3,951
)
 
(3,362
)
Restricted stock used for tax withholdings
 

 
(89
)
Payment on capital lease obligation
 

 
(3
)
Net cash provided by financing activities
 
76,049

 
8,902

Net decrease in cash, cash equivalents, and restricted cash
 
75,318

 
(14,505
)
Cash and cash equivalents beginning of period
 
2,991

 
20,157

Cash and cash equivalents end of period
 
$
78,309

 
$
5,652


The accompanying notes are an integral part of these condensed consolidated financial statements. 

6



ROSEHILL RESOURCES INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (continued)
(Unaudited) 
(In thousands)

Supplemental cash flow information and noncash activity:
 
 
Three Months Ended March 31,
 
 
2020
 
2019
Supplemental disclosures:
 
 
 
 
Cash paid for interest
 
$
5,598

 
$
3,424

 
 
 
 
 
Supplemental noncash activity:
 
 
 
 
Asset retirement obligations incurred, net of revision of estimates
 
$
(22
)
 
$
66

Changes in accrued capital expenditures
 
418

 
(4,618
)
Changes in accounts payable for capital expenditures
 
2,504

 
8,264

Series A Preferred Stock dividends paid-in-kind
 
2,102

 

Series A Preferred Stock cash dividends declared and payable
 

 
2,006

Series B Preferred Stock accrued dividends
 
4,677

 

Series B Preferred Stock cash dividends declared and payable
 

 
3,866

Series B Preferred Stock return
 
816

 
1,577

Series B Preferred Stock deemed dividend
 
405

 
365


The accompanying notes are an integral part of these condensed consolidated financial statements.

7



ROSEHILL RESOURCES INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
 
Note 1 – Organization and Basis of Presentation
 
Organization

Rosehill Resources Inc. (the “Company” or “Rosehill”) is an independent oil and natural gas company focused on the acquisition, exploration, development and production of unconventional oil and associated liquids-rich natural gas reserves in the Permian Basin. The Company’s assets are concentrated in the Delaware Basin, a sub-basin of the Permian Basin.

Recent Developments

The adverse economic effects of COVID-19 have materially decreased demand for crude oil as a result of the restrictions implemented by governments trying to curb the outbreak and changes in consumer behavior. This has led to a significant global oversupply of oil and consequently a substantial decrease in crude oil prices. While global oil producers, including the Organization of Petroleum Exporting Countries (“OPEC”) and other oil producing nations (together with OPEC, “OPEC+”), have reached agreement to cut oil production to a limited extent, downward pressure on commodity prices has remained and could continue for the foreseeable future, particularly given concerns over available storage capacity for oil. The Company considered the impact of COVID-19 and the substantial decline in crude oil prices on the assumptions and estimates used in preparation of its financial statements and as a result has recognized a number of material charges during the three months ended March 31, 2020, including impairments to its capitalized costs for proved and unproved crude oil and natural gas properties. The Company has also recorded a full valuation allowance on its deferred tax assets and reduced its Tax Receivable Agreement liability. These items are discussed further in the following notes. In response to adverse effects of COVID-19 on the Company’s financial condition, the Company halted its capital drilling activities and reduced personnel. The full extent of the impact of COVID-19 on the Company’s operations is uncertain. A prolonged pandemic and low commodity prices could have a further material adverse effect on the Company’s results of operations, financial condition, and liquidity, including additional impairments to oil and natural gas properties.

On March 27, 2020, President Trump signed into U.S. federal law the “Coronavirus Aid, and Economic Security Act” (“CARES Act”), which is aimed at providing emergency assistance and health care for individuals, families, and businesses affected by the COVID-19 pandemic and generally supporting the U.S. economy. We have analyzed the different aspects of the CARES Act and determined that there is no impact on the Company’s financial statements.

Certain events of default under the Amended and Restated Credit Agreement and the Note Purchase Agreement (in each case, as defined below) have occurred, and the Company entered into a forbearance agreement with the lenders under the Amended and Restated Credit Agreement. On June 30, 2020, the Company entered into a Restructuring Support Agreement (“RSA”) with the stakeholders named therein, pursuant to which the Company expects to file for protection under Chapter 11 of the Bankruptcy Code for the purpose of confirming the Plan (as defined below). See further information, please read Note 3 - Liquidity and Note 20 - Subsequent Events.

Basis of Presentation

The condensed consolidated financial results of the Company consist of the financial results of Rosehill and Rosehill Operating Company, LLC (“Rosehill Operating”), its consolidated subsidiary. As of March 31, 2020, the Company owns approximately 64.7% of the common units of Rosehill Operating (the “Rosehill Operating Common Units”) and Tema Oil & Gas Company (“Tema”) owns approximately 35.3% of the Rosehill Operating Common Units.

The accompanying unaudited condensed consolidated financial statements of the Company have been prepared in accordance with generally accepted accounting principles in the United States (“U.S. GAAP”) and the rules and regulations of the United States Securities and Exchange Commission (“SEC”) for interim financial reporting. Accordingly, certain disclosures normally included in an Annual Report on Form 10-K have been condensed or omitted, although the company believes that the disclosures made are adequate to make the information not misleading. The condensed consolidated financial statements and related notes included in this Quarterly Report should be read in conjunction with the Company’s consolidated financial statements and related notes included in the Company’s Annual Report on Form 10-K for the period ended December 31, 2019. Except as disclosed herein, there have been no material changes to the information disclosed in the notes to the consolidated financial statements included in the Company’s Annual Report on Form 10-K for the period ended December 31, 2019. In the opinion of management, all normal, recurring adjustments and accruals considered necessary to present fairly, in all material respects, the Company’s interim financial results have been included. Operating results for the periods presented are not indicative of expected results for

8

ROSEHILL RESOURCES INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

the full year. The Company has disclosed that it has substantial doubt about its ability to continue as a going concern within one year after the date that these condensed consolidated financial statements are issued and the impact on the presentation of these condensed consolidated financial statements in Note 3 - Liquidity.

All intercompany balances and transactions have been eliminated in consolidation. Certain prior period amounts have been reclassified to conform to the current presentation on the accompanying consolidated financial statements. Such reclassifications had no impact on net income, cash flows or shareholders’ equity previously reported.

Variable Interest Entities

Rosehill Operating is a variable interest entity. The Company determined that it is the primary beneficiary of Rosehill Operating as the Company is the sole managing member and has the power to direct the activities most significant to Rosehill Operating’s economic performance as well as the obligation to absorb losses and receive benefits that are potentially significant and the Company now holds a majority of the ownership interest of Rosehill Operating. The Company consolidated 100% of Rosehill Operating’s assets and liabilities and results of operations in the Company’s consolidated financial statements. For further discussion, see Noncontrolling Interest in Note 16 - Stockholders’ Equity.

Note 2 – Summary of Significant Accounting Policies and Recently Issued Accounting Standards

The significant accounting policies followed by the Company are set forth in Note 2 – Summary of Significant Accounting Policies included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2019.

