10% Series B Redeemable Preferred Stock

12 Months Ended

Dec. 31, 2019

Temporary Equity Disclosure [Abstract]

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 of Directors of the Company (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. With respect to dividends declared for any quarter ending on or prior to January 15, 2019, the Company had the option, and elected, to pay as dividends additional shares of Series B Preferred Stock in kind (the “Series B PIK Shares”) in an amount up to 40% of that which would have been payable had the dividends been fully paid in cash. 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. Subsequent to December 31, 2019, the Company fully drew the amount available under its Amended and Restated Credit Agreement and is restricted from paying dividends on its Series B Preferred Stock. The next scheduled dividend payment is payable on or about April 15, 2020, but the company must reduce its borrowings outstanding to an amount that is 20% less than the committed borrowing capacity in place at the time of the dividend payment. 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.

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.

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 Consolidated Balance Sheets. The Series B Preferred Stock, while not currently redeemable at the option of the holders, are considered probable of becoming redeemable and therefore will be subsequently remeasured each reporting period by accreting the initial value to the estimated redemption date of 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 as a deemed dividend, which increases the carrying value of the Series B Preferred Stock on the Consolidated Balance Sheets and is included within preferred dividends on the Consolidated Statements of Operations. Any redemption must be made out of funds legally available therefor.

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, such holders are guaranteed a base return on the initial 150,000 shares purchased in an amount equal to (1) $1,250 per share of Series B Preferred Stock times the number of outstanding shares of Series B Preferred Stock had the Company redeemed the shares prior to the first anniversary of the date of issuance of such share of Series B Preferred Stock; (2) $1,350 per share of Series B Preferred Stock times the number of outstanding shares of Series B Preferred Stock if the Company redeems the shares on or after the first anniversary and prior to the second anniversary of the date of issuance of such share of Series B Preferred Stock; and (3) on or after the second anniversary of the date of issuance of such share of Series B Preferred Stock, the greater of (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. Since the Series B Preferred Stock can be redeemed by the holders on or after December 8, 2023 and management has no immediate plans to redeem before that date, the Company has accrued a guaranteed return amount in order to achieve the 16% IRR. If the Series B Preferred Stock would have been redeemed on December 31, 2019, the Base Return Amount was approximately $199.2 million, which was higher than the redemption amount accrued, and will be reduced by subsequent dividend payments.

In the event of a Change of Control (as defined in the Certificate of Designation of the Series B Preferred Stock, 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. 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 for the Company’s 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). The Company cannot guarantee that it will be able to maintain listing of its Class A Common Stock, Class A Common Stock Public Units, or Public Warrants on The Nasdaq Capital Market. 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.

The Company reflected the following activity in mezzanine equity for the Series B Preferred Stock as of December 31, 2019:



	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, 2017	150,626	$	140,158		$	710		$	140,868
Discount - transaction costs	—	(20		)	—			(20		)
Return (16% IRR)	—	—			22,092			22,092
Dividends declared and paid or payable in cash	—	—			(9,174		)	(9,174		)
Dividends declared and paid-in-kind	6,120	6,120			(6,120		)	—
Accretion of discount - deemed dividend	—	1,345			—			1,345
Total Series B Preferred Stock at December 31, 2018	156,746	$	147,603		$	7,508		$	155,111
Discount - transaction costs	—	—			—			—
Return (16% IRR)	—	—			22,061			22,061
Dividends declared and paid or payable in cash	—	—			(15,675		)	(15,675		)
Dividends declared and paid-in-kind	—	—			—			—
Accretion of discount - deemed dividend	—	1,529			—			1,529
Total Series B Preferred Stock at December 31, 2019	156,746	$	149,132		$	13,894		$	163,026

For the quarters ended December 31, 2019, September 30, 2019, June 30, 2019 and March 31, 2019, dividends per share on the Company’s Series B Preferred Stock were $25.21, $25.21, $24.93 and $24.66, respectively, which was the same as the comparative periods in 2018.

Stockholders’ Equity

The following description summarizes the material terms and provisions of the securities that the Company has authorized. Prior to the Transaction, KLRE was a shell company with no operations, formed as a vehicle to effect a business combination with one or more operating businesses. After the closing of the Transaction, the Company became a holding company whose sole material asset is its interest in Rosehill Operating. The following table summarizes the changes in the outstanding preferred stock, common stock and Class A common warrants exercisable for shares of Class A Common Stock through the date of the Transaction.



