Item 1.03Bankruptcy or Receivership.
Chapter 11 Filing
As previously disclosed, on November 18, 2019 (the “Petition Date”), Approach Resources Inc. (“Approach,” the “Company” or “we”) and all of its subsidiaries (the “Filing Subsidiaries and, together with Approach, the “Debtors”) filed voluntary petitions (collectively, the “Bankruptcy Petitions”) under chapter 11 (“Chapter 11”), of Title 11 of the U.S. Code (the “Bankruptcy Code”) in the United States Bankruptcy Court for the Southern District of Texas (the “Court”), thereby commencing the Chapter 11 cases captioned In re Approach Resources Inc., et al., Case No. 19-36444 (Bankr. S.D. Tex.) (the “Chapter 11 Cases”). Each Debtor is continuing to operate its business and manage its properties as a “debtor in possession” under the jurisdiction of the Court and in accordance with the applicable provisions of the Bankruptcy Code and the orders of the Court.
As previously disclosed, on the Petition Date, the Debtors filed a number of motions with the Court generally designed to stabilize their operations and facilitate the Debtors’ transition into Chapter 11. Certain of these motions sought approval from the Court for the Debtors to execute, deliver and perform under the DIP Facility (as defined below), to establish certain procedures to protect the potential value of the Company’s net operating loss carryforwards (“NOLs,” and such motion, the “NOL Motion”), and to maintain insurance and cash management programs (the “Administrative Motions”). On December 13, 2019, the Court entered a final order approving the DIP Motion (as defined below) (the “DIP Order”), a final order approving the NOL Motion (the “NOL Order”), and the Administrative Motions (the “Administrative Orders”). The Court also approved as part of the DIP Order the allocation to the Company’s estate of 2% of the net cash proceeds from any sales of the Company’s assets, at a range between $2 million and $5 million.
The NOL Motion sought entry of a final order establishing certain procedures (the “Procedures”) with respect to direct and indirect trading and transfers of stock of the Company, and sought related relief, in order to protect the potential value of the Company’s NOLs and certain other of the Company’s tax attributes for use in connection with the reorganization. Prior to the entering of the NOL Order, the Court previously approved the Procedures on an interim basis by order dated November 20, 2019. In certain circumstances, the Procedures will, among other things, restrict transactions involving, and require notices of the holdings of and proposed transactions by, any person or group of persons that is or, as a result of such a transaction, would become, a Substantial Stockholder of the common stock issued by Approach (the “Common Stock”). For purposes of the Procedures, a “Substantial Stockholder” is any person or, in certain cases, group of persons that beneficially own, directly or indirectly (and/or owns options to acquire) at least 4.45 million shares of Common Stock (representing approximately 4.75% of all issued and outstanding shares of Common Stock). Any prohibited transfer of stock of the Company would be null and void ab initio and may lead to contempt, compensatory damages, punitive damages, or sanctions being imposed by the Court. In addition, the Procedures set forth in the NOL Order provide (i) certain future circumstances under which any person, group of persons, or entity holding, or which as a result of a proposed transaction may hold, a substantial amount of certain claims against the Debtors may be required to file notice of its holdings of such claims and of proposed transactions, which transactions may be restricted, and (ii) certain limited circumstances thereafter under which such person(s) may be required to sell, by a specified date following the confirmation of a chapter 11 plan of the Debtors, all or a portion of any such claims acquired during the Chapter 11 Cases.
Information regarding the Chapter 11 Cases, including the DIP Order, the NOL Order, the Administrative Orders and the NOL Motion and Procedures, is available through the Company’s website under the Restructuring Information tab, which contains a link to the claims agent’s website, https://dm.epiq11.com/approachresources. A direct or indirect holder of, or prospective holder of, stock issued by the Debtors that may be or become a Substantial Stockholder or a direct or indirect holder of, or prospective holder of, a substantial amount of claims against the Debtors should consult the NOL Motion and Procedures.
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Additionally, as previously disclosed, the Debtors are considering, among other things, sales of all or substantially all of their assets pursuant to Section 363 of the Bankruptcy Code.