Accounting Standard Adopted in 2020

On January 1, 2020 we adopted ASC Topic 842, Leases, which requires companies to generally recognize on the balance sheet operating and financing lease liabilities and a corresponding right-of-use assets. We adopted this standard using the modified retrospective method. The Company has elected the following practical expedients that allow an entity to carry forward historical accounting treatment relating to: (i) lease identification and classification for existing leases and (ii) existing land easements. The adoption of the standard resulted in the recognition of approximately $2.1 million of right-of-use assets and $2.6 million of lease liabilities as of January 1, 2020, with the entire amount relating to our operating leases.The adoption of this standard did not have a significant impact on the Company’s Consolidated Statements of Operations or Consolidated Statements of Cash Flows. Refer to Note 5 - Leases for additional information.

Fair Value Measurement Disclosures. In August 2018, the FASB issued ASU 2018-13, Fair Value Measurement (Topic 820): Disclosure Framework - Changes to the Disclosure Requirements for Fair Value Measurement, which removes, modifies and adds disclosure requirements on fair value measurements. ASU 2018-13 is effective for the Company for fiscal years beginning after December 15, 2019. The Company adopted ASU 2018-13 on January 1, 2020. The impact to the Company was additional disclosures to provide the range and weighted average of significant unobservable inputs used to develop Level 3 fair value measures. Refer to Note 9 - Fair Value Measurements for more detail on the additional disclosures.

Recently Issued Accounting Standards Not Yet Adopted

In December 2019, the FASB issued ASU No. 2019-12, Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes (“ASU 2019-12”). ASU 2019-12 was issued to reduce the complexity of accounting for income taxes for those entities that fall within the scope of the accounting standard. The guidance is to be applied using a prospective method, excluding amendments related to franchise taxes, which should be applied on either a retrospective basis for all periods presented or a modified retrospective basis through a cumulative-effect adjustment to retained earnings as of the beginning of the fiscal year of adoption. ASU 2019-12 is effective for the Company for fiscal years beginning after December 15, 2021 due to its emerging growth company status, with early adoption permitted. The Company is still evaluating the impact of ASU 2019-12.

Note 3 – 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.

9

ROSEHILL RESOURCES INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)


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”).


10

ROSEHILL RESOURCES INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

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.

Note 4— Revenue from Contracts with Customers

The Company recognizes oil, natural gas and NGL revenue at the point in time when control of the product transfers to the customer, which differs depending on the contractual terms of each of the Company’s arrangements. Transfer of control drives the presentation of gathering, transportation, processing and other post-production expenses (“gathering and transportation expense”) within the Company’s Condensed Consolidated Statements of Operations. In these scenarios below, the Company evaluates whether it is the principal or the agent in the transaction and the analysis includes considerations of product redelivery, take-in-kind rights

11

ROSEHILL RESOURCES INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

and risk of loss. For those contracts where the Company has concluded that control of the product transfers at the tailgate of the plant, meaning that the Company is the principal and the ultimate third party purchaser is its customer, the Company recognizes revenue on a gross basis, with transportation, processing and gathering expenses presented within the Gathering and transportation line item on the Company’s Condensed Consolidated Statements of Operations. Alternatively, for those contracts where the Company has concluded control of the product transfers at or near the wellhead or inlet of the plant, meaning that the Company is the agent and the midstream processing company is the Company’s customer, the Company recognizes natural gas and NGL revenues based on the net amount of proceeds received from the midstream processing company.

Performance obligations

The Company’s contractual performance obligations arise upon the production of hydrocarbons from wells in which the Company has an ownership interest. The performance obligations are considered satisfied upon control transferring to a customer at the wellhead, inlet, or tailgate of the midstream processor’s processing facility, or other contractually specified delivery point. For all commodity products, the Company records revenue in the month production is delivered to the customer. Settlement statements for certain natural gas and NGL sales may not be received for 30 to 90 days after the date production volumes are delivered and for oil, generally within 30 days after delivery has occurred. However, payment is unconditional once the performance obligations have been satisfied. At this time, the volume and price can be reasonably estimated and amounts due from customers are accrued in Accounts receivable, net in the Condensed Consolidated Balance Sheets. As of March 31, 2020 and December 31, 2019, such receivable balances were $15.6 million and $34.5 million, respectively, as disclosed in Note 7 - Accounts Receivable.

The Company records any differences between its estimates and the actual amounts received for product sales in the month that payment is received from the purchaser. Historically, any identified differences between revenue estimates and actual revenue received have not been significant.

Transaction price allocated to remaining performance obligations

For the Company’s product sales that have a contract term greater than one year, the Company has utilized the practical expedient in ASC Topic 606 which states the Company is not required to disclose the transaction price allocated to the remaining performance obligations if the variable consideration is allocated entirely to a wholly unsatisfied performance obligation. Under these sales contracts, monthly sales of a product generally represent a separate performance obligation; therefore, future commodity volumes to be delivered and sold are wholly unsatisfied and disclosure of the transaction price allocated to such unsatisfied performance obligations is not required.

Note 5 – Leases

Effective January 1, 2020, the Company adopted Topic 842, which requires lessees to recognize operating and finance leases with terms greater than 12 months on the balance sheet. The Company adopted this standard using the modified retrospective method and elected to use the optional transition methodology whereby reporting periods prior to adoption continue to be presented in accordance with legacy accounting guidance. As of March 31, 2020, the Company did not have any agreements in place that were classified as finance leases under Topic 842. Arrangements classified as operating leases are included on the accompanying Condensed Consolidated Balance Sheets within the “Other assets, net”, “Accrued liabilities and other” and “Other liabilities” line items. For any agreement that contains both lease and non-lease components, such as a service arrangement that also includes an identifiable right-of-use (“ROU”) asset, the Company’s policy for all asset classes is to combine lease and non-lease components together and account for the arrangement as a single lease. Aside from the recognition of ROU assets and corresponding lease liabilities on the accompanying balance sheets, Topic 842 does not have a material impact on the timing or classification of costs incurred for those agreements considered to be leases.

As outlined in Topic 842, a ROU asset represents a lessee’s right to use an underlying asset for the lease term, while the associated lease liability represents the lessee’s obligations to make lease payments. At the commencement date, which is the date on which a lessor makes an underlying asset available for use by a lessee, a lease ROU asset and corresponding lease liability is recognized based on the present value of the future lease payments. The initial measurement of lease payments may also be adjusted for certain items, including options that are reasonably certain to be exercised, such as options to purchase the asset at the end of the lease term, or options to extend or early terminate the lease. Excluded from the initial measurement are certain variable lease payments, which for the Company’s office rental agreements, may be a significant component of the total lease costs.

The Company evaluates a contractual arrangement at its inception to determine if it is a lease or contains an identifiable lease component as defined by Topic 842. When evaluating a contract to determine appropriate classification and recognition under

12

ROSEHILL RESOURCES INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

Topic 842, significant judgment may be necessary to determine, among other criteria, if an embedded leasing arrangement exists, the length of the term, classification as either an operating or financing lease, which options are reasonably likely to be exercised, fair value of the underlying ROU asset or assets, upfront costs, and future lease payments that are included or excluded in the initial measurement of the ROU asset.