	Series A Preferred Stock	Class A Common Stock		Class B Common Stock	Class F Common Stock		Total Shares of Common Stock		Class A Common Stock Warrants
Issued at formation	—	588,276		—	4,312,500		4,900,776		588,276
Issued at IPO	—	7,597,044		—	—		7,597,044		7,597,044
Issued in connection with private placement	—	—		—	—		—		8,408,838
Forfeitures/Cancellation of founder shares	—	—		—	(2,266,170	)	(2,266,170	)	—
Conversion of founder shares	—	3,475,665		—	(2,046,330	)	1,429,335		—
Redemption of Class A shares	—	(5,804,404	)	—	—		(5,804,404	)	—
Issued to Tema in connection with the Transaction	—	—		29,807,692	—		29,807,692		4,000,000
Preferred stock and warrants issued to PIPE Investors	75,000	—		—	—		—		5,000,000
Preferred stock issued to Sponsor and Rosemore Holdings, Inc.	20,000	—		—	—		—		—
Outstanding at the Transaction date	95,000	5,856,581		29,807,692	—		35,664,273		25,594,158

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.

On December 26, 2019, Tema redeemed 14,100,000 shares of its Rosehill Operating Common Units for an equivalent number of shares of Class A Common Stock in accordance with the terms of the LLC Agreement. Pursuant to the Tax Receivable Agreement described in Note 13 – Income Taxes, the redemption of the Rosehill Operating Common Units in December 2019 created additional Tax Receivable Agreement liability.

On September 27, 2018, the Company entered into an underwriting agreement (the “Underwriting Agreement”) with Citigroup Global Markets Inc., as representative of the several underwriters named therein (the “Underwriters”), for a public offering of 6,150,000 shares of common stock (the “Class A Common Stock Offering”) at a public offering price of $6.10 per share ($5.795 per share net of underwriting discount and commissions). Pursuant to the Underwriting Agreement, the Company granted the Underwriters a 30-day option to purchase up to an additional 922,500 shares of Class A Common Stock. On October 2, 2018, upon the closing of the Class A Common Stock Offering, the Company issued 6,150,000 shares of Class A Common Stock. The Company’s net proceeds from the Class A Common Stock Offering, net of underwriting discounts and commissions and offering costs, was $34.5 million. On October 5, 2018, the Underwriters exercised their option to purchase an additional 840,744 shares of Class A Common Stock at the Underwriters’ price of $5.795 per share. The Company received net proceeds of approximately $4.9 million for the shares of Class A Common Stock sold pursuant to the exercise of the Underwriters’ option. The Company contributed all of the net proceeds from the Class A Common Stock Offering and the exercise of the Underwriters’ option to Rosehill Operating in exchange for Rosehill Operating Common Units.

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.

In the Transaction, the Company issued to Rosehill Operating 29,807,692 shares of its Class B Common Stock and 4,000,000 warrants exercisable for shares of its Class A Common Stock in exchange for 4,000,000 warrants exercisable for Rosehill Operating Common Units. Rosehill Operating immediately distributed the warrants and shares of Class B Common Stock to Tema. As noted above, in December 2019, Tema redeemed 14,100,000 shares of its Rosehill Operating Common Units in exchange for an equivalent number of shares of Class A Common Stock. After the exchange, Tema holds 15,707,692 shares of Class B Common Stock.

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”). Under certain circumstances, the Company will increase the conversion rate upon a “fundamental change” as described in the Certificate of Designation.

The Company contributed the net proceeds of $70.8 million from its issuance of 75,000 shares of Series A Preferred Stock and 5,000,000 warrants exercisable for shares of Class A Common Stock to Rosehill Operating. In connection with the issuance of the Series A Preferred Stock, the KLR Energy Sponsor, LLC (“KLR Sponsor”) transferred 476,540 shares of its Class A Common Stock to the PIPE Investors to consummate the Transaction. The net proceeds from the issuance of these shares of Series A Preferred Stock and warrants was attributed to the Series A Preferred Stock, warrants and Class A Common Stock contributed by KLR Sponsor to the PIPE Investors based on the relative fair value of those securities using, among other factors, the closing price of the Class A Common Stock and the closing price of the warrants on April 27, 2017.

Rosemore and KLR Sponsor backstopped redemptions by the public stockholders of the Company once 30% of the outstanding shares of Class A Common Stock were redeemed by purchasing 20,000 shares of Series A Preferred Stock for net proceeds of $20.0 million pursuant to a side letter entered into between Rosemore, KLR Sponsor and the Company. The Company contributed to Rosehill Operating the net proceeds from the issuance of 20,000 shares of Series A Preferred Stock to Rosemore Holdings, Inc. and KLR Sponsor.

