Carbon Natural Gas Co

On April 7, 2020, Carbon Energy Corporation, together with Nytis Exploration (USA) Inc. (the “Sellers”), and certain of the Company’s other direct and indirect wholly owned subsidiaries, entered into a Membership Interest Purchase Agreement (“MIPA”) to sell all of the issued and outstanding membership interests of Carbon Appalachia Company, LLC (“Carbon Appalachia”) and Nytis Exploration Company LLC (“Nytis LLC”) to Diversified Gas & Oil Corporation (“DGOC”) for $110.0 million, subject to customary purchase price adjustments, and a contingent payment of up to $15.0 million (the “Appalachia Divestiture”). The assets sold in the Appalachia Divestiture comprised substantially all of the Company’s assets in the Appalachian and Illinois basin. The transaction closed on May 26, 2020 for net proceeds of $98.1 million based on preliminary estimates of closing adjustments, resulting in a loss of approximately $34.5 million. The contingent payment of up to $15.0 million in the aggregate represents a contingent receivable that is not recorded in our unaudited condensed consolidated balance sheet. The contingent payment will be calculated based on fixed volumes and the average settled natural gas pricing for 2020, 2021, and 2022 as compared to established benchmark pricing. Any payments due will be paid yearly by January 5 of each of 2021, 2022 and 2023 based on the contingent payment calculation for the respective calendar years.

On May 25, 2020, Carbon entered into an Agreement Regarding Payoff and Release or Amendment of Notes (the “Payoff Agreement”) with Old Ironsides. Pursuant to the terms of the Payoff Agreement, Carbon is required to apply certain net proceeds from the Appalachia Divestiture in repayment of the Old Ironsides Notes on specified repayment dates tied to milestones under the MIPA. The initial payment of $10.5 million was paid within three business days after the closing date of the Appalachia Divestiture. The second payment is due within three business days after the settlement and payment of the Final Base Purchase Price (as defined in the MIPA). If the sum of the initial payment and the second payment is at least $20.0 million, the Old Ironsides Notes will be deemed paid in full. If the sum of the initial payment and the second payment is at least $18.0 million but less than $20.0 million, the Old Ironsides Notes will be amended such that the outstanding principal balance plus all accrued and unpaid interest is equal to $21.5 million (less the amount of the initial and second payments) and the Old Ironsides Notes will remain outstanding with no other change to the existing terms. If the sum of the initial payment and the second payment is less than $18.0 million, then Carbon will have the opportunity to make a third payment. 

As more fully described in proxy materials filed with the SEC, the Board of Directors is proposing to amend the Company’s amended and restated certificate of incorporation to effect a reverse stock split at a ratio of 4-for-1 (the “Reverse Stock Split”). If the Reverse Stock Split is approved, the Company will file with the Delaware Secretary of State a certificate of amendment to its Amended and Restated Certificate of Incorporation, at which date (the “effective time”) a stockholder owning fewer than four shares immediately prior to the effective time would only be entitled to a fraction of a share of common stock and will be paid cash in lieu of such fraction of a share, on the basis of $1.00 (the “Cash Payment”), for each share of common stock held by the stockholder (the “Cashed Out Stockholder”) immediately prior to effective time and the Cashed Out Stockholders will no longer be a stockholder of the Company. As of July 16, 2020, 90 shareholders that collectively owned 191 shares of the Company’s common stock owned less than four shares of common stock. If the Reverse Stock Split is approved, the Company would pay $191.00 to these Cashed Out Shareholders. The Company will use its own funds to pay the Cashed Out Stockholders.

In May 2020, the Company received the PPP Loan under the PPP. The PPP, established as part of the CARES Act, provides for loans to qualifying businesses for amounts up to 2.5 times the average monthly payroll expenses of the qualifying business. The PPP Loan and accrued interest are forgivable after 24 weeks as long as the borrower uses the loan proceeds for documented eligible purposes, including payroll, benefits, rent and utilities, and maintains its payroll levels. For purposes of the PPP Loan, payroll costs exclude cash compensation of an individual employee in excess of $100,000, prorated annually. Not more than 40% of the forgiven amount may be for non-payroll costs. The amount of loan forgiveness will be reduced if the borrower terminates full-time employees or reduces salaries and wages for employees with salaries of $100,000 or less annually by more than 25% during the 24-week period.

As of August 4, 2020, approximately $16.4 million in principal and accrued interest was outstanding under the Old Ironsides Notes. Pursuant to the terms of the Payoff Agreement, Carbon is required to apply certain net proceeds from the Appalachia Divestiture in repayment of the Old Ironsides Notes on specified repayment dates tied to milestones under the Purchase Agreement. The initial payment of $10.5 million was paid within three business days after the closing date of the Appalachia Divestiture. The second payment is due within three business days after the settlement and payment of the Final Base Purchase Price (as defined in the purchase agreement for the Appalachia Divestiture). If the sum of the initial payment and the second payment is at least $20.0 million, the Old Ironsides Notes will be deemed paid in full. If the sum of the initial payment and the second payment is at least $18.0 million but less than $20.0 million, the Old Ironsides Notes will be amended such that the outstanding principal balance plus all accrued and unpaid interest is equal to $21.5 million (less the amount of the initial and second payments) and the Old Ironsides Notes will remain outstanding with no other change to the existing terms. If the sum of the initial payment and the second payment is less than $18.0 million, then Carbon will have the opportunity to make a third payment. The third payment would be due within three business days after the first Contingent Payment (as defined in the purchase agreement for the Appalachia Divestiture). If the sum of the initial payment, the second payment and the third payment is at least $18.0 million, the Old Ironsides Notes will be amended such that the outstanding principal balance plus all accrued and unpaid interest is equal to $23.0 million (less the amount of the initial, second and third payments) and the Old Ironsides Notes will remain outstanding with no other change to the existing terms. If the sum of the initial payment, the second payment and the third payment is less than $18.0 million, the payments made by Carbon as of such date will be considered mandatory prepayments and the Old Ironsides Notes will remain outstanding with no change to the existing terms.