Currently, the Company has operating leases for office lease agreements, apartment lease agreement and certain wellhead equipment. For those operating leases included on the accompanying balance sheets, which only include leases with terms greater than 12 months at commencement, the present value of future lease payments was determined based upon the Company’s incremental borrowing rate. The table below summarizes our discount rate and remaining lease term as of March 31, 2020.
 
As of March 31, 2020
Weighted-average discount rate
4.5
%
Weighted-average remaining lease term (years)
1.94


Subsequent to initial measurement, costs associated with the Company’s operating leases are either expensed or capitalized depending on how the underlying ROU asset is utilized and in accordance with U.S. GAAP requirements. Variable lease payments are recognized in the period in which they are incurred. Expenses related to short-term leases are recognized on a straight-line basis over the lease term. The following table presents the components of the Company’s lease expenses for the three months ended March 31, 2020.
 
Three Months Ended March 31, 2020
 
(in thousands)
Lease costs
 
  Operating lease cost
$
291

  Variable lease cost (1)
179

  Short-term lease cost (2)
688

    Total Lease Cost
$
1,158

(1)
Variable lease payments include additional payments made that were not included in the initial measurement of the ROU asset and corresponding liability for lease agreements with terms longer than 12 months. Variable lease payments primarily relate to variable utility costs associated with the Company’s leased office space.
(2)
Costs associated with short-term lease agreements primarily relate to certain field equipment rentals.

Other information related to the Company’s leases for three months ended March 31, 2020, was as follows:
 
Three Months Ended March 31, 2020
 
(in thousands)
Cash paid for amounts included in the measurement of lease liabilities:
 
   Operating cash flows from operating leases (fixed payments)
$
332

   Operating cash flows from operating leases (liability reduction)
$
305

Right-of-use assets obtained in exchange for new operating lease liabilities
$
2,163


Maturities of the Company’s operating lease liabilities included on the accompanying Condensed Consolidated Balance Sheet as of March 31, 2020 were as follows:
 
As of March 31, 2020
 
(in thousands)
2020
$
1,000

2021
1,051

2022
346

Total lease payments
$
2,397

  Less: imputed interest
(100
)
Present value of lease liabilities
$
2,297


13

ROSEHILL RESOURCES INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)


As of December 31, 2019, future total obligations on our noncancelable lease obligations were $4.5 million in the aggregate, which consisted of the following: $2.5 million in 2020, $1.5 million in 2021 and $0.5 million in 2022.

Amounts recorded in the accompanying Condensed Consolidated Balance Sheet for operating leases as of March 31, 2020, were as follows:
 
 
As of March 31, 2020
 
Classification on our Balance Sheets
(in thousands)
Operating lease ROU assets
Other assets, net
$
1,898

 
 
 
Current operating lease liability
Accrued liabilities and other
$
1,233

Non-current operating lease liability
Other liabilities
$
1,064


Note 6 – Loss Per Share 
 
The following table sets forth the calculation of basic and diluted weighted average shares outstanding and earnings (loss) per share for the indicated periods:
 
Three Months
 
Ended March 31,
 
2020
 
2019
 
(In thousands, except per share data)
Net loss (numerator):
 

 
 

Net loss attributable to common stockholders of Rosehill Resources Inc. - basic
$
(148,349
)
 
$
(37,977
)
Add: Net loss attributable to the noncontrolling interest, net of taxes
(90,036
)
 

Net loss attributable to common stockholders of Rosehill Resources Inc. - diluted
$
(238,385
)
 
$
(37,977
)
 
 
 
 
Weighted average shares (denominator):
 

 
 

Weighted average shares – basic
28,566

 
13,830

Add: Dilutive effects of Class B Common Stock
15,708

 

Weighted average shares – diluted
44,274

 
13,830

 
 
 
 
Basic loss per share
$
(5.19
)
 
$
(2.75
)
Diluted loss per share
$
(5.38
)
 
$
(2.75
)

For the three months ended March 31, 2020, the Company excluded 25.6 million shares of Class A Common Stock issuable upon exercise of the Company’s warrants, 9.2 million shares of Class A Common Stock issuable upon conversion of the Company’s Series A Preferred Stock and 1.8 million shares of Class A Common Stock issuable upon vesting of awards under the Company’s Long-Term Incentive Plan (as amended and restated on May 22, 2018, the “LTIP”) from the computation of diluted earnings per share because the effect of such instruments was anti-dilutive.

For the three months ended March 31, 2019, the Company excluded 29.8 million shares of Class A Common Stock issuable upon exchange of the Company’s Class B Common Stock, 25.6 million shares of Class A Common Stock issuable upon exercise of the Company’s warrants, 8.7 million shares of Class A Common Stock issuable upon conversion of the Company’s Series A Preferred Stock and 1.0 million shares of Class A Common Stock issuable upon vesting under the Company’s LTIP from the computation of diluted earnings per share because the effect of such instruments was anti-dilutive.


14

ROSEHILL RESOURCES INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

Note 7 – Accounts Receivable
 
Accounts receivable is comprised of the following:
 
 
March 31, 2020
 
December 31, 2019
 
 
(In thousands)
Revenue receivable
 
$
15,604

 
$
34,518

Realized derivative receivable
 
5,586

 
273

Joint interest billings
 
84

 
95

Other
 
59

 
24

Accounts receivable
 
$
21,333

 
$
34,910


Note 8 – Derivative Instruments
 
Commodity derivatives. The Company enters into various derivative instruments primarily to mitigate a portion of the exposure to potentially adverse market changes in oil and natural gas commodity prices and the associated impact on cash flows. All contracts are entered into for other-than-trading purposes. Oil and natural gas commodity derivative instruments are recorded on the condensed consolidated balance sheets at fair value as either an asset or a liability with changes in fair value recognized in earnings. While commodity derivative instruments are utilized to manage the price risk attributable to expected oil and natural gas production, the Company’s commodity derivative instruments are not designated as accounting hedges under the accounting guidance. The related cash flow impact of the commodity derivative activities is reflected as cash flows from operating activities unless they are determined to have a significant financing element at inception, in which case they are classified within financing activities.

Interest rate swaps - The Company utilizes interest rate swaps to reduce its exposure to adverse fluctuations in London Interbank Offered (“LIBO”) rates on a portion of its revolving credit facility outstanding borrowings. The realized and unrealized gains and losses on the interest rate swaps are recognized in “Interest expense”, net. Entering into interest rate swaps allows the Company to mitigate, but not eliminate, the negative effects of increases in the LIBO rate, but reduces the Company’s ability to benefit from any decreases in the LIBO rate.

Series B Preferred Stock bifurcated derivative. In the event of a change of control, the Company shall redeem in cash all of the outstanding shares of Series B Preferred Stock out of funds legally available therefor, excluding Series B PIK Shares, each as defined in Note 14 - 10% Series B Redeemable Preferred Stock, for a price per share equal to the Base Return Amount as defined in Note 14 - 10% Series B Redeemable Preferred Stock. 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 a bifurcated derivative. See Note 14 - 10% Series B Redeemable Preferred Stock for defined terms and more detail. 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.