Future issuances of Series A Preferred Stock resulting from dividends paid-in-kind may, depending on the trading price per share of the Company’s Class A Common Stock on the dividend date, contain a beneficial conversion feature determined on the same basis as described above and, thus, result in additional non-cash deemed dividends which will reduce net income attributable to the Company’s common stockholders when such paid-in-kind shares of Series A Preferred Stock are granted.

The Company will ratably recognize additional non-cash deemed dividends attributable to the Series A Preferred Stock discount which was created by the issuance of the warrants exercisable for shares of Class A Common Stock and the contribution of the Class A Common Stock, as the Series A Preferred Stock is converted to Class A Common Stock. Such non-cash deemed dividends will reduce net income attributable to Rosehill Resources Inc. common stockholders.

The Company reflected the following in equity for the Series A Preferred Stock for the following periods:



	Year Ended December 31,
	2019			2018
	(In thousands)
Liquidation Preference	$	105,589		$	101,669
Discount	(17,038		)	(17,038		)
Series A Preferred Stock	$	88,551		$	84,631

The table below summarizes the Series A Preferred Stock dividends reflected in the Company’s Consolidated Statements of Operations:



	Year Ended December 31,
	2019		2018		2017
	(In thousands)
Series A Preferred Stock paid-in-kind	$	4,141	$	3,971	$	5,530
Series A Preferred Stock paid or payable in cash	4,033		3,967		38
Series A Preferred Stock dividends	$	8,174	$	7,938	$	5,568
Deemed dividend related to beneficial conversion feature	—		—		6,700
Deemed dividend related to conversion to Class A Common Stock	—		—		668
Series A Preferred Stock dividends and deemed dividends	$	8,174	$	7,938	$	12,936

For the quarters ended December 31, 2019, September 30, 2019, June 30, 2019 and March 31, 2019, dividends per share on the Company’s Series A Preferred Stock was $20.16, $20.16, $19.95 and $19.73, respectively, which was the same as the comparative periods in 2018.

Warrants. Each of the Company’s warrants entitles the registered holder to purchase one share of the Company’s Class A Common Stock at a price of $11.50 per share, subject to adjustment pursuant to the terms of the warrant agreement. The warrants have a five-year term which commenced on April 27, 2017, upon the completion of the Transaction, and will expire on April 27, 2022. As of December 31, 2019, there were 25,594,158 warrants exercisable for shares of Class A Common Stock outstanding at a price of $11.50.

Of the outstanding exercisable warrants, there were 588,276 warrants issued in connection with the formation of the Company, 7,597,044 public warrants (the “Public Warrants”) issued in connection with KLRE’s initial public offering, 5,000,000 warrants issued to certain qualified institutional buyers and accredited investors in connection with the Transaction, and 4,000,000 warrants issued to Tema in connection with the Transaction. The Company may call the warrants for redemption if the reported last sale price of the Class A Common Stock equals or exceeds $21.00 per share for any 20 trading days within a 30-trading day period ending on the third trading day prior to the date the Company sends the notice of redemption to the warrant holders.

Of the outstanding warrants exercisable, there were 8,408,838 warrants issued to the Sponsor and EarlyBirdCapital Inc. pursuant to a private placement (the “Private Placement Warrants”) in connection with the Company’s initial public offering. The Private Placement Warrants are not redeemable by the Company and are exercisable on a cashless basis so long as they are held by the initial holders or their permitted transferees. Otherwise, the Private Placement Warrants have terms and provisions that are identical to those of the warrants described above.

Noncontrolling Interest. Noncontrolling interest represents the membership interest in Rosehill Operating held by holders other than the Company. The Company has consolidated the financial position and results of operations of Rosehill Operating and reflected the proportionate interest held by Tema as a noncontrolling interest. The noncontrolling interest will change if warrants are exercised for Class A Common Stock, when shares of Series A Preferred Stock are converted into shares of Class A Common Stock, when shares of Class A Common Stock are issued in connection with the Company’s LTIP and if Tema elects to exchange the Class B Common Stock received in connection with the Transaction for shares of Class A Common Stock. At December 31, 2019, Tema held an approximate 35.5% noncontrolling interest in Rosehill Operating. As noted above, in December 2019, Tema redeemed 14,100,000 shares of its Rosehill Operating Common Units in exchange for an equivalent number of shares of Class A Common Stock, which significantly decreased Tema’s noncontrolling interest in Rosehill Operating at December 31, 2019.