Basis of Presentation

Organization and Nature of Operations

Lonestar Resources US Inc. (“Lonestar” or the "Company") is a Delaware corporation whose common stock is listed and traded on the Nasdaq Global Select Market under the symbol “LONE”. Lonestar is an independent oil and natural gas company focused on the exploration, development and production of unconventional oil, natural gas liquids and natural gas in the Eagle Ford Shale play in South Texas.

Interim Financial Statements

The accompanying unaudited condensed consolidated financial statements of Lonestar Resources US Inc., and its subsidiaries have been prepared in accordance with the rules and regulations of the Securities and Exchange Commission (“SEC”) and do not include all of the information and footnotes required by accounting principles generally accepted in the United States for complete financial statements. These financial statements and the notes thereto should be read in conjunction with our Annual Report on Form 10-K for the year ended December 31, 2019 filed on April 13, 2020 (the “Form 10-K”). Unless indicated otherwise or the context requires, the terms “we,” “our,” “us,” “Company” or “Lonestar,” refer to Lonestar Resources US Inc. and its subsidiaries.

The results of operations for the interim periods shown in this report are not necessarily indicative of results to be expected for the year. In management’s opinion, the accompanying unaudited condensed consolidated financial statements include all adjustments of a normal recurring nature necessary for a fair statement of our consolidated financial position as of March 31, 2020 and our consolidated results of operations for the three months ended March 31, 2020 and 2019.

Risks and Uncertainties

The COVID-19 pandemic has caused a rapid and precipitous drop in demand for oil, which in turn has caused oil prices to plummet since the first week of March 2020, negatively affecting the Company’s cash flow, liquidity and financial position. These events have worsened an already deteriorated oil market that resulted from the early-March 2020 failure by the group of oil producing nations known as OPEC+ to reach an agreement over proposed oil production cuts. Moreover, the uncertainty about the duration of the COVID-19 pandemic has caused storage constraints in the United States resulting from over-supply of produced oil, which has significantly decreased our realized oil prices in the second quarter of 2020 and potentially beyond. Oil prices are expected to continue to be volatile as a result of these events and the ongoing COVID-19 outbreak, and as changes in oil inventories, oil demand and economic performance are reported. The Company cannot predict when oil prices will improve and stabilize.

The current pandemic and uncertainty about its length and depth in future periods has caused the realized oil prices the Company has received since February 2020 to be significantly reduced, adversely affecting its operating cash flow and liquidity. Although the Company has reduced its 2020 capital expenditures budget, the lower levels of cash flow may require it to shut-in production that has become uneconomic in addition to shut-ins of production that the Company performed during the second quarter of 2020 (see below).

The COVID-19 pandemic is rapidly evolving, and the ultimate impact of this pandemic is highly uncertain and subject to change. The extent of the impact of the COVID-19 pandemic on the Company's operational and financial performance will depend on future developments, including the duration and spread of the pandemic, its severity, the actions to contain the disease or mitigate its impact, related restrictions on travel, and the duration, timing and severity of the impact on domestic and global oil demand.

In response to these developments, the Company has implemented the following operational and financial measures:


•	Reduced budgeted 2020 capital spending from $80-$85 million to $55-$65 million, or 27% at midpoint;


•	Deferred its 2020 drilling program;


•	Implemented cost-reduction measures including negotiations reducing rates for water disposal, chemicals, rentals, and workovers;


•	Shut in or stored approximately 4,700 BOE per day of production during late-April and all of May 2020, primarily at the Company's Central Eagle Ford Area. These shut-in wells back online during the first week of June.

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Entered into additional commodities derivatives in March 2020 to hedge an additional 2,000 Bbls of oil per day at an average swap price of $41.00 per Bbl and 27,500 Mcf of natural gas per day at an average price of $2.36 per Mcf in 2021. The Company's current oil hedge position covers 7,498 Bbls per day for the second quarter of 2020, 7,565 Bbls per day for the second half of 2020, and 7,000 Bbls per day for 2021. The Company's current natural gas hedge position covers 20,000 Mcf per day for the remaining three quarters of 2020, and 27,500 Mcf per day for 2021.

Recent Developments

The Company's present level of indebtedness and the current commodity price environment present challenges to its ability to comply with the covenants in its Credit Facility (see Note 7. Long-Term Debt) over the next twelve months and therefore substantial doubt exists that the Company will be able to continue as a going concern. As of March 31, 2020, the Company had total indebtedness of $522.4 million, including $250.0 million of Senior Notes due 2023 (the “11.25% Senior Notes"), $267.0 million under the Company's Credit Facility and $8.9 million under the Company's building loan. As of July 2, 2020, the Company's Credit Facility is drawn to $285.0 million and is subject to a $60.4 million borrowing-base deficiency due to the terms of the Forbearance Agreement (see below).