15

ROSEHILL RESOURCES INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

The following tables summarize the location and fair value amounts of all the Company’s derivative instruments in the Condensed Consolidated Balance Sheets, as well as the gross recognized derivative assets, liabilities and offset amounts in the Condensed Consolidated Balance Sheets:
 
 
March 31, 2020
 
 
Gross Fair Value
 
Gross Amounts Offset (1)
 
Net Recognized Fair Value
 
 
(In thousands)
Assets
 
 
 
 
 
 
     Commodity derivatives - current
 
$
165,409

 
$
(85,502
)
 
$
79,907

     Commodity derivatives - non-current
 
154,738

 
(93,954
)
 
60,784

Total assets
 
$
320,147

 
$
(179,456
)
 
$
140,691

 
 
 
 
 
 
 
Liabilities
 
 
 
 
 
 
     Commodity derivatives - current
 
$
(85,502
)
 
$
85,502

 
$

     Commodity derivatives - non-current
 
(93,954
)
 
93,954

 

     Interest rate derivatives - current
 
(2,122
)
 

 
(2,122
)
Interest rate derivatives - non-current
 
(3,041
)
 

 
(3,041
)
Total liabilities
 
$
(184,619
)
 
$
179,456

 
$
(5,163
)
(1)
The Company has agreements in place with all of its counterparties that allow for the financial right of offset for derivative assets and liabilities.

 
 
December 31, 2019
 
 
Gross Fair Value
 
Gross Amounts Offset (1)
 
Net Recognized Fair Value
 
 
(In thousands)
Assets
 
 
 
 
 
 
     Commodity derivatives - current
 
$
28,512

 
$
(18,172
)
 
$
10,340

     Commodity derivatives - non-current
 
61,241

 
(28,136
)
 
33,105

     Interest rate derivatives - current
 
10

 
(10
)
 

Total assets
 
$
89,763

 
$
(46,318
)
 
$
43,445

 
 
 
 
 
 
 
Liabilities
 
 
 
 
 
 
     Commodity derivatives - current
 
$
(22,014
)
 
$
18,172

 
$
(3,842
)
     Commodity derivatives - non-current
 
(28,528
)
 
28,136

 
(392
)
     Interest rate derivatives - current
 
(184
)
 
10

 
(174
)
Interest rate derivatives - non-current
 
(492
)
 

 
(492
)
Series B Preferred Stock bifurcated derivative - non-current
 
(416
)
 

 
(416
)
Total liabilities
 
$
(51,634
)
 
$
46,318

 
$
(5,316
)
(1)
The Company has agreements in place with all of its counterparties that allow for the financial right of offset for derivative assets and liabilities.


16

ROSEHILL RESOURCES INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

As of March 31, 2020, the open derivative positions with respect to future production and interest rates were as follows:
 
 
2020
 
2021
 
2022
Commodity derivative swaps
Oil:
 
 
 
 
 
 
Notional volume (Bbls) (1)(2)
760,000

 

 

 
Weighted average fixed price ($/Bbl)
$
67.46

 
$

 
$

Natural gas:
 
 
 
 
 
 
Notional volume (MMBtu)
1,595,368

 
1,615,792

 
1,276,142

 
Weighted average fixed price ($/MMbtu)
$
2.73

 
$
2.79

 
$
2.85

 
 
 
 
 
 
 
Commodity derivative three-way collars
Oil:
 
 
 
 
 
 
Notional volume (Bbls)
2,475,000

 
4,200,000

 
2,000,000

 
Weighted average ceiling price ($/Bbl)
$
70.29

 
$
60.40

 
$
61.45

 
Weighted average floor price ($/Bbl)
$
57.50

 
$
54.49

 
$
55.00

 
Weighted average sold put option price ($/Bbl)
$
47.50

 
$
45.51

 
$
45.00

 
 
 
 
 
 
 
Crude oil basis swaps
Midland / Cushing:
 
 
 
 
 
 
Notional volume (Bbls)
3,905,000

 
4,200,000

 
2,100,000

 
Weighted average fixed price ($/Bbl)
$
(0.85
)
 
$
0.49

 
$
0.54

 
 
 
 
 
 
 
Argus WTI roll:
 
 
 
 
 
 
Notional volume (Bbls)
370,650

 

 

 
Weighted average fixed price ($/Bbl)
$
0.40

 
$

 
$

 
 
 
 
 
 
 
NYMEX WTI roll:
 
 
 
 
 
 
Notional volume (Bbls)
2,102,752

 

 

 
Weighted average fixed price ($/Bbl)
$
0.42

 
$

 
$

 
 
 
 
 
 
 
Natural gas basis swaps
EP Permian:
 
 
 
 
 
 
Notional volume (MMBtu)
1,617,388

 

 

 
Weighted average fixed price ($/MMBtu)
$
(1.03
)
 
$

 
$

 
 
 
 
 
 
 
Interest rate swaps:
 
 
 
 
 
 
Notional principal (3)
$
150,000,000

 
$
150,000,000

 
$

 
Average fixed rate
1.721
%
 
1.721
%
 

(1)
During the second quarter of 2019, the Company entered into commodity derivative swaps where it bought 2,160,000 barrels of crude oil at a weighted average fixed price of $50.48 per barrel to offset commodity derivative swaps for the year ended December 31, 2021, it previously sold off 2,160,000 barrels of crude oil at a weighted average fixed price of $61.21 per barrel.
(2)
During the second quarter of 2019, the Company entered into commodity derivative swaps where it bought 1,100,000 barrels of crude oil at a weighted average fixed price of $50.55 per barrel to offset commodity derivative swaps for the year ended December 31, 2022, it previously sold off 1,100,000 barrels of crude oil at a weighted average fixed price of $58.42 per barrel.
(3)
Interest rate swaps expire in August 2022.

17

ROSEHILL RESOURCES INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)


The effect of the derivative activity on the Company’s Condensed Consolidated Statements of Operations for the following periods was as follows:
 
Three Months
 
Ended March 31,
 
2020
 
2019
 
(In thousands)
Realized gain (loss) on derivatives
 

 
 

Commodity derivative options
$
2,033

 
$
1,500

Commodity derivative swaps
6,474

 
(2,523
)
Interest rate swaps
(14
)
 

Total realized gain (loss) on derivatives
$
8,493

 
$
(1,023
)
 
 
 
 
Unrealized gain (loss) on derivatives
 

 
 

Commodity derivative options
$
52,842

 
$
(25,566
)
Commodity derivative swaps
48,771

 
(77,982
)
Interest rate swaps
(4,497
)
 

Series B Preferred Stock bifurcated derivative
416

 
81

Total unrealized gain (loss) on derivatives
$
97,532

 
$
(103,467
)
 
The gains and losses resulting from the cash settlement and mark-to-market of the commodity derivatives are included within “Gain (loss) on commodity derivative instruments, net” in the Condensed Consolidated Statements of Operations. The gains and losses resulting from mark-to-market of the Series B Preferred Stock bifurcated derivative are included within “Other income (expense), net” in the Condensed Consolidated Statements of Operations. The gains and losses resulting from the cash settlement and mark-to-market of the interest rate swaps are included within “Interest expense, net” in the Condensed Consolidated Statements of Operations. The Company’s Proposed Plan of Reorganization as discussed in Note 20 - Subsequent Events, anticipates that the Company will unwind its derivative instruments to pay down on its Amended and Restated Credit Agreement.

