Item 1.01 Entry into a Material Definitive Agreement.
On December 22, 2017, the Corporation, the Seller and Petrodome Energy, LLC, a Texas limited liability company (“Petrodome Energy”), entered into Amendment No. 2 to the Agreement to include Petrodome Hamilton Ranch, LLC, a Texas limited liability company (“Hamilton Ranch”), and Petrodome San Patricio, LLC, a Texas limited liability company (“San Patricio”), as companies to be acquired, to update certain exhibits to the Agreement, and to make other changes described therein (the “Second Amendment”). The foregoing description of the Second Amendment is qualified by reference to the full text of the Second Amendment, which is attached hereto as Exhibit 2.3 and incorporated by reference into this Item 1.01.
The Agreement, as amended by the First Amendment (defined below) and the Second Amendment, is referred to herein as the “Acquisition Agreement.” Pursuant to the Acquisition Agreement, the Corporation agreed to purchase from the Seller (the “Acquisition”) all of the issued and outstanding membership interests in Petrodome Energy and each of its subsidiaries described in the Acquisition Agreement (the “Acquired Companies” and each, an “Acquired Company”).
On December 22, 2017, in connection with the closing of the Acquisition, Petrodome Energy and each of the Acquired Companies other than Hamilton Ranch and San Patricio (collectively, the “Borrowers”) entered into a Term Loan Agreement (the “Loan Agreement”), dated December 22, 2017, by and among the Borrowers, 405 Petrodome LLC, as administrative agent (the “Agent”), and 405 Petrodome LLC and Cargill, Incorporated, as lenders (collectively, the “Lenders”).
The Loan Agreement provides for a funded term loan in the amount of $8.0 million at a 6.0% original issue discount, which results in an original principal amount of approximately $8.5 million (the “Term Loan”). The Borrowers also paid an upfront fee equal to 1.0% of the Term Loan amount. The maturity date of the Term Loan is December 22, 2019 (the “Maturity Date”). On the closing date, approximately $5.2 million of the Term Loan was funded into a capital expenditures account controlled by the Agent (the “CapEx Account”). The release of funds from the CapEx Account to the Borrowers is subject to the satisfaction, in the Agent’s sole discretion, of several conditions related to the Borrowers’ operations and development prospects. The full amount of the Term Loan bears interest at the following rates: (i) 12-Month LIBOR plus 9.875% per annum until June 30, 2018; (ii) 12-Month LIBOR plus 11.375% per annum until December 31, 2018 and (iii) 12-Month LIBOR plus 12.875% per annum until December 31, 2019. If there is an event of default, the interest rate under the Term Loan increases by an additional 2.0% per annum. Interest is payable in kind monthly during the first three months while the Term Loan is outstanding, and payable in cash monthly on the first business day of each calendar month thereafter. Principal payments are due on the Term Loan as follows: $75,000 per month for the first six months commencing on June 1, 2018, and $125,000 per month thereafter. The remaining balance of the Term Loan is due and payable on the Maturity Date.
Pursuant to the Loan Agreement, the Borrowers also conveyed a 2.5% over-riding royalty interest in all of their interests in certain oil and gas leases to the Agent. Subject to certain conditions: (i) on the twelve month anniversary of the effective date of the Loan Agreement, fifty percent of the over-riding royalty interest conveyed to the Agent will revert back to the Borrowers, and (ii) on the twelve month anniversary of the date the Term Loan is paid in full, twenty five percent of the over-riding royalty interest conveyed to the Agent will revert back to the Borrowers. At any time within the twenty four months following the date the Term Loan is paid in full, the Borrowers also have an option to purchase the remaining twenty-five percent of the over-riding royalty interests conveyed to the Agent on the terms and conditions specified in the Loan Agreement.
The Loan Agreement contains various affirmative covenants that require the Borrowers to, among other things, maintain adequate records; provide the Agent with financial statements, reserve reports, and other financial information; provide notice of certain events; hedge production volumes; reimburse the Agent and Lenders for certain expenses in connection with the Loan Agreement; maintain insurance and provide the Agent with access to meetings of the Borrowers’ governing body or the governing body of their managers. The Loan Agreement contains various negative covenants that limit the ability of the Borrowers to, among other things, incur additional indebtedness; grant certain liens; engage in certain asset acquisitions and dispositions; make certain loans; make or declare certain dividends or distributions; issue additional equity interests other than common equity; engage in certain changes in their organizational structure; engage in certain transactions with affiliates; make certain capital expenditures; amend their organizational documents or form or acquire additional subsidiaries.
The Loan Agreement also contains covenants that require the maintenance of specified financial ratios or conditions as follows:
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Current Ratio
: Commencing as of the closing of any fiscal month on or after May 31, 2018, the Borrowers may not allow the ratio of current assets to current liabilities to be less than 1.00 to 1.00.
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PDP Collateral Coverage
: The Borrowers may not allow the PDP Collateral Coverage percentage to be less than: (i) seventy percent on and after May 31, 2018; (ii) sixty-five percent on and after November 30, 2018; (iii) sixty percent on and after May 31, 2019 and (iv) fifty-five percent on and after November 30, 2019. The PDP Collateral Coverage percentage is: (a) the positive difference of: (i) the balance under the Loan Agreement as of the relevant date, minus (ii) the amount of cash in the CapEx Account as of the relevant date, divided by (b) the PV-10 value of the Borrowers’ proved developed producing reserves (using adjusted strip prices on the relevant date applied to the proved developed producing reserves of the Borrowers on a consolidated basis).
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Proved Reserve Coverage
: The Borrowers may not allow, as of May 31, 2018, and each November 30th and May 31st thereafter, the positive difference of: (a) the difference of: (i) the balance under the Loan Agreement as of the relevant date, minus (ii) the amount of cash in the CapEx Account, as of the relevant date, to be more than (b) fifty percent of the PV-10 value of proved reserves (using adjusted strip prices on the relevant date applied to the proved resources of the Borrowers on a consolidated basis). Only twenty percent of the PV-10 value of proved undeveloped reserves are included for purposes of calculating the PV-10 value of proved reserves.
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The Loan Agreement contains customary representations and warranties and events of default. Events of default include, among other things, payment defaults; breaches of representations and warranties; covenant defaults; cross-defaults and cross-acceleration to certain indebtedness; the attachment of levies and garnishments; certain events of bankruptcy and insolvency; certain final and non-appealable judgments; actual or asserted failure of any security document supporting the Loan Agreement; payment of subordinated indebtedness and a change of control. If such an event of default occurs, the Lenders would be entitled to take various actions, including the acceleration of amounts due under the Term Loan and all actions permitted to be taken by a secured creditor.
Obligations under the Loan Agreement are secured by mortgages on the oil and gas leases of the Borrowers, a security agreement covering all assets of each Borrower, and a pledge by the Corporation of all of the membership interests of Petrodome Energy, and by Petrodome Energy of all of the membership interests in each Borrower.
The foregoing description of the Loan Agreement is qualified by reference to the full text of the Loan Agreement, which is attached hereto as Exhibit 10.1 and incorporated by reference into this Item 1.01.