Debtor-In-Possession Financing
As previously disclosed, in connection with the Bankruptcy Petitions, the Debtors filed a motion (the “DIP Motion”) seeking, among other things, final approval of $16.5 million of debtor-in-possession financing (the “DIP Financing”) on the terms and conditions set forth in the Senior Secured Super Priority Debtor-In-Possession Credit Agreement among the Company, as borrower, the guarantors party thereto, JPMorgan Chase Bank, N.A., as administrative agent (the “DIP Administrative Agent”) and issuing bank, and the financial institutions or other entities from time to time parties thereto as lenders (the “DIP Lenders”) filed with the Court (the “DIP Facility”). On December 13, 2019, the Court entered the DIP Order approving the DIP Facility, and the DIP Facility became effective on December 18, 2019. The DIP Financing will provide the Debtors with valuable liquidity, which, along with cash on hand and cash generated from ongoing operations, will be used to support the business and any marketing and sale process.
The DIP Facility contains the following terms:
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a senior secured super priority debtor-in-possession credit facility in an aggregate principal amount of up to $41.25 million consisting of (i) a new money revolving credit facility in the principal amount of $16.5 million (the “New Money DIP Loans”) and (ii) a refinancing “roll-up” term loan in the principal amount of $24.75 million (the “Roll-Up Loans” and, together with the New Money DIP Loans, the “DIP Loans”);
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proceeds of the DIP Facility may be used by the Debtors to (i) pay certain costs, fees and expenses related to the Chapter 11 Cases; (ii) make payments provided for in the DIP Motion, including in respect of certain “adequate protection” obligations and (iii) fund working capital needs, capital improvements and other general corporate purposes of the Debtors, in all cases subject to the terms of the DIP Facility and applicable orders of the Court;
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the maturity date of the DIP Facility will be the earliest to occur of (i) seven months after the Petition Date; (ii) the entry of an order approving a sale pursuant to Section 363 of the Bankruptcy Code; (iii) the effective date of any Acceptable Plan (as defined in the DIP Facility) or any other Chapter 11 plan; (iv) the conversion of any of the Debtors’ cases to a case under Chapter 7 of the Bankruptcy Code; (v) the entry of an order for dismissal of any of the Chapter 11 Cases; and (vi) at the election of the DIP Administrative Agent, the date on which any event of default under the DIP Facility is continuing;
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interest will accrue at a rate per annum equal to the Adjusted LIBO Rate for one-month periods (with a floor of 2%) plus 6% or the Alternate Base Rate plus 5%;
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the Company is required to pay the following fees: (i) a facility fee of 2% on the new money commitments, (ii) an unused commitment fee of 1% per annum, (iii) letters of credit fees, including a 6% per annum participation fee to each participating lender and an additional fronting fee of 0.25% per annum to the issuing bank, in each case, on the average daily amount of LC Exposure (as defined in the DIP Facility), and (iv) customary agency and arrangement fees;
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the obligations and liabilities of the Debtors owed to the administrative agent and participating lenders under the DIP Facility and related financing documents will be entitled to super priority claims status and super priority security interests and liens on all of the Debtors’ assets, subject to limited exceptions;
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in addition to prepayment events and events of default, the DIP Facility will provide for certain customary covenants applicable to the Company, including covenants requiring (i) weekly delivery of an operating debtor-in-possession budget (the “DIP Budget”) and variance report, with all permitted variances subject to capital expenditure restrictions on certain leases; and (ii) compliance with the approved DIP Budget subject to permitted variances of (A) 10% on aggregate weekly disbursements, (B) 15% on individual line item weekly disbursements, and (C) 10% on actual aggregate monthly production from the Debtor’s oil and gas properties from the aggregate amount of monthly production forecasted in the DIP Budget; and
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the Debtors’ Chapter 11 Cases are subject to certain milestones, including, among others, the following deadlines: (i) filing of the bid procedures and sale motion seeking approval of a sale of substantially all of the Debtors’ assets no later than 23 days after the Petition Date; (ii) entry of the Court’s order approving bid procedures and setting a hearing date for approval of the sale no later than 50 days after the Petition Date; (iii) entry of the Court’s order approving the sale not later than 100 days after the Petition Date; (iv) filing of a plan of reorganization and disclosure statement not later than 105 days after the Petition Date; (v) entry of the Court’s order approving the disclosure statement not later than 135 days after the Petition Date; and (vi) entry of the Court’s order confirming the plan of reorganization not later than 180 days after the Petition Date.
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The foregoing description of the DIP Facility does not purport to be complete and is qualified in its entirety by reference to the DIP Facility, which is attached hereto as Exhibit 10.1 and incorporated herein by reference.