Note 9 – Fair Value Measurements
 
The financial instruments measured at fair value on a recurring basis consist of the following:
 
 
March 31,
 
December 31,
 
 
2020
 
2019

 
(In thousands)
Derivative assets
 
 

 
 

Derivative assets - current
 
$
79,907

 
$
10,340

Derivative assets - non-current
 
60,784

 
33,105

Total derivative assets
 
140,691

 
43,445

 
 
 
 
 
Derivative liabilities
 
 
 
 
Derivative liabilities - current
 
(2,122
)
 
(4,016
)
Derivative liabilities - non-current
 
(3,041
)
 
(1,300
)
Total derivative liabilities
 
(5,163
)
 
(5,316
)
 
 
 
 
 
Total derivative assets, net
 
$
135,528

 
$
38,129

 
Derivative assets and liabilities primarily represent unsettled amounts related to commodity derivative positions, including swaps, options, and interest rate swaps. Derivative liabilities also include the Series B Preferred Stock bifurcated derivative for the various redemption amounts that the Company could incur if a change of control event occurs. The Company utilizes Level 3 assumptions to estimate the probability of a change of control occurring and when that would occur as the timing impacts the Base Return Amount as defined in Note 14 - 10% Series B Redeemable Preferred Stock.

18

ROSEHILL RESOURCES INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)


The tables below, set forth by level within the fair value hierarchy, represent the net components of the assets and liabilities that were measured at fair value on a recurring basis as of March 31, 2020 and December 31, 2019
 
 
March 31, 2020
 
 
Level 1
 
Level 2
 
Level 3
 
Total
 
 
(In thousands)
Derivative assets
 
 
 
 
 
 
 
 
Commodity derivative assets - current
 
$

 
$
79,907

 
$

 
$
79,907

Commodity derivative assets - non-current
 

 
60,784

 

 
60,784

Total derivative assets
 
$

 
$
140,691

 
$

 
$
140,691

 
 
 
 
 
 
 
 
 
Derivative liabilities
 
 
 
 
 
 
 
 
Interest rate swaps - current
 

 
(2,122
)
 

 
$
(2,122
)
Interest rate swaps - non-current
 

 
(3,041
)
 

 
(3,041
)
Total derivative liabilities
 
$

 
$
(5,163
)
 
$

 
$
(5,163
)

 
 
December 31, 2019
 
 
Level 1
 
Level 2
 
Level 3
 
Total
 
 
(In thousands)
Derivative assets
 
 
 
 
 
 
 
 
Commodity derivative assets - current
 
$

 
$
10,340

 
$

 
$
10,340

Commodity derivative assets - non-current
 

 
33,105

 

 
33,105

Total derivative assets
 
$

 
$
43,445

 
$

 
$
43,445

 
 
 
 
 
 
 
 
 
Derivative liabilities
 
 
 
 
 
 
 
 
Commodity derivative liabilities - current
 

 
(3,842
)
 

 
(3,842
)
Commodity derivative liabilities - non-current
 

 
(392
)
 

 
(392
)
Interest rate swaps - current
 

 
(174
)
 

 
$
(174
)
Interest rate swaps - non-current
 

 
(492
)
 

 
(492
)
Series B Preferred Stock bifurcated derivative - non-current
 
$

 
$

 
$
(416
)
 
$
(416
)
Total derivative liabilities
 
$

 
$
(4,900
)
 
$
(416
)
 
$
(5,316
)
 
The table below sets forth a summary of changes in the fair value of the Company’s level 3 derivatives for the three months ended March 31, 2020.
Balance at December 31, 2019
 
$
416

(Gains) losses reported in earnings
 
(416
)
Balance at March 31, 2020
 
$


Financial Instruments
 
The carrying amounts of the Company’s cash, cash equivalents, accounts receivable and accounts payable approximate their fair values because of the short-term maturities and/or liquid nature of these assets and liabilities. The Company’s revolving credit facility carrying value is representative of its fair value because the interest rate changes monthly based on the current market of the stated rates in the agreement. As of March 31, 2020 and December 31, 2019, the fair value of the Second Lien Notes was approximately $80.8 million and $98.5 million, respectively, which was determined using quoted prices for similar instruments, a Level 2 classification in the fair value hierarchy.
 

19

ROSEHILL RESOURCES INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

Non-Financial Assets and Liabilities
 
Non-financial assets and liabilities that are initially measured at fair value are comprised of asset retirement obligations (“ARO”), impairments, and stock-based compensation.

ARO. The initial measurement of ARO at fair value is calculated using discounted cash flow techniques and is based on internal estimates of future retirement costs associated with property and equipment. Significant “Level 3” inputs used in the calculation of ARO include plugging costs and reserve lives.

Proved oil and gas properties. If the carrying amount of oil and natural gas properties exceeds the estimated undiscounted future cash flows, the carrying amount of the oil and natural gas properties will be adjusted to their fair value. The fair value of oil and natural gas properties is determined using valuation techniques consistent with the income and market approach. The factors used to determine fair value are subject to management’s judgment and expertise and include, but are not limited to, (i) recent sales prices of comparable properties; (ii) the present value of future cash flows, net of estimated operating and development costs using estimates of proved oil and natural gas reserves; (iii) future commodity prices; (iv) future production estimates; (v) anticipated capital expenditures; and (vi) various discount rates commensurate with the risk and current market conditions associated with the projected cash flows. These assumptions represent “Level 3” inputs.

As a result of the decrease in commodity price forecasts at the end of the first quarter of 2020, specifically decreases in oil and NGL prices, the Company recorded impairment expense of $333.8 million to its proved oil and gas properties. The Company used a discount rate of 10% in its calculation of the present value of expected future cash flows based on it estimated average cost of capital as of March 31, 2020. The Company also used relevant commodity strip prices as of April 1, 2020 in its calculation.

Stock-based compensation. The Company measures stock-based compensation based on the fair value of the award on the date of grant. The fair value of the Company’s restricted stock, stock-settled time-based restricted stock units and cash-settled time-based restricted stock units are based on the Company’s trading stock price on the date of grant, which is a Level 1 input. The fair value of the Company’s market based performance share units is calculated using a Monte Carlo valuation model which performs an iterative run of likely outcomes of the performance metric based on assumptions such as expected volatility, correlation of coefficients, risk-free rates and expected dividend yields. These assumptions represent “Level 3” inputs. See Note 17 - Stock-Based Compensation for the weighted average of significant unobservable inputs used in the fair value measurement.