The Company did not satisfy the consolidated current ratio covenant under the Credit Facility as of the March 31, 2020 measurement date and did not make the July 1, 2020 interest payment under the 11.25% Senior Notes. Such failures represent events of default under our revolving credit facility, and the missed interest payment will represent an event of default under the 11.25% Senior Notes if not cured within 30 days. The Company received a forbearance from the lenders under the Credit Facility until July 31, 2020 for the defaults in the consolidated current ratio covenant as of the March 31, 2020 measurement date and the missed interest payment pursuant to the Forbearance Agreement. Despite the forbearance, the defaults under the Credit Facility are continuing, and will continue, absent a waiver or amendment from the Credit Facility lenders.

Forbearance Agreement

On July 2, 2020, the Company entered into a Forbearance Agreement, Fourteenth Amendment, and Borrowing Base Agreement with Citibank, N.A., as administrative agent and the lenders party thereto (the “Forbearance Agreement”) with respect to the Credit Facility. Pursuant to the Forbearance Agreement, among other things, (i) the lenders under the Credit Facility agreed to refrain from exercising their rights and remedies under the Credit Facility and related loan documents with respect to certain defaults until July 31, 2020, (ii) the borrowing base was redetermined to $225 million from $286 million, (iii) all proceeds of dispositions and terminations or liquidations of swap agreements shall be used to repay the Credit Facility and shall automatically reduce the borrowing base by the amount of the repayment and (iv) certain exceptions to the covenant restriction on investments shall no longer be available.

The rights of the Credit Facility lenders to exercise rights and remedies resulted from the Company's failure to comply with the current ratio with respect to the quarter ended March 31, 2020 and the defaults expected with respect to the quarter ending June 30, 2020 under the current ratio and the leverage ratio covenants, and the default with respect to the failure to make the interest payment due on July 1, 2020, under the 11.25% Senior Notes.

The Forbearance Agreement can be terminated by the lenders upon (i) the occurrence of any default or event of default under the Credit Facility other than those disclosed above, (ii) the failure of the Company to comply with any of the terms and requirements of the Forbearance Agreement, (iii) the breach of any representation or warranty, (iv) the exercise of any rights by other debt holders relating to foreclosure or acceleration (including acceleration of the 11.25% Senior Notes in the event of default) and (v) the commencement of any bankruptcy proceeding with respect to any loan party. Additionally, the Forbearance Agreement can be terminated if the Company fails to deliver a detailed restructuring proposal to the lenders by July 16, 2020. If the Forbearance Agreement terminates and any then-current and ongoing events of default have not been waived or cured, the lenders will be able to accelerate the loans and pursue their rights and remedies.

Borrowing Base Redetermination

As of March 31, 2020, the borrowing base and lender commitments for the Credit Facility were $290 million. However, subsequent to the end of the first quarter of 2020, the borrowing base was lowered to $286 million on June 11, 2020 as part of the Thirteenth Amendment (see Note 7. Long-Term Debt), and the borrowing base was later redetermined to $225 million from $286 million pursuant to the Forbearance Agreement on July 2, 2020, which created a deficiency between the outstanding amount borrowed under the Company's revolving credit facility and the borrowing base. The outstanding balance under the Credit Facility was $285 million as of July 2, 2020 which represents a borrowing deficiency of $60.4 million. The Company is obligated to pay the deficiency within 60 days after July 2, 2020 due to the Credit Facility being in a state of default at the time of the deficiency, as noted below.

Going Concern

The Company has concluded that these circumstances create substantial doubt regarding its ability to continue as a going concern. However, these consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty and instead have been prepared on a going concern basis, which contemplates the realization of assets and the settlement of liabilities and commitments in the normal course of business.

The Company does not anticipate maintaining compliance with the consolidated current ratio covenant under its Credit Facility over the next twelve months, and is evaluating the available financial alternatives, including obtaining acceptable alternative financing as well as seeking additional waivers, forbearances or amendments to the covenants or other provisions of the Credit Facility to address any existing or future defaults and have engaged financial and legal advisors to assist the Company. If the Company is unable to reach an agreement with its lenders or find acceptable alternative financing, the lenders of the Credit Facility may choose to accelerate repayment, in addition to the $60.4 million due from the current borrowing base deficiency noted above, which in turn may result in an event of default and an acceleration of the 11.25% Senior Notes, which have a $14.1 million interest payment that was due and unpaid on July 1, 2020 (see below). If the Company's lenders or its noteholders accelerate the payment of amounts outstanding under our Credit Facility or the 11.25% Senior Notes, respectively, the Company does not currently have sufficient liquidity to repay such indebtedness and would need additional sources of capital to do so.

The Company cannot provide any assurances that it will be successful in any restructuring of existing debt obligations or obtaining capital sufficient to fund the refinancing of its outstanding indebtedness or to provide sufficient liquidity to meet its operating needs. If the Company is unsuccessful in its efforts to restructure and obtain new financing, it may be necessary for it to seek protection from creditors under Chapter 11 of the U.S. Bankruptcy Code (“Chapter 11”), or an involuntary petition for bankruptcy may be filed against it.