Note 10 – Property and equipment, net
 
Property and equipment, net is comprised of the following: 
 
 
March 31,
 
December 31,
 
 
2020
 
2019
 
 
(In thousands)
Proved oil and natural gas properties
 
$
1,056,236

 
$
1,013,952

Unproved oil and natural gas properties
 
97,726

 
97,706

Land
 
1,575

 
1,575

Less: accumulated DD&A and impairment
 
(746,215
)
 
(368,636
)
    Total oil and natural gas properties (successful efforts), net
 
409,322

 
744,597

Other property and equipment
 
7,415

 
7,348

Less: accumulated DD&A
 
(4,676
)
 
(4,364
)
    Total other property and equipment
 
2,739

 
2,984

Total property and equipment, net
 
$
412,061

 
$
747,581



20

ROSEHILL RESOURCES INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

The Company recorded depreciation, depletion and amortization (“DD&A”) to property and equipment as follows:
 
Three Months Ended March 31,
 
2020
 
2019
 
(in thousands)
Proved oil and natural gas properties
$
30,933

 
$
35,567

Other property and equipment
336

 
207

Total DD&A related to property and equipment
$
31,269

 
$
35,774


As a result of the decrease in commodity price forecasts at the end of the first quarter of 2020, specifically decreases in oil and NGL prices, the Company recorded impairment expense of $333.8 million to its proved oil and gas properties for the three months ended March 31, 2020. The Company recorded an impairment of approximately $12.8 million within Exploration costs for the three months ended March 31, 2020 related to actual and anticipated lease expirations, as well as anticipated losses on acreage due to title defects. There were no impairment charges to proved and unproved oil and natural gas properties for the three months ended March 31, 2019. Capitalized costs included in proved oil and natural gas properties not subject to DD&A totaled $24.8 million at March 31, 2020 and $19.9 million at December 31, 2019.

Note 11 – Asset Retirement Obligations
 
The following table summarizes the changes in the Company’s asset retirement obligation for the three months ended March 31, 2020 (in thousands):
Asset retirement obligations, beginning of period
$
14,431

Additional liabilities incurred
31

Accretion expense
217

Revision of estimates
(8
)
Asset retirement obligations, end of period
$
14,671

 
Note 12 – Accrued Liabilities and Other
 
Accrued liabilities and other is comprised of the following:
 
 
March 31,
 
December 31,
 
 
2020
 
2019
 
 
(In thousands)
Accrued payroll
 
$
565

 
$
4,035

Accrued general and administrative expense
 
5,077

 
987

Royalties payable
 
5,676

 
9,592

Accrued lease operating expense
 
6,601

 
6,676

Operating lease liabilities
 
1,233

 

Preferred Stock dividends payable
 

 
3,951

Accrued interest expense
 
377

 
174

Accrued ad valorem taxes
 
990

 

Other
 
1,304

 
1,098

Total accrued liabilities and other
 
$
21,823

 
$
26,513



21

ROSEHILL RESOURCES INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

Note 13 – Long-term debt, net
 
The Company’s long-term debt is comprised of the following:
 
 
March 31,
 
December 31,
 
 
2020
 
2019
 
 
(In thousands)
Second Lien Notes
 
$
100,000

 
$
100,000

Revolving credit facility
 
340,000

 
260,000

          Total debt
 
440,000

 
360,000

Debt issuance cost on Second Lien Notes, net
 
2,346

 
2,528

Discount on Second Lien Notes, net
 
1,820

 
1,961

          Total debt issuance cost and discounts
 
4,166

 
4,489

Total long-term debt, net
 
$
435,834

 
$
355,511


Revolving Credit Facility

On March 28, 2018, Rosehill Operating entered into an Amended and Restated Credit Agreement (the “Amended and Restated Credit Agreement”) by and among Rosehill Operating, as borrower, JPMorgan Chase Bank, N.A., as administrative agent (in such capacity, “JPMorgan”), and certain other financial institutions party thereto, as lenders. The borrowings under the Amended and Restated Credit Agreement bear interest at an adjusted base rate plus an applicable margin ranging from 1% to 2% or at an adjusted LIBO rate plus an applicable margin ranging from 2% to 3%. As of March 31, 2020, the weighted average interest rate of outstanding borrowings under the Amended and Restated Credit Agreement was 4.2%. Pursuant to the Amended and Restated Credit Agreement, the lenders party thereto have agreed to provide the Company with a $500 million secured reserve-based revolving credit facility. The maturity date of the Amended and Restated Credit Agreement is August 31, 2022 and automatically extends to March 2023 upon the payment in full of the Second Lien Notes. The borrowing base is re-determined semi-annually, with the lenders and the Company each having the right to one interim unscheduled redetermination between any two consecutive semi-annual redeterminations. As of March 31, 2020, the borrowing base was $340 million and the Company had fully drawn the $340 million.

Please read Note 3 - Liquidity for details on the following items under the Amended and Restated Credit Agreement: (i) Forbearance Agreement, (ii) event of default related to the delivery of audited financial statements (without a going concern qualification), (iii) the letter from Nasdaq regarding the Company’s stock price trading below the minimum bid price requirement for continued listing and (iv) restrictions on cash distributions on its Series A Preferred Stock and Series B Preferred Stock.

The Amended and Restated Credit Agreement requires Rosehill Operating to deliver unaudited financial statements to the lenders within 45 days after the end of each fiscal quarter. The Company can satisfy this requirement by delivery of unaudited financial statements of Rosehill Resources as filed with the SEC within 45 days after the end of each fiscal quarter. The Company failed to provide the lenders 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. The Amended and Restated Credit Agreement gives the Company a 30-day cure period before it becomes an event of default that will allow the lenders to require the Company to repay a portion or all amounts outstanding. However, the Company was unable to satisfy these requirements within the cure period. As such, this represented an event of default under the Amended and Restated Credit Agreement.

The amounts outstanding under the Amended and Restated Credit Agreement are secured by first priority liens on substantially all of Rosehill Operating’s property and all of the stock of Rosehill Operating’s material operating subsidiaries that are guarantors of the Amended and Restated Credit Agreement. Subject to the Forbearance Agreement, if an event of default occurs under the Amended and Restated Credit Agreement, JPMorgan Chase Bank, N.A. will have the right to proceed against any pledged capital stock and take control of substantially all of the assets of Rosehill Operating and Rosehill Operating’s material operating subsidiaries that are guarantors. There are currently no guarantors under the Amended and Restated Credit Agreement. An event of default can be triggered in a number of circumstances, including failure to maintain listing of the Company’s Class A Common Stock on a national securities exchange or failure to timely repay deficiencies in the Company’s borrowings.

The Company is subject to certain restrictions under the Amended and Restated Credit Agreement, including (without limitation) a negative pledge with respect to its equity interests in Rosehill Operating and a contingent obligation to guarantee the borrowings upon request by the lenders in the event that the Company incurs debt obligations. The Amended and Restated Credit

22

ROSEHILL RESOURCES INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

Agreement contains various affirmative and negative covenants. These covenants may limit Rosehill Operating’s ability to, among other things: incur additional indebtedness; make loans to others; make investments; enter into mergers; make or declare dividends or distributions; enter into commodity hedges exceeding a specified percentage of Rosehill Operating’s expected production; enter into interest rate hedges exceeding a specified percentage of Rosehill Operating’s outstanding indebtedness; incur liens; sell assets; and engage in certain other transactions without the prior consent of JPMorgan Chase Bank, N.A. or the lenders.
 
The Amended and Restated Credit Agreement also requires Rosehill Operating to maintain the following financial ratios: (1) a current ratio, which is the ratio of consolidated current assets (including unused commitments under the Amended and Restated Credit Agreement, but excluding non-cash assets) to consolidated current liabilities (excluding non-cash obligations, current maturities under the Amended and Restated Credit Agreement and the Note Purchase Agreement (as defined below)), of not less than 1.0 to 1.0; (2) (x) a leverage ratio, which is the ratio of the sum of all of Rosehill Operating’s Total Debt to Annualized EBITDAX (as such terms are defined in the Amended and Restated Credit Agreement) for the four fiscal quarters then ended, of not greater than 4.0 to 1.0 and (y) commencing on and after repayment in full of the Second Lien Notes (other than surviving contingent indemnification obligations) and the repayment or redemption in full of the Series B Preferred Stock, a leverage ratio, which is the ratio of the sum of all of Rosehill Operating’s Net Debt to Annualized EBITDAX (as such terms are defined in the Amended and Restated Credit Agreement), of not greater than 4.0 to 1.0 and (3) for so long as the Series B Preferred Stock remains outstanding, a coverage ratio, which is the ratio of (i) EBITDAX (as defined in the Amended and Restated Credit Agreement) to (ii) the sum of (x) Interest Expense (as defined in the Amended and Restated Credit Agreement) plus (y) the aggregate amount of Restricted Payments (as defined in the Amended and Restated Credit Agreement) made in cash pursuant to Sections 9.04(a)(iv) and (v) of the Amended and Restated Credit Agreement during the preceding four fiscal quarters, of not less than 2.5 to 1.0. The Company was in compliance with these financial ratios for the measurement period ended March 31, 2020. If the Company is not able to generate additional funds or if oil prices do not improve significantly, the Company will not be able to comply with its current ratio or leverage ratio under the Amended and Restated Credit Agreement in future periods.
 
Second Lien Notes

On December 8, 2017, Rosehill Operating issued and sold $100,000,000 in aggregate principal amount of 10.00% Senior Secured Second Lien Notes due January 31, 2023 to EIG Global Energy Partners, LLC (“EIG”) under and pursuant to the terms of that certain Note Purchase Agreement, dated as of December 8, 2017 (as amended by the Limited Consent and First Amendment to Note Purchase Agreement, dated as of March 28, 2018, the “Note Purchase Agreement”), among Rosehill Operating, the Company, the holders of the Second Lien Notes party thereto (the “Holders”) and U.S. Bank National Association, as agent and collateral agent on behalf of the Holders. The Second Lien Notes were issued and sold to the Holders in a private placement exempt from the registration requirements under the Securities Act of 1933, as amended (such issuance and sale, the “Notes Purchase”).

Under the Note Purchase Agreement, Rosehill Operating may, at its option, redeem the Second Lien Notes in whole or in part, together with accrued and unpaid interest thereon, (i) at any time after December 8, 2019 but on or prior to December 8, 2020, at a redemption price equal to 103% of the principal amounts of the Second Lien Notes being redeemed, (ii) at any time after December 8, 2020 but on or prior to December 8, 2021, at a redemption price equal to 101.5% of the principal amount of the Second Lien Notes being redeemed and (iii) at any time after December 8, 2021, at a redemption price equal to the principal amount of the Second Lien Notes being redeemed.

The Second Lien Notes may become subject to redemption under certain other circumstances, including upon the incurrence of non-permitted debt or, subject to various exceptions, reinvestments rights and prepayment or redemption rights with respect to other debt or equity of Rosehill Operating, upon an asset sale, hedge termination or casualty event. Rosehill Operating will be further required to make an offer to redeem the Second Lien Notes upon a Change in Control (as defined in the Note Purchase Agreement) at a redemption price equal to 101% of the principal amount being redeemed. Other than in connection with a Change in Control or casualty event, the redemption prices described in the foregoing paragraph shall also apply, at such times and to the extent set forth therein, to any mandatory redemption of the Second Lien Notes or any acceleration of the Second Lien Notes prior to the stated maturity thereof upon the occurrence of an Event of Default (as defined in the Note Purchase Agreement).

The Note Purchase Agreement requires Rosehill Operating to maintain a leverage ratio, which is the ratio of the sum of all of Rosehill Operating’s Total Debt to Annualized EBITDAX (as such terms are defined in the Note Purchase Agreement) for the four fiscal quarters then ended, of not greater than 4.00 to 1.00. The Company was in compliance with the leverage ratio for the measurement period ended March 31, 2020. If the Company is not able to generate additional funds or if oil prices do not improve significantly, the Company will not be able to comply with its leverage ratio under the Note Purchase Agreement in future periods.


23

ROSEHILL RESOURCES INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

Please read Note 3 - Liquidity for details on the event of default related to the delivery of audited financial statements (without a going concern qualification).

The Note Purchase Agreement requires the Company to deliver unaudited financial statements to the lenders within 45 days after the end of each fiscal quarter. The Company can satisfy this requirement by delivery of unaudited financial statements of Rosehill Resources as filed with the SEC within 45 days after the end of each fiscal quarter. The Company failed to provide the lenders with unaudited financial statements and other required certificates and operating reports within 45 days after March 31, 2020, which constituted a default under the Note Purchase Agreement. The Note Purchase Agreement gives the Company a 30-day cure period before it becomes an event of default that will allow the noteholders to require the Company to redeem a portion or all of the notes outstanding. However, the Company was unable to satisfy these requirements within the cure period. As such, this represented an event of default under the Note Purchase Agreement

The Note Purchase Agreement contains various affirmative and negative covenants, events of default and other terms and provisions that are based largely on the Amended and Restated Credit Agreement, with a number of important modifications reflecting the second lien nature of the Second Lien Notes and certain other terms that were agreed to with the Holders. The negative covenants may limit Rosehill Operating’s ability to, among other things, incur additional indebtedness (including under senior unsecured notes), make investments, make or declare dividends or distributions, redeem its preferred equity, acquire or dispose of oil and gas properties and other assets or engage in certain other transactions without the prior consent of the Holders, subject to various exceptions, qualifications and value thresholds. Rosehill Operating is also required to meet minimum commodity hedging levels based on its expected production on an ongoing basis. Any event or condition that causes any debt under the Amended and Restated Credit Agreement becoming due prior to its scheduled maturity, with certain exceptions, including borrowing base deficiencies, is an event of default under the Note Purchase Agreement.

The Company is subject to certain restrictions under the Note Purchase Agreement, including (without limitation) a negative pledge with respect to its equity interests in Rosehill Operating and a contingent obligation to guarantee the Second Lien Notes upon request by the Holders in the event that the Company incurs debt obligations. The obligations of Rosehill Operating under the Note Purchase Agreement are secured on a second-lien basis by the same collateral that secures its first-lien obligations. In connection with the Notes Purchase, Rosehill Operating has granted second-lien security interests over additional collateral to meet the minimum mortgage requirements under the Note Purchase Agreement.