Impairment of Long-Lived Assets

The carrying value of long-lived assets and certain identifiable intangibles are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. When it is determined that the estimated future net cash flows of an asset will not be sufficient to recover its carrying amount, an impairment loss must be recorded to reduce the carrying amount to its estimated fair value. Judgments and assumptions are inherent in management’s estimate of undiscounted future cash flows and an asset’s fair value. These judgments and assumptions include such matters as the estimation of oil and gas reserve quantities, risks associated with the different categories of oil and gas reserves, the timing of development and production, expected future commodity prices, capital expenditures, production costs, and appropriate discount rates.

The Company evaluates impairment of proved and unproved oil and gas properties on a region basis. On this basis, certain regions may be impaired because they are not expected to recover their entire carrying value from future net cash flows. As a result of this evaluation, the Company recorded impairment oil and gas properties of $199.9 million for the three months ended March 31, 2020, of which $199.0 million was proved and $0.9 million was unproved. The impairment was the result of removing development of PUD and probable reserves from future net cash flows as the Company cannot assure that they will be developed going forward in light of continued depressed commodity prices and uncertainty regarding the Company's liquidity situation. If pricing remains depressed, it is reasonably likely that the Company may have to record impairment of its oil and gas properties in the future.

CAREs Act

On March 27, 2020, Congress enacted the Coronavirus Aid, Relief, and Economic Security Act (the “CARES Act”) to provide certain taxpayer relief as a result of the COVID-19 pandemic. The CARES Act included several favorable provisions that impacted income taxes, primarily the modified rules on the deductibility of business interest expense for 2019 and 2020, a five-year carryback period for net operating losses generated after 2017 and before 2021, and the acceleration of refundable alternative minimum tax credits. The CARES Act did not materially impact the Company's effective tax rate for the three months ended March 31, 2020.

The Company has applied for, and has received, funds under the Paycheck Protection Program after the period end in the amount of $2.2 million. The application for these funds requires the Company to, in good faith, certify that the current economic uncertainty made the loan request necessary to support the ongoing operations of the Company. This certification further requires the Company to take into account our current business activity and our ability to access other sources of liquidity sufficient to support ongoing operations in a manner that is not significantly detrimental to the business. The receipt of these funds, and the forgiveness of the loan attendant to these funds, is dependent on the Company having initially qualified for the loan and qualifying for the forgiveness of such loan based on our future adherence to the forgiveness criteria.

Net Loss per Common Share

The two-class method is utilized to compute earnings per common share as our Class A Participating Preferred Stock (the "Preferred Stock") is considered a participating security. Under the two-class method, losses are allocated only to those securities that have a contractual obligation to share in the losses of the Company. The Preferred Stock is not obligated to absorb Company losses and accordingly is not allocated losses. Net income attributable to common stockholders is allocated between common stock and participating securities based on the weighted average number of common shares and participating securities outstanding for the period.

Basic earnings per share is computed by dividing the allocated net income (loss) attributable to common stockholders by the weighted-average number of shares of common stock outstanding for the period.

Diluted earnings per share is computed similarly except that the denominator is increased to include dilutive potential common shares. Potential common shares consist of warrants, equity compensation awards and Preferred Stock. In certain circumstances adjustment to the numerator is also required for changes in income or loss resulting from the potential common shares. Basic weighted average common shares exclude shares of non-vested restricted stock. As these restricted shares vest, they will be included in the shares outstanding used to calculate basic earnings per share.

For the periods presented, there were no differences between the basic and diluted weighted average common shares. The following securities could potentially dilute earnings per share in the future, but were excluded from the computation of diluted net loss per share, as their effect would have been antidilutive:



	Three Months Ended March 31,
	2020	2019
Preferred stock	16,725,467	15,301,157
Warrants	760,000	760,000
Stock appreciation rights	1,010,000	1,010,000
Restricted stock units	1,925,366	834,397

Recent Accounting Pronouncements

Reference Rate Reform. In March 2020, the FASB issued ASU 2020-04, Reference Rate Reform (Topic 848) (“ASU 2020-04”). ASU 2020-04 provides optional expedients and exceptions for applying GAAP to contracts, hedging relationships, and other transactions to ease financial reporting burdens related to the expected market transition from the London Interbank Offered Rate (“LIBOR”) or another reference rate to alternative reference rates. The amendments in this ASU are effective beginning on March 12, 2020, and an entity may elect to apply the amendments prospectively through December 31, 2022. The Company is currently evaluating the impact this guidance may have on its consolidated financial statements and related footnote disclosures.

Income Taxes. In December 2019, the FASB issued ASU 2019-12, Income Taxes (Topic 740) – Simplifying the Accounting for Income Taxes (“ASU 2019-12”). The objective of ASU 2019-12 is to simplify the accounting for income taxes by removing certain exceptions to the general principles in Topic 740 and to provide more consistent application to improve the comparability of financial statements. The amendments in this ASU are effective for fiscal years beginning after December 15, 2020, and early adoption is permitted. The Company is currently evaluating the impact this guidance may have on its consolidated financial statements and related footnote disclosures.