Deferred Financing Costs and Debt Discount

The Company capitalizes discounts and certain direct costs associated with the issuance of debt and amortizes such costs over the lives of the respective debt instruments. The Company amortized debt issuance costs and discounts of $0.5 million and $0.4 million for the three months ended March 31, 2020 and 2019, respectively. The deferred financing costs related to the Amended and Restated Credit Agreement are classified in prepaid assets and the deferred financing costs and discounts related to the Second Lien Notes are netted against the long-term debt. The following table summarizes the Company’s deferred financing costs and debt discounts:


24

ROSEHILL RESOURCES INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

 The following table summarizes the Company’s deferred financing costs and debt discounts:
 
 
March 31,
 
December 31,
 
 
2020
 
2019
 
 
(In thousands)
Revolving credit facility
 
 
 
 
Debt issuance costs
 
$
3,167

 
$
3,167

Accumulated amortization of debt issuance costs
 
(1,286
)
 
(1,092
)
Net deferred costs - Revolving credit facility
 
$
1,881

 
$
2,075

 
 
 
 
 
Second Lien Notes
 
 
 
 
Debt discount
 
$
3,000

 
$
3,000

Accumulated amortization of debt discount
 
(1,180
)
 
(1,039
)
Debt issuance costs
 
3,868

 
3,868

Accumulated amortization of debt issuance costs
 
(1,522
)
 
(1,340
)
Net deferred costs - Second Lien Notes
 
4,166

 
4,489

Total deferred financing costs and debt discount, net
 
$
6,047

 
$
6,564

 
Note 14 – 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.


25

ROSEHILL RESOURCES INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

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.


26

ROSEHILL RESOURCES INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

Note 15 – Income Taxes
 
In 2017, the Company became the sole managing member of Rosehill Operating, the Company’s accounting predecessor. Rosehill Operating is a limited liability company that is treated as a partnership for U.S. federal income tax purposes and is not generally subject to U.S. federal income tax at the entity level. Any taxable income or loss generated by Rosehill Operating is passed through to and included in the taxable income or loss of its members, including the Company. The Company is a C corporation and is subject to U.S. federal income tax and state and local income taxes.

The Company’s income tax provision was an expense of $37.0 million and an expense of $3.3 million for the three months ended March 31, 2020 and 2019, respectively. The Company’s effective tax rate was (19)% and (3)% for the three months ended March 31, 2020 and 2019, respectively. The effective tax rate differs from the enacted statutory rate of 21% in 2020 primarily due to the allocation of profits and losses to Rosehill and the noncontrolling interest holder in accordance with the LLC Agreement, the impact of state income taxes, and effects of the valuation allowance. The effective tax rate differs from the enacted statutory rate of 21% in 2019 primarily due to the allocation of profits and losses to Rosehill and the noncontrolling interest holder in accordance with the LLC agreement and the impact of state income taxes.

As of March 31, 2020, the Company had approximately $55.7 million of U.S. federal net operating loss carryovers, which will begin to expire in 2037. The Company periodically assesses whether it is more likely than not that it will generate sufficient taxable income to realize its deferred tax assets, including NOL carry forwards. A valuation allowance for deferred tax assets is recognized when it is more likely than not that some or all of the benefit from the deferred tax assets will not be realized. As of March 31, 2020, the Company had a full valuation allowance to offset its net deferred tax assets in excess of deferred tax liabilities because the Company thinks it is more likely than not that its deferred tax will not be realized prior to their expiration due to uncertainty of the market, the significant decline in oil prices that began during the first quarter of 2020 and the Company having substantial doubt about its ability to continue as a going concern.

The Company is subject to the following material taxing jurisdictions: the United States and Texas. As of March 31, 2020, the Company has no current tax years under audit. The Company remains subject to examination for federal income taxes and state income taxes for tax years 2016 to present.

The Company has evaluated all tax positions for which the statute of limitations remains open and believes that the material positions taken would more likely than not be sustained upon examination. Therefore, as of March 31, 2020, the Company had not established any reserves for, nor recorded any unrecognized benefits related to, uncertain tax positions. The Company’s policy is to recognize interest and penalties related to uncertain tax positions in income tax expense.

Tax Receivable Agreement

On April 27, 2017, the Company entered into a tax receivable agreement (“Tax Receivable Agreement”) with the noncontrolling interest holder, Tema. The Tax Receivable Agreement provides that the Company will pay to Tema 90% of the net cash savings, if any, in U.S. federal, state and local income tax that the Company realizes (or is deemed to realize in certain circumstances) in periods beginning with and after the closing of the Transaction as a result of the following: (i) any tax basis increases in the assets of Rosehill Operating resulting from the distribution to Tema of $35 million in cash, the shares of Class B Common Stock and the issuance of 4,000,000 warrants to Rosehill Operating exercisable for shares of its Class A Common Stock, all in connection with the Transaction, and resulting from the assumption of Tema liabilities in connection with the Transaction, (ii) the tax basis increases in the assets of Rosehill Operating resulting from a redemption by Rosehill Operating with respect to Tema and (iii) imputed interest deemed to be paid by the Company as a result of, and additional tax basis arising from, payments it makes under the Tax Receivable Agreement.

The estimation of liability under the Tax Receivable Agreement is by its nature imprecise and subject to significant assumptions regarding the amount and timing of future taxable income.  The Company is not obligated to make any payments under the Tax Receivable Agreement until the tax benefits associated with the transaction that gave rise to the payment obligation are realized. Amounts payable under the Tax Receivable Agreement are contingent upon, among other things, (i) generation of future taxable income over the term of the Tax Receivable Agreement and (ii) future changes in tax laws. If the Company does not generate sufficient taxable income in the aggregate over the term of the Tax Receivable Agreement to utilize the tax benefits, then the Company would not be required to make the related Tax Receivable Agreement payment.

On December 26, 2019, Tema exercised its right to cause the Company to redeem all or a portion of its Rosehill Operating Common Units, by exchanging 14,100,000 out of its 29,807,692 Rosehill Operating Common Units then outstanding at the time.

27

ROSEHILL RESOURCES INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

A liability under the Tax Receivable Agreement relating to such redemption was recorded in the amount of $50.1 million as of the date of the redemption, increasing the Tax Receivable Agreement liability as of December 31, 2019 to $53.8 million. Due to the uncertainty of the market, the significant decrease in oil prices that began during the first quarter of 2020 and the Company having substantial doubt about its ability to continue as a going concern, the Tax Receivable Agreement liability was revalued to $0.2 million as of March 31, 2020 because it is not probable that the Company will have sufficient future taxable income to utilize all the tax benefits related to the Tax Receivable Agreement liability. The revaluation of the Tax Receivable Agreement liability resulted in income of $53.6 million recognized in ‘Other Income, net’ on the Condensed Consolidated Statement of Operations.

Note 16 – 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: